Filed Pursuant to Rule 424(B)(5)
Registration No. 333-71111
This prospectus supplement relates to an effective registration statement under
the Securities Act of 1933, as amended, but is not complete and may be changed.
This prospectus supplement and the accompanying base prospectus are not offers
to sell these securities and they are not soliciting an offer to buy these
securities in any state where such offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 2002
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 5, 1999
$170,000,000
[LOGO] FERRELLGAS PARTNERS
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
% Senior Notes due 2012
-------------
We are offering $170,000,000 of our % Senior Notes due 2012. We will pay
interest on the notes semi-annually in arrears on June 15 and December 15 of
each year, commencing on December 15, 2002. The notes will mature on June 15,
2012.
At our option, we may redeem the notes on or after June 15, 2007 at the
redemption prices set forth in this prospectus supplement. We may redeem up to
35% of the notes on or prior to June 15, 2005 with the net proceeds of public
or specified private equity offerings. This offering of the notes is
conditioned upon the successful completion of our concurrent consent
solicitation and tender offer to repurchase all of our outstanding 9 3/8%
Senior Secured Notes due 2006. See the section entitled "Use of Proceeds" in
this prospectus supplement.
Ferrellgas Partners Finance Corp. will be our co-obligor on the notes and
our obligations with respect to the notes will be joint and several.
Investing in the notes involves risks. See "Risk Factors" on page S-10 of
this prospectus supplement and page 5 of the accompanying base prospectus.
Underwriting
Price to Discounts and Proceeds to
Public (1) Commissions Issuers
---------- ------------- -----------
Per Note % % %
Total... $ $ $
- ---------------------
(1)Plus accrued interest, if any, from , 2002.
Delivery of the notes in book entry form will be made on or about ,
2002.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying base prospectus to which it
relates is truthful or complete. Any representation to the contrary is a
criminal offense.
Joint Book-Running Managers
Credit Suisse First Boston Banc of America Securities LLC
-------------
Banc One Capital Markets, Inc.
BNP PARIBAS
Wells Fargo Brokerage Services, LLC
The date of this prospectus supplement is , 2002.
Ferrellgas Partners, L.P.
[MAP] UNITED STATES
As of April 30, 2002, we had 569 retail locations
serving more than 1 million customers in 45 states.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
BASE PROSPECTUS
Page
----
FORWARD-LOOKING STATEMENTS........... ii
PROSPECTUS SUPPLEMENT SUMMARY........ S-1
RISK FACTORS......................... S-10
USE OF PROCEEDS...................... S-15
RATIO OF EARNINGS TO FIXED CHARGES... S-16
CAPITALIZATION....................... S-17
DESCRIPTION OF NOTES................. S-18
DESCRIPTION OF OTHER INDEBTEDNESS AND
OTHER FINANCIAL OBLIGATIONS........ S-46
BOOK ENTRY, DELIVERY AND FORM OF
NOTES.............................. S-49
UNDERWRITING......................... S-52
WHERE YOU CAN FIND MORE
INFORMATION........................ S-53
LEGAL MATTERS........................ S-53
EXPERTS.............................. S-54
Page
----
WHO WE ARE......................... 2
ABOUT THIS PROSPECTUS.............. 2
WHERE YOU CAN FIND MORE
INFORMATION...................... 3
FORWARD-LOOKING STATEMENTS......... 4
RISK FACTORS....................... 5
FERRELLGAS......................... 16
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITIES................. 17
RATIO OF EARNINGS TO FIXED CHARGES. 19
DESCRIPTION OF UNITS............... 20
DESCRIPTION OF WARRANTS............ 23
DESCRIPTION OF DEBT SECURITIES..... 25
TAX CONSIDERATIONS................. 35
USE OF PROCEEDS.................... 49
PLAN OF DISTRIBUTION............... 49
LEGAL MATTERS...................... 50
EXPERTS............................ 50
This document is in two parts. The first part is the prospectus supplement
which describes our business and the terms of this offering. The second part is
the base prospectus which gives more general information, some of which may not
apply to this offering. Generally, when we refer to the "prospectus," we refer
to both this prospectus supplement and the accompanying base prospectus
combined. If information varies between this prospectus supplement and the
accompanying base prospectus, you should rely on the information in this
prospectus supplement.
You should rely only on the information contained in this prospectus
supplement, the accompanying base prospectus and the documents we have
incorporated by reference. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
state where the offer or sale is not permitted. You should not assume that the
information provided by this prospectus supplement or the accompanying base
prospectus, as well as the information we previously filed with the SEC that is
incorporated by reference herein, is accurate as of any date other than its
respective date.
i
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying base prospectus and the
documents we have incorporated by reference include forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. These
forward-looking statements are identified as any statement that does not relate
strictly to historical or current facts. They use words such as "anticipate,"
"believe," "intend," "plan," "projection," "forecast," "strategy," "position,"
"continue," "estimate," "expect," "may," "will," or the negative of those terms
or other variations of them or by comparable terminology. In particular,
statements, express or implied, concerning future operating results or the
ability to generate sales, income or cash flow are forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Our future results may differ materially
from those expressed in these forward-looking statements. Many of the factors
that will determine these results are beyond our ability to control or predict.
Forward-looking statements include, but are not limited to, the following:
. whether our operating partnership will have sufficient funds to meet its
obligations and to enable it to distribute to us sufficient funds to
permit us to meet our obligations with respect to the notes;
. whether we and our operating partnership will continue to meet all of the
quarterly financial tests required by the agreements governing our
indebtedness; and
. the expectation that future periods may not have the same percentage
decrease in retail volumes, revenues and expenses as was experienced in
the first three quarters of fiscal 2002.
You should not put undue reliance on any forward-looking statements. All
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in or implied by
such statements.
See the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of our Annual Report on Form
10-K for our fiscal year ended July 31, 2001 and in Item 2 of our Quarterly
Report on Form 10-Q for the nine-month period ended April 30, 2002 for a more
detailed description of these and other factors that may affect any
forward-looking statements. When considering forward-looking statements, you
should keep in mind the risk factors described under the section entitled "Risk
Factors" beginning on page S-10 of this prospectus supplement and beginning on
page 5 of the accompanying base prospectus. We will not update any
forward-looking statements unless the securities laws require us to do so.
In addition, our classification as a partnership for federal income tax
purposes means that we do not generally pay federal income taxes. We do,
however, pay taxes on the income of our subsidiaries that are corporations. We
rely on a legal opinion from our counsel, and not a ruling from the Internal
Revenue Service, as to our proper classification for federal income tax
purposes. See the section entitled "Risk Factors--Tax Risks--Tax treatment is
dependent on partnership status" beginning on page 13 of the accompanying base
prospectus.
ii
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all of the information that may be important to
you. To fully understand the terms of the notes, you should carefully read this
entire prospectus supplement, the accompanying base prospectus and the
documents we have incorporated by reference. You should pay special attention
to the section entitled ''Risk Factors'' beginning on page S-10 of this
prospectus supplement and beginning on page 5 of the accompanying base
prospectus to determine whether an investment in the notes is appropriate for
you. For purposes of this prospectus supplement and the accompanying base
prospectus, unless the context otherwise indicates, when we refer to ''us,''
''we,'' ''our,'' or ''ours,'' we describe Ferrellgas Partners, L.P. together
with its subsidiaries, including Ferrellgas Partners Finance Corp. and
Ferrellgas, L.P., its operating partnership. References to our "general
partner" refer to Ferrellgas, Inc. Our fiscal year end is July 31.
Our Business
We are the second largest retail marketer of propane in the United States
based on retail gallons sold during our latest fiscal year, representing
approximately 11% of the retail propane gallons sold in the United States. As
of April 30, 2002, we had 569 retail locations serving more than 1 million
residential, industrial/commercial and agricultural and other customers in 45
states. Our operations primarily include the retail distribution and sale of
propane and related equipment and supplies and extend from coast to coast with
concentrations in the Midwest, Southeast, Southwest and Northwest regions of
the country. For the twelve-month period ended April 30, 2002, we had retail
propane sales volumes of 830 million gallons and EBITDA of $160.9 million. See
the section entitled "--Summary Historical Consolidated Financial and Operating
Data" for our definition of EBITDA.
The market for propane is seasonal because propane is used primarily for
heating in residential and commercial buildings. Consequently, sales and
operating profits are concentrated in our second and third fiscal quarters. In
addition, sales volume traditionally fluctuates from year to year in response
to variations in weather, price and other factors. We believe that our broad
geographic distribution helps us to minimize exposure to regional weather and
economic patterns. The weather has been significantly warmer than normal in
four of the last five winter heating seasons. Despite reduced gallon sales
during these warmer than normal periods and the completion of our largest
acquisition to date, we have been able to maintain our debt to cash flow ratio.
In addition, during times of colder than normal winter weather, we have been
able to take advantage of our large, efficient distribution network to avoid
supply disruptions such as those experienced by some of our competitors,
thereby broadening our long-term customer base.
Our retail propane distribution business consists principally of
transporting propane purchased from third parties to our retail distribution
locations and then to tanks on customers' premises, as well as to portable
propane cylinders. For our 2001 fiscal year, approximately 90% of our gross
profit was derived from the retail distribution and sale of propane and related
risk management activities. Gross profit from our retail distribution of
propane was derived primarily from three sources:
. 63% from residential customers;
. 27% from industrial/commercial customers; and
. 10% from agricultural and other customers.
Our gross profit from the retail distribution of propane is primarily based
on margins, the cents-per-gallon difference between our purchase price and the
sales price we charge our customers. We generally purchase propane in the
contract and spot markets from major domestic energy companies on a short-term
basis. Our costs to purchase and distribute propane fluctuate with the movement
of market prices. That fluctuation subjects us to potential price risk, which
we attempt to minimize through the use of risk management activities.
S-1
Our other activities that comprised the remainder of our gross profit in our
fiscal year 2001 included:
. the lease of tanks to customers;
. the sale of propane appliances and related parts and fittings;
. wholesale propane marketing;
. wholesale marketing of propane appliances;
. other propane related services;
. the sale of refined fuels;
. chemical feedstocks marketing;
. natural gas liquids storage; and
. common carrier services.
Recent Operating Results
The winter heating season for the twelve-month period ended April 30, 2002
was the third warmest in recorded United States history, with national average
temperatures 12% warmer than normal, compared to winter heating season
temperatures that were 6% colder than normal for the same period last year.
During the recent twelve-month period, we had EBITDA of $160.9 million,
compared to a record $198.3 million for the twelve-month period ended April 30,
2001. Gross profit for the recent twelve-month period was $486.4 million,
compared to a record $542.8 million for the prior twelve-month period. During
the recent twelve-month period, we experienced a substantial decrease in retail
sales volume, as compared to the prior twelve-month period, due primarily to
the significantly warmer than normal winter temperatures and, to a lesser
extent, a weak national economy. Although the recent twelve-month period did
not benefit from the colder than normal weather that helped to produce our
record-setting performance during the twelve-month period ended April 30, 2001,
we were successful during the recent twelve-month period in partially
offsetting the negative impact of the warmer weather by managing our margins
and reducing expenses.
For our fiscal third quarter ended April 30, 2002, we had EBITDA of $63.9
million, 2% less than last fiscal year's record setting third quarter EBITDA of
$65.2 million. Gross profit for the same period was $152.5 million, unchanged
from the record third quarter gross profit of $152.8 million realized for the
same quarter last year.
Our History
We are a Delaware limited partnership that was formed in 1994 in connection
with our initial public offering. Our operations began in 1939 as a single
location propane retailer in Atchison, Kansas. Our initial growth largely
resulted from small acquisitions in rural areas of eastern Kansas, northern and
central Missouri, Iowa, western Illinois, southern Minnesota, South Dakota and
Texas. Since 1986, we have acquired more than 100 propane retailers, expanding
our operations from coast to coast, and as of April 30, 2002, we had 569 retail
locations nationwide. Our three largest acquisitions have been:
Estimated Retail
Gallons Acquired
Company Date Acquired (in millions)
----------------------- --------------- ----------------
Thermogas December 1999 270
Skelgas Propane May 1996 93
Vision Energy Resources November 1994 47
S-2
For the twelve-month period ended April 30, 2002, we had retail propane
sales volumes of 830 million gallons. In our past three fiscal years, we
reported annual retail propane sales volumes of:
Fiscal Year Ended Retail Propane Sales
July 31, (gallons in millions)
----------------- ---------------------
2001 957
2000 847
1999 680
For our fiscal year 2001 and the twelve-month period ended April 30, 2002,
our retail propane sales volumes included a full year's contribution from the
Thermogas operations we acquired in December 1999. With this acquisition, we
acquired 180 retail locations primarily in the Midwest, complimenting our
historically strong presence in that region. Over 130 of the 180 acquired
Thermogas retail locations were integrated with our existing locations which
resulted in significant cost savings.
Business Strategy
Our business strategy is to:
. achieve operating efficiencies through the utilization of technology and
process enhancements in our operations;
. capitalize on our national presence and economies of scale;
. expand our operations through disciplined acquisitions and internal
growth; and
. align employee interest with investors through significant employee
ownership.
Using technology and process enhancements to improve operations. We have
completed a review of our key business processes and have identified several
areas where we can use technology and process enhancements to improve our
operational efficiency. Specifically, we have identified and are currently
working on areas where we believe we can reduce our operating expenses and
improve customer satisfaction in the near future. These areas of opportunity
include improvements to our routing and scheduling of customer deliveries,
customer administration and operational workflow. During our fiscal year 2002,
we allocated considerable resources toward these improvements, including the
purchase and development of computer hardware and software. For the nine-month
period ended April 30, 2002, we incurred growth and maintenance capital
expenditures of $19.6 million related to this technology and process
enhancement initiative which was funded primarily from excess cash generated
from our operations during our record financial performance in fiscal 2001.
These capital expenditures represent a substantial majority of the capital
expenditures we expect to incur in connection with this initiative.
Capitalizing on our national presence and economies of scale. We believe our
national presence of 569 retail locations and estimated 11% market share of
retail propane gallons sold in the United States give us advantages over our
smaller competitors. These advantages include economies of scale in areas such
as:
. product procurement;
. transportation;
. fleet purchases;
. customer administration; and
. general administration.
S-3
Our national presence also allows us to be one of the few propane retailers
that can competitively serve commercial customers on a nationwide basis. In
addition, we believe that our presence in 45 states provides us opportunities
to make acquisitions that overlap with our existing operations, providing
economies of scale and significant cost savings in these markets. In December
1999, we acquired Thermogas, which had retail locations that directly or
indirectly overlapped with over 70% of our retail locations.
Employing a disciplined acquisition strategy and achieving internal growth.
We expect to continue the expansion of our customer base through the
acquisition of other retail propane distributors. We intend to concentrate on
acquisition activities in geographic areas adjacent to our existing operations
and, on a selected basis, in areas that broaden our geographic coverage. We
also intend to focus on acquisitions that can be efficiently combined with our
existing operations to provide an attractive return on investment after taking
into account the cost savings we anticipate will result from these
combinations. Our goal is to improve the operations and profitability of the
businesses we acquire by integrating them into our established national
organization. We also believe that, as a result of our industry leadership and
efficient operating standards, we are positioned to successfully compete for
growth opportunities within our existing operating regions. In addition, we
have implemented marketing programs that focus specific resources towards
internal growth.
Aligning employee interests with our investors. In 1998, we established an
employee benefit plan that aligns the interests of our employees with those of
our investors. Through the Ferrell Companies, Inc. Employee Stock Ownership
Trust, employees own approximately 50% of our outstanding common units,
allowing them to participate directly in our overall success. This plan is
unique in the retail propane distribution industry, and we believe that the
entrepreneurial culture fostered by employee ownership provides us with a
distinct competitive advantage.
Risk Management Activities
Our risk management activities include the use of energy commodity forward
contracts, swaps and options traded on the over-the-counter financial markets
and futures and options traded on the New York Mercantile Exchange. These risk
management activities are conducted primarily to offset the effect of market
price fluctuations on propane inventory and purchase commitments and to
mitigate the price risk on sale commitments to our retail customers. Our risk
management activities are intended to generate a profit which we then apply to
reduce our cost of product sold. Risk management activities directly related to
the delivery of propane to our retail customers are included in our discussion
of retail margins. Other risk management activities are discussed separately as
risk management trading activities and are marked to market for accounting
purposes. These discussions may be found within the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2 of our Quarterly Report on Form 10-Q for the nine-month
period ended April 30, 2002.
Ferrellgas Partners Finance Corp.
Ferrellgas Partners Finance Corp. is our wholly-owned subsidiary. It has
nominal assets and does not, and will not in the future, conduct any operations
or have any employees. Ferrellgas Partners Finance Corp. is acting as
co-obligor of the notes, so as to allow institutional investors to invest in
the notes if they might not otherwise have been able to invest in our
securities by reason of the legal investment laws of their states of
organization or their charters because we are a partnership. You should not
expect Ferrellgas Partners Finance Corp. to have the ability to service
obligations on the notes we are offering in this prospectus supplement.
S-4
Our Structure
Ferrellgas, L.P. is our operating partnership and accounts for substantially
all of our consolidated assets, sales and operating earnings. Both we and
Ferrellgas, L.P. are Delaware limited partnerships that were formed in April
1994 in connection with our initial public offering. We are the sole limited
partner of Ferrellgas, L.P. with a 99% limited partner interest. Ferrellgas
Partners Finance Corp. is a Delaware corporation that was formed in 1996 and is
our wholly-owned subsidiary.
Our general partner, Ferrellgas, Inc., performs all of the management
functions for us and our subsidiaries, including both Ferrellgas, L.P. and
Ferrellgas Partners Finance Corp. Ferrellgas, Inc. holds a 1% general partner
interest in us and also owns an approximate 1% general partner interest in
Ferrellgas, L.P.
The following chart depicts our ownership structure as of April 30, 2002.
JEF Capital Management, Inc. is wholly-owned by James E. Ferrell, the
president, chief executive officer and chairman of the board of directors of
our general partner.
[FLOW CHART]
Our general partner does not receive any management fee in connection with
its management of us or our subsidiaries, and does not receive any remuneration
for its services as our general partner other than reimbursement for all direct
and indirect expenses it incurs in connection with our operations and those of
our subsidiaries.
S-5
The Offering
Issuers..................... Ferrellgas Partners, L.P. and Ferrellgas Partners
Finance Corp. will be co-issuers of the notes and
our obligations with respect to the notes will be
joint and several.
Securities Offered.......... $170 million in aggregate principal amount of %
Senior Notes due 2012.
Maturity Date............... June 15, 2012.
Interest.................... % per annum, payable semi-annually in arrears
on June 15 and December 15, commencing December
15, 2002.
Ranking..................... The notes will rank:
. effectively junior to (1) all of our existing
and future senior secured indebtedness and
(2) all liabilities of the operating
partnership, including any borrowings under
the operating partnership's credit facility;
. equally with all of our future senior
indebtedness, including trade payables; and
. senior to any of our future indebtedness that
expressly provides it is subordinated to the
notes.
As of April 30, 2002, on a pro forma basis after
giving effect to this offering and the
application of the proceeds thereof, the notes
would have ranked effectively junior to $684
million of our operating partnership's
indebtedness and other liabilities.
Optional Redemption......... We may redeem any of the notes at any time on or
after June 15, 2007, in whole or in part, in cash
at the redemption prices described in the section
entitled "Description of Notes--Optional
Redemption," plus accrued and unpaid interest to
the date of redemption.
In addition, on or before June 15, 2005, we may
redeem up to 35% of the aggregate principal
amount of notes originally issued at a redemption
price of % with the proceeds of public or
specified private equity offerings within 90 days
of the closing of such offerings. We may make
that redemption only if, after the redemption, at
least 65% of the aggregate principal amount of
notes originally issued remains outstanding.
Change of Control........... If a change of control occurs, we will be
required to make an offer to repurchase the
notes. The repurchase price will equal 101% of
the principal amount of the notes on the date of
repurchase, plus accrued and unpaid interest to
the date of repurchase. For more details, see the
S-6
section entitled "Description of Notes--Offers to
Purchase; Repurchase at the Option of the
Noteholders--Change of Control Offer." We cannot
assure you that upon a change of control we will
have sufficient funds to repurchase any of the
notes.
Asset Sales................. Under specified circumstances, we may be required
to make an offer to repurchase a portion of the
notes in the event of specified asset sales by us
or our subsidiaries. For more details, see the
section entitled "Description of Notes--Offers to
Purchase; Repurchase at the Option of the
Noteholders--Asset Sales."
Covenants................... We will issue the notes under an indenture with
U.S. Bank, N.A. acting as trustee. The indenture
will contain covenants that will limit our
ability and the ability of specified subsidiaries
of ours to, among other things:
. incur additional indebtedness;
. make distributions to our unitholders;
. purchase or redeem our outstanding equity
interests or subordinated debt;
. make specified investments;
. create liens;
. sell assets;
. engage in specified transactions with
affiliates;
. restrict the ability of our subsidiaries to
make specified payments, loans, guarantees
and transfers of assets or interests in
assets;
. engage in sale-leaseback transactions; and
. effect a merger or consolidation with or into
other companies or a sale of all or
substantially all of our properties or assets.
These limitations will be subject to a number of
important qualifications and exceptions. For more
details, see the section entitled "Description of
Notes."
Use of Proceeds............. We will use the net proceeds from the sale of the
notes to repurchase and, to the extent necessary,
to redeem the principal of all of our outstanding
9 3/8% notes, and to pay the premium thereon,
accrued and unpaid interest and fees and expenses
associated with this transaction. For more
details, see the section entitled "Use of
Proceeds."
S-7
Summary Historical Consolidated Financial and Operating Data
Our summary historical consolidated financial and operating data were
derived from, and should be read in conjunction with, our historical
consolidated financial statements and the notes thereto. Our historical
consolidated financial statements for the fiscal years ended July 31, 2000 and
2001 have been audited. Our historical consolidated financial statements for
the nine-month periods ended April 30, 2001 and 2002 and the twelve-month
period ended April 30, 2002 are unaudited.
In addition, our summary historical consolidated financial data should be
read together with the following, each of which is incorporated by reference
herein:
. "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in our Quarterly Report on Form 10-Q for the
nine-month period ended April 30, 2002;
. our consolidated financial statements and notes thereto included in our
Quarterly Report on Form 10-Q for the nine-month period ended April 30,
2002;
. "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in our Annual Report on Form 10-K for the fiscal
year ended July 31, 2001; and
. our consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended July 31, 2001.
We believe that all material adjustments, that consist only of normal
recurring adjustments necessary for the fair presentation of our interim
results, have been included. Results of our operations for any interim period
are not necessarily indicative of the results of operations for the entire
fiscal year due to the seasonal nature of our business.
Our capital expenditures fall generally into four categories:
. maintenance capital expenditures, which include capitalized expenditures
for repair and replacement of property, plant and equipment;
. growth capital expenditures, which include expenditures for purchases of
new propane tanks and other equipment to facilitate expansion of our
customer base and operating capacity;
. technology and process enhancement initiative capital expenditures, which
include expenditures for purchases of computer hardware and software; and
. acquisition capital expenditures, which include expenditures related to
the acquisitions of retail propane operations. Acquisition capital
expenditures represent total cost of acquisition less working capital
acquired. Our fiscal year 2001 capital expenditures do not include a $4.6
million increase to working capital related to a final valuation
adjustment to record the Thermogas acquisition. We acquired Thermogas in
December 1999 for a total acquisition cost, less working capital
acquired, of approximately $307 million.
Please note that our financial statements found in our Quarterly Report on
Form 10-Q for the nine-month period ended April 30, 2002 and in our Annual
Report on Form 10-K for the fiscal year ended July 31, 2001 are not detailed in
the same categories of capital expenditures as listed above.
We define EBITDA as earnings before interest, income taxes, depreciation,
amortization, other charges and non-cash items such as employee stock ownership
plan compensation charge and gain or loss on disposal of assets and other.
EBITDA provides additional information for evaluating our ability to make debt
service obligations, capital expenditures and distributions and is presented
solely as a supplemental measure. You should not consider EBITDA as an
alternative to operating income, net cash provided by operating activities or
any other measure of financial performance presented in accordance with
generally accepted accounting principles. Our EBITDA may not be comparable to
EBITDA or similarly titled measures of other entities as other entities may not
calculate EBITDA in the same manner as we do.
S-8
Loss or gain on disposal of assets and other has been reclassified in fiscal
year 2000 to conform to the presentation used for fiscal year 2001.
As disclosed in the footnotes to the financial statements included in our
Quarterly Report on Form 10-Q for the nine-month period ended April 30, 2002
and in our Annual Report on Form 10-K for the fiscal year ended July 31, 2001,
in fiscal year 2002 we adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," and, accordingly, we ceased the
amortization of goodwill and some intangibles beginning August 1, 2001. If
amounts reported for our fiscal years prior to our adoption of this statement
were adjusted to exclude this amortization, our net earnings for our fiscal
years 1999, 2000 and 2001 would have been, in millions, $6.0 ($18.8 before
extraordinary items), $7.7 and $74.6, respectively. Additionally, our net
earnings (loss) per unit available to our common and subordinated unitholders
for those same years would have been $0.19 ($0.60 before extraordinary items),
($0.11) and $1.75, respectively.
"Winter degree days--% colder (warmer) than normal" is based upon the
deviation of each day between November 1 and March 31 from the average heating
degree days during the same period for the 30 year period from 1971 to 2000.
These calculations are based upon weather statistics for the contiguous United
States provided by the National Oceanic and Atmospheric Administration.
Unaudited
Audited Fiscal Year Unaudited Nine Months Twelve Months
Ended July 31, Ended April 30, Ended April 30,
--------------------- -------------------- ---------------
2000 2001 2001 2002 2002
-------- ---------- ---------- -------- ---------------
(in thousands, except as specified)
Income statement data:
Total revenues............................ $959,023 $1,468,670 $1,314,672 $888,142 $1,042,140
Gross profit.............................. 428,044 538,553 479,092 426,964 486,425
Equipment lease expense................... 25,518 30,986 24,386 18,456 25,056
Depreciation and amortization............. 61,633 56,523 42,462 32,844 46,905
ESOP compensation charge.................. 3,733 4,843 3,510 3,856 5,189
Loss (gain) on disposal of assets and
other................................... (356) 5,744 4,761 1,830 2,813
Operating income.......................... 57,091 126,691 156,881 136,218 106,028
Balance sheet data at end of period:
Working capital........................... $ (6,344) $ 22,062 $ 75,782 $ 60,547 $ 60,547
Total assets.............................. 967,907 896,159 954,374 916,880 916,880
Total debt................................ 721,646 706,566 709,542 707,329 707,329
Partners' capital......................... 40,344 37,987 99,230 72,776 72,776
Other data:
Retail propane sales volumes (in thousands
of gallons)............................. 846,664 956,718 847,908 720,690 829,500
Winter degree days--% colder (warmer)
than normal............................. (15.8)% 6.3% 6.3% (11.8)% (11.8)%
Gross profit (cents per retail gallon).... 50.6c 56.3c 56.5c 59.2c 58.6c
Interest expense.......................... $ 58,298 $ 61,544 $ 47,158 $ 45,039 $ 59,425
Capital expenditures:
Maintenance.............................. $ 8,917 $ 11,996 $ 6,965 $ 7,201 $ 12,232
Growth................................... 11,838 3,152 2,245 3,796 4,703
Technology and process enhancement
initiative............................. -- 100 -- 19,557 19,657
Acquisition.............................. 310,260 1,417 874 10,744 11,287
-------- ---------- ---------- -------- ----------
Total.................................. $331,015 $ 16,665 $ 10,084 $ 41,298 $ 47,879
======== ========== ========== ======== ==========
EBITDA.................................... $122,101 $ 193,801 $ 207,614 $174,748 $ 160,935
Ratio of total debt to EBITDA............. 4.4x
S-9
RISK FACTORS
You should consider carefully the risk factors discussed below and in the
section entitled "Risk Factors" beginning on page 5 of the accompanying base
prospectus, as well as all other information in this prospectus supplement and
the accompanying base prospectus before you decide to purchase the notes.
Investing in the notes is speculative and involves significant risk. Any of the
risks described in this prospectus supplement or the accompanying base
prospectus could impair our business, financial condition and operating
results, could cause the trading price, if any, of the notes to decline or
could result in a partial or total loss of your investment.
Risks Related To The Notes
Our substantial debt and other financial obligations could impair our financial
condition and our ability to fulfill our debt obligations.
We have substantial indebtedness and other financial obligations. As of
April 30, 2002, we had:
. total indebtedness of approximately $707 million;
. partners' capital of approximately $73 million;
. availability under our operating partnership's bank credit facility of
approximately $116 million and approximately $60 million under our
operating partnership's accounts receivables securitization facility; and
. aggregate future minimum rental commitments under non-cancelable tank and
other equipment operating leases of approximately $77 million. If we
elect to purchase the underlying assets at the end of the lease terms,
such aggregate buyout would be approximately $185 million.
Subject to the restrictions governing our operating partnership's
indebtedness and other financial obligations and the indenture governing the
notes, we may incur significant additional indebtedness and other financial
obligations, which may be secured and/or structurally senior to the notes.
Our substantial indebtedness and other financial obligations could have
important consequences to you. For example, it could:
. make it more difficult for us to satisfy our obligations with respect to
the notes;
. impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes;
. result in higher interest expense in the event of increases in interest
rates since some of our debt is, and will continue to be, at variable
rates of interest;
. have a material adverse effect on us if we fail to comply with financial
and restrictive covenants in our debt agreements and an event of default
occurs as a result of that failure that is not cured or waived;
. require us to dedicate a substantial portion of our cash flow from the
operating partnership to payments on our indebtedness and other financial
obligations, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures and other general partnership
requirements;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
. place us at a competitive disadvantage compared to our competitors that
have proportionately less debt.
S-10
If we or our operating partnership are unable to meet our debt service
obligations and other financial obligations, we could be forced to restructure
or refinance our indebtedness and other financial transactions, seek additional
equity capital or sell our assets. We may then be unable to obtain such
financing or capital or sell our assets on satisfactory terms, if at all.
We are a holding company and have no material operations or assets.
Accordingly, we are dependent on distributions from our operating partnership
to service our debt obligations. These distributions are not guaranteed and may
be restricted. In addition, the notes will be non-recourse to our operating
partnership.
We are a holding company for our subsidiaries, including our operating
partnership. We have no material operations and only limited assets. Our
co-obligor, Ferrellgas Partners Finance Corp., is our wholly-owned finance
subsidiary that conducts no business and has nominal assets. Accordingly, we
are dependent on cash distributions from Ferrellgas, L.P., our operating
partnership, and its subsidiaries to service our debt obligations. Our
operating partnership is required to distribute all of its available cash each
quarter, less the amount of cash reserves that our general partner determines
is necessary or appropriate in its reasonable discretion to provide for the
proper conduct of our business, to provide funds for distributions over the
next four quarters or to comply with applicable law or with any of our debt or
other agreements. This discretion may limit the amount of available cash the
operating partnership may distribute to us each quarter. Noteholders will not
receive payments required by the notes unless our operating partnership is able
to make distributions to us after it first satisfies its obligations under the
terms of its own borrowing arrangements and reserves any necessary amounts to
meet its own financial obligations.
In addition, the various agreements governing our operating partnership's
indebtedness and other financing transactions permit quarterly distributions
only so long as each distribution does not exceed a specified amount, the
operating partnership meets a specified financial ratio and no default exists
or would result from such distribution. Those agreements include the indentures
governing the existing notes, a bank credit facility, an accounts receivable
securitization facility and tank lease arrangements. Each of these agreements
contain various negative and affirmative covenants applicable to the operating
partnership and some of these agreements require the operating partnership to
maintain specified financial ratios. If the operating partnership violates any
of these covenants or requirements, a default may result and distributions
would be limited. These covenants limit the operating partnership's ability to,
among other things:
. incur additional indebtedness;
. engage in transactions with affiliates;
. incur liens;
. sell assets;
. make restricted payments, loans and investments;
. enter into business combinations and asset sale transactions; and
. engage in other lines of business.
Additionally, our obligations under the notes will be non-recourse to our
operating partnership. Therefore, if we should fail to pay the interest or
principal on the notes or breach any of our other obligations under the notes
or the indenture, you will not be able to obtain any such payments or obtain
any other remedy from our operating partnership or its subsidiaries, which will
not be liable for any of our obligations under the indenture or the notes.
We are required to distribute all of our available cash to our unitholders and
we are not required to accumulate cash for the purpose of meeting our future
obligations to our noteholders, which may limit the cash available to service
the notes.
Subject to the limitations on restricted payments contained in the indenture
governing the notes, our partnership agreement requires us to distribute all of
our available cash each quarter to our limited partners and our general
partner. As a result of these distribution requirements, we do not expect to
accumulate significant
S-11
amounts of cash. Our general partner will determine the timing and amount of
our distributions and has broad discretion to establish and make additions to
our reserves for any proper purpose, including, but not limited to, reserves:
. to comply with the terms of any of our agreements or obligations
(including the establishment of reserves to fund the payment of interest
and principal in the future);
. to provide for level distributions of cash notwithstanding the
seasonality of our business; and
. to provide for future capital expenditures and other payments deemed by
our general partner to be necessary or advisable.
Depending on the timing and amount of our cash distributions, these
distributions could significantly reduce the cash available to us in subsequent
periods to make payments on the notes.
The notes are structurally subordinated to all indebtedness and other
liabilities of our operating partnership and its subsidiaries.
The notes are effectively subordinated to all existing and future claims of
creditors of our operating partnership and its subsidiaries, including the
lenders under our operating partnership's indebtedness, the claims of lessors
under our operating leases (including our tank lease agreements), the claims of
the lenders and their affiliates under our accounts receivable securitization
facility and all possible future creditors of our operating partnership and its
subsidiaries. This is because these creditors will have priority as to the
assets of our operating partnership and its subsidiaries over our claims as an
equity holder in our operating partnership and, thereby, indirectly, your
claims as holders of the notes. As a result, upon any distribution to these
creditors in a bankruptcy, liquidation or reorganization or similar proceeding
relating to us or our property, these creditors will be entitled to be paid in
full before any payment may be made with respect to the notes. Thereafter, the
holders of the notes will participate with our trade creditors and all other
holders of our subordinated indebtedness in the assets remaining, if any. In
any of these cases, we may have insufficient funds to pay all of our creditors
and noteholders may therefore receive less, ratably, than creditors of our
operating partnership and its subsidiaries. As of April 30, 2002, on a pro
forma basis after giving effect to this offering and the application of the
proceeds thereof, the notes would have ranked effectively junior to $684
million of our operating partnership's indebtedness and other liabilities.
Restrictive covenants in the agreements governing our indebtedness and our
operating partnership's indebtedness and other financial obligations may reduce
our operating flexibility.
The indenture governing the notes and the agreements governing our operating
partnership's indebtedness and other financial obligations contain various
covenants that limit our ability and the ability of specified subsidiaries of
ours to, among other things:
. incur additional indebtedness;
. make distributions to our unitholders;
. purchase or redeem our outstanding equity interests or subordinated debt;
. make specified investments;
. create liens;
. sell assets;
. engage in specified transactions with affiliates;
. restrict the ability of our subsidiaries to make specified payments,
loans, guarantees and transfers of assets or interests in assets;
. engage in sale-leaseback transactions;
. effect a merger or consolidation with or into other companies or a sale
of all or substantially all of our properties or assets; and
. engage in other lines of business.
S-12
These restrictions could limit our ability and the ability of our operating
partnership and other subsidiaries to obtain future financings, make needed
capital expenditures, withstand a future downturn in our business or the
economy in general, conduct operations or otherwise take advantage of business
opportunities that may arise. Some of the agreements governing our operating
partnership's indebtedness and other financial obligations also require the
operating partnership to maintain specified financial ratios and satisfy other
financial conditions. The ability of the operating partnership to meet those
financial ratios and conditions can be affected by events beyond its control,
such as weather conditions and general economic conditions. Accordingly, it may
be unable to meet those ratios and conditions. Our breach of any of these
covenants or our operating partnership's failure to meet any of these ratios or
conditions could result in a default under the terms of the relevant
indebtedness or other financial obligations, which could cause such
indebtedness or other financial obligations, and by reason of cross-default
provisions, the notes, to become immediately due and payable. If we were unable
to repay those amounts, the lenders could initiate a bankruptcy proceeding or
liquidation proceeding or proceed against the collateral, if any. If the
lenders of our operating partnership's indebtedness or other financial
obligations accelerate the repayment of borrowings or other amounts owed, we
may not have sufficient assets to repay our indebtedness or other financial
obligations, including the notes.
We may be unable to repurchase the notes upon a change of control and it may be
difficult to determine if a change of control has occurred.
Upon the occurrence of "change of control" events specified in the section
entitled "Description of Notes--Offers to Purchase; Repurchase at the Option of
the Noteholders--Change of Control Offer," we or a third party will be required
to make a change of control offer to repurchase your notes at 101% of their
principal amount, plus accrued and unpaid interest. The terms of our operating
partnership's indebtedness limit our ability to repurchase your notes in those
circumstances. Any of our future debt agreements may contain similar
restrictions and provisions. Accordingly, we may be unable to satisfy our
obligations to purchase your notes unless we are able to refinance or obtain
waivers under our indebtedness and that of our operating partnership with
similar restrictions. We may not have the financial resources to purchase your
notes, particularly if a change of control event triggers a similar repurchase
requirement for, or results in the acceleration of, other indebtedness. Some of
the agreements governing our operating partnership's indebtedness currently
provide that specified change of control events will constitute a default and
could result in the acceleration of the indebtedness under those agreements.
Our failure to make or consummate a change of control repurchase offer or pay
the change of control purchase price when due will give the trustee and the
holders of the notes the rights described under the section entitled
"Description of Notes--Events of Default and Remedies."
In addition, one of the events that trigger a change of control is a sale of
all or substantially all of our assets. The meaning of "substantially all"
varies according to the facts and circumstances of the subject transaction and
has no clearly established meaning under New York law, which is the law that
governs the indenture. This ambiguity as to when a sale of substantially all of
our assets has occurred may make it difficult for holders of the notes to
determine whether we have properly identified, or failed to identify, a change
of control.
There is no active trading market for the notes.
We do not intend to list the notes to be issued in this offering on any
securities exchange or to seek approval for quotations through any automated
quotation system. We anticipate $170 million aggregate principal amount of
notes will be outstanding upon the completion of this offering. An established
market for the notes may not develop, or if one does develop, it may not be
maintained. Although the underwriters have advised us that they currently
intend to make a market in the notes, they are not obligated to do so and may
discontinue such market making activity at any time without notice. In
addition, market making activity will be subject to the limits imposed by the
Securities Act and the Exchange Act. For these reasons, we cannot assure you
that:
. a liquid market for the notes will develop;
. you will be able to sell your notes; or
. you will receive any specific price upon any sale of your notes.
S-13
If a public market for the notes did develop, the notes could trade at
prices that may be higher or lower than their principal amount or purchase
price, depending on many factors, including prevailing interest rates, the
market for similar notes and our financial performance. Historically, the
market for non-investment grade debt, such as the notes, has been subject to
disruptions that have caused substantial fluctuations in the prices of these
securities.
Risks Inherent In Our Business
The timing of collections of our accounts receivable and increases in product
costs and demand may decrease our working capital availability.
We typically borrow on our credit facilities to fund working capital during
the winter heating season. We purchase product from suppliers and make payments
with terms that are typically less than one week. As is typical in our
industry, our customers do not pay upon receipt, but pay between thirty and
sixty days after delivery. During winter heating seasons, we experience
significant increases in accounts receivable and inventory levels and thus a
significant decline in working capital availability. Although we have the
ability to fund working capital with borrowings from our credit facility and
sales of accounts receivable, we cannot predict the effect that increases in
propane prices and colder than normal weather may have on future working
capital availability.
Increases in propane prices may cause our customers to increase their
conservation efforts.
As the price of propane increases, our retail customers tend to increase
their conservation efforts and thereby decrease their consumption of propane.
We cannot predict the materiality of the effect of any such decreases on our
financial results.
We may not be successful in making acquisitions.
We have historically expanded our business through acquisitions. We
regularly consider and evaluate opportunities to acquire local, regional and
national propane distributors. We may choose to finance these acquisitions
through internal cash flow, external borrowings or the issuance of additional
common units or other securities. The competition for acquisitions of propane
companies among publicly-traded master limited partnerships like ours has
intensified in recent years. Although we believe there are numerous potential
large and small acquisition candidates in our industry, there can be no
assurance that:
. we will be able to acquire any of these candidates on economically
acceptable terms;
. any acquisitions made will not be dilutive to our earnings and
distributions;
. any additional equity we issue as consideration for an acquisition will
not be dilutive to our unitholders; or
. any additional debt we incur to finance an acquisition will not affect
our operating partnership's ability to make distributions to us.
The terms of our senior units limit our use of proceeds from sales of equity.
While our senior units are outstanding, other than issuances of equity
pursuant to an exercise of any of our common unit options, we may use up to $20
million of aggregate cash proceeds from sales of our equity to reduce our
indebtedness. Any other cash proceeds from equity issuances must be used to
redeem a portion of our outstanding senior units, all of which are owned by JEF
Capital Management, Inc. As a result, as long as any of the senior units are
outstanding, our ability to access the equity capital markets for purposes
other than the redemption of our senior units, including meeting our future
obligations under the notes, will be limited. JEF Capital Management, Inc. is
wholly-owned by James E. Ferrell, the president, chief executive officer and
chairman of the board of directors of our general partner.
S-14
USE OF PROCEEDS
The estimated net proceeds to us from this offering will be $ million
after deducting the underwriting commission and the estimated costs and
expenses of this offering.
We will use the net proceeds from this offering to:
. repurchase and retire the principal of all of our existing 9 3/8% notes
that are tendered and accepted by us pursuant to a consent and tender
offer we are simultaneously conducting with this offering and pay the
premium thereon;
. redeem the principal of any 9 3/8% notes not tendered and pay the premium
thereon;
. pay accrued and unpaid interest on the 9 3/8% notes repurchased or
redeemed; and
. pay other costs and expenses related to this offering and the consent and
tender offer.
The 9 3/8% notes bear interest at 9 3/8% per annum, mature on June 15, 2006,
and became redeemable on June 15, 2001. At June 15, 2002, the 9 3/8% notes
became redeemable at 103.125% of their principal amount. Pursuant to an Offer
to Purchase and Consent Solicitation Statement dated July 1, 2002, we initiated
a tender offer to repurchase any and all of the outstanding 9 3/8% notes at a
price of $1,031.25 per $1,000 principal amount, plus accrued interest up to,
but not including, the date of payment. Currently, $160 million aggregate
principal amount of the 9 3/8% notes are outstanding. In addition to the tender
offer, we have solicited the consent of the holders of the 9 3/8% notes to
remove the restrictive covenants and decrease the notice period for our
optional redemption of the 9 3/8% notes from thirty days to three days. On July
16, 2002, we received consents sufficient to effect these amendments.
If any of the 9 3/8% notes are not tendered and repurchased by us pursuant
to the tender offer, they will remain outstanding and will rank equal with the
notes being offered by this prospectus supplement except that the notes not
tendered will continue to be secured. We anticipate, however, that if such a
situation arose, we would redeem these remaining 9 3/8% notes pursuant to the
indenture that governs the 9 3/8% notes.
For a more detailed description of the terms of the 9 3/8% notes, see the
section entitled "Description of Other Indebtedness and Other Financial
Obligations--Other Indebtedness-- 9 3/8% Senior Secured Notes."
S-15
RATIO OF EARNINGS TO FIXED CHARGES
Our historical and pro forma ratio of earnings to fixed charges for each of
the periods indicated below is as follows:
Nine Months
Ended
April 30,
Fiscal Year Ended July 31, 2002
------------------------ -----------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
Historical 1.5 1.1 1.3 1.0* 1.8 2.7 2.7
Pro Forma. 1.5 1.2 1.4 1.1* 1.9 2.9 2.7
- --------
* The ratio of earnings to fixed charges for our fiscal year ended July 31,
2000 reflects the partial year cash flow contribution from our acquisition of
Thermogas in December 1999.
These computations include us and our operating partnership on a
consolidated basis. For these ratios, "earnings" is the amount resulting from
adding the following items:
. pre-tax income from continuing operations; and
. fixed charges.
The term "fixed charges" means the sum of the following:
. interest expense;
. amortized premiums, discounts and capitalized expenses related to
indebtedness; and
. an estimate of the interest component within rental expenses.
The pro forma ratio of earnings to fixed charges in our fiscal years ended
July 31, 1997 to 2001 and for the nine-month period ended April 30, 2001 were
calculated by adding back amortization on goodwill and some intangible assets.
Beginning in the first quarter of our fiscal year 2002, we implemented
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" and thus did not amortize goodwill and some intangibles for
the nine-month period ended April 30, 2002. The addition of amortization
charges related to goodwill and intangibles totaled approximately $8 million
for the nine-month period ended April 30, 2001. Such additions of amortization
charges related to goodwill and intangibles totaled approximately $3, $4, $4,
$7 and $11 million for our fiscal years 1997 through 2001, respectively.
S-16
CAPITALIZATION
The following table sets forth our unaudited consolidated capitalization as
of April 30, 2002 on an actual basis and on an as adjusted basis after giving
effect to the application of the proceeds from this offering.
This table should be read in conjunction with our financial statements and
the notes thereto that are incorporated by reference in this prospectus
supplement and the accompanying base prospectus.
As of April 30, 2002
--------------------
As
Actual Adjusted
-------- --------
(in thousands)
Cash and cash equivalents............... $ 23,899 $ 23,899
======== ========
Debt:
9 3/8% senior secured notes due 2006. $160,000 $ --
The notes offered hereby............. -- 170,000
7.16% senior notes due 2005-2013..... 350,000 350,000
8.80% senior notes due 2006-2009..... 184,000 184,000
Unsecured bank credit facility....... -- --
Other................................ 13,329 13,329
-------- --------
Total debt......................... $707,329 $717,329
Minority interest....................... 2,429 2,429
Partners' capitalization................ 72,776 67,776
-------- --------
Total capitalization............. $782,534 $787,534
======== ========
Our operating partnership's $157 million unsecured bank credit facility had,
as of April 30, 2002, availability of $116 million, with $41 million of letters
of credit outstanding. Partners' capital does not include the 1,232,000 common
units issuable, subject to vesting, upon exercise of options granted by us and
outstanding as of April 30, 2002.
S-17
DESCRIPTION OF NOTES
Ferrellgas Partners, L.P. and Ferrellgas Partners Finance Corp., as
co-issuers, will issue the notes under an indenture among themselves and U.S.
Bank, N.A., as trustee. The terms of the notes include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture. It does not restate that agreement in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of the notes. We will file a copy of the indenture as an exhibit to a
Current Report on Form 8-K to be filed upon the closing of the sale of the
notes.
The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the indenture.
Some of the terms used in this description are defined in the section
entitled "--Certain Definitions." For purposes of this description:
. the "partnership" refers to Ferrellgas Partners, L.P.;
. the words "we," "us," "our" and "ourselves" refer to Ferrellgas Partners,
L.P. and Ferrellgas Partners Finance Corp., the co-issuers of the notes;
. the "operating partnership" refers to Ferrellgas, L.P.; and
. the "general partner" refers to Ferrellgas, Inc.
Brief Description of the Notes
The notes:
. are our unsecured general joint and several obligations;
. rank senior in right of payment to all our subordinated indebtedness;
. rank equally in right of payment with all our other senior indebtedness;
and
. are structurally subordinated to, which means they rank behind, the
indebtedness and other liabilities of the operating partnership,
including the Credit Agreement and the Existing Notes.
As described in more detail under the sections entitled "Prospectus
Supplement Summary" and "Risk Factors," the partnership is a holding company
for its subsidiaries and has no material operations or assets other than its
consolidated subsidiaries, including the operating partnership. Accordingly,
the partnership is dependent upon the distribution of the earnings of its
consolidated subsidiaries, including the operating partnership, to service its
debt obligations, including the notes.
Because the notes are structurally subordinated to the indebtedness of the
operating partnership, noteholders generally have no recourse to the operating
partnership or any of its subsidiaries or their assets for amounts due under
the notes. Noteholders may, however, have indirect recourse to the extent the
partnership has rights as a holder of equity interests in the operating
partnership and its subsidiaries. In addition, the noteholders do not have any
right to require the operating partnership to make distributions to the
partnership.
Principal, Maturity and Interest
The notes will:
. be issued in registered form, without coupons, and in denominations of
$1,000;
S-18
. accrue interest at the annual rate of % from the most recent date to
which interest has been paid, which interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months;
. pay interest semi-annually in arrears on June 15 and December 15 to
holders of record on the immediately preceding June 1 and December 1; and
. mature on June 15, 2012.
We will issue notes with an initial maximum aggregate principal amount of
$170 million. We do not intend to list the notes on any securities exchange or
to seek approval for quotations of the notes through any automated quotation
system. There is no established market for the notes, and we do not anticipate
that one will develop. We may issue additional notes from time to time after
this offering as part of this series or in one or more additional series. Any
offering of additional notes is subject to the covenant described below in the
section entitled "--Limitation on Additional Indebtedness." The notes and any
additional notes later issued under the indenture as part of this series will
be treated as a single class for all purposes under the indenture, including
waivers, amendments, redemptions and offers to purchase.
We will pay principal and interest on the notes at our office or agency,
which we maintain in New York City. At our option, we may make payments of
interest by check mailed to the noteholders at their respective addresses as
set forth in the register of notes. All payments with respect to global notes,
however, will be made by wire transfer of immediately available funds to the
accounts specified by the holders of the global notes. Until otherwise
designated by us, our office or agency in New York will be the office of the
trustee maintained for payment purposes.
Optional Redemption
We do not have the option to redeem the notes before June 15, 2007 except
under specified circumstances following the completion by the partnership on or
before June 15, 2005 of one or more Equity Offerings. The partnership has the
option to use the net proceeds of any such offering to redeem the notes at %
of their principal amount plus accrued and unpaid interest to the applicable
redemption date so long as the redemption is completed within 90 days of the
completion of the offering and at least 65% of the principal amount of the
notes already issued, together with the notes and any additional notes sold
pursuant to this prospectus supplement or otherwise, are outstanding
immediately following the redemption.
On and after June 15, 2007, we have the right to redeem the notes, in whole
or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed in percentages of principal amount) listed in the
table below, plus accrued and unpaid interest on the notes to the applicable
redemption date, if redeemed during the twelve-month period beginning on June
15 of the years indicated in the table below:
Year Percentage
---- ----------
2007............... %
2008............... %
2009............... %
2010 and thereafter 100.000%
Mandatory Redemption; Open Market Purchases
We are not required to make any mandatory redemption or sinking fund
payments with respect to the notes. We may at any time and from time to time
purchase notes in the open market or otherwise.
Offers to Purchase; Repurchase at the Option of the Noteholders
We may be required to offer to purchase the notes if there is a change in
control of, or specified asset sales by, the partnership.
S-19
Change of Control Offer: The indenture defines the term "change of control."
Upon the occurrence of a change of control, each noteholder will have the right
to require us to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that holder's notes pursuant to a change of control
offer on the terms set forth in the indenture. In a change of control offer, we
will offer a change of control payment in cash equal to 101% of the aggregate
principal amount of the notes or portion of notes validly tendered for payment,
plus accrued and unpaid interest to the date of purchase. Generally, a change
of control would occur when:
(1) there is a sale, lease, conveyance or other disposition of all or
substantially all of the assets of the partnership or the operating
partnership to any entity other than to a Related Party; in this regard,
the meaning of "all or substantially all" varies according to the facts
and circumstances of the subject transaction and has no clearly
established meaning under New York law, which is the law that governs
the indenture; therefore, in some transactions it may be unclear whether
a change of control has occurred;
(2) there is a liquidation or dissolution of the partnership or our general
partner, or a successor to the general partner; or
(3) there is any transaction or series of transactions that results in a
Person other than a Related Party beneficially owning in the aggregate,
directly or indirectly, more than 35% of the voting stock of our general
partner or a successor to the general partner and such percentage is
more than the percentage of voting stock that is owned by the Related
Party or a successor to the Related Party.
Within 30 days following any change of control, we will mail a notice to
each noteholder stating that, among other things, a change of control offer is
being made, that all notes tendered will be accepted for payment and that any
note not tendered will continue to accrue interest. We will identify the amount
of the change of control payment and the change of control payment date for the
notes. The notice will also include directions for noteholders who elect to
have their notes purchased in the change of control offer.
Noteholders will be entitled to withdraw any election to have their notes
purchased if the paying agent receives timely and proper notice of such
withdrawal. The notice from the partnership to noteholders will describe the
requirements for the notice from the noteholders to the paying agent.
We will comply with the requirements of Rule 14e-l under the Exchange Act
and any other relevant securities laws applicable to the repurchase of notes in
connection with a change of control.
On the change of control payment date, we will, to the extent lawful, accept
for payment notes or portions of notes tendered in accordance with the change
of control offer; deposit an amount equal to the change of control payment for
the notes with the paying agent in respect of all notes or portions of notes
properly tendered; and deliver or cause to be delivered to the trustee the
notes so accepted together with an officers' certificate stating the aggregate
amount of the notes or portions of notes tendered to us.
The paying agent will promptly mail the change of control payment to each
noteholder. The trustee will promptly authenticate and mail to each noteholder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered. However, each new note will be in a principal amount of $1,000 or
an integral multiple of $1,000. We will publicly announce the results of the
change of control offer on or as soon as practicable after the change of
control payment date.
We will not be required to make a change of control offer upon a change of
control if a third party makes the change of control offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a change of control offer made by us and purchases all
notes properly tendered and not withdrawn under the change of control offer.
The triggering of the purchase right will not constitute an event of default
under the indenture. See the section entitled "Risk Factors--We may be unable
to repurchase the notes upon a change of control and it may be difficult to
determine if a change of control has occurred."
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In addition, we may be unable to pay the change of control payment because
(1) the agreements governing the operating partnership's Existing Notes and the
Credit Agreement limit the operating partnership's ability to make
distributions to the partnership and (2) we may not have sufficient immediate
financial resources to pay cash to the holders of notes upon a repurchase.
The failure of the partnership to repurchase the notes upon a change of
control offer would constitute an immediate Event of Default under the
indenture.
Asset Sales: The indenture defines the term "Asset Sale" and provides that
the partnership and, in specified circumstances, its subsidiaries that are
Restricted Subsidiaries, meaning they are not "Unrestricted Subsidiaries," must
comply with restrictions applicable to an Asset Sale. Briefly, an Unrestricted
Subsidiary has no Indebtedness or any other obligation that, directly or
indirectly, is guaranteed by or obligates in any way the partnership.
The partnership and its Restricted Subsidiaries may complete an Asset Sale
if the partnership or its Restricted Subsidiary, as the case may be, receives
consideration at the time of the Asset Sale at least equal to the fair market
value, as determined in good faith by an authorized financial officer of our
general partner, of the assets sold or otherwise disposed of, and at least 75%
of the consideration received by the partnership or the Restricted Subsidiary
is in the form of cash. For purposes of determining the amount of cash received
in an Asset Sale, the following will be deemed to be cash:
(1) the amount of any liabilities on the partnership's or any Restricted
Subsidiary's balance sheet that are assumed by the transferee of the
assets; and
(2) the amount of any notes or other obligations received by the partnership
or the Restricted Subsidiary from the transferee that is converted
within 180 days by the partnership or the Restricted Subsidiary into
cash, to the extent of the cash received.
Furthermore, the 75% limitation will not apply to any Asset Sale in which
the cash portion of the consideration received is equal to or greater than the
after-tax proceeds would have been had the Asset Sale complied with the 75%
limitation.
If the partnership or any of its Restricted Subsidiaries receives Net
Proceeds exceeding $10 million from one or more Asset Sales in any fiscal year,
then within 360 days after the date the aggregate amount of Net Proceeds
exceeds $10 million, the partnership must apply the amount of such Net Proceeds
either (1) to reduce Indebtedness of the partnership or any of its Restricted
Subsidiaries, with a permanent reduction of availability in the case of
revolving Indebtedness, or (2) to make an investment in assets or capital
expenditures useful to the partnership's or any of its Subsidiaries' business
as in effect on the date of the indenture or businesses related or ancillary
thereto. Any Net Proceeds that are not applied or invested in either of these
ways will be considered "Excess Proceeds."
Pending the final application of any Net Proceeds, the partnership or any
Restricted Subsidiary may temporarily reduce borrowings under the Credit
Facilities, or otherwise invest the Net Proceeds in any manner that is not
prohibited by the indenture.
When the aggregate amount of Excess Proceeds exceeds $10 million, we will
make an offer to all noteholders to purchase for cash that number of notes that
may be purchased out of the Excess Proceeds at a purchase price equal to 100%
of the principal amount of the note plus accrued and unpaid interest to the
date of purchase. We will follow the procedures set forth in the indenture and
we will comply with the requirements of Rule 14e-l under the Exchange Act and
any other applicable securities laws.
To the extent that the aggregate amount of notes tendered in response to our
purchase offer is less than the Excess Proceeds, the partnership or any
Restricted Subsidiary may use such deficiency for general business
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purposes. If the aggregate principal amount of notes surrendered by the
noteholders exceeds the amount of Excess Proceeds, the trustee shall select the
notes to be purchased in accordance with the procedures for selection and
notice of redemption set forth below. Notwithstanding the foregoing, if we make
this purchase offer at any time when we have securities outstanding ranking
equally in right of payment with the notes and the terms of those securities
provide that a similar offer must be made with respect to those other
securities, then our offer to purchase the notes will be made concurrently with
the other offers, and securities of each issue will be accepted on a pro rata
basis in proportion to the aggregate principal amount of securities of each
issue which their holders elect to have purchased. Upon completion of the offer
to the noteholders, the amount of Excess Proceeds will be reset at zero.
Selection and Notice of Redemption: If less than all the notes are to be
redeemed at any time, the trustee will select the notes to be redeemed among
the holders of notes pro rata, by lot or in accordance with a method which the
trustee considers to be fair and appropriate. The trustee must choose in a
manner that complies with any legal and stock exchange requirements. Notices of
redemption shall be mailed by first class mail at least 10 but not more than 60
days before the redemption date to each holder of notes to be redeemed at its
registered address. If any note is to be redeemed in part only, the notice of
redemption that relates to that note shall state the portion of the principal
amount thereof to be redeemed. A new note in principal amount equal to the
unredeemed portion of the note will be issued in the name of the holder of that
note upon surrender and cancellation of the original note. On and after the
redemption date, interest ceases to accrue on notes or portions of notes called
for redemption.
Covenants
The indenture requires us to comply with a number of covenants, including
those summarized below.
Limitation on Additional Indebtedness: The partnership and its Restricted
Subsidiaries may incur more debt only under specified circumstances. The
partnership will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or in any
manner become directly or indirectly liable, contingently or otherwise, for the
payment, in each case, to "incur," any Indebtedness, unless at the time of the
incurrence and after giving pro forma effect to the receipt and application of
the proceeds of the Indebtedness, the Consolidated Fixed Charge Coverage Ratio
of the partnership would be greater than 2.00 to 1.00.
In addition to any Indebtedness that may be incurred as set forth above, the
partnership and its Restricted Subsidiaries may incur "Permitted Indebtedness."
The term Permitted Indebtedness is defined in the indenture and includes:
(1) Indebtedness evidenced by the notes;
(2) Indebtedness outstanding as of the date of the indenture;
(3) Indebtedness of the partnership or a Restricted Subsidiary incurred for
the making of expenditures for the improvement or repair, to the extent
the improvements or repairs may be capitalized in accordance with GAAP,
or additions, including by way of acquisitions of businesses and
related assets, to the property and assets of the partnership and its
Restricted Subsidiaries, including, without limitation, the acquisition
of assets subject to operating leases, Indebtedness incurred under the
Credit Facilities, or incurred by assumption in connection with
additions, including additions by way of acquisitions or capital
contributions of businesses and related assets, to the property and
assets of the partnership and its Restricted Subsidiaries; provided,
that the aggregate principal amount of this Indebtedness outstanding at
any time may not exceed $75 million;
(4) Indebtedness of the partnership or a Restricted Subsidiary incurred for
any purpose permitted under the Credit Facilities, provided, that the
aggregate principal amount of this Indebtedness outstanding under this
clause at any time may not exceed an amount equal to the sum of (a)
$175 million plus
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(b) the amount, if any, by which the Borrowing Base as of the date of
calculation exceeds the amount of the Borrowing Base as of July 31,
2002;
(5) Indebtedness of the partnership owed to our general partner or an
affiliate of our general partner that is unsecured and that is
subordinated in right of payment to the notes; provided, that the
aggregate principal amount of this Indebtedness outstanding at any time
under this clause may not exceed $50 million and this Indebtedness has
a final maturity date later than the final maturity date of the notes;
(6) Indebtedness (a) owed by the partnership or any Restricted Subsidiary
to the operating partnership or any Restricted Subsidiary or (b) owed
by the operating partnership or any Restricted Subsidiary to the
partnership or to any other Restricted Subsidiary;
(7) Permitted Refinancing Indebtedness (including, for the avoidance of
doubt, Indebtedness incurred as permitted under the Consolidated Fixed
Charge Coverage Ratio set forth in the second sentence of this section
entitled "--Limitation on Additional Indebtedness");
(8) the incurrence by the partnership or a Restricted Subsidiary of
Indebtedness owing directly to its insurance carriers, without
duplication, in connection with the partnership's, its Subsidiaries' or
its Affiliates' self-insurance programs or other similar forms of
retained insurable risks for their respective businesses, consisting of
reinsurance agreements and indemnification agreements, and guarantees
of the foregoing, secured by letters of credit; provided, that any
Consolidated Fixed Charges associated with the Indebtedness evidenced
by the reinsurance agreements, indemnification agreements, guarantees
and letters of credit will be included, without duplication, in any
determination of the Consolidated Fixed Charge Coverage Ratio test set
forth in the second sentence of this section entitled "--Limitation on
Additional Indebtedness;"
(9) Indebtedness of the partnership and its Restricted Subsidiaries in
respect of Capital Leases, meaning, generally, any lease of any
property which would be required to be classified and accounted for as
a capital lease on a balance sheet of the lessor; provided, that the
aggregate amount of this Indebtedness outstanding at any time may not
exceed $15 million;
(10) Indebtedness of the partnership and its Restricted Subsidiaries
represented by letters of credit supporting (a) obligations under
workmen's compensation laws, (b) obligations to suppliers of propane or
energy commodity derivative providers in the ordinary course of
business consistent with past practices, not to exceed $10 million at
any one time outstanding, and (c) the repayment of Indebtedness
permitted to be incurred under the Indenture;
(11) surety bonds and appeal bonds required in the ordinary course of
business or in connection with the enforcement of rights or claims of
the partnership or any of its Subsidiaries or in connection with
judgments that do not result in a "Default" or "Event of Default"
(which terms are defined in the section entitled "--Events of Default
and Remedies");
(12) Indebtedness of the partnership or its Restricted Subsidiaries incurred
in connection with acquisitions of retail propane businesses in favor
of the sellers of such businesses in an aggregate principal amount not
to exceed $15 million in any fiscal year and not to exceed $60 million
at any one time outstanding; provided, that the principal amount of
such Indebtedness incurred in connection with any such acquisition
shall not exceed the fair market value of the assets so acquired and,
to the extent issued by the partnership, such Indebtedness is expressly
subordinated to the notes; and
(13) Indebtedness of the partnership or its Restricted Subsidiaries owing in
respect of any Accounts Receivable Securitization, operating lease,
Synthetic Lease, or other off-balance sheet obligation existing on the
date of the indenture that arises because, after the date of the
indenture, such off-balance sheet obligations are refinanced with
Indebtedness, not to exceed $160 million at any one time outstanding.
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For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Indebtedness or is entitled to be incurred in compliance with the
Consolidated Fixed Charge Coverage Ratio in the first paragraph of this
section, the partnership may, in its sole discretion, classify (or later
reclassify) in whole or in part such items of Indebtedness in any manner that
complies with this covenant, and such item of Indebtedness or a portion thereof
may be classified (or later reclassified) in whole or in part as having been
incurred under more than one of the applicable clauses of Permitted
Indebtedness or in compliance with the Consolidated Fixed Charge Coverage Ratio
in the first paragraph of this section.
Limitation on Restricted Payments: The partnership will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make a
Restricted Payment, that is, to:
(1) declare or pay any dividend or any other distribution or payment on or
with respect to Capital Stock of the partnership or any of its
Restricted Subsidiaries or any payment made to the direct or indirect
holders, in their capacities as such, of Capital Stock of the
partnership or any of its Restricted Subsidiaries other than (a)
dividends or distributions payable solely in Capital Stock of the
partnership (including Common Units or Senior Units, but excluding
Redeemable Capital Stock), or in options, warrants or other rights to
purchase Capital Stock of the partnership (including Common Units or
Senior Units, but excluding Redeemable Capital Stock); (b) dividends or
other distributions to the extent declared or paid to the partnership or
any Restricted Subsidiary of the partnership; or (c) dividends or other
distributions by any Restricted Subsidiary of the partnership to all
holders of Capital Stock of that Restricted Subsidiary on a pro rata
basis, including, in the case of the operating partnership, to its
general partner;
(2) purchase, redeem, defease or otherwise acquire or retire for value any
Capital Stock of the partnership or any of its Restricted Subsidiaries,
other than any Capital Stock owned by a Restricted Subsidiary of the
partnership;
(3) make any principal payment on, or purchase, defease, repurchase, redeem
or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
stated maturity, any subordinated Indebtedness, other than any such
Indebtedness owned by the partnership or a Restricted Subsidiary of the
partnership; or
(4) make any investment, other than a Permitted Investment, in any entity,
unless, at the time of and after giving effect to the proposed Restricted
Payment, no Default or Event of Default shall have occurred and be continuing,
and the Restricted Payment, together with the aggregate of all other Restricted
Payments made by the partnership and its Restricted Subsidiaries during the
fiscal quarter during which the Restricted Payment is made, will not exceed:
(a) if the Consolidated Fixed Charge Coverage Ratio of the partnership is
greater than 1.75 to 1.00, an amount equal to Available Cash for the
immediately preceding fiscal quarter; or
(b) if the Consolidated Fixed Charge Coverage Ratio of the partnership is
equal to or less than 1.75 to 1.00, an amount equal to the sum of $25
million, less the aggregate amount of all Restricted Payments made by
the partnership and its Restricted Subsidiaries in accordance with
this clause during the period ending on the last day of the fiscal
quarter of the partnership immediately preceding the date of the
Restricted Payment and beginning on the first day of the sixteenth
full fiscal quarter immediately preceding the date of the Restricted
Payment plus the aggregate net cash proceeds of capital contributions
to the partnership from any Person other than a Restricted Subsidiary
of the partnership, or issuance and sale of shares of Capital Stock,
other than Redeemable Capital Stock, of the partnership to any entity
other than to a Restricted Subsidiary of the partnership, in any case
made during the period ending on the last day of the fiscal quarter
of the partnership immediately preceding the date of the Restricted
Payment and beginning on the first day of the sixteenth full fiscal
quarter immediately preceding the date of the Restricted Payment.
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The Restricted Payment may be made in assets other than cash, in which case
the amount will be the fair market value, as determined in good faith by an
authorized financial officer of the general partner on the date of the
Restricted Payment of the assets proposed to be transferred.
The above provisions will not prohibit:
(1) the payment of any dividend or distribution within 60 days after the
date of its declaration if, at the date of declaration, the payment
would be permitted as summarized above;
(2) the redemption, repurchase or other acquisition or retirement of any
shares of any class of Capital Stock of the partnership or any
Restricted Subsidiary of the partnership in exchange for, or out of the
net cash proceeds of, a substantially concurrent capital contribution to
the partnership from any entity other than a Restricted Subsidiary of
the partnership; or issuance and sale of other Capital Stock, other than
Redeemable Capital Stock, of the partnership to any entity other than to
a Restricted Subsidiary of the partnership; provided, however, that the
amount of any net cash proceeds that are utilized for any redemption,
repurchase or other acquisition or retirement will be excluded from the
calculation of Available Cash;
(3) the repurchase of any Common Units or the payment of any dividend or
distribution under any employment agreement, stock or unit option
agreement, or restricted stock agreement not to exceed $1 million in any
calendar year and not to exceed $5 million in the aggregate amount since
the date of the indenture; or
(4) any redemption, repurchase or other acquisition or retirement of
subordinated Indebtedness in exchange for, or out of the net cash
proceeds of, a substantially concurrent capital contribution to the
partnership from any entity other than a Restricted Subsidiary of the
partnership; or issuance and sale of Indebtedness of the partnership
issued to any entity other than a Restricted Subsidiary or the
partnership, so long as the Indebtedness is Permitted Refinancing
Indebtedness; provided, however, that the amount of any net cash
proceeds that are utilized for any redemption, repurchase or other
acquisition or retirement will be excluded from the calculation of
Available Cash.
In computing the amount of Restricted Payments previously made for purposes
of the Restricted Payments test above, Restricted Payments made under the first
and third points above will be included and Restricted Payments made under the
second and fourth points above shall not be so included.
Limitation on Liens: The partnership will not, and will not permit any of
its Restricted Subsidiaries to, incur any liens or other encumbrance, unless
the lien is a Permitted Lien or the notes are directly secured equally and
ratably with the obligation or liability secured by such lien.
Limitation on Transactions with Affiliates: The partnership will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or suffer to exist any transaction or series of related
transactions, including the sale, transfer, disposition, purchase, exchange or
lease of assets, property or services, other than as provided for in our
partnership agreement or in the operating partnership's partnership agreement
and the other agreements entered into between the partnership or the operating
partnership and any of their affiliates, with, or for the benefit of any
affiliates of the partnership unless:
(1) the transaction or series of related transactions are between the
partnership and its Restricted Subsidiaries or between two Restricted
Subsidiaries; or
(2) the transaction or series of related transactions are on terms that are
no less favorable to the partnership or the Restricted Subsidiary, as
the case may be, than those which would have been obtained in a
comparable transaction at such time from an entity that is not an
affiliate of the partnership or Restricted Subsidiary, and, with respect
to transaction(s) involving aggregate payments or value equal to or
greater than $20 million, the partnership shall have delivered an
officers' certificate to the trustee certifying that the transaction(s)
is on terms that are no less favorable to the partnership or the
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Restricted Subsidiary than those which would have been obtained from an
entity that is not an affiliate of the partnership or Restricted
Subsidiary and has been approved by a majority of the board of directors
of our general partner, including a majority of the disinterested
directors.
However, the covenant limiting transactions with affiliates will not
restrict the partnership, any Restricted Subsidiary or the general partner from
entering into: any employment agreement, stock option agreement, restricted
stock agreement, employee stock ownership plan related agreements, or similar
agreement and arrangements, or Synthetic Leases, in the ordinary course of
business; transactions permitted by the provisions described in the section
entitled "--Restricted Payments;" transactions in the ordinary course of
business in connection with reinsuring the self-insurance programs or other
similar forms of retained insurable risks of the retail propane business
operated by the partnership, its Subsidiaries and affiliates; any Accounts
Receivable Securitization; any affiliate trading transactions done in the
ordinary course of business; and any transaction that is a Flow-Through
Acquisition.
Limitation on Dividends and Other Payment Restrictions Affecting the
Subsidiaries: The partnership will not, and will not permit any of its
Restricted Subsidiaries to, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends, in cash or otherwise, or make any other distributions on
or with respect to its Capital Stock or any other interest or
participation in, or measured by, its profits;
(2) pay any Indebtedness owed to the partnership or any other Restricted
Subsidiary;
(3) make loans or advances to, or any investment in, the partnership or any
other Restricted Subsidiary;
(4) transfer any of its properties or assets to the partnership or any other
Restricted Subsidiary; or
(5) guarantee any Indebtedness of the partnership or any other Restricted
Subsidiary.
Collectively, these restrictions are called the "Payment Restrictions."
However, some encumbrances or restrictions are permissible, including those
existing under or by reason of:
(1) applicable law;
(2) any agreement in effect at or entered into on the date of the indenture,
including the operating partnership's Existing Notes outstanding on and
the Credit Facilities in effect on that date, or any agreement relating
to any Indebtedness permitted to be incurred under the indenture
(including agreements or instruments evidencing Indebtedness incurred
after the date of the indenture); provided, however, that the
encumbrances and restrictions contained in the agreements governing such
permitted Indebtedness are no more restrictive with respect to the
payment restrictions than those set forth in the agreements governing
the operating partnership's Existing Notes and the Credit Facilities as
in effect on the date of the indenture;
(3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of the partnership or any Restricted
Subsidiary;
(4) specific purchase money obligations or Capital Leases for property
subject to such obligations;
(5) any agreement of an entity (or any it its Restricted Subsidiaries)
acquired by the partnership or any Restricted Subsidiary, in existence
at the time of the acquisition but not created in contemplation of the
acquisition, which encumbrance or restriction is not applicable to any
third party other than the entity; or
(6) provisions contained in instruments relating to Indebtedness which
prohibit the transfer of all or substantially all of the assets of the
obligor of the Indebtedness unless the transferee shall assume the
obligations of the obligor under the agreement or instrument.
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Limitation on Sale and Leaseback Transactions: The partnership will not, and
will not permit any of its Restricted Subsidiaries to, enter into any "Sale and
Leaseback Transaction" with respect to their properties. The term "Sale and
Leaseback Transaction" is defined in the indenture and, generally, means any
arrangement (other than between the partnership and a Restricted Subsidiary or
between Restricted Subsidiaries) whereby property has been or will be disposed
of by a transferor to another entity with the intent of taking back a lease on
the property pursuant to which the rental payments are calculated to amortize
the purchase price of the property over its life.
The partnership and its Restricted Subsidiaries may, however, enter into a
Sale and Leaseback Transaction; provided, that the partnership or the
Restricted Subsidiary would be permitted under the indenture to incur
Indebtedness secured by a lien on the property in an amount equal to the
Attributable Debt with respect to the Sale and Leaseback Transaction.
Limitations on Ferrellgas Partners Finance Corp.: In addition to the
restrictions set forth under the section entitled "--Limitation on Additional
Indebtedness," Ferrellgas Partners Finance Corp. may not incur any Indebtedness
unless the partnership is a co-obligor or guarantor of the Indebtedness; or the
net proceeds of the Indebtedness are either lent to the partnership, used to
acquire outstanding debt securities issued by the partnership, or used,
directly or indirectly, to refinance or discharge Indebtedness permitted under
the limitation of this paragraph.
Ferrellgas Partners Finance Corp. may not engage in any business not
related, directly or indirectly, to obtaining money or arranging financing for
the partnership.
Merger, Consolidation or Sale of Assets
The indenture provides that the partnership may not consolidate or merge
with or into, or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions to, another entity unless:
(1) the partnership is the surviving entity or the entity formed by or
surviving the transaction, if other than the partnership, or the entity
to which the sale was made is a corporation or partnership organized or
existing under the laws of the United States, any state thereof or the
District of Columbia;
(2) the entity formed by or surviving the transaction, if other than the
partnership, or the entity to which the sale was made assumes all the
obligations of the partnership in accordance with a supplemental
indenture in a form reasonably satisfactory to the trustee, under the
notes and the indenture;
(3) immediately after the transaction no Default or Event of Default exists;
and
(4) at the time of the transaction and after giving pro forma effect to it
as if the transaction had occurred at the beginning of the applicable
four-quarter period, the partnership or such other entity or survivor is
permitted to incur at least $1.00 of additional Indebtedness in
accordance with the Consolidated Fixed Charge Coverage Ratio as
described in the section entitled "--Limitation on Additional
Indebtedness."
The indenture also provides that Ferrellgas Partners Finance Corp. may not
consolidate or merge with or into, whether or not it is the surviving entity,
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another entity except under conditions similar to those
described in the paragraph above.
Reports to Noteholders
Whether or not required by the rules and regulations of the SEC, so long as
any notes are outstanding, we will furnish to the noteholders all quarterly and
annual financial information that would be required to be contained in a filing
with the SEC on Forms 10-Q and 10-K if we were required to file those Forms,
including a
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, we will furnish to such noteholders all reports that
would be required to be filed with the SEC on Form 8-K if we were required to
file the reports. Finally, whether or not required by the rules and regulations
of the SEC, we will file a copy of all the information described in the
preceding sentences with the SEC unless the SEC will not accept the filing. We
will also make the information available to investors who request it in
writing. Currently, we are required to and do file quarterly and annual reports
on Forms 10-Q and 10-K. Furthermore, we will promptly furnish to the
noteholders notices of (a) any Payment Default under any instrument evidencing
Indebtedness for borrowed money, and (b) any acceleration of such Indebtedness
prior to its express maturity.
Events of Default and Remedies
The indenture describes in detail the occurrences that would constitute an
"Event of Default." Such occurrences include the following:
(1) default in the payment of the principal of or premium, if any, on any
note when the same becomes due and payable, upon stated maturity,
acceleration, optional redemption, required purchase, scheduled
principal payment or otherwise;
(2) default in the payment of an installment of interest on any of the
notes, when the same becomes due and payable, which default continues
for a period of 30 days;
(3) failure to perform or observe any other term, covenant or agreement
contained in the notes or the indenture, other than a default specified
in either of the two clauses above, and the default continues for a
period of 45 days after written notice of the default requiring us to
remedy the same shall have been given to the partnership by the trustee
or to us and the trustee by holders of 25% in aggregate principal amount
of the applicable notes then outstanding;
(4) default or defaults under one or more agreements, instruments,
mortgages, bonds, debentures or other evidences of Indebtedness under
which the partnership or any Restricted Subsidiary of the partnership
then has outstanding Indebtedness in excess of $10 million, if the
default:
(a) is caused by a failure to pay principal of or premium, if any, or
interest on to such Indebtedness within the applicable grace period,
if any, provided with respect to such Indebtedness or
(b) results in the acceleration of such Indebtedness prior to its stated
maturity;
(5) a final judgment or judgments, which is or are non-appealable and
nonreviewable or which has or have not been stayed pending appeal or
review or as to which all rights to appeal or review have expired or
been exhausted, shall be rendered against the partnership, any
Restricted Subsidiary, or the general partner provided such judgment or
judgments requires or require the payment of money in excess of $10
million in the aggregate and is not covered by insurance or discharged
or stayed pending appeal or review within 60 days after entry of such
judgment; in the event of a stay, the judgment shall not be discharged
within 30 days after the stay expires; or
(6) specified events of bankruptcy, insolvency or reorganization with
respect to us or any of our significant subsidiaries, as that term is
defined in Rule 1.02(v) of Regulation S-X under the Securities Act, has
occurred.
If any Event of Default occurs and is continuing, the trustee or the holders
of at least 25% of principal amount of the applicable series of notes then
outstanding may declare all the notes of that series to be due and payable
immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising
from specified events of bankruptcy or insolvency, with respect to the
partnership or Ferrellgas Partners Finance Corp. or any significant subsidiary,
all outstanding notes will become due and payable immediately without further
action or notice. Noteholders may not enforce the indenture or the notes except
as provided in the indenture. Subject to limitations, holders of a majority in
principal amount of a series of then-outstanding notes may direct the trustee
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of that series of notes in its exercise of any trust or power. The trustee may
withhold from noteholders notice of any continuing Default or Event of Default,
except a Default or Event of Default relating to the payment of principal or
interest, if the trustee determines in good faith that withholding notice is in
their interest. If any Event of Default occurs because we or those acting on
our behalf willfully intended to avoid payment of the premium that we would
have to pay if we then elected to redeem the notes under the optional
redemption provisions of the indenture governing the notes, then an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the notes. The holders of a majority
in aggregate principal amount of a series of notes issued under the indenture
and then outstanding, by notice to the trustee for those notes, may waive any
existing Default or Event of Default for all noteholders of that series and its
consequences under the indenture, except a continuing Default or Event of
Default in the payment of any principal of, premium, if any, or interest on the
notes. We are required to deliver to the trustee annually a statement regarding
compliance with the indenture. In addition, upon becoming aware of any Default
or Event of Default, we are required to deliver to the trustee a statement
specifying the Default or Event of Default.
No Personal Liability of Limited Partners, Directors, Officers, Employees and
Unitholders
No limited partner of the partnership or director, officer, employee,
incorporator or stockholder of our general partner or Ferrellgas Partners
Finance Corp., as such, shall have any liability for any of our obligations
under the notes or the indenture or any claim based on, in respect of, or by
reason of, these obligations. Each noteholder, by accepting a note, waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
Non-Recourse
Our obligations under the indenture are recourse to our general partner and
non-recourse to the operating partnership, and their respective affiliates,
other than ourselves, and are payable only out of our cash flow and assets. The
trustee has, and each holder of a note, by accepting a note, is deemed to have,
agreed in the indenture that the operating partnership and their affiliates
will not be liable for any of our obligations under the indenture or the notes.
Legal Defeasance and Covenant Defeasance
We may, at the option of the board of directors of our general partner, on
our behalf, and the board of directors of Ferrellgas Partners Finance Corp. and
at any time, elect to have all of our obligations discharged with respect to
outstanding notes. This is known as "legal defeasance." However, under legal
defeasance we cannot discharge:
(1) the rights of holders of outstanding notes to receive payments with
respect to any principal, premium, and interest on the notes when the
payments are due;
(2) our obligations with respect to the notes concerning issuing temporary
notes, registration of notes or mutilated, destroyed, lost or stolen
notes;
(3) our obligation to maintain an office or agency for payment and money for
security payments held in trust;
(4) the rights, powers, trusts, duties and immunities of the trustee, and
our obligations in connection therewith; and
(5) the legal defeasance and covenant defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to specified covenants that are described in
the indenture. This is called "covenant defeasance." After our
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obligations have been released in this manner, any failure to comply with these
obligations will not constitute a Default or Event of Default with respect to
the notes. In the event covenant defeasance occurs, specific events, not
including non-payment, bankruptcy, receivership, reorganization and insolvency,
described in the section entitled "--Events of Default and Remedies," will no
longer constitute an Event of Default with respect to the notes.
In order to exercise either legal defeasance or covenant defeasance, we must
irrevocably deposit with the trustee, in trust, for the benefit of the
noteholders, cash in U.S. dollars, non-callable U.S. government securities, or
a combination thereof, in amounts sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal, any
premium and interest on the outstanding notes on the stated maturity date or on
the applicable redemption date.
In addition, we will be required to deliver to the trustee an opinion of
counsel stating that after the 91st day following the deposit the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, and that
all conditions precedent provided for or relating to legal defeasance or
covenant defeasance have been complied with, and confirming other matters.
Furthermore, in the case of a legal defeasance, the opinion must confirm that
we have received from, or there shall have been published by, the IRS a ruling,
or since the date of the indenture, there shall have been a change in the
applicable federal income tax law, in either case, to the effect that, and
based thereon, the holders of the outstanding notes will not recognize income,
gain or loss for federal income tax purposes as a result of the legal
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if the legal
defeasance had not occurred. In the case of covenant defeasance, the opinion
must confirm that the holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of the
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if the covenant defeasance had not occurred.
Finally, to exercise either legal defeasance or covenant defeasance, we must
have delivered to the trustee an officers' certificate stating that we did not
make the deposit with the intent of preferring the holders of notes over our
other creditors or with the intent of defeating, hindering, delaying or
defrauding our other creditors.
We may not exercise either legal defeasance or covenant defeasance if an
Event of Default has occurred and is continuing on the date of the deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit. In addition, we may not exercise either legal defeasance or covenant
defeasance if such legal defeasance or covenant defeasance will result in a
breach, violation or constitute a default under any material agreement or
instrument, other than the indenture, to which we or any of our Restricted
Subsidiaries is a party or by which we or any of our Restricted Subsidiaries is
bound.
Amendment, Supplement and Waiver
In general, the indenture and the notes may be amended or supplemented, and
any existing default or compliance with any provision of the indenture or the
notes may be waived, with the consent of the holders of at least a majority in
principal amount of the notes then outstanding. This includes consents obtained
in connection with a tender offer or exchange offer for notes. However, without
the consent of each noteholder affected, an amendment or waiver may not, with
respect to any notes held by a non-consenting noteholder:
(1) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes, other
than provisions relating to our obligation to repurchase the notes upon
specific asset sales or a change of control;
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(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default in the payment of principal or interest on the notes;
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of holders of notes to receive payments
of principal, premium, if any, or interest on the notes; or
(7) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any noteholder, we and
the trustee may amend or supplement the indenture or the notes to:
(1) cure any ambiguity, defect or inconsistency;
(2) provide for uncertificated notes in addition to or in place of
certificated notes;
(3) provide for the assumption of our obligations to noteholders in the case
of a merger or consolidation;
(4) make any change that could provide any additional rights or benefits to
the noteholders that does not adversely affect the legal rights under
the indenture of any such holder;
(5) comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act; or
(6) to provide security for or add guarantees with respect to the notes.
The Trustee
Should the trustee, U.S. Bank, N.A., become our creditor, the indenture
contains specific limitations on the trustee's rights to obtain payment of
claims or to realize on specific property received in respect of any claim as
security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must
eliminate the conflict within 90 days, apply to the SEC for permission to
continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
specific exceptions. The indenture provides that in case an uncured Event of
Default occurs, the trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs.
Subject to these provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
noteholder, unless the noteholder offers to the trustee security and indemnity
satisfactory to the trustee against any loss, liability or expense.
Certain Definitions
Set forth below are defined terms used in the indenture and in the
description of the notes set forth above. These defined terms frequently refer
to other defined terms and include details that explain the terms of the
indenture with greater precision than the summary section above does. We have
not, however, included in this glossary all of the defined terms that are
included in the indenture. We urge you to read the indenture and the form of
note because they, not this description, define the rights of the noteholders
and include all the details about the notes.
"Accounts Receivable Securitization" shall mean a financing arrangement
involving the transfer or sale of accounts receivable of the partnership and
its Restricted Subsidiaries in the ordinary course of business through one or
more SPEs, the terms of which arrangement do not impose (a) any recourse or
repurchase obligations upon the partnership and its Restricted Subsidiaries or
any Affiliate of the partnership and its Restricted
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Subsidiaries (other than any such SPE) except to the extent of the breach of a
representation or warranty by the partnership and its Restricted Subsidiaries
in connection therewith or (b) any negative pledge or lien on any accounts
receivable not actually transferred to any such SPE in connection with such
arrangement.
"Asset Acquisition" means the following (in all cases, including assets
acquired through a Flow-Through Acquisition):
(1) an Investment by the partnership or any Restricted Subsidiary of the
partnership in any other Person pursuant to which the Person shall
become a Restricted Subsidiary of the partnership, or shall be merged
with or into the partnership or any Restricted Subsidiary of the
partnership;
(2) the acquisition by the partnership or any Restricted Subsidiary of the
partnership of the assets of any Person, other than a Restricted
Subsidiary of the partnership, which constitute all or substantially all
of the assets of such Person; or
(3) the acquisition by the partnership or any Restricted Subsidiary of the
partnership of any division or line of business of any Person, other
than a Restricted Subsidiary of the partnership.
"Asset Sale" means either of the following, whether in a single transaction
or a series of related transactions:
(1) the sale, lease, conveyance or other disposition of any assets other
than (a) sales, leases or transfers of assets in the ordinary course of
business (including but not limited to the sales of inventory in the
ordinary course of business), and (b) sales of accounts receivable under
any Accounts Receivable Securitization; or
(2) the issuance or sale of Capital Stock of any direct Subsidiary.
Notwithstanding the preceding, none of the following items will be deemed to
be an Asset Sale:
(1) any sale, lease or transfer of assets or Capital Stock by the
partnership or any of its Restricted Subsidiaries to us, the operating
partnership or a Restricted Subsidiary;
(2) any sale or transfer of assets or Capital Stock by the partnership or
any of its Restricted Subsidiaries to any entity in exchange for other
assets used in a related business and/or cash (provided, that such cash
portion is at least 75% of the difference between the value of the
assets being transferred and the value of the assets being received) and
having a fair market value, as determined in good faith by an authorized
financial officer of our general partner, reasonably equivalent to the
fair market value of the assets so transferred;
(3) any sale, lease or transfer of assets in accordance with Permitted
Investments;
(4) the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the partnership; provided, that the sale, lease,
conveyance or other disposition of all or substantially all of the
assets of the partnership will be governed by the provisions described
under the section entitled "--Offers to Purchase; Repurchase at the
Option of the Noteholders--Change of Control Offer" and/or the
provisions described under the section entitled "--Merger, Consolidation
or Sale of Assets" and not the Asset Sale covenant;
(5) the transfer or disposition of assets that are permitted Restricted
Payments;
(6) any sale, lease or transfer of assets pursuant to a Synthetic Lease or a
Sale and Leaseback Transaction otherwise permitted by the indenture; and
(7) sales or transfers of accounts receivable under an Accounts Receivable
Securitization.
"Attributable Debt" means, with respect to any Sale and Leaseback
Transactions not involving a Capital Lease, as of any date of determination,
the total obligation, discounted to present value at the rate of interest
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implicit in the lease included in the transaction, of the lessee for rental
payments during the remaining portion of the term of the lease, including
extensions which are at the sole option of the lessor, of the lease included in
the transaction. For purposes of this definition, the rental payments shall not
include amounts required to be paid on account of property taxes, maintenance,
repairs, insurance, assessments, utilities, operating and labor costs and other
items which do not constitute payments for property rights. In the case of any
lease which is terminable by the lessee upon the payment of a penalty, the
rental obligation shall also include the amount of the penalty, but no rent
shall be considered as required to be paid under such lease subsequent to the
first date upon which it may be so terminated.
"Available Cash" as to any quarter means:
(1) the sum of:
(a) all cash receipts of the partnership during such quarter from all
sources (including, without limitation, distributions of cash
received from the operating partnership and cash proceeds from
Interim Capital Transactions, but excluding cash proceeds from
Termination Capital Transactions); and
(b) any reduction with respect to such quarter in a cash reserve
previously established pursuant to clause (2)(b) below (either by
reversal or utilization) from the level of such reserve at the end of
the prior quarter;
(2) less the sum of:
(a) all cash disbursements of the partnership during such quarter,
including, without limitation, disbursements for operating expenses,
taxes, if any, debt service (including, without limitation, the
payment of principal, premium and interest), redemption of Capital
Stock of the partnership (including Common Units or Senior Units),
capital expenditures, contributions, if any, to the operating
partnership and cash distributions to partners of the partnership
(but only to the extent that such cash distributions to partners
exceed Available Cash for the immediately preceding quarter); and
(b) any cash reserves established with respect to such quarter, and any
increase with respect to such quarter in a cash reserve previously
established pursuant to this clause (2)(b) from the level of such
reserve at the end of the prior quarter, in such amounts as the
general partner determines in its reasonable discretion to be
necessary or appropriate (i) to provide for the proper conduct of the
business of the partnership or the operating partnership (including,
without limitation, reserves for future capital expenditures), (ii)
to provide funds for distributions with respect to Capital Stock of
the partnership in respect of any one or more of the next four
quarters or (iii) because the distribution of such amounts would be
prohibited by applicable law or by any loan agreement, security
agreement, mortgage, debt instrument or other agreement or obligation
to which the partnership or the operating partnership is a party or
by which any of them is bound or its assets are subject;
(3) plus the lesser of (a) an amount as calculated in accordance with
clauses (1) and (2) above for the partnership or its Restricted
Subsidiaries for the first 45 days of the quarter during which such
Restricted Payment is made (rather than the quarter for which clauses
(1) and (2) were calculated) and (b) an amount of working capital
Indebtedness that the partnership or its Restricted Subsidiaries could
have incurred on or before the 45th day after the last day of the
quarter used to calculate clauses (1) and (2) above;
provided, however, that Available Cash attributable to any Restricted
Subsidiary of the partnership will be excluded to the extent dividends or
distributions of Available Cash by the Restricted Subsidiary are not at the
date of determination permitted by the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or other regulation.
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Notwithstanding the foregoing, "Available Cash" shall not include any cash
receipts or reductions in reserves or take into account any disbursements made
or reserves established in each case after the date of liquidation of the
partnership. Taxes paid by the partnership on behalf of, or amounts withheld
with respect to, all or less than all of the partners shall not be considered
cash disbursements of the partnership that reduce Available Cash, but the
payment or withholding thereof shall be deemed to be a distribution of
Available Cash to the partners other than the limited partners holding Senior
Units. Alternatively, in the discretion of the general partner, such taxes (if
pertaining to all partners) may be considered to be cash disbursements of the
partnership which reduce Available Cash, but the payment or withholding thereof
shall not be deemed to be a distribution of Available Cash to such partners.
"Borrowing Base" means, as of any date, an amount equal to:
(1) 80% of the face amount of all accounts receivable owned by the
partnership and its Subsidiaries as of the end of the most recent month
preceding such date that were not more than 90 days past due; plus
(2) 70% of the value of all inventory owned by the partnership and its
Subsidiaries as of the end of the most recent month preceding such date,
in each case, as calculated on a consolidated basis and in accordance with
GAAP.
"Capital Stock" means of any Person any capital stock, partnership interest,
membership interest, or equity interest of any kind.
"Common Units" means the units representing limited partner interests of the
partnership, having the rights and obligations specified with respect to common
units of the partnership.
"Consolidated Cash Flow Available for Fixed Charges" means, with respect to
the partnership and its Restricted Subsidiaries, for any period, the sum of,
without duplication, the amounts for the period, taken as single accounting, of:
(1) Consolidated Net Income;
(2) Consolidated Non-cash Charges;
(3) Consolidated Interest Expense; and
(4) Consolidated Income Tax Expense.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
partnership and its Restricted Subsidiaries, the ratio of (y) the aggregate
amount of Consolidated Cash Flow Available for Fixed Charges of the Person for
the four full fiscal quarters immediately preceding the date of the transaction
(the "Transaction Date") giving rise to the need to calculate the Consolidated
Fixed Charge Coverage Ratio (the "Four Quarter Period"), to (z) the aggregate
amount of Consolidated Fixed Charges of the Person for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated Cash Flow Available for Fixed Charges" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of the calculation to, without duplication:
(1) the incurrence or repayment of any Indebtedness, excluding revolving
credit borrowings and repayments of revolving credit borrowings (other
than any revolving credit borrowings the proceeds of which are used for
Asset Acquisitions or Growth Related Capital Expenditures of the
partnership or any of its Restricted Subsidiaries and in the case of any
incurrence, the application of the net proceeds thereof) during the
period commencing on the first day of the Four Quarter Period to and
including the Transaction Date (the "Reference Period"), including,
without limitation, the incurrence of the Indebtedness giving rise to
the need to make the calculation (and the application of the net
proceeds thereof), as if the incurrence (and application) occurred on
the first day of the Reference Period; and
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(2) any Asset Sales or Asset Acquisitions (including, without limitation,
any Asset Acquisition giving rise to the need to make the calculation as
a result of the partnership or one of its Restricted Subsidiaries,
including any Person who becomes a Restricted Subsidiary as a result of
the Asset Acquisition, incurring, assuming or otherwise being liable for
Acquired Indebtedness) occurring during the Reference Period, as if the
Asset Sale or Asset Acquisition occurred on the first day of the
Reference Period; provided, however, that:
(a) Consolidated Fixed Charges will be reduced by amounts attributable to
businesses or assets that are so disposed of or discontinued only to
the extent that the obligations giving rise to such Consolidated
Fixed Charges would no longer be obligations contributing to the
Consolidated Fixed Charges subsequent to the date of determination of
the Consolidated Fixed Charge Coverage Ratio;
(b) Consolidated Cash Flow Available for Fixed Charges generated by an
acquired business or asset shall be determined by the actual gross
profit, which is equal to revenues minus cost of goods sold, of the
acquired business or asset during the immediately available preceding
four full fiscal quarters occurring in the Reference Period, minus
the pro forma expenses that would have been incurred by the
partnership and its Restricted Subsidiaries in the operation of the
acquired business or asset during the period computed on the basis of
personnel expenses for employees retained or to be retained by the
partnership and its Restricted Subsidiaries in the operation of the
acquired business or asset and non-personnel costs and expenses
incurred by or to be incurred by the partnership and its Restricted
Subsidiaries based upon the operation of the partnership's business,
all as determined in good faith by an authorized financial officer of
our general partner; and
(c) Consolidated Cash Flow Available for Fixed Charges shall not include
the impact of any non-recurring cash charges incurred in connection
with a restructuring, reorganization or other similar transaction, as
determined in good faith by an authorized financial officer of our
general partner.
Furthermore, subject to the following paragraph, in calculating
"Consolidated Fixed Charges" for purposes of determining the "Consolidated
Fixed Charge Coverage Ratio":
(1) interest on outstanding Indebtedness, other than Indebtedness referred
to in the point below, determined on a fluctuating basis as of the last
day of the Four Quarter Period and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate
per annum equal to the rate of interest on such Indebtedness in effect
on that date;
(2) only actual interest payments associated with Indebtedness incurred in
accordance with clause (4) of the definition of Permitted Indebtedness
and all Permitted Refinancing Indebtedness in respect thereof, during
the Four Quarter Period shall be included in the calculation; and
(3) if interest on any Indebtedness actually incurred on the date may
optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the last day of the Four
Quarter Period will be deemed to have been in effect during the period.
"Consolidated Fixed Charges" means, with respect to the partnership and its
Restricted Subsidiaries for any period, the sum of, without duplication:
(1) the amounts for such period of Consolidated Interest Expense; and
(2) the product of:
(a) the aggregate amount of dividends and other distributions paid or
accrued during the period in respect of Preferred Stock and
Redeemable Capital Stock of the partnership and its Restricted
Subsidiaries on a consolidated basis; and
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(b) a fraction, the numerator of which is one and the denominator of
which is one less the then applicable current combined federal, state
and local statutory tax rate, expressed as a percentage.
"Consolidated Income Tax Expense" means, with respect to the partnership and
its Restricted Subsidiaries for any period, the provision for federal, state,
local and foreign income taxes of the partnership and its Restricted
Subsidiaries for the period as determined on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means, with respect to the partnership and
its Restricted Subsidiaries, for any period, without duplication, the sum of:
(1) the interest expense of the partnership and its Restricted Subsidiaries
for the period as determined on a consolidated basis in accordance with
GAAP, including, without limitation:
(2) any amortization of debt discount;
(3) the net cost under Interest Rate Agreements;
(4) the interest portion of any deferred payment obligation;
(5) all commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
(6) all accrued interest for all instruments evidencing Indebtedness; and
(7) the interest component of Capital Leases paid or accrued or scheduled to
be paid or accrued by the partnership and its Restricted Subsidiaries
during the period as determined on a consolidated basis in accordance
with GAAP.
"Consolidated Net Income" means the net income of the partnership and its
Restricted Subsidiaries, as determined on a consolidated basis in accordance
with GAAP and as adjusted to exclude:
(1) net after-tax extraordinary gains or losses;
(2) net after-tax gains or losses attributable to Asset Sales or sales of
receivables under any Accounts Receivable Securitization;
(3) the net income or loss of any Person which is not a Restricted
Subsidiary and which is accounted for by the equity method of
accounting; provided, that Consolidated Net Income shall include the
amount of dividends or distributions actually paid to the partnership or
any Restricted Subsidiary;
(4) the net income or loss prior to the date of acquisition of any Person
combined with the partnership or any Restricted Subsidiary in a pooling
of interest;
(5) the net income of any Restricted Subsidiary to the extent that dividends
or distributions of that net income are not at the date of determination
permitted by the terms of its charter or any judgment, decree, order,
statute, rule or other regulation; and
(6) the cumulative effect of any changes in accounting principles.
"Consolidated Non-Cash Charges" means, with respect to the partnership and
its Restricted Subsidiaries for any period, the aggregate (1) depreciation, (2)
amortization, (3) non-cash employee compensation expenses of the partnership or
its Restricted Subsidiaries for such period, and (4) any non-cash charges
resulting from writedowns of non-current assets, in each case which reduces the
Consolidated Net Income of the partnership and its Restricted Subsidiaries for
the period, as determined on a consolidated basis in accordance with GAAP.
"Credit Agreement" means that Third Amended and Restated Credit Agreement,
dated as of April 18, 2000, among the operating partnership, the general
partnership, Bank of America, N.A. (formerly known as Bank of America National
Trust and Savings Association), as agent, and the other financial institutions
party thereto.
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"Credit Facilities" means, one or more debt facilities (including, without
limitation, the facilities evidenced by the Credit Agreement) or commercial
paper facilities, in each case with banks or other institutional lenders
providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation Amount" means, with respect to the designation of a Restricted
Subsidiary or a newly acquired or formed Subsidiary as an Unrestricted
Subsidiary, an amount equal to the sum of:
(1) the net book value of all assets of the Subsidiary at the time of the
designation in the case of a Restricted Subsidiary; and
(2) the cost of acquisition or formation in the case of a newly acquired or
formed Subsidiary.
"Equity Offering" means a public offering or private placement of
partnership interests (other than interests that are mandatorily redeemable) of:
(1) any entity that directly or indirectly owns equity interests in the
partnership, to the extent the net proceeds are contributed to the
partnership;
(2) any Subsidiary of the partnership to the extent the net proceeds are
distributed, paid, lent or otherwise transferred to the partnership that
results in the net proceeds to the partnership of at least $20 million;
or
(3) the partnership.
A private placement of partnership interests will not be deemed an Equity
Offering unless net proceeds of at least $20 million are received.
"Existing Notes" means the operating partnership's (1) $109,000,000
principal amount of 6.99% Senior Notes, Series A, due August 1, 2005, (2)
$37,000,000 principal amount of 7.08% Senior Notes, Series B, due August 1,
2006, (3) $52,000,000 principal amount of 7.12% Senior Notes, Series C, due
August 1, 2008, (4) $82,000,000 principal amount of 7.24% Senior Notes, Series
D, due August 1, 2010, (5) $70,000,000 principal amount of 7.42% Senior Notes,
Series E, due August 1, 2013, (6) $21,000,000 principal amount of 8.68% Senior
Notes, Series A, due August 1, 2006, (7) $90,000,000 principal amount of 8.78%
Senior Notes, Series B, due August 1, 2007, and (8) $73,000,000 principal
amount of 8.87% Senior Notes, Series C, due August 1, 2009.
"Flow-Through Acquisition" means an acquisition by the general partner or
its parent from a Person that is not an Affiliate of the general partner, its
parent or the partnership, of property (real or personal), assets or equipment
(whether through the direct purchase of assets or the Capital Stock of the
Person owning such assets) in a permitted line of business, which is promptly
sold, transferred or contributed by the general partner or its parent to the
partnership or one of its Subsidiaries.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, in each case, which are in effect on the date of the indenture.
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"Growth Related Capital Expenditures" means, with respect to any Person, all
capital expenditures by such Person made to improve or enhance the existing
capital assets or to increase the customer base of such Person or to acquire or
construct new capital assets (but excluding capital expenditures made to
maintain, up to the level thereof that existed at the time of such expenditure,
the operating capacity of the capital assets of such Person as such assets
existed at the time of such expenditure).
"Indebtedness" means, as applied to any Person, without duplication:
(1) (a) any indebtedness for borrowed money and (b) all obligations
evidenced by any (i) bond, note, debenture or other similar instrument
or (ii) letter of credit, or reimbursement agreements in respect
thereof, but only for any drawings that are not reimbursed within five
Business Days after the date of such drawings, which in each case the
Person has, directly or indirectly, created, incurred or assumed;
(2) any indebtedness for borrowed money and all obligations evidenced by any
bond, note, debenture or other similar instrument secured by any lien in
respect of property owned by the Person, whether or not the Person has
assumed or become liable for the payment of the indebtedness; provided,
that the amount of the indebtedness, if the Person has not assumed the
same or become liable therefor, shall in no event be deemed to be
greater than the fair market value from time to time, as determined in
good faith by the Person of the property subject to the lien;
(3) any indebtedness, whether or not for borrowed money (excluding trade
payables and accrued expenses arising in the ordinary course of
business) with respect to which the Person has become directly or
indirectly liable and which represents the deferred purchase price, or a
portion thereof, or has been incurred to finance the purchase price, or
a portion thereof, of any property or business acquired by, or service
performed on behalf of, the Person, whether by purchase, consolidation,
merger or otherwise;
(4) the principal component of any obligations under Capital Leases to the
extent the obligations would, in accordance with GAAP, appear on the
balance sheet of the Person;
(5) all Attributable Debt of the Person in respect of Sale and Leaseback
Transactions not involving a Capital Lease;
(6) any indebtedness of any other Person of the character referred to in the
foregoing clauses (1)-(5) of this definition with respect to which the
Person whose indebtedness is being determined has become liable by way
of a guarantee; and
(7) all Redeemable Capital Stock of the Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued
dividends.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of the Redeemable Capital Stock as if it were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the indenture and if the price is based upon, or measured by, the
fair market value of the Redeemable Capital Stock, the fair market value shall
be determined in good faith by the board of directors of the issuer of the
Redeemable Capital Stock. For purposes hereof, the term "Indebtedness" shall
not include (x) accrual of interest, the accretion of accreted value and the
payment of interest or any other similar incurrence by the partnership or its
Restricted Subsidiaries related to Indebtedness otherwise permitted in the
indenture, (y) indebtedness under any hedging arrangement which provides for
the right or obligation to purchase, sell or deliver any currency, commodity or
security at a future date for a specified price entered into to protect such
Person from fluctuations in prices or rates, including currencies, interest
rates, commodity prices, and securities prices, including without limitation
indebtedness under any interest rate or commodity price swap agreement,
interest rate cap agreement, interest rate collar agreement or any forward
sales arrangements, calls, options, swaps, or other similar transactions or any
combination thereof, including, or (z) any Accounts Receivable Securitization.
"Interim Capital Transactions" means (1) borrowings, refinancings or
refundings of Indebtedness and sales of debt securities (other than for working
capital purposes and other than for items purchased on open account in
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the ordinary course of business) by the partnership or the operating
partnership, (2) sales of Capital Stock of the partnership by the partnership
or the operating partnership and (3) sales or other voluntary or involuntary
dispositions of any assets of the partnership or the operating partnership
(other than (x) sales or other dispositions of inventory in the ordinary course
of business, (y) sales or other dispositions of other current assets including,
without limitation, receivables and accounts and (z) sales or other
dispositions of assets as a part of normal retirements or replacements), in
each case prior to the commencement of the dissolution and liquidation of the
partnership.
"Investment" means as applied to any Person:
(1) any direct or indirect purchase or other acquisition by the Person of
stock or other securities of any other Person; or
(2) any direct or indirect loan, advance or capital contribution by the
Person to any other Person and any other item which would be classified
as an "investment" on a balance sheet of the Person prepared in
accordance with GAAP, including without limitation any direct or
indirect contribution by the Person of property or assets to a joint
venture, partnership or other business entity in which the Person
retains an interest, it being understood that a direct or indirect
purchase or other acquisition by the Person of assets of any other
Person, other than stock or other securities, shall not constitute an
"Investment" for purposes of the indenture.
The amount classified as Investments made during any period shall be the
aggregate cost to the partnership and its Restricted Subsidiaries of all the
Investments made during the period, determined in accordance with GAAP, but
without regard to unrealized increases or decreases in value, or write-ups,
write-downs or write-offs, of the Investments and without regard to the
existence of any undistributed earnings or accrued interest with respect
thereto accrued after the respective dates on which the Investments were made,
less any net return of capital realized during the period upon the sale,
repayment or other liquidation of the Investments, determined in accordance
with GAAP, but without regard to any amounts received during the period as
earnings (in the form of dividends not constituting a return of capital,
interest or otherwise) on the Investments or as loans from any Person in whom
the Investments have been made.
"Net Amount of Unrestricted Investment" means, without duplication, the sum
of:
(1) the aggregate amount of all Investments made after the date of the
indenture pursuant to clause (3) of the definition of Permitted
Investment, computed as provided in the last sentence of the definition
of Investment; and
(2) the aggregate of all Designation Amounts in connection with the
designation of unrestricted subsidiaries, less all Designation Amounts
in respect of unrestricted subsidiaries which have been designated as
Restricted Subsidiaries and otherwise reduced in a manner consistent
with the provisions of the last sentence of the definition of Investment.
"Net Proceeds" means, with respect to any asset sale or sale of Capital
Stock, the proceeds therefrom in the form of cash or cash equivalents including
payments in respect of deferred payment obligations when received in the form
of cash or cash equivalents, except to the extent that the deferred payment
obligations are financed or sold with recourse to the partnership or any of its
Restricted Subsidiaries, net of:
(1) brokerage commissions and other fees and expenses related to the Asset
Sale, including, without limitation, fees and expenses of legal counsel
and accountants and fees, expenses, discounts or commissions of
underwriters, placement agents and investment bankers;
(2) provisions for all taxes payable as a result of the Asset Sale;
(3) amounts required to be paid to any Person, other than the partnership or
any Restricted Subsidiary of the partnership, owning a beneficial
interest in the assets subject to the Asset Sale;
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(4) appropriate amounts to be provided by the partnership or any Restricted
Subsidiary of the partnership, as the case may be, as a reserve required
in accordance with GAAP against any liabilities associated with the
Asset Sale and retained by the partnership or any Restricted Subsidiary
of the partnership, as the case may be, after the Asset Sale, including,
without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with the
Asset Sale; and
(5) amounts applied to the repayment of Indebtedness in connection with the
asset or assets acquired in the Asset Sale, including any transaction
costs and expenses associated therewith and any make-whole or other
premium owed in connection with such repayment.
"Permitted Investments" means any of the following:
(1) Investments made or owned by the partnership or any Restricted
Subsidiary in:
(a) marketable obligations issued or unconditionally guaranteed by the
United States, or issued by any agency thereof and backed by the full
faith and credit of the United States, in each case maturing one year
or less from the date of acquisition thereof;
(b) marketable direct obligations issued by any state of the United
States or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition thereof and having as at such date the highest rating
obtainable from either Standard & Poor's Ratings Group ("S&P") and
its successors or Moody's Investors Service, Inc. ("Moody's") and its
successors;
(c) commercial paper maturing no more than 270 days from the date of
creation thereof and having as at the date of acquisition thereof one
of the two highest ratings obtainable from either S&P or Moody's;
(d) certificates of deposit maturing one year or less from the date of
acquisition thereof issued by commercial banks incorporated under the
laws of the United States or any state thereof or the District of
Columbia or Canada;
. the commercial paper or other short term unsecured debt
obligations of which are as at such date rated either "A-2" or
better (or comparably if the rating system is changed) by S&P or
"Prime-2" or better (or comparably if the rating system is
changed) by Moody's;
. the long-term debt obligations of which are, as at such date,
rated either "A" or better (or comparably if the rating system is
changed) by either S&P or Moody's ("Permitted Banks");
(e) eurodollar time deposits having a maturity of less than 270 days from
the date of acquisition thereof purchased directly from any Permitted
Bank;
(f) bankers' acceptances eligible for rediscount under requirements of
the Board of Governors of the Federal Reserve System and accepted by
Permitted Banks; and
(g) obligations of the type described in clauses (a) through (e) above
purchased from a securities dealer designated as a "primary dealer"
by the Federal Reserve Bank of New York or from a Permitted Bank as
counterparty to a written repurchase agreement obligating such
counterparty to repurchase such obligations not later than 14 days
after the purchase thereof and which provides that the obligations
which are the subject thereof are held for the benefit of the
partnership or a Restricted Subsidiary by a custodian which is a
Permitted Bank and which is not a counterparty to the repurchase
agreement in question;
(2) the acquisition by the partnership or any Restricted Subsidiary of
Capital Stock or other ownership interests, whether in a single
transaction or in a series of related transactions, of a Person located
in the United States, Mexico or Canada and engaged in substantially the
same business as the partnership such that, upon the completion of such
transaction or series of transactions, the Person becomes a Restricted
Subsidiary;
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(3) the making or ownership by the partnership or any Restricted Subsidiary
of Investments (in addition to any other Permitted Investments) in any
Person incorporated or otherwise formed pursuant to the laws of the
United States, Mexico or Canada or any state thereof which is engaged in
the United States, Mexico or Canada; provided, that the aggregate amount
of all such Investments made by the partnership and its Restricted
Subsidiaries following the date of the indenture and outstanding
pursuant to this third clause shall not at any date of determination
exceed 7.5% of Total Assets;
(4) the making or ownership by the partnership or any Restricted Subsidiary
of Investments:
(a) arising out of loans and advances to employees incurred in the
ordinary course of business;
(b) arising out of extensions of trade credit or advances to third
parties in the ordinary course of business; or
(c) acquired by reason of the exercise of customary creditors' rights
upon default or pursuant to the bankruptcy, insolvency or
reorganization of a debtor;
(5) the creation or incurrence of liability by the partnership or any
Restricted Subsidiary, with respect to any guarantee constituting an
obligation, warranty or indemnity, not guaranteeing Indebtedness of any
Person, which is undertaken or made in the ordinary course of business;
(6) the creation or incurrence of liability by the partnership or any
Restricted Subsidiary with respect to any hedging agreements or
arrangements;
(7) the making by any Restricted Subsidiary of Investments in the
partnership or another Restricted Subsidiary and the making by the
partnership of Investments in any Restricted Subsidiary;
(8) the making or ownership by the partnership or any Restricted Subsidiary
of Investments in the operating partnership;
(9) the present value, determined on the basis of the implicit interest
rate, of all basic rental obligations under all Synthetic Leases of the
partnership or any Restricted Subsidiary; and
(10) the creation or incurrence of liability by the partnership or any
Restricted Subsidiary or the making or ownership by the partnership or
any Restricted Subsidiary of Investments in any Person with respect to
any Accounts Receivable Securitization.
"Permitted Liens" means any of the following:
(1) liens for taxes, assessments or other governmental charges, the payment
of which is not yet due or the payment of which is being contested in
good faith by appropriate proceedings promptly initiated and diligently
conducted and as to which reserves or other appropriate provision, if
any, as shall be required by GAAP, shall have been made therefor and be
adequate in the good faith judgment of the obligor;
(2) liens of lessors, landlords and carriers, vendors, warehousemen,
mechanics, materialmen, repairmen and other like liens incurred in the
ordinary course of business for sums not yet due or the payment of which
is being contested in good faith by appropriate proceedings promptly
initiated and diligently conducted and as to which reserves or other
appropriate provisions, if any, as shall be required by GAAP, shall have
been made therefor and be adequate in the good faith judgment of the
obligor, in each case:
(a) not incurred or made in connection with the borrowing of money, the
obtaining of advances or credit or the payment of the deferred
purchase price of property; or
(b) incurred in the ordinary course of business securing the unpaid
purchase price of property or services constituting current accounts
payable;
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(3) liens, other than any lien imposed by the Employee Retirement Income
Security Act of 1974, as may be amended from time to time, incurred or
deposits made in the ordinary course of business:
(a) in connection with workers' compensation, unemployment insurance and
other types of social security; or
(b) to secure or to obtain letters of credit that secure the performance
of tenders, statutory obligations, surety and appeal bonds, bids,
leases, performance bonds, purchase, construction or sales contracts
and other similar obligations, in each case not incurred or made in
connection with the borrowing of money;
(4) other deposits made to secure liability to insurance carriers under
insurance or self-insurance arrangements;
(5) liens securing reimbursement obligations under letters of credit,
provided in each case that such liens cover only the title documents and
related goods and any proceeds thereof covered by the related letter of
credit;
(6) any attachment or judgment lien, unless the judgment it secures shall
not, within 60 days after the entry thereof, have been discharged or
execution thereof stayed pending appeal or review, or shall not have
been discharged within 60 days after expiration of any such stay;
(7) leases or subleases granted to others, easements, rights-of-way,
restrictions and other similar charges or encumbrances, which, in each
case either are granted, entered into or created in the ordinary course
of the business of the partnership or any Restricted Subsidiary or do
not materially impair the value or intended use of the property covered
thereby;
(8) liens on property or assets of any Restricted Subsidiary securing
Indebtedness of the Restricted Subsidiary owing to the partnership or a
Restricted Subsidiary;
(9) liens on assets of the partnership or any Restricted Subsidiary existing
on the date of the indenture;
(10) liens on personal property leased under leases entered into by the
partnership or its Restricted Subsidiaries which are accounted for as
operating leases in accordance with GAAP;
(11) liens securing Indebtedness arising under an Accounts Receivable
Securitization (including the filing of any related financing statements
naming the partnership or any Restricted Subsidiary as the debtor
thereunder in connection with the sale of accounts receivable by the
partnership, the operating partnership or any Restricted Subsidiary to
an SPE in connection with any such permitted Accounts Receivable
Securitization);
(12) liens securing Indebtedness incurred in accordance with:
(a) clauses (4), (5) and (7) of the definition of Permitted Indebtedness;
and
(b) Indebtedness otherwise permitted to be incurred under the "Limitation
on Additional Indebtedness" covenant to the extent incurred:
(i) to finance the making of expenditures for the improvement or
repair (to the extent the improvements and repairs may be
capitalized on the books of the partnership and the Restricted
Subsidiaries in accordance with GAAP) of, or additions including
additions by way of acquisitions of businesses and related assets
to, the assets and property of the partnership and its Restricted
Subsidiaries; or
(ii) by assumption in connection with additions including additions by
way of acquisition or capital contributions of businesses and
related assets to the property and assets of the partnership and
its Restricted Subsidiaries; provided, that, in the case of
Indebtedness incurred in accordance with clauses (b) and (c)
above, the principal amount of the
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Indebtedness does not exceed the lesser of the cost to the
partnership and its Restricted Subsidiaries of the additional
property or assets and the fair market value of the additional
property or assets at the time of the acquisition thereof, as
determined in good faith by an authorized financial officer of
the general partner;
(13) liens existing on any property of any Person at the time it becomes a
Subsidiary of the partnership, or existing at the time of acquisition
upon any property acquired by the partnership or any Subsidiary through
purchase, merger or consolidation or otherwise, whether or not assumed
by the partnership or the Subsidiary, or created to secure Indebtedness
incurred to pay all or any part of the purchase price (a "Purchase Money
Lien") of property including, without limitation, Capital Stock and
other securities acquired by the partnership or a Restricted Subsidiary;
provided, that:
(a) the lien shall be confined solely to the item or items of property
and, if required by the terms of the instrument originally creating
the lien, other property which is an improvement to or is acquired
for use specifically in connection with the acquired property;
(b) in the case of a Purchase Money Lien, the principal amount of the
Indebtedness secured by the Purchase Money Lien shall at no time
exceed an amount equal to the lesser of:
(i) the cost to the partnership and the Restricted Subsidiaries of
the property; and
(ii) the fair market value of the property at the time of the
acquisition thereof as determined in good faith by an authorized
financial officer of the general partner;
(c) the Purchase Money Lien shall be created not later than 360 days
after the acquisition of the property; and
(d) the lien, other than a Purchase Money Lien, shall not have been
created or assumed in contemplation of the Person's becoming a
Subsidiary of the partnership or the acquisition of property by the
partnership or any Subsidiary;
(14) easements, exceptions or reservations in any property of the partnership
or any Restricted Subsidiary granted or reserved for the purpose of
pipelines, roads, the removal of oil, gas, coal or other minerals, and
other like purposes, or for the joint or common use of real property,
facilities and equipment, which are incidental to, and do not materially
interfere with, the ordinary conduct of the business of the partnership
or any Restricted Subsidiary;
(15) liens arising from or constituting permitted encumbrances under the
agreements and instruments securing the obligations under the operating
partnership's Existing Notes and the Credit Agreement;
(16) liens securing any Indebtedness of the operating partnership; and
(17) any lien renewing or extending any lien permitted by clauses (9) through
(13) and (15) and (16) above; provided, that, the principal amount of
the Indebtedness secured by any such lien shall not exceed the principal
amount of the Indebtedness outstanding immediately prior to the renewal
or extension of the lien, and no assets encumbered by the lien other
than the assets encumbered immediately prior to the renewal or extension
shall be encumbered thereby.
"Permitted Refinancing Indebtedness" means Indebtedness incurred by the
partnership or any Restricted Subsidiary to substantially and concurrently
(excluding any notice period on redemptions) repay, refund, renew, replace,
extend or refinance, in whole or in part, any Permitted Indebtedness of the
partnership or any Restricted Subsidiary or any other Indebtedness incurred by
the partnership or any Restricted Subsidiary pursuant to the "Limitation on
Additional Indebtedness" covenant, to the extent:
(1) the principal amount of the Permitted Refinancing Indebtedness does not
exceed the principal or accreted amount plus the amount of accrued and
unpaid interest of the Indebtedness so repaid, refunded, renewed,
replaced, extended or refinanced (plus the amount of all expenses and
premiums incurred in connection therewith);
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(2) with respect to the repayment, refunding, renewal, replacement,
extension or refinancing of our Indebtedness, the Permitted Refinancing
Indebtedness ranks no more favorably in right of payment with respect to
the notes than the Indebtedness so repaid, refunded, renewed, replaced,
extended or refinanced; and
(3) with respect to the repayment, refunding, renewal, replacement,
extension or refinancing of our Indebtedness, the Permitted Refinancing
Indebtedness has a Weighted Average Life to Stated Maturity and stated
maturity equal to, or greater than, and has no fixed mandatory
redemption or sinking fund requirement in an amount greater than or at a
time prior to the amounts set forth in, the Indebtedness so repaid,
refunded, renewed, replaced, extended or refinanced;
provided, however, that Permitted Refinancing Indebtedness shall not include
Indebtedness incurred by a Restricted Subsidiary to repay, refund, renew,
replace, extend or refinance Indebtedness of the partnership.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock (other than the Common Units and Senior Units) of any class or
classes (however designated), which is preferred as to the payment of
distributions, dividends, or upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares or units of Capital Stock of any other
class of such Person; provided, that any limited partnership interest of the
partnership will not be considered Preferred Stock.
"Principal" means James E. Ferrell.
"Redeemable Capital Stock" means any shares of any class or series of
Capital Stock (excluding, but not limited to, the Senior Units and Common Units
issued by the partnership), that, either by the terms thereof, by the terms of
any security into which it is convertible or exchangeable or by contract or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to the stated maturity of the principal of the
notes or is redeemable at the option of the holder thereof at any time prior to
the stated maturity of the principal of the notes, or is convertible into or
exchangeable for debt securities at any time prior to the stated maturity of
the principal of the notes.
"Related Party" means any of the following:
(1) any immediate family member or lineal descendant of the Principal;
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or
more controlling interest of which consist of any one or more Principals
and/or such other Persons referred to in the immediately preceding
clause (1);
(3) the Ferrell Companies, Inc. Employee Stock Ownership Trust ("FCI ESOT");
(4) any participant in the FCI ESOT whose account has been allocated shares
of Ferrell Companies, Inc.;
(5) Ferrell Companies, Inc.; or
(6) any Subsidiary of Ferrell Companies, Inc.
"Restricted Subsidiary" means a Subsidiary of the partnership, which, as of
the date of determination, is not an Unrestricted Subsidiary of the partnership.
"Senior Units" means the units representing limited partner interests of the
partnership, having the rights and obligations specified with respect to Senior
Units of the partnership.
"SPE" shall mean any special purpose Unrestricted Subsidiary established in
connection with any Accounts Receivable Securitization.
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"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation,
association or other business entity is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Synthetic Lease" means any lease (1) which is accounted for by the lessee
as an operating lease and (2) under which the lessee is intended to be the
"owner" of the leased property for federal income tax purposes.
"Termination Capital Transactions" means any sale, transfer or other
disposition of property of the partnership or the operating partnership
occurring upon or incident to the liquidation and winding up of the partnership
and the operating partnership.
"Total Assets" means, as of any date of determination, the consolidated
total assets of the partnership and the Restricted Subsidiaries as would be
shown on a consolidated balance sheet of the partnership and the Restricted
Subsidiaries prepared in accordance with GAAP as of that date.
"Unrestricted Subsidiary" means (y) Ferrellgas Receivables, LLC, and (z) any
other Person (other than operating partnership or Ferrellgas Partners Finance
Corp.) that is designated as such by the general partner; provided, that no
portion of the Indebtedness of such Person:
(1) is guaranteed by the partnership or any Restricted Subsidiary;
(2) is recourse to or obligates the partnership or any Restricted Subsidiary
in any way; or
(3) subjects any property or assets of the partnership or any Restricted
Subsidiary, directly or indirectly, contingently or otherwise, to the
satisfaction thereof.
Notwithstanding the foregoing, the partnership or a Restricted Subsidiary
may guarantee or agree to provide funds for the payment or maintenance of, or
otherwise become liable with respect to Indebtedness of an Unrestricted
Subsidiary, but only to the extent that the partnership or a Restricted
Subsidiary would be permitted to:
(1) make an Investment in the Unrestricted Subsidiary pursuant to the third
clause of the definition of Permitted Investments; and
(2) incur the Indebtedness represented by the guarantee or agreement
pursuant to the first paragraph of the section entitled "--Limitation on
Additional Indebtedness." The board of directors may designate an
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, that
immediately after giving effect to the designation there exists no Event
of Default or event which after notice or lapse or time or both would
become an Event of Default, and if the Unrestricted Subsidiary has, as
of the date of the designation, outstanding Indebtedness other than
Permitted Indebtedness, the partnership could incur at least $1.00 of
Indebtedness other than Permitted Indebtedness.
Notwithstanding the foregoing, no Subsidiary may be designated an
Unrestricted Subsidiary if the Subsidiary, directly or indirectly, holds
Capital Stock of a Restricted Subsidiary.
"Weighted Average Life to Stated Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) The sum of the products obtained by multiplying:
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(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth, that will
elapse between the date and the making of the payment, by
(2) The then outstanding principal amount of the Indebtedness;
provided, however, that with respect to any revolving Indebtedness, the
foregoing calculation of Weighted Average Life to Stated Maturity shall be
determined based upon the total available commitments and the required
reductions of commitments in lieu of the outstanding principal amount and the
required payments of principal, respectively.
DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCIAL OBLIGATIONS
Other Indebtedness
9 3/8% Senior Secured Notes
We currently have outstanding $160 million aggregate principal amount of
9 3/8% Senior Secured Notes due 2006. We issued these 9 3/8% notes pursuant to
an indenture dated as of April 26, 1996, with U.S. Bank, N.A. (formerly known
as American Bank National Association) as trustee. These 9 3/8% notes are
senior obligations, are secured by our interest in our operating partnership
and rank senior in right of payment to all of our existing and future
subordinated indebtedness and equal in right of payment with all of our
existing and future senior indebtedness. With the proceeds from this offering,
we anticipate repurchasing and retiring these 9 3/8% notes pursuant to a tender
offer we are conducting simultaneously with this offering. To the extent any of
the 9 3/8% notes are not tendered, we anticipate redeeming these remaining
9 3/8% notes pursuant to the indenture governing the 9 3/8% notes. For more
details regarding the repurchase and possible redemption of the 9 3/8% notes,
see the section entitled "Use of Proceeds."
Bank Credit Facility
Our operating partnership, with our general partner serving as a co-obligor,
has in place a credit facility with a group of commercial banks. This bank
credit facility consists of:
. a $40 million revolving credit facility available for working capital
purposes; and
. a $117 million revolving credit facility for working capital purposes,
acquisitions, capital expenditures and other general partnership purposes.
As of April 30, 2002, our operating partnership had no outstanding loans
under the bank credit facility. This facility will terminate on June 30, 2003
unless extended or renewed.
Our operating partnership's obligations under the bank credit facility are
senior unsecured obligations and will be structurally senior to your claims as
a holder of the notes being offered herein. At our operating partnership's
option, the loans made under the bank credit facility bear interest either at a
base rate of, as of April 30, 2002, 4.75% plus a margin varying from 0.25% to
1.25%, or at the London Interbank Offered Rate of, as of April 30, 2002, 1.80%
plus a margin varying from 1.25% to 2.25%. This bank credit facility contains
various affirmative and negative covenants and default provisions, including
covenants and provisions similar to those contained in the agreements governing
the operating partnership's notes described below, as well as requirements with
respect to the maintenance of specified financial ratios and limitations on the
making of loans and investments.
S-46
Operating Partnership's Notes
Our operating partnership currently has $534 million aggregate principal
amount of senior unsecured notes outstanding. We issued $350 million aggregate
principal amount of these notes in 1998 and the remaining $184 million
aggregate principal amount in 2000. These operating partnership notes will be
structurally senior to your claims as a holder of the notes being offered
herein.
The operating partnership notes have maturity dates ranging from 2005 to
2013, and bear interest at rates ranging from 6.99% to 8.87%. These notes
require annual aggregate principal payments, without premium, during the
following calendar years of approximately:
. $109 million--2005;
. $ 58 million--2006;
. $ 90 million--2007;
. $ 52 million--2008;
. $ 73 million--2009;
. $ 82 million--2010; and
. $ 70 million--2013.
Our operating partnership may, at its option, offer to prepay, and upon the
disposition of assets may be required to prepay, in whole or in part, the
operating partnership notes. Any such prepayment will require the payment of a
premium in addition to the payment of principal and accrued but unpaid interest.
The agreements governing the operating partnership notes contain various
negative and affirmative covenants that limit our ability and the ability of
the operating partnership to, among other things:
. incur additional indebtedness;
. engage in transactions with affiliates;
. incur liens;
. sell assets;
. make restricted payments;
. enter into business combinations and asset sale transactions; and
. engage in other lines of business.
These agreements also require our operating partnership to satisfy various
financial conditions. In the event of a default under the operating partnership
notes, the holders of the operating partnership notes may accelerate the
maturity thereof and cause all outstanding amounts thereunder to become
immediately due and payable.
Our operating partnership is permitted to make quarterly cash distributions
to us so long as each distribution does not exceed a specified amount, the
operating partnership meets a specified financial ratio and no default exists
or would result from such distribution.
S-47
Other Financial Obligations
Our operating partnership utilizes a 364-day accounts receivable
securitization facility for the purpose of providing it with additional
short-term working capital funding, especially during the winter heating
months. As part of this facility, our operating partnership transfers an
interest in a pool of its trade accounts receivable to Ferrellgas Receivables,
LLC, a wholly-owned, unconsolidated, qualifying special purpose subsidiary of
our operating partnership, which in turn sells this interest to a commercial
paper conduit of Bank One, NA (or, if the commercial paper conduit declines to
purchase the interest in the trade accounts receivables, then such interest
will be sold directly to Bank One, NA as the sole purchaser under the facility).
Neither we nor our operating partnership provide any guarantee or similar
support with respect to the collectability of these accounts receivables. Our
operating partnership remits daily to Ferrellgas Receivables funds collected on
its pool of trade accounts receivables. Based on the twelve-month period ending
April 30, 2002, this accounts receivable securitization facility provided
additional working capital liquidity to our operating partnership at interest
rates approximately 0.5% lower than borrowings from our operating partnership's
credit facility. The level of funding available under the facility is currently
limited to the lesser of $60,000,000 or qualified trade accounts receivable. As
of April 30, 2002, there was no funding under the accounts receivable
securitization facility. This facility was renewed effective September 25, 2001
for a 364-day commitment with Bank One, NA. In accordance with SFAS No. 140,
these transactions are reflected on the operating partnership's consolidated
financial statements as a sale of accounts receivable and an investment in an
unconsolidated subsidiary.
In December 1999, our operating partnership entered into a $25 million
operating lease involving a portion of its customer tanks. Also in December
1999, our operating partnership assumed a $135 million operating lease
involving a portion of the customer tanks related to the Thermogas acquisition.
Both operating leases utilize a structure referred to as a synthetic operating
lease, using a special purpose entity as lessor and our operating partnership
as lessee; thus, the assets and liabilities of the special purpose entities are
not included on the operating partnership's consolidated balance sheet. The
agreements governing these operating leases contain covenants and default
provisions similar to those contained in the agreements governing the operating
partnership notes and its bank credit facility as well as specified
requirements with respect to the maintenance of financial ratios. Both
operating leases have terms that expire June 30, 2003, if they are not extended
or renewed. Annual lease payments under these two operating lease facilities
were, respectively, $15.1 million and $10.0 million for our fiscal year 2001
and the twelve-month period ended April 30, 2002.
Additionally, our operating partnership maintains various non-cancelable
operating leases with respect to property, computers, light and medium duty
trucks, tractors and trailers. The following table summarizes our operating
partnership's future minimum rental commitments under these non-cancelable
operating lease agreements (including the tank and equipment operating leases
discussed above) as of April 30, 2002. This summary presents the future minimum
rental payments and, should our operating partnership elect to do so, the
buyout amounts necessary to purchase the underlying assets at the end of the
lease terms.
Future Minimum Rental and Buyout Amounts
(in thousands)
----------------------------------------------
Less than After 5
Total 1 year 1-3 years 4-5 years years
-------- --------- --------- --------- -------
Operating Leases--Rental Payment $ 77,092 $28,216 $ 29,190 $14,192 $5,494
Operating Leases--Buyouts....... 185,360 5,889 168,194 8,706 2,571
S-48
BOOK ENTRY, DELIVERY AND FORM OF NOTES
Global Notes
We will issue each note in denominations of $1,000 and in fully registered
form without coupons. Each note will be represented by a global note registered
in the name of a nominee of the depositary. Except as set forth in this
prospectus supplement, the notes will be issuable only in global form. Upon
issuance, all notes will be represented by one or more fully registered global
notes. Each global note will be deposited with, or on behalf of, the depositary
and registered in the name of the depositary or its nominee or will remain in
the custody of the trustee pursuant to the FAST Balance Certificate Agreement
between the depositary and the trustee. Your beneficial interest in a note will
be shown on, and transfers of beneficial interests will be effected only
through, records maintained by the depositary or its participants. Payments of
principal of, premium, if any, and interest, if any, on the notes represented
by a global note will be made by us or our paying agent to the depositary or
its nominee. The Depository Trust Company, often referred to as DTC, will be
the initial depositary.
We have provided the following descriptions of the operations and procedures
of DTC and its participants solely as a matter of convenience. These operations
and procedures are solely within the control of DTC and its participants and
are subject to change by them from time to time. Neither we, the underwriters,
the trustee nor the paying agent take any responsibility for these operations
or procedures, and you are urged to contact DTC or its participants directly to
discuss these matters.
In addition, neither we, the trustee nor the paying agent will be liable for
any delay by DTC, its nominee or any direct or indirect participant in
identifying the beneficial owners of the notes. We, the trustee and the paying
agent may conclusively rely on, and will be protected in relying on,
instructions from DTC or its nominee, including instructions about the
registration and delivery, and the respective principal amounts, of the notes
to be issued.
The Depositary
DTC has advised us that:
. DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code
and a "clearing agency" registered under Section 17A of the Exchange Act;
. DTC holds securities that its direct participants deposit with DTC and
facilitates the settlement among direct participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in direct
participants' accounts, thereby eliminating the need for physical
movement of securities certificates;
. direct participants include securities brokers and dealers, including the
underwriters of this offering, banks, trust companies, clearing
corporations and other organizations;
. DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange LLC and the National
Association of Securities Dealers, Inc.;
. access to the DTC system is also available to indirect participants such
as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a direct participant,
either directly or indirectly; and
. the rules applicable to DTC and its direct and indirect participants are
on file with the SEC.
S-49
Ownership of Global Notes
We expect that under procedures established by DTC:
. upon deposit of the global notes with DTC or its nominee, DTC will credit
on its internal system the accounts of direct participants designated by
the underwriters with portions of the principal amounts of the global
notes; and
. ownership of beneficial interests in the notes will be shown on, and the
transfer of that ownership will be effected only through, records
maintained by the depositary, or by participants in the depositary or
persons that may hold interests through participants.
Ownership of beneficial interests in a global note will be limited to
participants or persons that hold interests through participants. Ownership of
beneficial interests in notes represented by a global note will be limited to
participants or persons that hold interests through participants.
So long as the depositary for a global note, or its nominee, is the
registered owner of the global note, the depositary or its nominee will be
considered the sole owner or holder of the notes represented by a global note
for all purposes under the indenture. Except as provided below, as the owner of
beneficial interests in notes represented by a global note or global notes, you:
. will not be entitled to register the notes represented by a global note
in your name;
. will not receive or be entitled to receive physical delivery of notes in
definitive form; and
. will not be considered the owner or holder of the notes under the
indenture.
The laws of some states require that purchasers of securities take physical
delivery of securities in definitive form. Therefore, the limits and
restrictions listed above may impair your ability to transfer beneficial
interests in a global note. In addition, the lack of a physical certificate
evidencing your beneficial interests in the global notes may limit your ability
to pledge the interests to a person or entity that is not a participant in DTC.
We understand that under existing policy of the depositary and industry
practices, if:
. we request any action of holders; or
. you desire to give notice or take action which a holder is entitled to
under the indenture or a global note,
the depositary would authorize the participants holding the beneficial
interests to give the notice or take the action. Accordingly, if you are a
beneficial owner that is not a participant, you must rely on the procedures of
the depositary or on the procedures of the participant as well as the
contractual arrangements you have directly, or indirectly through your
financial intermediary, with a participant to exercise any rights of a holder
under the indenture or a global note or to give notice or take action.
To facilitate subsequent transfers, all global notes deposited by
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of global notes with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual beneficial owners of the book-entry notes. DTC's
records reflect only the identity of the direct participants to whose accounts
the book-entry notes are credited, which may or may not be the beneficial
owners. The participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Neither DTC nor Cede & Co. will consent or vote with respect to book-entry
notes. Under its usual procedures, DTC will mail an "omnibus proxy" to us as
soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
book-entry notes are credited on the record date, which are identified in a
listing attached to the omnibus proxy.
S-50
A beneficial owner will give notice to elect to have its book-entry notes
purchased or tendered, through its participant, to the paying agent, and shall
effect delivery of such book-entry notes by causing the direct participant to
transfer the participant's interest in the book-entry notes, on the
depositary's records, to the paying agent. The requirement for physical
delivery of book-entry notes in connection with a demand for purchase or a
mandatory purchase will be deemed satisfied when the ownership rights in the
book-entry notes are transferred by a direct participant on the depositary's
records.
Payments
We will make payments of principal of, premium, if any, and interest, if
any, on the notes represented by a global note through the trustee to the
depositary or its nominee, as the registered owner of a global note. So long as
the notes are represented by global notes registered in the name of DTC or its
nominee, all payments will be made by us in immediately available funds. We
expect that the depositary, upon receipt of any payments, will immediately
credit the accounts of the related participants with payments in amounts
proportionate to their beneficial interest in the global note. We also expect
that payments by participants to owners of beneficial interests in a global
note will be governed by standing customer instructions and customary practices
and will be the responsibility of the participants. However, these payments
will be the sole responsibility of the participant.
Neither we, the trustee, any paying agent or any other of our agents will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of a global note
or for maintaining, supervising or reviewing any records relating to beneficial
ownership interests.
Certificated Notes
We will issue certificated notes in exchange for all the global notes if:
. DTC or any other designated replacement depositary is at any time
unwilling or unable to continue as depositary or ceases to be a clearing
agency registered under the Exchange Act and a successor depositary
registered as a clearing agency under the Exchange Act and a successor
depositary registered as a clearing agency under the Exchange Act is not
appointed by us within 90 calendar days; or
. we determine in our sole discretion to not have the notes represented by
the global notes.
In either instance, you, as an owner of a beneficial interest in a global
note, will be entitled to have certificated notes equal in principal amount to
the beneficial interest registered in your name and will be entitled to
physical delivery of the certificated notes. The certificated notes will be
registered in the name or names as the depositary shall instruct the trustee.
These instructions may be based upon directions received by the depositary from
participants with respect to beneficial interests in the global notes. The
certificated notes will be issued in denominations of $1,000 and will be issued
in registered form only, without coupons. No service charge will be made for
any transfer or exchange of certificated notes, but we may require payment of a
sum sufficient to cover any tax or other governmental charge.
Settlement Procedures
Initial settlement of the notes will be made by the underwriters in
immediately available funds. So long as the notes are represented by global
notes registered in the name of DTC or its nominee, secondary market trading
between DTC participants will occur in the ordinary way in accordance with
DTC's rules and procedures and will be settled in immediately available funds
using DTC's same-day funds settlement system. No assurance though can be given
as to the effect, if any, of settlement in immediately available funds on the
trading activity of the notes.
S-51
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated September , 2002, we have agreed to sell to each of the
underwriters named in the table below, and each of the underwriters has
severally agreed to purchase, the following principal amount of notes:
Principal
Underwriters Amount
------------ ------------
Credit Suisse First Boston Corporation $
Banc of America Securities LLC........
Banc One Capital Markets, Inc.........
BNP Paribas Securities Corp...........
Wells Fargo Brokerage Services, LLC...
------------
Total.............................. $170,000,000
============
The underwriting agreement provides that the underwriters are obligated to
purchase all of the notes if any are purchased. The underwriting agreement also
provides that if an underwriter defaults, the purchase commitments of
non-defaulting underwriters may be increased or this offering may be terminated.
The underwriters propose to offer the notes initially at the public offering
price on the cover page of this prospectus supplement and to selling group
members at that price less a selling concession of % of the principal amount
per note. The underwriters and selling group members may allow a discount of %
of the principal amount per note on sales to other broker/dealers. After the
initial public offering, the underwriters may change the public offering price
and concession and discount to broker/dealers.
The notes are a new issue of securities with no established trading market.
One or more of the underwriters intend to make a secondary market for the
notes. However, they are not obligated to do so and may discontinue making a
secondary market for the notes at any time without notice. No assurance can be
given as to how liquid the trading market for the notes will be.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments, which the underwriters may be
required to make in that respect.
In connection with this offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of notes in excess of
the principal amount of the notes that the underwriters are obligated to
purchase, which creates a syndicate short position.
. Syndicate covering transactions involve purchases of the notes in the
open market after the distribution has been completed in order to cover
syndicate short positions. A short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on
the price of the notes in the open market after pricing that could
adversely affect investors who purchase in this offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the notes originally sold by the syndicate
member are purchased in a stabilizing transaction or a syndicate covering
transaction to cover syndicate short positions.
S-52
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of the
notes or preventing or retarding a decline in the market price of the notes. As
a result, the price of the notes may be higher than the price that might
otherwise exist in the open market. These transactions, if commenced, may be
discontinued at any time.
We expect that delivery of the notes will be made against payment therefor
on or about the closing date specified on the cover page of this prospectus
supplement, which will be the business day following the date of
pricing of the notes (this settlement cycle being referred to as "T+ "). Under
Rule 15c6-1 under the Exchange Act, trades in the secondary market generally
are required to settle in three business days, unless the parties to any such
trade expressly agree otherwise. Accordingly, purchasers who wish to trade
notes on the date specified on the cover page of this prospectus supplement or
the next succeeding business days will be required, by virtue of the
fact that the notes initially will settle in T+ , to specify an alternate
settlement cycle at the time of any such trade to prevent a failed settlement.
Purchasers of notes who wish to trade notes on the date specified on the cover
page of this prospectus supplement or the next succeeding business
days should consult their own advisors.
WHERE YOU CAN FIND MORE INFORMATION
You may request a copy of any of the documents we have incorporated by
reference in this prospectus supplement as described in the section entitled
"Where You Can Find More Information" on page 3 of the accompanying base
prospectus at no cost to you by writing or telephoning us at the following
address:
Ferrellgas Partners, L.P.
One Liberty Plaza
Liberty, Missouri 64068
Attention: Investor Relations
(816) 792-0203
LEGAL MATTERS
Certain legal matters with respect to the validity of the notes will be
passed upon for us by Bracewell & Patterson, L.L.P., Houston, Texas and Mayer,
Brown, Rowe & Maw, Houston, Texas. Certain legal matters with respect to the
notes will be passed upon for the underwriters by Latham & Watkins, New York,
New York.
S-53
EXPERTS
The consolidated financial statements and the related financial statement
schedules as of July 31, 2000 and 2001, and for each of the three years in the
period ended July 31, 2001, incorporated in this prospectus supplement and the
accompanying base prospectus by reference to our Annual Report on Form 10-K for
the fiscal year ended July 31, 2001, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports, which are incorporated
herein by reference, and have been so incorporated in reliance upon the reports
of such firm given upon their authority as experts in auditing and accounting.
The consolidated balance sheets of Ferrellgas, Inc. and subsidiaries as of
July 31, 2000 and 2001, incorporated in this prospectus supplement and the
accompanying base prospectus by reference to our Current Report on Form 8-K
filed on December 12, 2001, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein
by reference, and has been so incorporated in reliance upon the report of such
firm given upon their authority as experts in auditing and accounting.
The statements of sold net assets of the businesses of Thermogas Company, a
wholly-owned subsidiary of Williams Natural Gas Liquids, Inc., as of September
30, 1999 and December 31, 1998, and the related statements of operations for
the nine-month period ended September 30, 1999 and the years ended December 31,
1998 and 1997, incorporated in this prospectus supplement and the accompanying
base prospectus by reference to Amendment No. 1 to our Current Report on From
8-K/A filed on March 1, 2000, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein
by reference, and has been so incorporated in reliance upon the report of such
firm given upon their authority as experts in auditing and accounting.
S-54
PROSPECTUS
$300,000,000
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
Common Units
Deferred Participation Units
Warrants
Debt Securities
-----------------
WE WILL PROVIDE THE SPECIFIC TERMS OF THESE SECURITIES IN SUPPLEMENTS TO THIS
PROSPECTUS.
YOU SHOULD READ THIS PROSPECTUS AND ANY SUPPLEMENT CAREFULLY BEFORE YOU INVEST.
-----------------
This prospectus provides you with a general description of the securities we
may offer. Each time we sell securities we will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus.
The Common Units are traded on the New York Stock Exchange under the symbol
"FGP".
We will provide information in the prospectus supplement for the expected
trading market, if any, for the Deferred Participation Units, Warrants and Debt
Securities.
Our executive offices are located at One Liberty Plaza, Liberty, Missouri
64068, and our telephone number is (816) 792-1600.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
THE MATERIAL RISKS INVOLVED IN INVESTING IN OUR SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is February 5, 1999.
TABLE OF CONTENTS
Who We Are.......................................... 2
About this Prospectus............................... 2
Where You Can Find More Information................. 3
Forward-Looking Statements.......................... 4
Risk Factors........................................ 5
Ferrellgas.......................................... 16
Conflicts of Interest and Fiduciary Responsibilities 17
Ratio of Earnings to Fixed Charges.................. 19
Description of Units................................ 20
Description of Warrants............................. 23
Description of Debt Securities...................... 25
Tax Considerations.................................. 35
Use of Proceeds..................................... 49
Plan of Distribution................................ 49
Legal Matters....................................... 50
Experts............................................. 50
WHO WE ARE
We are a publicly traded Delaware limited partnership engaged in the sale,
distribution, marketing and trading of propane and other natural gas liquids in
the United States. We believe that we are the second largest retail marketer of
propane in the United States (as measured by retail gallons sold). We currently
serve more than 800,000 residential, industrial/commercial and agricultural
customers in 45 states and the District of Columbia through approximately 563
retail outlets with 302 satellite locations in 38 states. Our retail propane
business consists of selling propane to retail (primarily residential)
customers. We purchase this propane in the contract and spot markets, primarily
from major oil companies, and then transport it to our retail distribution
outlets and then to tanks located on our customers' premises and to portable
propane cylinders. Through our natural gas liquids trading operations and
wholesale marketing, we believe that we are one of the largest independent
marketers of propane and natural gas liquids in the United States.
As used in this prospectus, "we," "us," "our," "Ferrellgas," and the
"Partnership" means Ferrellgas Partners, L.P. and, unless the context requires
otherwise, includes our subsidiary operating partnership, Ferrellgas, L.P., and
our wholly owned subsidiary Ferrellgas Partners Finance Corp. Our subsidiary
operating partnership is sometimes referred to in this prospectus as the
"Operating Partnership."
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission ("SEC") using a "shelf" registration
process. Under this shelf registration process, we may sell the Common Units,
Deferred Participation Units, Warrants and Debt Securities described in this
prospectus, in one or more offerings up to a total dollar amount of
$300,000,000. The Common Units, Deferred Participation Units, Warrants and Debt
Securities are sometimes referred to in this prospectus as the "Securities."
This prospectus provides you with a general description of us and the
Securities. Each time we sell Securities with this prospectus, we will provide
a prospectus supplement that will contain specific information about the terms
of that offering. The prospectus supplement may also add to, update or change
information in this prospectus. The information in this prospectus is accurate
as of February 5, 1999. You should carefully read this prospectus, the
prospectus supplement and the documents we have incorporated by reference under
the heading "Where You Can Find More Information."
2
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other information with the
SEC. You may read and download our SEC filings over the Internet at the SEC's
website at http://www.sec.gov. You may also read and copy our SEC filings at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. You may also access additional
information about us at our website at http://www.ferrellgas.com.
Because the Common Units are traded on the New York Stock Exchange ("NYSE"),
we also provide information to the NYSE. You may obtain our reports and other
information at the offices of the NYSE at 20 Broad Street, New York, New York
10002.
The SEC allows us to "incorporate by reference" the information we have
filed with them, which means that we can disclose important information to you
without actually including the specific information in this prospectus by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. Information that we file later with the
SEC will automatically update and may supersede information in this prospectus
and information previously filed with the SEC. The documents listed below are
incorporated by reference:
. our annual report on Form 10-K for the year ended July 31, 1998;
. our quarterly report on Form 10-Q for the quarter ended October 31, 1998;
. our current report on Form 8-K dated August 5, 1998;
. the description of the Common Units in our registration statement on Form
8-A filed on May 12, 1994 and any amendments or reports filed to update
the description;
. all documents that we file under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of the initial
registration statement and before the registration statement becomes
effective; and
. all documents that we file under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 between the date of this prospectus and
the termination of the registration statement.
If information in incorporated documents conflicts with information in this
prospectus you should rely on the most recent information. If information in an
incorporated document conflicts with information in another incorporated
document, you should rely on the most recent incorporated document.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Ferrellgas Partners, L.P.
One Liberty Plaza
Liberty, MO 64068
Attention: Theresa A. Schekirke
(816) 792-0203
You should rely only on the information contained in this prospectus, the
prospectus supplement and the documents we have incorporated by reference. We
have not authorized anyone else to provide you with different information. We
are not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus, the
prospectus supplement or any documents incorporated by reference is accurate as
of any date other than the date on the front of those documents.
3
FORWARD-LOOKING STATEMENTS
Some information in this prospectus, the prospectus supplement and the
documents we have incorporated by reference may contain forward-looking
statements. Such statements use forward-looking words such as "anticipate,"
"continue," "estimate," "expect," "may," "will," or other similar words. These
statements discuss future expectations or contain projections. Specific factors
which could cause actual results to differ from those in the forward-looking
statements, include:
. the effect of weather conditions on demand for propane;
. price and availability of propane supplies;
. the availability of capacity to transport propane to market areas;
. competition from other energy sources and within the propane industry;
. operating risks incidental to transporting, storing, and distributing
propane;
. changes in interest rates;
. governmental legislation and regulations;
. energy efficiency and technology trends;
. our ability to acquire other retail propane distributors and successfully
integrate them into our existing operations and make cost saving changes;
. our ability to obtain new customers and retain existing customers;
. the condition of the capital markets in the United States; and
. the political and economic stability of the oil producing nations of the
world.
In addition, our classification as a partnership for federal income tax
purposes means that generally we do not pay federal income taxes on our net
income. We are relying on a legal opinion from our counsel, and not a ruling
from the Internal Revenue Service, as to our proper classification for federal
income tax purposes. See "Tax Considerations."
When considering forward-looking statements, you should keep in mind the
risk factors described in "Risk Factors" below. The risk factors could cause
our actual results to differ materially from those contained in any
forward-looking statement. We disclaim any obligation to update any
forward-looking statement or to announce publicly the result of any revisions
to any of the forward-looking statements to reflect future events or
developments.
You should consider the above information when reviewing any forward-looking
statements in:
. this prospectus;
. the prospectus supplement;
. any documents incorporated in this prospectus by reference;
. press releases; or
. oral statements made by us or any of our officers or other persons acting
on our behalf.
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RISK FACTORS
Before you invest in our Securities, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in this
prospectus, any prospectus supplement and the documents we have incorporated by
reference before buying our Securities.
If any of the following risks actually occurs, then our business, financial
condition or results of operations could be materially adversely affected. In
such event, we may be unable to make distributions to our unitholders or pay
interest on or the principal of any Debt Securities, the trading price of our
Securities could decline, and you may lose all or part of your investment.
Risks Inherent in Our Business
Weather conditions affect the demand for propane
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many of our customers rely heavily on
propane as a heating fuel. Accordingly, the volume of retail propane sold is
highest during the six-month peak heating season of October through March and
is directly affected by the severity of the winter weather. During fiscal 1998,
approximately 67% of our retail propane volume was attributable to sales during
the peak heating season. Actual weather conditions can vary substantially from
year to year, which may significantly affect our financial performance.
Furthermore, variations in weather in one or more regions in which we operate
can significantly affect the total volume of propane that we sell and the
profits realized on these sales. A negative effect on our sales volume may in
turn affect our results of operations. The agricultural demand for propane is
also affected by weather, as dry weather during the harvest season will reduce
the demand for propane used in crop drying.
We are subject to pricing and inventory risk
We believe that one of the primary reasons we have been able to retain our
retail customers has been our ability to deliver propane during periods of
extreme demand. We engage in the brokerage and trading of propane and other
natural gas liquids primarily to generate profit in addition to our retail and
wholesale operations. We also engage in such activities to help insure the
availability of propane during periods of short supply. Our trading policy
places certain restrictions on our trading activity such as volume limitations,
stop loss limits, time limits on contracts, and limitations on the ability to
enter into certain derivative contracts. The volume and stop loss limits are
applicable to both the individual product level and to our trading as a whole.
Our trading policy also dictates that reports on our current trading positions
are to be provided to management on a daily basis. In addition, our bank credit
facility places limitations on our ability to modify our trading policy.
Certain of these limits may be waived on a case by case basis with the
authorization of senior management of our general partner. From time to time,
such authorization has been obtained to allow certain trading positions to
exceed our trading policy limits. If we sustain material losses from our
trading operations, our ability to make distributions to our unitholders or pay
interest on or principal of any Debt Securities may be adversely affected.
While we generally attempt to minimize our inventory risk by purchasing
propane on a short-term basis, depending on inventory and price outlooks, we
may purchase and store propane or other natural gas liquids. We may purchase
large volumes of propane during periods of low demand and accordingly, low
prices, which generally occur during the summer months, at the then current
market price. Because of the potential volatility of propane prices, if we make
such purchases, the market price for propane could fall below the price at
which we made the purchases which would adversely affect our profits or cause
sales from such inventory to be unprofitable.
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In the retail propane business, the amount of gross profit we make depends
on the excess of the sales price over our propane supply costs. Consequently,
our profitability is sensitive to changes in wholesale propane prices. Propane
is a commodity, the market price of which can be subject to volatile changes in
response to changes in supply or other market conditions. We have no control
over these market conditions. Consequently, the unit price for the propane we
purchase can change rapidly over a short period of time. A percentage of our
propane sales (approximately 15% in fiscal 1998 based on total retail gallons
sold) are pursuant to fixed-price contracts. In order to manage these fixed
price sale commitments, we enter into certain propane purchase contracts with
our suppliers whereby the volume, price and date of delivery have been mutually
determined. We enter into these agreements to purchase propane at volume levels
that we believe are necessary to mitigate the price risk related to our
anticipated fixed price sales volumes. If our retail customers do not purchase
volumes that are anticipated pursuant to their fixed price sales contracts, we
will still be obligated to purchase the volumes established under the purchase
contracts we have entered into with our suppliers. Such a scenario may cause us
to incur losses if the price of propane declines prior to the sale to other
retail customers. In general, product supply contracts permit suppliers to
charge posted prices (plus transportation costs) at the time of delivery or the
current prices established at major delivery points. As it may not be possible
to immediately pass on to customers any rapid increases in the wholesale cost
of propane, such increases could reduce our gross profit.
The retail propane business is highly competitive
Our profitability is affected by the competition for customers among all of
the participants in the retail propane business. We compete with a number of
large national and regional firms and several thousand small independent firms.
Because of the relatively low barriers to entry into the retail propane market,
there is potential for small independent propane retailers, as well as other
companies (not necessarily then engaged in retail propane distribution) to
compete with our retail outlets. As a result, we are always subject to the risk
of additional competition in the future. Certain of our competitors may have
greater financial resources than we do. Should a competitor attempt to increase
market share by reducing prices, our financial condition and results of
operations could be materially adversely affected. Generally,
warmer-than-normal weather further intensifies competition. We believe that our
ability to compete effectively depends on the reliability of our service, our
responsiveness to customers and our ability to maintain competitive retail
propane prices.
The retail propane industry is a mature one
The retail propane industry is a mature one, with only limited growth in
total demand for the product foreseen. Based on information available from the
Energy Information Administration, we believe the overall demand for propane
has remained relatively constant over the past several years, with year-to-year
industry volumes being impacted primarily by weather patterns. Therefore, our
ability to grow within the industry is dependent upon our ability to acquire
other retail distributors and the success of our marketing efforts to acquire
new customers.
We may not be successful in growing through acquisitions
While our business strategy includes internal growth and start-ups of new
customer service locations, our ability to grow our retail propane business
will depend principally upon our ability to acquire other retail propane
distributors and successfully integrate them into our existing operations and
make cost saving changes. We cannot guarantee that we will be able to identify
attractive acquisition candidates in the future, that we will be able to
acquire such businesses on economically acceptable terms or successfully
integrate them into our existing operations and make cost saving changes, that
any acquisitions will not be dilutive to earnings and distributions to
unitholders or that any additional debt incurred to finance acquisitions will
not adversely affect our ability to make distributions to unitholders or
service our existing debt. We are subject to certain covenants contained in our
debt agreements that restrict our ability to incur indebtedness. In addition,
to the extent that warm weather or other factors adversely affect our operating
and financial results, our access to capital to finance acquisitions may be
further limited.
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The retail propane business faces competition from other energy sources
Propane competes with other sources of energy, some of which are less costly
for equivalent energy value. We compete for customers against suppliers of
electricity, natural gas and fuel oil. Electricity is a major competitor of
propane, but propane generally enjoys a competitive price advantage over
electricity. Except for certain industrial and commercial applications, propane
is generally not competitive with natural gas in areas where natural gas
pipelines already exist because natural gas is generally a less expensive
source of energy than propane. The gradual expansion of the nation's natural
gas distribution systems has resulted in the availability of natural gas in
many areas that were previously dependent upon propane. Although propane is
similar to fuel oil in certain applications and market demand, propane and fuel
oil compete to a lesser extent primarily because of the cost of converting from
one to the other. We cannot predict the effect that the development of
alternative energy sources might have on our operations.
Energy efficiency and technology advances may affect demand for propane
The national trend toward increased conservation and technological advances,
including installation of improved insulation and the development of more
efficient furnaces and other heating devices, has adversely affected the demand
for propane by retail customers. We cannot predict the materiality of the
effect of future conservation measures or the effect that any technological
advances in heating, conservation, energy generation or other devices might
have on our operations.
We are subject to operating and litigation risks which may not be covered by
insurance
Our operations are subject to all operating hazards and risks normally
incidental to the handling, storing and delivering of combustible liquids such
as propane. As a result, we have been, and are likely to be, a defendant in
various legal proceedings arising in the ordinary course of business. We will
maintain insurance policies with insurers in such amounts and with such
coverages and deductibles as we believe are reasonable and prudent. However, we
cannot guarantee that such insurance will be adequate to protect us from all
material expenses related to potential future claims for personal injury and
property damage or that such levels of insurance will be available in the
future at economical prices.
Risks Inherent in an Investment in Us
The distribution priority of holders of Common Units terminates at the end of
the subordination period
Assuming that the restrictions under our debt agreements are met, our
partnership agreement requires us to distribute, on a quarterly basis, 100% of
our "Available Cash" to our partners. "Available Cash" is generally all of our
cash receipts, less cash disbursements and adjustments for net changes in
reserves. Currently the Common Units have the right to receive distributions of
Available Cash from our operations in an amount equal to $0.50 per unit before
any distributions of such Available Cash are made on our Subordinated Units.
This priority right is scheduled to end when certain financial tests, which are
related to generating cash from operations and distributing at least $0.50 per
unit on all Common Units and Subordinated Units, are satisfied for each of
three consecutive four quarter periods ending on or after July 31, 1999. If
these financial tests are met, the Common Units and the Subordinated Units will
thereafter share equally in distributions of Available Cash. We met these
financial tests for the four quarter periods ended July 31, 1997 and July 31,
1998, however, there can be no assurance that we will meet the remaining
financial tests in the four quarter period ended July 31, 1999. The period
during which the Common Units have a priority right to distributions and in
which the right of the Subordinated Units to distributions is subordinate is
referred to as the subordination period.
We may sell additional limited partner interests, diluting existing interests
of unitholders
Our partnership agreement generally allows us to issue additional limited
partner interests and other equity securities. During the subordination period,
however, the number of Common Units that we may issue is subject
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to certain limitations. These limitations do not apply to issuances in
connection with acquisitions that are accretive. When we issue additional
equity securities, your proportionate partnership interest will decrease. Such
an issuance could negatively affect the amount of cash distributed to
unitholders and the market price of Common Units. Issuance of additional Common
Units will also diminish the relative voting strength of the previously
outstanding units. Following the end of the subordination period there are no
limits on the total number of Common Units or other equity securities that we
may issue.
The amount of our outstanding indebtedness is substantial and could have
adverse consequences
As of October 31, 1998, we had an aggregate of $546 million of long-term
indebtedness (excluding current maturities). Our leverage could have important
consequences to investors in the Securities. Our ability to make scheduled
payments on, or refinance our existing indebtedness, or our ability to obtain
additional financing in the future will depend on our financial and operating
performance, which, in turn, is subject to prevailing economic conditions and
to financial, business and other factors beyond our control. We believe that we
will have sufficient cash flow from operations and available borrowings under
our credit facility to service our indebtedness, although the principal amount
of the Senior Notes and the Senior Secured Notes will likely need to be
refinanced at maturity in whole or in part. A significant downturn in the
propane industry or other development adversely affecting our cash flow,
however, could materially impair our ability to service our indebtedness. If
our cash flow and capital resources are insufficient to fund our debt service
obligations, we may be forced to refinance all or a portion of our debt or sell
assets. We cannot guarantee that we will be able to refinance our existing
indebtedness or sell assets on terms that are commercially reasonable. As of
October 31, 1998, on a consolidated basis, we had outstanding approximately $70
million of indebtedness bearing interest at floating rates. In addition,
pursuant to our credit facility, we had available an additional $52 million of
borrowings, all of which would have borne interest at floating rates. Increases
in interest rates following an offering of Debt Securities, if material, could
adversely impact our ability to make payments in respect of the Debt
Securities. We have entered into an interest rate collar agreement with a major
bank effectively fixing the LIBOR component of $25.0 million notional principal
amount of floating rate debt between 5.05% and 6.5%. This agreement expires in
January 2001.
We may have to refinance our indebtedness; our existing indebtedness must be
repaid upon the occurrence of certain change of control events
The $350 million in principal amount of Senior Notes issued by the Operating
Partnership do not contain any sinking fund provision. Such indebtedness will
be due according to the following schedule:
. $109 million due 2005;
. $37 million due 2006;
. $52 million due 2008;
. $82 million due 2010; and
. $70 million due 2013.
The $160 million in principal amount of Senior Secured Notes issued by the
Partnership also contain no sinking fund provisions and such indebtedness will
be due in 2006. Our Senior Secured Notes and the Senior Notes of the Operating
Partnership are sometimes referred to in this prospectus as the "Notes." The
Senior Secured Notes also provide that upon the occurrence of certain change of
control events (including the failure by certain affiliates to control the
General Partner, the removal of the General Partner as the sole general partner
of the Partnership or the Operating Partnership, the liquidation or dissolution
of the Partnership, the Operating Partnership or the General Partner or the
transfer of all or substantially all the assets of the Partnership or the
Operating Partnership to another entity), the holders of the Senior Secured
Notes have the right to require the issuer to repurchase any or all of the
outstanding Senior Secured Notes at 101% of the aggregate principal
8
amount thereof plus accrued and unpaid interest and liquidated damages, if any,
to the date of purchase. The Operating Partnership's bank credit facility also
contains a provision requiring the Operating Partnership to repay all
outstanding amounts under the credit facility within 30 days after the
occurrence of certain change of control events similar to those contained in
the Notes.
Our debt agreements may limit our ability to make distributions to
unitholders and our financial flexibility
The indenture governing our Senior Secured Notes (the "Senior Secured Note
Indenture") contains restrictive covenants that may limit or prohibit
distributions to unitholders under certain circumstances. The indenture
generally prohibits us from:
. distributing amounts in excess of 100% of Available Cash for the
immediately preceding fiscal quarter plus the lesser of (1) Available
Cash for the 45 days following such fiscal quarter and (2) the amount of
working capital that could have been borrowed on the last day of such
fiscal quarter;
. making any distributions to unitholders if an event of default exists or
would exist when such distribution is made; and
. making any distributions to unitholders if the fixed charge coverage
ratio as defined in the indenture for the preceding four fiscal quarters
is less than or equal to 2.0 to 1.0.
As of October 31, 1998, the Partnership's fixed charge coverage ratio as
defined in the indenture was 2.2 to 1.0.
The Senior Secured Note Indenture also requires us to maintain certain
financial ratios and contain restrictions on:
. incurring additional debt;
. entering into mergers, consolidations and sales of assets;
. making investments; and
. granting liens.
The restrictive covenants in the indenture may prevent us from engaging in
certain beneficial transactions.
We are a holding company and our ability to repay indebtedness depends on the
success of our subsidiary operating partnership
We are a holding company and have no material operations and only limited
assets. Accordingly, our ability to service our debt obligations will be
entirely dependent upon the receipt of distributions from our subsidiary
operating partnership. The Operating Partnership is restricted under the terms
of its debt agreements from making distributions to us in the following
situations, among others:
. if a default or event of default exists or would result therefrom;
. if its fixed charge coverage ratio as defined in the agreements for the
preceding four fiscal quarters is less than or equal to 2.25 to 1.0;
. if the amount of the distribution exceeds 100% of Available Cash for the
immediately preceding fiscal quarter plus the lesser of (a) Available
Cash for the 45 days following such fiscal quarter and (b) the amount of
working capital that could have been borrowed on the last day of such
fiscal quarter; or
. if the Operating Partnership fails to meet the aggregate restricted
payments test as defined in the agreements.
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As of October 31, 1998, the Operating Partnership's fixed charge coverage
ratio as defined in such agreements was 3.27 to 1.0.
Our indebtedness will be effectively subordinated to indebtedness and
liabilities of our subsidiary operating partnership
The Debt Securities will be effectively subordinated to claims of creditors
(other than the Partnership) of the Operating Partnership. Claims of creditors
(other than the Partnership) of the Operating Partnership, including trade
creditors, secured creditors, taxing authorities and creditors holding
guarantees, will generally have priority as to assets of the Operating
Partnership over the claims and equity interests of the Partnership and,
thereby indirectly, the holders of indebtedness of the Partnership, including
the Debt Securities.
We are required to distribute available cash, limiting cash reserves
available to service Debt Securities
Assuming that the restrictions under our debt agreements are met, our
partnership agreement requires us to distribute, on a quarterly basis, 100% of
our "Available Cash" to our partners. The timing and amount of distributions to
our partners could significantly reduce the cash available to us to meet our
future business needs and to pay future principal, interest and premium (if
any), including liquidated damages, if any, on the Debt Securities. Prior to
making any distribution on the Common Units, we must reimburse our general
partner and its affiliates at cost for all expenses that they have incurred on
our behalf. The reimbursement of such expenses and the payment of any such fees
could adversely affect our ability to make distributions to our unitholders.
The General Partner will determine the amount and timing of such distributions
and has broad discretion to establish and make additions to our reserves for
any proper purpose, including but not limited to reserves for the purpose of:
. complying with the terms of any agreement or obligation of the
Partnership (including the establishment of reserves) to fund the payment
of interest and principal in the future;
. providing for level distributions of cash notwithstanding the seasonality
of our business; and
. providing for future capital expenditures and other payments deemed by
the General Partner to be necessary or advisable.
Cash distributions are not guaranteed and may fluctuate with our performance
and other external factors
Although we distribute all of our Available Cash, we cannot guarantee the
amounts of Available Cash that will be distributed to our unitholders. The
actual amounts of Available Cash will depend upon numerous factors, including:
. cash flow generated by operations;
. required principal and interest payments on our debt;
. the costs of acquisitions (including related debt service payments);
. restrictions contained in debt instruments;
. issuances of debt and equity securities;
. fluctuations in working capital;
. capital expenditures;
. adjustments in reserves;
. prevailing economic conditions; and
. financial, business and other factors, a number of which will be beyond
our control.
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Cash distributions are dependent primarily on cash flow, including from
reserves and, subject to certain limitations, working capital borrowings and
not on profitability, which is affected by non-cash items. Therefore, cash
distributions might be made during periods when we record losses and might not
be made during periods when we record profits.
Potential change of control if Ferrell Companies, Inc. defaults on its
outstanding indebtedness
Ferrell Companies, Inc. ("FCI") owns all of the outstanding capital stock of
the General Partner in addition to Common Units and Subordinated Units in the
Partnership. FCI has pledged these securities to secure some of its debt.
Presently, FCI's only source of income to pay such debt is dividends that FCI
receives from the General Partner and distributions received on the Common
Units and Subordinated Units. If FCI defaults on its debt, the lenders could
acquire control of the General Partner and the Common Units and Subordinated
Units owned by FCI.
Risks Arising from Our Partnership Structure and Relationships with Our General
Partner
Unitholders have certain limits on their voting rights; the General Partner
manages and operates the Partnership
The General Partner manages and operates the Partnership. Unlike the holders
of common stock in a corporation, unitholders will have only limited voting
rights on matters affecting our business. Unitholders will have no right to
elect the General Partner on an annual or other continuing basis, and the
General Partner may not be removed except pursuant to the vote of the holders
of at least 66 2/3% of the outstanding units (including Common Units and
Subordinated Units owned by the General Partner and its affiliates) and upon
the election of a successor general partner by the vote of the holders of not
less than a majority of the outstanding Common Units. Because the General
Partner and its affiliates own approximately 57% of the outstanding units, the
General Partner cannot be removed without its consent.
The General Partner will have a limited call right with respect to the
limited partner interests
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its affiliates, the General Partner will have the right, which it
may assign to any of its affiliates or to the Partnership, to acquire all, but
not less than all, of the remaining limited partner interests of such class
held by such unaffiliated persons at a price generally equal to the
then-current market price of limited partner interests of such class. As a
consequence, a unitholder may be required to sell his Common Units at a time
when he may not desire to sell them or at a price that is less than the price
he would desire to receive upon such sale.
Unitholders may not have limited liability in certain circumstances and may
be liable for the return of certain distributions
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were determined that we had been conducting business in any
state without compliance with the applicable limited partnership statute, or
that the right, or the exercise of the right by the unitholders as a group, to:
(1) remove or replace the General Partner, (2) make certain amendments to our
partnership agreement, or (3) take other action pursuant to our partnership
agreement constituted participation in the "control" of our business, then the
unitholders could be held liable in certain circumstances for our obligations
to the same extent as a general partner.
In addition, under certain circumstances a unitholder may be liable to us
for the amount of a distribution for a period of three years from the date of
the distribution. Unitholders will not be liable for assessments in addition to
their initial capital investment in the Common Units. Under Delaware General
Corporate Law, we may not
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make a distribution to you if the distribution causes all liabilities of the
Partnership to exceed the fair value of the partnership's assets. Liabilities
to partners on account of their partnership interests and non-recourse
liabilities are not counted for purposes of determining whether a distribution
is permitted. Delaware law provides that a limited partner who receives such a
distribution and knew at the time of the distribution that the distribution
violated the Delaware law will be liable to the limited partnership for the
distribution amount for three years from the distribution date. Under Delaware
law, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of the assignor to make contributions
to the partnership. However, such an assignee is not obligated for liabilities
unknown to him at the time he or she became a limited partner if the
liabilities could not be determined from the partnership agreement.
Persons owning 20% or more of the Common Units cannot vote
Any Common Units held by a person that owns 20% or more of the Common Units
cannot be voted. This limitation does not apply to the General Partner and its
affiliates. This provision may:
. discourage a person or group from attempting to remove the General
Partner or otherwise change management; and
. reduce the price at which the Common Units will trade under certain
circumstances.
The General Partner's liability to the Partnership and unitholders may be
limited
Our partnership agreement contains language limiting the liability of the
General Partner to the Partnership and the unitholders. For example, our
partnership agreement provides that:
. the General Partner does not breach any duty to the Partnership or the
unitholders by borrowing funds or approving any borrowing. The General
Partner is protected even if the purpose or effect of the borrowing is to
increase incentive distributions to the General Partner;
. the General Partner does not breach any duty to the Partnership or the
unitholders by taking any actions consistent with the standards of
reasonable discretion outlined in the definitions of Available Cash and
Cash from Operations contained in our partnership agreement; and
. the General Partner does not breach any standard of care or duty by
resolving conflicts of interest unless the General Partner acts in bad
faith.
The modifications of state law standards of fiduciary duty contained in our
partnership agreement may significantly limit the ability of unitholders to
successfully challenge the actions of the general partner as being a breach of
what would otherwise have been a fiduciary duty. These standards include the
highest duties of good faith, fairness and loyalty to the limited partners.
Such a duty of loyalty would generally prohibit a general partner of a Delaware
limited partnership from taking any action or engaging in any transaction for
which it has a conflict of interest. Under our partnership agreement, the
General Partner may exercise its broad discretion and authority in the
management of the Partnership and the conduct of its operations as long as the
General Partner's actions are in the best interest of the Partnership.
The General Partner and its affiliates may have conflicts with the Partnership
The directors and officers of the General Partner and its affiliates have
fiduciary duties to manage the General Partner in a manner that is beneficial
to its shareholder. At the same time, the General Partner has fiduciary duties
to manage the Partnership in a manner that is beneficial to the Partnership.
Therefore, the General Partner's duties to us may conflict with the duties of
its officers and directors to its shareholder. Such conflicts of interest may
arise with respect to the following matters, among others.
. Decisions of the General Partner with respect to the amount and timing of
cash expenditures, borrowings, issuances of additional Common Units and
other securities, and changes in reserves in any quarter can affect the
amount of incentive distributions we pay to the General Partner.
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. We do not have any employees and rely solely on employees of the General
Partner.
. Under the terms of our partnership agreement, we will reimburse the
General Partner and its affiliates for costs incurred in managing and
operating our business, including costs incurred in rendering corporate
staff and support services to us.
. Our partnership agreement permits the General Partner to limit the
liability of the Partnership in contractual arrangements to all or
particular assets of the Partnership, thereby providing no recourse
against the General Partner, even if we could have obtained more
favorable terms without such limitations on the General Partner's
liability.
. Our partnership agreement provides that it is not a breach of the General
Partner's fiduciary duties to us or our partners for affiliates of the
General Partner to engage in activities, other than retail propane sales
to end users in the continental United States, that compete with us.
The General Partner can protect itself against dilution
Whenever we issue equity securities to any person other than the General
Partner and its affiliates, the General Partner has the right to purchase
additional limited partnership interests on the same terms. This allows the
General Partner to maintain its partnership interest in the Partnership. No
other unitholder has a similar right. Therefore, only the General Partner may
protect itself against dilution caused by issuance of additional equity
securities.
Tax Risks
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
Tax treatment is dependent on partnership status
The availability to a unitholder of the federal income tax benefits of an
investment in the Common Units depends, in large part, on our classification as
a partnership for federal income tax purposes (unless the context otherwise
requires, references in this subdivision to "us" are references to the
Partnership and the Operating Partnership and not to Ferrellgas Partners
Finance Corp.). Based on certain representations of the General Partner and the
Partnership, Counsel is of the opinion that, under current law, we have been
and will continue to be classified as a partnership for federal income tax
purposes. However, no ruling from the IRS as to such status has been or is
expected to be requested. One of the representations on which the opinion of
counsel is based is that at least 90% of our gross income for each taxable year
has been and will be "qualifying income" within the meaning of Section 7704 of
the Code. Whether we will continue to be classified as a partnership in part
depends on our ability to meet this qualifying income test in the future. See
"Tax Considerations--Partnership Status."
If we were classified as a corporation for federal income tax purposes, we
would pay tax on our income at corporate rates (currently a 35% federal rate),
distributions would generally be taxed a second time in the hands of the
unitholders as corporate distributions, and no income, gains, losses or
deductions would flow through to the unitholders. Because a tax would be
imposed upon us as an entity, the cash available for distribution to the
holders of Common Units would be substantially reduced. Our treatment as a
taxable entity would result in a material reduction in the anticipated cash
flow and after-tax return to the unitholders and this would likely result in a
substantial reduction in the value of the Common Units. See "Tax
Considerations--Partnership Status."
No assurance can be given that the law will not be changed so as to cause us
to be treated as an association taxable as a corporation for federal income tax
purposes or otherwise to be subject to entity-level taxation. Our partnership
agreement provides that if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to taxation as a corporation or
otherwise subjects us to entity-level taxation for federal, state or local
13
income tax purposes, certain provisions of our partnership agreement will be
subject to change. Such changes would include a decrease in the Minimum
Quarterly Distribution and the Target Distribution Levels to reflect the impact
of such law on us.
The IRS has not issued a ruling with respect to our classification as a
partnership
We have not requested a ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes, whether our
propane operations generate "qualifying income" under Section 7704 of the Code
or any other matters affecting us. Accordingly, the IRS may adopt positions
that differ from counsel's conclusions. It may be necessary to resort to
administrative or court proceedings in an effort to sustain some or all of
counsel's conclusions, and some or all of those conclusions ultimately may not
be sustained. Any such contest with the IRS may materially and adversely impact
the market for the Common Units and the prices at which the Common Units trade.
In addition, the costs of any contest with the IRS will be borne directly or
indirectly by some or all of the unitholders and the General Partner.
A unitholders tax liability could exceed cash distributions on his units
A unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of our income, even
if he receives no cash distributions from us. We cannot guarantee that a
unitholder will receive cash distributions equal to his allocable share of our
taxable income or even the tax liability to him resulting from that income.
Further, a unitholder may incur a tax liability, in excess of the amount of
cash received, upon the sale of his Common Units. See "Tax Considerations--Tax
Treatment of Unitholders" and "Tax Considerations--Disposition of Units."
Ownership of Common Units raises issues for tax-exempt organizations and
certain other investors
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, virtually all of the taxable income derived by most organizations
exempt from federal income tax (including IRAs and other retirement plans) from
the ownership of a Common Unit will be unrelated business taxable income and
thus will be taxable to such a unitholder. See "Tax Considerations--Tax-Exempt
Organizations and Certain Other Investors."
There are limits on the deductibility of losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by us will
only be available to offset our future income and cannot be used to offset
income from other activities, including passive activities or investments.
Unused losses may be deducted when the unitholder disposes of his entire
investment in us in a fully taxable transaction with an unrelated party. A
unitholder's share of our net passive income may be offset by unused losses
carried over from prior years, but not by losses from other passive activities,
including losses from other publicly traded partnerships. See "Tax
Considerations--Tax Treatment of Unitholders--Limitations on Deductibility of
Partnership Losses."
Tax gain or loss on disposition of Common Units could be different than
expected
A unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of our nonrecourse
liabilities) and his adjusted tax basis in such Common Units. Thus, prior
distributions in excess of cumulative net taxable income in respect of a Common
Unit which decreased a unitholder's tax basis in such Common Unit will, in
effect, become taxable income if the Common Unit is sold at a price greater
than the unitholder's tax basis in such Common Unit, even if the price is less
than his original cost. A portion of the amount realized (whether or not
representing gain) may be ordinary income. Furthermore, should the IRS
successfully contest certain conventions that we use, a unitholder could
realize more gain on the sale of Common Units than would be the case under such
conventions without the benefit of decreased income in prior years.
14
Reporting of partnership tax information is complicated and subject to audits
We will furnish each unitholder with a Schedule K-1 that sets forth his
allocable share of income, gains, losses and deductions. In preparing these
schedules, we will use various accounting and reporting conventions and adopt
various depreciation and amortization methods. We cannot guarantee that these
schedules will yield a result that conforms to statutory or regulatory
requirements or to administrative pronouncements of the IRS.
Tax shelter registration could increase risk of potential IRS audit
We are registered with the Secretary of the Treasury as a "tax shelter." The
IRS has issued to us the following tax shelter registration number:
94201000010. Issuance of the registration number does not indicate that an
investment in us or the claimed tax benefits have been reviewed, examined or
approved by the IRS. We cannot guarantee that we will not be audited by the IRS
or that tax adjustments will not be made. The rights of a unitholder owning
less than a 1% profits interest in us to participate in the income tax audit
process are very limited. Further, any adjustments in our tax returns will lead
to adjustments in the unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to us. Each
unitholder would bear the cost of any expenses incurred in connection with an
examination of such unitholder's personal tax return.
There is a possibility of loss of tax benefits relating to non-uniformity of
Common Units and nonconforming depreciation conventions
Because we cannot match transferors and transferees of Common Units,
uniformity of the economic and tax characteristics of the Common Units to a
purchaser of Common Units of the same class must be maintained. To maintain
uniformity and for other reasons, we have adopted certain depreciation and
amortization conventions that do not conform with all aspects of certain
proposed and final Treasury Regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax benefits
available to a purchaser of Common Units and could have a negative impact on
the value of the Common Units. See "Tax Considerations--Tax Treatment of
Operations--Uniformity of Units."
There are state, local and other tax considerations
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property. A unitholder will likely
be required to file state and local income tax returns and pay state and local
income taxes in some or all of the various jurisdictions in which we do
business or own property and may be subject to penalties for failure to comply
with those requirements. We currently conduct business in 45 states. It is the
responsibility of each unitholder to file all United States federal, state and
local tax returns that may be required of such unitholder. Counsel has not
rendered an opinion on the state or local tax consequences of an investment in
us. See "Tax Considerations--State, Local and Other Tax Considerations."
Unitholders may have negative tax consequences if we default on our debt or
sell assets
If we default on any of our debt, the lenders will have the right to sue us
for non-payment. Such an action could cause an investment loss and negative tax
consequences for unitholders through the realization of taxable income by
unitholders without a corresponding cash distribution. Likewise, if we were to
dispose of assets and realize a taxable gain while there is substantial debt
outstanding and proceeds of the sale were applied to the debt, unitholders
could have increased taxable income without a corresponding cash distribution.
15
FERRELLGAS
We are a publicly traded Delaware limited partnership engaged in the sale,
distribution, marketing and trading of propane and other natural gas liquids in
the United States. We believe that we are the second largest retail marketer of
propane in the United States (as measured by retail gallons sold). We currently
serve more than 800,000 residential, industrial/commercial and agricultural
customers in 45 states and the District of Columbia through approximately 563
retail outlets with 302 satellite locations in 38 states. Our retail propane
business consists of selling propane to retail (primarily residential)
customers. We purchase this propane in the contract and spot markets, primarily
from major oil companies, and then transport it to our retail distribution
outlets and then to tanks located on our customers' premises and to portable
propane cylinders.
In the residential and commercial markets, propane is primarily used for
space heating, water heating and cooking. In the agricultural market, propane
is primarily used for crop drying, space heating, irrigation and weed control.
In addition, propane is used for certain industrial applications, including use
as an engine fuel, which is burned in internal combustion engines that power
vehicles and forklifts, and as a heating or energy source in manufacturing and
drying processes.
We also trade propane and other natural gas liquids and are engaged in
chemical feedstocks marketing and wholesale propane marketing. Through our
natural gas liquids trading operations and wholesale marketing, we believe that
we are one of the largest independent marketers of propane and natural gas
liquids in the United States.
We trade propane and other natural gas liquids for our account and for
supplying our retail and wholesale propane operations. We primarily trade
products purchased from our over 110 suppliers; however, we also conduct
transactions on the New York Mercantile Exchange. Trading of products is
conducted primarily to generate a profit independent of the retail and
wholesale operations, but is also conducted to help insure the availability of
propane during periods of short supply. We attempt to minimize trading risk
through the enforcement of our trading policies, which include total inventory
limits and loss limits, and attempt to minimize credit risk through credit
checks and application of its credit policies. However, we cannot guarantee
that historical experience or the existence of such policies will prevent
trading losses in the future. We regularly evaluate potential acquisitions of
assets and businesses that would complement our existing business. Our general
partner receives incentive distributions that provide it with a strong
incentive to increase unitholder distributions through successful management
and growth of our business.
Ferrellgas Partners Finance Corp., a co-obligor of the Debt Securities to be
offered by this prospectus, has only nominal assets and does not conduct any
operations.
16
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Partnership, on the one hand, and our general partner and its affiliates,
on the other. The directors and officers of the General Partner have fiduciary
duties to manage the General Partner in a manner beneficial to its stockholder.
At the same time, the General Partner has fiduciary duties to manage the
Partnership in a manner beneficial to the Partnership and the unitholders. The
duties of the General Partner to the Partnership and the unitholders,
therefore, may come into conflict with the duties of management of the General
Partner to its stockholder.
Conflicts of interest might arise with respect to the following matters,
among others:
(1)Decisions of the General Partner with respect to the amount and timing
of cash expenditures, borrowings, issuances of additional Common Units
and changes in reserves in any quarter can affect the amount of
incentive distributions the Partnership pays to the General Partner.
(2)The Partnership does not have any employees and relies solely on
employees of the General Partner and its affiliates.
(3)Under the terms of the Partnership Agreement, the Partnership will
reimburse the General Partner and its affiliates for costs incurred in
managing and operating the Partnership, including costs incurred in
rendering corporate staff and support services to the Partnership. The
General Partner is not restricted from causing the Partnership to pay
the General Partner or its affiliates for any services rendered on terms
that are fair and reasonable to the Partnership or causing the
Partnership to enter into additional contractual arrangements with any
of such entities. Neither the Partnership Agreement nor any of the other
agreements, contracts and arrangements between the Partnership, on the
one hand, and the General Partner and its affiliates, on the other, are
or will be the result of arm's-length negotiations.
(4)Whenever possible, the General Partner limits the liability of the
Partnership under contractual arrangements to all or particular assets
of the Partnership, with the other party thereto having no recourse
against the General Partner or its assets. The Partnership Agreement
permits the General Partner to do this even if the Partnership could
have obtained more favorable terms if it had not limited the General
Partner's liability.
(5)Any agreements between the Partnership and the General Partner and its
affiliates will not grant to the unitholders, separate and apart from
the Partnership, the right to enforce the obligations of the General
Partner and such affiliates in favor of the Partnership. Therefore, the
General Partner, in its capacity as the general partner of the
Partnership, will be primarily responsible for enforcing such
obligations.
(6)The General Partner may exercise its right to call for and purchase
Common Units as provided in the Partnership Agreement or assign such
right to one of its affiliates or to the Partnership.
(7)The Partnership Agreement provides that it will not constitute a breach
of the General Partner's fiduciary duties to the Partnership for
affiliates of the General Partner to engage in certain activities of the
type conducted by the Partnership, other than retail propane sales to
end users in the continental United States, even if in direct
competition with the Partnership. In addition, the General Partner and
such affiliates have no obligation to present business opportunities to
the Partnership.
Unless otherwise provided for in a partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its limited partners the
highest duties of good faith, fairness and loyalty and which generally prohibit
the general partner from taking any action or engaging in any transaction as to
which it has a conflict of interest. The Partnership Agreement expressly
permits the General Partner to resolve conflicts of interest between itself or
its affiliates, on the one hand, and the Partnership or the unitholders, on the
other, and to consider, in resolving such conflicts of interest, the interests
of other parties in addition to the interests of the unitholders. In addition,
the Partnership Agreement provides that a purchaser of Common Units is deemed
to have consented to certain conflicts of interest and
17
actions of the General Partner and its affiliates that might otherwise be
prohibited, including those described above, and to have agreed that such
conflicts of interest and actions do not constitute a breach by the General
Partner of any duty stated or implied by law or equity. The General Partner
will not be in breach of its obligations under the Partnership Agreement or its
duties to the Partnership or the unitholders if the resolution of such conflict
is fair and reasonable to the Partnership. Any resolution of a conflict
approved by the Audit Committee of the General Partner is conclusively deemed
fair and reasonable to the Partnership. The latitude given in the Partnership
Agreement to the General Partner in resolving conflicts of interest may
significantly limit the ability of a unitholder to challenge what might
otherwise be a breach of fiduciary duty.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and their
officers and directors will not be liable for monetary damages to the
Partnership, the limited partners or assignees for errors of judgment or for
any acts or omissions if the General Partner and such other persons acted in
good faith. In addition, the Partnership is required to indemnify the General
Partner, its affiliates and their respective officers, directors, employees,
agents and trustees to the fullest extent permitted by law against liabilities,
costs and expenses incurred by the General Partner or such other persons, if
the General Partner or such persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than the
General Partner) not opposed to, the best interests of the Partnership and,
with respect to any criminal proceedings, had no reasonable cause to believe
the conduct was unlawful.
18
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods indicated is
as follows:
Historical Three
Months
Historical Eleven Historical One Pro Forma Historical Year Ended July 31, October 31,
Months Ended Month Ended Year Ended ------------------------------ -----------
June 30, 1994 July 31, 1994(1) July 31, 1994(2) 1995 1996 1997 1998 1997(3) 1998(3)
- ----------------- ---------------- ---------------- ---- ---- ---- ---- ------- -------
1.2 -- 2.4 1.7 1.6 1.5 1.1 -- --
- -------------
(1) For the one month ended July 31, 1994, earnings were inadequate to cover
fixed charges by $5.0 million.
(2) The pro forma year ended July 31, 1994 includes the eleven months ended
June 30, 1994 for our predecessor, Ferrellgas, Inc. and its subsidiaries,
and our historical financial data for the period from inception (July 5,
1994) to July 31, 1994 (adjusted principally for the pro forma effect on
interest expense resulting from the early retirement of debt net of
additional borrowings).
(3) For the three months ended October 31, 1997 and 1998, earnings were
inadequate to cover fixed charges by $13.3 million and $11.2 million,
respectively.
These computations include the Partnership and the Operating Partnership on
a consolidated basis. For these ratios, "earnings" is the amount resulting from
adding the following items:
. pre-tax income from continuing operations; and
. fixed charges.
The term "fixed charges" means the sum of the following:
. interest expensed;
. amortized premiums, discounts and capitalized expenses related to
indebtedness; and
. an estimate of the interest within rental expenses.
Earnings from continuing operations for the periods presented were reduced
by certain non-cash expenses, consisting principally of depreciation and
amortization and a non-cash employee stock ownership plan charge. Such non-cash
charges totaled $26.5 million for the eleven months ended June 30, 1994, $2.4
million for the one month ended July 31, 1994, $28.8 million for the pro forma
year ended July 31, 1994, $32.0 million for the year ended July 31, 1995, $37.0
million for the year ended July 31, 1996, $43.8 million for the year ended July
31, 1997, $45.4 million for the year ended July 31, 1998, and $11.5 million and
$12.2 million for the three months ended October 31, 1997 and 1998,
respectively.
19
DESCRIPTION OF UNITS
General
As of October 31, 1998, we had 14,703,298 Common Units outstanding,
representing a 46% limited partner interest in the Partnership, and 16,593,721
Subordinated Units outstanding, representing a 52% limited partner interest in
the Partnership. All of the Subordinated Units are currently held by FCI, the
parent company of our general partner. The Common Units and the Subordinated
Units represent limited partner interests in the Partnership, which entitle the
holders thereof to participate in distributions and exercise the rights and
privileges available to limited partners under our partnership agreement. A
copy of our partnership agreement is filed as an exhibit to the registration
statement of which this prospectus is a part. A summary of the important
provisions of our partnership agreement is included in our reports filed with
the SEC.
Under our partnership agreement we may issue, without further unitholder
action, an unlimited number of additional limited partner interests and other
equity securities with such rights, preferences and privileges as shall be
established by the General Partner in its sole discretion, subject to the
following exceptions:
(1) during the subordination period, we may not issue limited partner interests
or other equity securities ranking prior or senior to the Common Units or
an aggregate of more than 7,000,000 additional Common Units or an
equivalent amount of other equity securities having rights to distributions
or in liquidation ranking on a parity with the Common Units, in either case
without the approval of two-thirds of the outstanding Common Units;
provided that we may issue an unlimited number of additional Common Units
or parity securities prior to the end of the subordination period and
without unitholder approval in connection with acquisitions if certain cash
flow criteria are met and
(2) during the subordination period, we may not issue limited partner interests
or other equity securities with rights to distributions or in liquidation
ranking prior or senior to the Common Units, without the approval of
two-thirds of the outstanding Common Units.
Common Units
Listing
Our outstanding Common Units are listed on the NYSE under the symbol "FGP".
Any additional Common Units we issue will also be listed on the NYSE.
Voting
Each holder of Common Units is entitled to one vote for each Common Unit on
all matters submitted to a vote of the unitholders; provided that, if at any
time any person or group (other than FCI and its affiliates) owns beneficially
20% or more of all Common Units, such Common Units so owned shall not be voted
on any matter and shall not be considered to be outstanding when sending
notices of a meeting of unitholders (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under our partnership agreement. Except as otherwise provided
by law or our partnership agreement, the holders of Common Units and
Subordinated Units vote as one class.
Distributions
Our partnership agreement requires us to distribute 100% of our "Available
Cash" to our unitholders and our general partner within 45 days following the
end of each fiscal quarter. "Available Cash" consists generally of all of our
cash receipts, less cash disbursements and adjustments for net changes to
reserves.
20
Currently the Common Units have the right to receive distributions of
Available Cash from our operations in an amount equal to $0.50 per unit before
any distributions of such Available Cash are made on the Subordinated Units.
This priority right is scheduled to end when certain financial tests, which are
related to generating cash from operations and distributing at least $0.50 per
unit on all Common Units and Subordinated Units, are satisfied for each of
three consecutive four quarter periods ending on or after July 31, 1999. If
these financial tests are met, the Common Units and the Subordinated Units will
thereafter share equally in distributions of Available Cash. We met these
financial tests for the four quarter periods ended July 31, 1997 and July 31,
1998, however, there can be no assurance that we will meet the remaining
financial tests in the four quarter period ended July 31, 1999. The period
during which the Common Units have a priority right to distributions and in
which the right of the Subordinated Units to distributions is subordinate is
referred to as the subordination period.
During the subordination period we distribute Available Cash from our
operations as follows:
. first, 98% to the holders of Common Units and 2% to the General Partner,
until the holders of Common Units have received $0.50 per Common Unit for
such quarter and any prior quarter in which they failed to receive $0.50
per Common Unit;
. second, 98% to the holders of Subordinated Units and 2% to the General
Partner, until the holders of Subordinated Units have received $0.50 per
Subordinated Unit for such quarter;
. third, 98% to all unitholders and 2% to the General Partner, until all
unitholders have received $0.55 per unit for such quarter;
. fourth, 85% to all unitholders, 13% to FCI as the holder of incentive
distribution rights and 2% to the General Partner, until all unitholders
have received $0.63 per unit for such quarter;
. fifth, 75% to all unitholders, 23% to FCI as the holder of incentive
distribution rights and 2% to the General Partner, until all unitholders
have received $0.82 per unit for such quarter; and
. sixth, thereafter 50% to all unitholders, 48% to FCI as the holder of
incentive distribution rights and 2% to the General Partner.
Following the end of the subordination period Available Cash from our
operations will be distributed as follows:
. first, 98% to all unitholders and 2% to the General Partner, until all
unitholders have received $0.55 per unit for such quarter;
. second, 85% to all unitholders, 13% to FCI as the holder of incentive
distribution rights and 2% to the General Partner, until all unitholders
have received $0.63 per unit for such quarter;
. third, 75% to all unitholders, 23% to FCI as the holder of incentive
distribution rights and 2% to the General Partner, until all unitholders
have received $0.82 per unit for such quarter; and
. fourth, thereafter 50% to all unitholders, 48% to FCI as the holder of
incentive distribution rights and 2% to the General Partner.
Transfer Agent and Registrar
Our transfer agent and registrar for the Common Units is Bank Boston, N.A.
You may contact our transfer agent and registrar at the following address:
Bank Boston, N.A.
c/o Boston EquiServe
Attn: Investor Relations/Shareholder Services
P. O. Box 8040 Boston, Massachusetts 02266-8040
Telephone: (781) 575-3120
21
Deferred Participation Units
No Deferred Participation Units ("DPUs") are issued or outstanding. The
General Partner has the authority, without further unitholder action, to
establish one or more series of DPUs and to determine the rights, preferences
and privileges of each such series of DPUs.
A prospectus supplement relating to a particular series of DPUs offered
thereby will include the specific terms of such DPUs, including the following:
. the designation, stated value and liquidation preference of such DPUs and
the number of DPUs offered;
. the initial public offering price at which such DPUs will be issued;
. the conversion or exchange provisions of such DPUs;
. any redemption or sinking fund provisions of such DPUs;
. the distribution rights of such DPUs, if any;
. a discussion of material federal income tax considerations, if any; and
. any additional rights, preferences, privileges, limitations and
restrictions of such DPUs.
22
DESCRIPTION OF WARRANTS
We may issue warrants to purchase Debt Securities (the "Debt Warrants"),
Common Units (the "Common Unit Warrants") or other securities issued by us or
another issuer (the "Other Warrants," collectively with the Debt Warrants and
the Common Unit Warrants, the "Warrants"). Warrants may be issued independently
or together with any Securities and may be attached to or separate from such
Securities. The Warrants are to be issued under warrant agreements (each a
"Warrant Agreement") to be entered into between us and a bank or trust company,
as warrant agent (the "Warrant Agent"), all as shall be set forth in a
prospectus supplement relating to the Warrants being offered pursuant thereto.
Debt Warrants
The applicable prospectus supplement will describe the terms of the Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and the debt warrant certificates representing such Debt Warrants, including
the following:
. the title of such Debt Warrants;
. the aggregate number of such Debt Warrants;
. the price or prices at which such Debt Warrants will be issued;
. the designation, aggregate principal amount and terms of the Debt
Securities purchasable upon exercise of such Debt Warrants;
. the principal amount of Debt Securities purchasable upon exercise of each
Debt Warrant, and the price at which such principal amount of Debt
Securities may be purchased upon such exercise;
. the date, if any, on and after which such Debt Warrants and the related
Debt Securities will be separately transferable;
. the date on which the right to exercise such Debt Warrants shall
commence, and the date on which such right shall expire;
. the maximum or minimum number of such Debt Warrants that may be exercised
at any time;
. a discussion of material federal income tax considerations, if any; and
. any other terms of such Debt Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Debt Warrants.
Debt Warrant certificates will be exchangeable for new Debt Warrant
certificates of different denominations and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated
in the prospectus supplement. Prior to the exercise of their Debt Warrants,
holders of Debt Warrants will not have any of the rights of holders of the Debt
Securities purchasable upon such exercise and will not be entitled to payments
of principal of (or premium, if any) or interest, if any, on the Debt
Securities purchasable upon such exercise.
Common Unit Warrants and Other Warrants
The applicable prospectus supplement will describe the terms of the Common
Unit Warrants and Other Warrants offered thereby, the Warrant Agreement
relating to such Warrants and the warrant certificates representing such
Warrants, including the following:
. the title of such Warrants;
. the aggregate number of such Warrants;
23
. the price or prices at which such Warrants will be issued;
. the securities for which such Warrants are exercisable, and the price at
which such securities may be purchased upon such exercise;
. any provisions for adjustment of the number of Common Units or number or
amount of other securities of ours or another issuer receivable upon
exercise of such Warrants or the exercise price of such Warrants;
. the date, if any, on and after which such Warrants and the related Common
Units or other securities of the Company or another issuer will be
separately transferable;
. the date on which the right to exercise such Warrants shall commence, and
the date on which such right shall expire;
. the maximum or minimum number of such Warrants that may be exercised at
any time;
. a discussion of material federal income tax considerations, if any; and
. any other terms of such Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Warrants.
Warrant certificates will be exchangeable for new Warrant certificates of
different denominations and Warrants may be exercised at the corporate trust
office of the Warrant Agent or any other office indicated in the prospectus
supplement. Prior to the exercise of their Warrants, holders of Warrants will
not have any of the rights of holders of the securities purchasable upon such
exercise and will not be entitled to any distributions or dividends on the
securities purchasable upon exercise.
Exercise of Warrants
Each Warrant will entitle the holder of the Warrant to purchase for cash
such principal amount of Debt Securities, number of Common Units, or number or
amount of other securities at such exercise price as shall in each case be set
forth in, or be determinable as set forth in, the prospectus supplement
relating to the Warrants offered thereby. Warrants may be exercised at any time
up to the close of business on the expiration date set forth in the prospectus
supplement relating to the Warrants offered thereby. After the close of
business on the expiration date, unexercised Warrants will become void.
Warrants may be exercised as set forth in the prospectus supplement relating
to the Warrants offered thereby. Upon receipt of payment and the warrant
certificate properly completed and duly executed at the corporate trust office
of the Warrant Agent or any other office indicated in the prospectus
supplement, we will, as soon as practicable, forward the Debt Securities,
Common Units or other securities purchasable upon such exercise. If less than
all of the Warrants represented by such warrant certificate are exercised, a
new warrant certificate will be issued for the remaining Warrants. -
24
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be:
. direct secured or unsecured general obligations of Ferrellgas Partners,
L.P. and Ferrellgas Partners Finance Corp. as co-obligors; and
. either senior debt securities or subordinated debt securities.
Senior Debt Securities will be issued under a Senior Indenture and
Subordinated Debt Securities will be issued under a Subordinated Indenture. The
Senior Indenture and the Subordinated Indenture are each referred to as an
"Indenture" and collectively referred to as the "Indentures." We will enter
into the Indentures with a trustee that is qualified to act under the Trust
Indenture Act of 1939, as amended (the "TIA") (together with any other
trustee(s) chosen by us and appointed in a supplemental indenture with respect
to a particular series of Debt Securities, the "Trustee"). The Trustee for each
series of Debt Securities will be identified in the applicable prospectus
supplement. The form of Indentures and any supplemental indentures will be
filed by us from time to time by means of an exhibit to a Current Report on
Form 8-K and will be available for inspection at the corporate trust office of
the Trustee, or as described above under "Where You Can Find More Information."
The Indentures will be subject to, and governed by, the TIA. We will execute an
Indenture and supplemental indenture if and when we issue any Debt Securities.
We summarized the material provisions of the Indentures in the following
order:
. those provisions that apply only to the Senior Indenture;
. those provisions that apply only to the Subordinated Indenture; and
. those provisions that apply to both Indentures.
We have not restated the Indentures in their entirety in this prospectus.
You should read the Indentures, because they, and not this description, control
your rights as holders of the Debt Securities. Capitalized terms used in the
summary have the meanings specified in the Indentures.
In this section, references to the Partnership relate only to Ferrellgas
Partners, L.P., the issuer of the Debt Securities, and not to our Subsidiaries.
In the Indentures, the term "Subsidiary" means, with respect to any person:
. any partnership of which more than 50% of the partners' equity interests
(considering all partners' equity interests as a single class) is at the
time owned or controlled, directly or indirectly, by such person or one
or more of the other Subsidiaries of such person or combination thereof,
or
. any corporation, association or other business entity of which more than
50% of the total voting power of the equity interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such person or one or more of the
other Subsidiaries of such person or combination thereof.
At present, our only Subsidiaries are Ferrellgas, L.P., our subsidiary
operating partnership, and Ferrellgas Partners Finance Corp.
Specific Terms of Each Series of Debt Securities in the Prospectus Supplement
A prospectus supplement and a supplemental indenture relating to any series
of Debt Securities being offered will include specific terms relating to such
Debt Securities. These terms will include some or all of the following:
. the form and title of the Debt Securities;
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. the total principal amount of the Debt Securities;
. the assets, if any, that are pledged as security for the payment of the
Debt Securities;
. the portion of the principal amount that will be payable if the maturity
of the Debt Securities is accelerated;
. the currency or currency unit in which the Debt Securities will be
payable, if not U.S. dollars;
. any right we may have to defer payments of interest by extending the
dates payments are due whether interest on those deferred amounts will be
payable as well;
. the dates on which the principal of the Debt Securities will be payable;
. the interest rate that the Debt Securities will bear and the interest
payment dates for the Debt Securities;
. any conversion or exchange provisions;
. any optional redemption provisions;
. any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the Debt Securities;
. any changes to or additional Events of Default or covenants; and
. any other terms of the Debt Securities.
Provisions Only in the Senior Indenture
Summary
The Senior Debt Securities will rank equally in right of payment with all of
our other senior and unsubordinated debt and senior in right of payment to any
of our subordinated debt (including the Subordinated Debt Securities). The
Senior Indenture will contain provisions that:
. limit our ability to put liens on our principal assets; and
. limit our ability to sell and lease back our principal assets.
The Subordinated Indenture will not contain any similar provisions. We have
described below these provisions and some of the defined terms used in them.
Limitations on Liens
The Senior Indenture will provide that the Partnership will not, nor will it
permit any Subsidiary to, create, assume, incur or suffer to exist any lien
upon any property or assets, whether owned or leased on the date of the Senior
Indenture or thereafter acquired, to secure any debt of the Partnership or any
other person (other than the Senior Debt Securities issued thereunder), without
in any such case making effective provision whereby all of the Senior Debt
Securities outstanding thereunder shall be secured equally and ratably with, or
prior to, such debt so long as such debt shall be so secured.
There is excluded from this restriction:
(1) Permitted Liens (as defined below);
(2) with respect to any series, any lien upon any property or assets of the
Partnership or any Subsidiary in existence on the date the Senior Debt
Securities of such series are first issued or provided for pursuant to
agreements existing on such date;
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(3) any lien upon any property or assets created at the time of acquisition of
such property or assets by the Partnership or any Subsidiary or within one
year after such time to secure all or a portion of the purchase price for
such property or assets or debt incurred to finance such purchase price,
whether such debt was incurred prior to, at the time of or within one year
after the date of such acquisition;
(4) any lien upon any property or assets existing thereon at the time of the
acquisition thereof by the Partnership or any Subsidiary; provided,
however, that such lien only encumbers the property or assets so acquired;
(5) any lien upon any property or assets of a person existing thereon at the
time such person becomes a Subsidiary by acquisition, merger or otherwise;
provided, however, that such lien only encumbers the property or assets of
such person at the time such person becomes a Subsidiary;
(6) any lien upon any property or assets to secure all or part of the cost of
construction, development, repair or improvements thereon or to secure debt
incurred prior to, at the time of, or within one year after completion of
such construction, development, repair or improvements or the commencement
of full operations thereof (whichever is later), to provide funds for any
such purpose;
(7) liens imposed by law or order as a result of any proceeding before any
court or regulatory body that is being contested in good faith, and liens
which secure a judgment or other court-ordered award or settlement as to
which the Partnership or the applicable Subsidiary has not exhausted its
appellate rights;
(8) any lien upon any additions, improvements, replacements, repairs, fixtures,
appurtenances or component parts thereof attaching to or required to be
attached to property or assets pursuant to the terms of any mortgage,
pledge agreement, security agreement or other similar instrument, creating
a lien upon such property or assets permitted by clauses (1) through (7)
above; or
(9) any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or replacements) of
liens, in whole or in part, referred to in clauses (1) through (8) above;
provided, however, that any such extension, renewal, refinancing, refunding
or replacement lien shall be limited to the property or assets covered by
the lien extended, renewed, refinanced, refunded or replaced and that the
obligations secured by any such extension, renewal, refinancing, refunding
or replacement lien shall be in an amount not greater than the amount of
the obligations secured by the lien extended, renewed, refinanced, refunded
or replaced and any expenses of the Partnership and its subsidiaries
(including any premium) incurred in connection with such extension,
renewal, refinancing, refunding replacement; or
(10) any lien resulting from the deposit of moneys or evidence of indebtedness
in trust for the purpose of defeasing debt of the Partnership or any
Subsidiary.
Notwithstanding the foregoing, under the Senior Indenture, the Partnership
may, and may permit any Subsidiary to, create, assume, incur, or suffer to
exist any lien upon any property or assets to secure debt of the Partnership or
any person (other than the Senior Debt Securities) that is not excepted by
clauses (1) through (10), inclusive, above without securing the Senior Debt
Securities issued under the Senior Indenture, provided that the aggregate
principal amount of all debt then outstanding secured by such lien and all
similar liens, together with all Attributable Indebtedness (as defined below)
from Sale-Leaseback Transactions (excluding Sale-Leaseback Transactions
permitted by clauses (1) through (4), inclusive, of the first paragraph of the
restriction on sale-leasebacks covenant described below) does not exceed 10% of
Consolidated Net Tangible Assets (as defined below).
"Permitted Liens" means:
(1) zoning restrictions, easements, licenses, covenants, reservations,
restrictions on the use of real property or minor irregularities of title
incident thereto that do not, in the aggregate, materially detract from the
value of the property or the assets of the Partnership or any of its
Subsidiaries or impair the use of such property in the operation of the
business of the Partnership or any of its Subsidiaries;
27
(2) any statutory or governmental lien or lien arising by operation of law, or
any mechanics', repairmen's, materialmen's, suppliers', vendors',
carriers', landlords', warehousemen's or similar lien incurred in the
ordinary course of business which is not yet due or which is being
contested in good faith by appropriate proceedings and any undetermined
lien which is incidental to construction, development, improvement or
repair;
(3) the right reserved to, or vested in, any municipality or public authority
by the terms of any right, power, franchise, grant, license, permit or by
any provision of law, to purchase or recapture or to designate a purchaser
of, any property;
(4) liens of taxes and assessments which are (A) for the then current year, (B)
not at the time delinquent, or (C) delinquent but the validity of which is
being contested at the time by the Partnership or any Subsidiary in good
faith;
(5) liens of, or to secure performance of, leases, other than capital leases;
(6) any lien upon, or deposits of, any assets in favor of any surety company or
clerk of court for the purpose of obtaining indemnity or stay of judicial
proceedings;
(7) any lien upon property or assets acquired or sold by the Partnership or any
Subsidiary resulting from the exercise of any rights arising out of
defaults on receivables;
(8) any lien incurred in the ordinary course of business in connection with
workmen's compensation, unemployment insurance, temporary disability,
social security, retiree health or similar laws or regulations or to secure
obligations imposed by statute or governmental regulations;
(9) any lien in favor of the Partnership or any Subsidiary;
(10) any lien in favor of the United States of America or any state thereof, or
any department, agency or instrumentality or political subdivision of the
United States of America or any state thereof, to secure partial,
progress, advance, or other payments pursuant to any contract or statute,
or any debt incurred by the Partnership or any Subsidiary for the purpose
of financing all or any part of the purchase price of, or the cost of
constructing, developing, repairing or improving, the property or assets
subject to such lien;
(11) any lien securing industrial development, pollution control or similar
revenue bonds;
(12) any lien securing debt of the Partnership or any Subsidiary, all or a
portion of the net proceeds of which are used, substantially concurrent
with the funding thereof (and for purposes of determining such
"substantial concurrence," taking into consideration, among other things,
required notices to be given to holders of outstanding securities under
the Indenture (including the Debt Securities) in connection with such
refunding, refinancing or repurchase, and the required corresponding
durations thereof), to refinance, refund or repurchase all outstanding
securities under the Indenture (including the Debt Securities), including
the amount of all accrued interest thereon and reasonable fees and
expenses and premium, if any, incurred by the Partnership or any
Subsidiary in connection therewith;
(13) liens in favor of any person to secure obligations under the provisions of
any letters of credit, bank guarantees, bonds or surety obligations
required or requested by any governmental authority in connection with any
contract or statute; or
(14) any lien upon or deposits of any assets to secure performance of bids,
trade contracts, leases or statutory obligations.
"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom:
(1) all current liabilities (excluding (A) any current liabilities that by
their terms are extendable or renewable at the option of the obligor
thereon to a time more than 12 months after the time as of which the amount
thereof is being computed, and (B) current maturities of debt), and
28
(2) the value (net of any applicable reserves) of all goodwill, trade names,
trademarks, patents and other like intangible assets, all as set forth, or
on a proforma basis would be set forth, on the consolidated balance sheet
of the Partnership and its consolidated subsidiaries for the Partnership's
most recently completed fiscal quarter, prepared in accordance generally
accepted accounting principles.
Restriction on Sale-Leasebacks
The Senior Indenture will provide that the Partnership will not, and will
not permit any Subsidiary to, engage in the sale or transfer by the Partnership
or any Subsidiary of any property or assets to a person (other than the
Partnership or a Subsidiary) and the taking back by the Partnership or any
Subsidiary, as the case may be, of a lease of such property or assets (a
"Sale-Leaseback Transaction"), unless:
(1) such Sale-Leaseback Transaction occurs within one year from the date of
completion of the acquisition of the property or assets subject thereto or
the date of the completion of construction, development or substantial
repair or improvement, or commencement of full operations on such property
or assets, whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period, including
renewals, of not more than the lesser of (A) three years and (B) 60% of the
useful remaining life of such property;
(3) the Partnership or such Subsidiary would be entitled to incur debt secured
by a lien on the property or assets subject thereto in a principal amount
equal to or exceeding the Attributable Indebtedness from such
Sale-Leaseback Transaction without equally and ratably securing the Senior
Debt Securities; or
(4) the Partnership or such Subsidiary, within a one-year period after such
Sale-Leaseback Transaction, applies or causes to be applied an amount not
less than the Attributable Indebtedness from such Sale-Leaseback
Transaction to (A) the prepayment, repayment, redemption, reduction or
retirement of any debt of the Partnership or any Subsidiary that is not
subordinated to the Senior Debt Securities, or (B) the expenditure or
expenditures for property or assets used or to be used in the ordinary
course of business of the Partnership or its Subsidiaries.
Notwithstanding the foregoing, the Indenture will permit the Partnership and
its Subsidiaries to enter into Sale-Leaseback Transactions relating to propane
tanks up to an aggregate principal amount of $25 million at any time, provided
that such transactions would not cause a default.
"Attributable Indebtedness," when used with respect to any to any
Sale-Leaseback Transaction, means, as at the time of determination, the present
value (discounted at the rate set forth or implicit in the terms of the lease
included in such transaction) of the total obligations of the lessee for rental
payments (other than amounts required to be paid on account of property taxes,
maintenance, repairs, insurance, assessments, utilities, operating and labor
costs and other items that do not constitute payments for property rights)
during the remaining term of the lease included in such Sale-Leaseback
Transaction (including any period for which such lease has been extended). In
the case of any lease that is terminable by the lessee upon the payment of a
penalty or other termination payment, such amount shall be the lesser of the
amount determined assuming termination upon the first date such lease may be
terminated (in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required to
be paid under such lease subsequent to the first date upon which it may be so
terminated) or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the Senior Indenture the Partnership
may, and may permit any Subsidiary to, effect any Sale-Leaseback Transaction
that is not excepted by clauses (1) through (4), inclusive, of the above
paragraph, provided that the Attributable Indebtedness from such Sale-Leaseback
Transaction, together with the aggregate principal amount of outstanding debt
(other than the Senior Debt Securities) secured by liens upon property and
assets not excepted by clauses (1) through (10), inclusive, of the second
paragraph of the limitation on liens covenant described above, do not exceed
10% of Consolidated Net Tangible Assets.
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Provisions Only in the Subordinated Indenture
Subordinated Debt Securities Subordinated to Senior Debt
The Subordinated Debt Securities will rank junior in right of payment to all
of our Senior Debt. "Senior Debt" is defined to include all notes or other
evidences of indebtedness, including guarantees of the Partnership for money
borrowed by the Partnership, not expressed to be subordinate or junior in right
of payment to any other indebtedness of the Partnership.
Payment Blockages
The Subordinated Indenture will provide that no payment of principal,
interest and any premium on the Subordinated Debt Securities may be made in the
event:
. we or our property are involved in any voluntary or involuntary
liquidation or bankruptcy;
. we fail to pay the principal, interest, any premium or any other amounts
on any Senior Debt when due; or
. we have a nonpayment default on any Senior Debt that imposes a payment
blockage on the Subordinated Debt Securities for a maximum of 179 days at
any one time.
No Limitation on Amount of Senior Debt
The Subordinated Indenture will not limit the amount of Senior Debt that we
may incur.
Consolidation, Merger or Asset Sale
Each Indenture will, in general, allow us to consolidate or merge with a
domestic partnership or corporation. They will also allow us to sell, lease or
transfer all or substantially all of our property and assets to a domestic
partnership or corporation. If this happens, the remaining or acquiring
partnership or corporation must assume all of our responsibilities and
liabilities under the Indentures including the payment of all amounts due on
the Debt Securities and performance of the covenants in the Indentures.
However, we will only consolidate or merge with or into a partnership or
corporation or sell, lease or transfer all or substantially all of our assets
according to the terms and conditions of the Indentures, which will include the
following requirements:
. the remaining or acquiring partnership or corporation is organized under
the laws of the United States, any state or the District of Columbia;
. the remaining or acquiring partnership or corporation assumes the
Partnership's obligations under the Indentures; and
. immediately after giving effect to the transaction no Default or Event of
Default (as defined below) exists.
The remaining or acquiring partnership or corporation will be substituted
for us in the Indentures with the same effect as if it had been an original
party to the Indentures. Thereafter, the successor may exercise our rights and
powers under the Indentures, in our name or in its own name. If we sell or
transfer all or substantially all of our assets, we will be released from all
our liabilities and obligations under the Indentures and under the Debt
Securities. If we lease all or substantially all of our assets, we will not be
released from our obligations under the Indentures.
30
Modification of Indentures
Under each Indenture, generally we and the Trustee may modify our rights and
obligations and the rights of the holders with the consent of the holders of a
majority in aggregate principal amount of the outstanding Debt Securities of
each series affected by the modification. No modification of the principal or
interest payment terms, and no modification reducing the percentage required
for modifications, is effective against any holder without its consent. In
addition, the Partnership and the Trustee may amend the Indentures without the
consent of any holder of the Debt Securities to make certain technical changes,
such as:
. correcting errors;
. providing for a successor trustee;
. qualifying the Indentures under the Trust Indenture Act; or
. adding provisions relating to a particular series of Debt Securities.
Events of Default and Remedies
"Event of Default" when used in an Indenture, will mean any of the following:
. failure to pay the principal of or any premium on any Debt Security when
due;
. failure to pay interest on any Debt Security for 30 days;
. failure to perform any other covenant in the Indenture that continues for
60 days after being given written notice;
. certain events of bankruptcy, insolvency or reorganization of the
Partnership; or
. any other Event of Default included in any Indenture or supplemental
indenture.
An Event of Default for a particular series of Debt Securities does not
necessarily constitute an Event of Default for any other series of Debt
Securities issued under an Indenture. The Trustee may withhold notice to the
holders of Debt Securities of any default (except in the payment of principal
or interest) if it considers such withholding of notice to be in the best
interests of the holders.
If an Event of Default for any series of Debt Securities occurs and
continues, the Trustee or the holders of at least 25% in aggregate principal
amount of the Debt Securities of the series may declare the entire principal of
all the Debt Securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the Debt Securities of that series can void the
declaration.
Other than its duties in case of a default, a Trustee is not obligated to
exercise any of its rights or powers under any Indenture at the request, order
or direction of any holders, unless the holders offer the Trustee reasonable
indemnity. If they provide this reasonable indemnification, the holders of a
majority in principal amount of any series of Debt Securities may direct the
time, method and place of conducting any proceeding or any remedy available to
the Trustee, or exercising any power conferred upon the Trustee, for any series
of Debt Securities.
No Limit on Amount of Debt Securities
Neither of the Indentures will limit the amount of Debt Securities that we
may issue. Each Indenture allows us to issue Debt Securities up to the
principal amount that we authorize.
31
Registration of Notes
We may issue Debt Securities of a series in registered, bearer, coupon or
global form.
Minimum Denominations
Unless the prospectus supplement for each issuance of Debt Securities states
otherwise the securities will be issued in registered form in amounts of $1,000
each or multiples of $1,000.
No Personal Liability of General Partner
Unless otherwise stated in a prospectus supplement and supplemental
indenture relating to a series of Debt Securities being offered, the General
Partner and its directors, officers, employees and shareholders will not have
any liability for our obligations under the Indentures or the Debt Securities.
Each holder of Debt Securities by accepting a Debt Security waives and releases
all such liability. The waiver and release are part of the consideration for
the issuance of the Debt Securities.
Payment and Transfer
Principal, interest and any premium on fully registered securities will be
paid at designated places. Payment will be made by check mailed to the persons
in whose names the Debt Securities are registered on days specified in the
Indentures or any prospectus supplement. Debt Securities payments in other
forms will be paid at a place designated by us and specified in a prospectus
supplement.
Fully registered securities may be transferred or exchanged at the corporate
trust office of the Trustee or at any other office or agency maintained by us
for such purposes, without the payment of any service charge except for any tax
or governmental charge.
Discharging Our Obligations
We may choose to either discharge our obligations on the Debt Securities of
any series in a legal defeasance, or to release ourselves from our covenant
restrictions on the Debt Securities of any series in a covenant defeasance. We
may do so at any time on the 91st day after we deposit with the Trustee
sufficient cash or government securities to pay the principal, interest, any
premium and any other sums due to the stated maturity date or a redemption date
of the Debt Securities of the series. If we choose the legal defeasance option,
the holders of the Debt Securities of the series will not be entitled to the
benefits of the Indenture except for registration of transfer and exchange of
Debt Securities, replacement of lost, stolen or mutilated Debt Securities
conversion or exchange of Debt Securities, sinking fund payments and receipt of
principal and interest on the original stated due dates or specified redemption
dates.
We may discharge our obligations under the Indentures or release ourselves
from covenant restrictions only if we meet certain requirements. Among other
things, we must deliver an opinion of our legal counsel that the discharge will
not result in holders of Debt Securities having to recognize taxable income or
loss or subject then to different tax treatment. In the case of legal
defeasance, this opinion must be based on either an IRS letter ruling or change
in federal tax law. We may not have a default on the Debt Securities discharged
on the date of deposit. The discharge may not violate any of our agreements.
The discharge may not result in our becoming an investment company in violation
of the Investment Company Act of 1940.
Book Entry, Delivery and Form
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a
depositary identified in a prospectus supplement.
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Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York ("DTC") will act as depositary. Book-entry notes of
a series will be issued in the form of a global note that will be deposited
with DTC. This means that we will not issue certificates to each holder. One
global note will be issued to DTC who will keep a computerized record of its
participants (for example, your broker) whose clients have purchased the notes.
The participant will then keep a record of its clients who purchased the notes.
Unless it is exchanged in whole or in part for a certificate note, a global
note may not be transferred; except that DTC, its nominees and their successors
may transfer a global note as a whole to one another.
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
United States Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act
of 1934. DTC holds securities that its participants ("Direct Participants")
deposit with DTC. DTC also records the settlement among Direct Participants of
securities transactions, such as transfers and pledges, in deposited securities
through computerized records for Direct Participant's accounts. This eliminates
the need to exchange certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on
file with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global notes for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global notes as
shown on DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Direct Participants whose accounts are credited
with notes on a record date, by using an omnibus proxy. Payments by
participants to owners of beneficial interests in the global notes, and voting
by participants, will be governed by the customary practices between the
participants and owners of beneficial interests, as is the case with notes held
for the account of customers registered in "street name." However, payments
will be the responsibility of the participants and not of DTC, the Trustee or
us.
Notes represented by a global note will be exchangeable for certificated
notes with the same terms in authorized denominations only if:
. DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
. we determine not to require all of the notes of a series to be
represented by a global note and notify the Trustee of our decision.
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The Trustee
Resignation or Removal of Trustee
Under provisions of the Indentures and the Trust Indenture Act of 1939, as
amended, governing trustee conflicts of interest, any uncured Event of Default
with respect to any series of Senior Debt Securities will force the trustee to
resign as trustee under either the Subordinated Indenture or the Senior
Indenture. Also, any uncured Event of Default with respect to any series of
Subordinated Debt Securities will force the trustee to resign as trustee under
either the Senior Indenture or the Subordinated Indenture. Any resignation will
require the appointment of a successor trustee under the applicable Indenture
in accordance with the terms and conditions of such Indenture.
The Trustee may resign or be removed by us with respect to one or more
series of Debt Securities and a successor trustee may be appointed to act with
respect to any such series. The holders of a majority in aggregate principal
amount of the Debt Securities of any series may remove the Trustee with respect
to the Debt Securities of such series.
Limitations on Trustee if it is a Creditor of the Partnership
Each Indenture will contain certain limitations on the right of the Trustee
thereunder, in the event that it becomes a creditor of the Partnership, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise.
Annual Trustee Report to Holders of Debt Securities
The Trustee is required to submit an annual report to the holders of the
Debt Securities regarding, among other things, the Trustee's eligibility to
serve as such, the priority of the Trustee's claims regarding certain advances
made by it, and any action taken by the Trustee materially affecting the Debt
Securities.
Certificates and Opinions to Be Furnished to Trustee
Each Indenture will provide that, in addition to other certificates or
opinions that may be specifically required by other provisions of an Indenture,
every application by us for action by the Trustee shall be accompanied by a
certificate of certain of our officers and an opinion of counsel (who may be
our counsel) stating that, in the opinion of the signers, all conditions
precedent to such action have been complied with by us.
34
TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective owners of Common Units and, to the extent set forth
below under "--Legal Opinions and Advice," expresses the opinion of Andrews &
Kurth L.L.P. ("Counsel"), insofar as it relates to matters of law and legal
conclusions. This section is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. Subsequent changes in such authorities may
cause the tax consequences to vary substantially from the consequences
described below. Unless the context otherwise requires, references in this
section to "us" are references to the Partnership and the Operating Partnership
and not to Ferrellgas Partners Finance Corp.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other unitholders subject to specialized tax
treatment (such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds). Accordingly, each prospective
unitholder should consult, and should depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences peculiar to
him of the ownership or disposition of Common Units.
Legal Opinions and Advice
Counsel is of the opinion that, based on the accuracy of the representations
and subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes we and the Operating Partnership will
each be treated as a partnership, and owners of Common Units (with certain
exceptions, as described in "--Limited Partner Status" below) will be treated
as partners of the Partnership (but not the Operating Partnership). In
addition, all statements as to matters of law and legal conclusions contained
in this section, unless otherwise noted, reflect the opinion of Counsel. (All
references to "us," "we" or "our" are to the Partnership and not Counsel.)
We have not requested, and do not expect to request a ruling from the
Internal Revenue Service (the "IRS") with respect to our classification as a
partnership for federal income tax purposes, whether our propane operations
generate "qualifying income" under Section 7704 of the Code or any other matter
affecting us or prospective unitholders. Instead, we have relied, and will
rely, on the opinions of counsel as to these matters stated here.
An opinion of counsel represents only that counsel's best legal judgment and
does not bind the IRS or the courts. No assurance can be provided that the
opinions and statements set forth herein would be sustained by a court if
contested by the IRS. Any such contest with the IRS may materially and
adversely impact the market for the Common Units and the prices at which Common
Units trade even if we prevail. In addition, the costs of any contest with the
IRS will be borne directly or indirectly by the unitholders and the General
Partner. Furthermore, no assurance is given that our treatment or an investment
in us will not be significantly modified by future legislative or
administrative changes or court decisions. Any such modification may even be
retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (1) the
treatment of a unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "--Tax Treatment of
Unitholders--Treatment of Short Sales"), (2) whether a unitholder acquiring
Common Units in separate transactions must maintain a single aggregate adjusted
tax basis in his Common Units (see "--Disposition of Common Units--Recognition
of Gain or Loss"), (3) whether our monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations (see
"--Disposition of Common Units--Allocations Between Transferors and
Transferees"), (4) whether our method for depreciating Section 743 adjustments
is sustainable (see "--Disposition of Common
35
Units--Section 754 Election") and (5) whether the allocations of recapture
income contained in the Partnership Agreement will be respected for federal
income tax purposes (see "--Tax Treatment of Unitholders--Allocation of
Partnership Income, Gain, Loss and Deduction").
Partnership Status
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss and deduction of the partnership in
computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of any cash distributed is in excess of
the partner's adjusted basis in his partnership interest.
As we said earlier, we have not requested, and do not expect to request any
ruling from the IRS as to our status or that of the Operating Partnership for
federal income tax purposes. Instead we have relied on the opinion of Counsel
that, based upon the Code, the regulations thereunder, published revenue
rulings and court decisions, we and the Operating Partnership have been and
will each be classified as a partnership for federal income tax purposes.
In rendering its opinion with respect to taxable years beginning before
January 1, 1997, Counsel relied on different factual matters which the General
Partner believes are true. In rendering its opinion as to taxable years
beginning after December 31, 1996, Counsel has relied on certain factual
representations made by us and the General Partner. Such factual matters are as
follows:
(1) Neither we nor the Operating Partnership has elected nor will elect to be
treated as an association or corporation;
(2) We and the Operating Partnership have been and will be operated in
accordance with (A) all applicable partnership statutes, (B) the
Partnership Agreement or Operating Partnership Agreement (whichever is
applicable), and (C) the description of the applicable agreement in this
Prospectus; and
(3) For each taxable year, more than 90% of our gross income will be (A)
derived from the exploration, development, production, processing,
refining, transportation or marketing of any mineral or natural resource,
including oil, gas or products thereof, or (B) other items of "qualifying
income" within the meaning of Section 7704(d) of the Code.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every taxable year
consists of "qualifying income." Qualifying income includes interest (from
other than a financial business), dividends and income and gains from the
processing, transportation and marketing crude oil, natural gas, and products
thereof, including the retail and wholesale marketing of propane, certain
hedging activities and the transportation of propane and natural gas liquids.
If we fail to meet the Qualifying Income Exception (other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery), we will be treated as if we transferred all
of our assets (subject to liabilities) to a newly formed corporation (on the
first day of the year in which we fail to meet the Qualifying Income Exception)
in return for stock in that corporation, and then distributed that stock to the
partners in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and us, so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we or the Operating Partnership were treated as an association taxable as
a corporation in any taxable year, either as a result of a failure to meet the
Qualifying Income Exception or otherwise, our items of income,
36
gain, loss and deduction would be reflected only on our tax return rather than
being passed through to the unitholders, and our net income would be taxed to
us or the Operating Partnership at corporate rates. In addition, any
distributions we made to a unitholder would be treated as either taxable
dividend income (to the extent of our current or accumulated earnings and
profits) or (in the absence of earnings and profits) a nontaxable return of
capital (to the extent of the unitholder's tax basis in his Common Units) or
taxable capital gain (after the unitholder's, tax basis in the Common Units is
reduced to zero). Accordingly, treatment of either us or the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Common Units.
The discussion below is based on the assumption that we will be classified
as a partnership for federal income tax purposes.
Tax Treatment of Unitholders
Limited Partner Status
Unitholders who have become our limited partners will be treated as our
partners for federal income tax purposes. Assignees who have executed and
delivered Transfer Applications, and are awaiting admission as limited partners
and unitholders whose Common Units are held in street name or by a nominee and
who have the right to direct the nominee in the exercise of all substantive
rights attendant to the ownership of their Common Units will be treated as our
partners for federal income tax purposes. Because there is no direct authority
addressing assignees of Common Units who are entitled to execute and deliver
Transfer Applications and thereby become entitled to direct the exercise of
attendant rights, but who fail to execute and deliver Transfer Applications, it
is not clear whether that conclusion extends to them. Income, gain, deductions
or losses would not appear to be reportable by a unitholder who is not a
partner for federal income tax purposes, and any cash distributions received by
such a unitholder would therefore be fully taxable as ordinary income. These
holders should consult their own tax advisors with respect to their status as
our partners for federal income tax purposes. Furthermore, a purchaser or other
transferee of Common Units who does not execute and deliver a Transfer
Application may not receive certain federal income tax information or reports
furnished to record holders of Common Units unless the Common Units are held in
a nominee or street name account and the nominee or broker has executed and
delivered a Transfer Application with respect to such Common Units. A
beneficial owner of Common Units whose Common Units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to such Common Units for federal income tax purposes.
These holders should consult their own tax advisors with respect to their
status as our partners for federal income tax purposes. See "--Tax Treatment of
Unitholders--Treatment of Short Sales."
Flow-through of Taxable Income
We will pay no federal income tax. Instead, each unitholder will be required
to report on his income tax return his allocable share of our income, gains,
losses and deductions without regard to whether corresponding cash
distributions are received by such unitholder. Consequently, a unitholder may
be allocated a share of our income even if he has not received a cash
distribution. Each unitholder will be required to include in income his
allocable share of our income, gain, loss and deduction for our taxable year
ending with or within his taxable year.
Treatment of Partnership Distributions
Our distributions to a unitholder generally will not be taxable to the
unitholder for federal income tax purposes to the extent of his tax basis in
his Common Units immediately before the distribution. Our cash distributions in
excess of a unitholder's tax basis generally will be considered to be gain from
the sale or exchange of the Common Units, taxable in accordance with the rules
described under "--Disposition of
37
Common Units" below. Any reduction in a unitholder's share of our liabilities
for which no partner, including the General Partner, bears the economic risk of
loss ("nonrecourse liabilities") will be treated as a distribution of cash to
that unitholder. To the extent that our distributions cause a unitholder's "at
risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. See "--Tax Treatment of
Unitholders--Limitations on Deductibility of Partnership Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional Common Units will decrease such unitholder's share of
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. Our non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax basis in his
Common Units, if such distribution reduces the unitholder's share of our
"unrealized receivables" (including depreciation recapture) and/or
substantially appreciated "inventory items" (both as defined in Section 751 of
the Code) (collectively, "Section 751 Assets"). To that extent, the unitholder
will be treated as having been distributed his proportionate share of the
Section 751 Assets and having exchanged such assets with us in return for the
non-pro rata portion of the actual distribution made to him. This latter deemed
exchange will generally result in the unitholder's realization of ordinary
income under Section 751(b) of the Code. Such income will equal the excess of
(1) the non-pro rata portion of such distribution over (2) the unitholder's tax
basis for the share of such Section 751 Assets deemed relinquished in the
exchange.
Alternative Minimum Tax
Each unitholder will be required to take into account his distributive share
of any of our items of income, gain, deduction or loss for purposes of the
alternative minimum tax. A portion of our depreciation deductions may be
treated as an item of preference for this purpose. A unitholder's alternative
minimum taxable income derived from us may be higher than his share of our net
income because we may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for noncorporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional alternative minimum
taxable income. Prospective unitholders should consult with their tax advisors
as to the impact of an investment in Common Units on their liability for the
alternative minimum tax.
Basis of Common Units
A unitholder will have an initial tax basis for his Common Units equal to
the amount he paid for the Common Units plus his share of our nonrecourse
liabilities. His basis will be increased by his share of our income and by any
increases in his share of our nonrecourse liabilities. His basis will be
decreased (but not below zero) by his share of our distributions, our losses,
any decrease in our nonrecourse liabilities and our expenditures that are not
deductible in computing our taxable income and are not required to be
capitalized. A limited partner will have no share of our debt which is recourse
to the General Partner, but will have a share, generally based on his share of
profits, of our debt which is not recourse to any partner. See "--Disposition
of Common Units--Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses
The deduction by a unitholder of his share of our losses will be limited to
his tax basis in his Common Units and, in the case of an individual unitholder
or a corporate unitholder (if more than 50% of the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations), to the amount for which the unitholder is considered to be "at
risk" with respect to our activities, if that is less than the unitholder's tax
basis. A unitholder must recapture losses deducted in previous years to the
extent that our distributions cause the unitholder's at risk amount to be less
than zero at the end of any taxable year. Losses disallowed to a unitholder or
recaptured as a result of these limitations will carry forward and will be
allowable to the extent that the unitholder's tax basis or at risk amount
(whichever is the limiting factor) subsequently increases. Upon the taxable
disposition of a Common Unit, any gain recognized by a unitholder can be offset
by losses that were
38
previously suspended by the at risk limitation but may not be offset by losses
suspended by the basis limitation. Any excess loss (above such gain) previously
suspended by the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of his tax basis in
his Common Units, excluding any portion of that basis attributable to his share
of our nonrecourse liabilities, reduced by any amount of money the unitholder
borrows to acquire or hold his Common Units if the lender of such borrowed
funds owns an interest in us, is related to such a person or can look only to
Common Units for repayment. A unitholder's at risk amount will increase or
decrease as the tax basis of the unitholder's Common Units increases or
decreases (other than tax basis increases or decreases attributable to
increases or decreases in his share of our nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by us will only be available to offset future income
generated by us and will not be available to offset income from other passive
activities or investments (including other publicly-traded partnerships) or
salary or active business income. Passive losses which are not deductible
because they exceed a unitholder's share of our income may be deducted in full
when he disposes of his entire investment in us in a fully taxable transaction
to an unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses from us, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly-traded partnerships. The IRS has announced that Treasury
Regulations will be issued which characterize net passive income from a
publicly-traded partnership as investment income for purposes of the
limitations on the deductibility of investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a unitholder's net passive income from us will be treated as
investment income for this purpose. In addition, the unitholder's share of our
portfolio income will be treated as investment income. Investment interest
expense includes (1) interest on indebtedness properly allocable to property
held for investment, (2) our interest expense attributed to portfolio income,
and (3) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a Common Unit. Net investment income includes gross income
from property held for investment and amounts treated as portfolio income
pursuant to the passive loss rules less deductible expenses (other than
interest) directly connected with the production of investment income, but
generally does not include gains attributable to the disposition of property
held for investment.
Allocation of Partnership Income, Gain, Loss and Deduction
In general, if we have a net profit, our items of income, gain, loss and
deduction will be allocated among the General Partner and the unitholders in
accordance with their respective percentage interests in us. At any time that
distributions are made to the Common Units and not to the Subordinated Units,
or that Incentive Distributions are made to the General Partner, gross income
will be allocated to the recipients to the extent of such distributions. If we
have a net loss, our items of income, gain, loss and deduction will generally
be allocated first, to the General Partner and the unitholders in accordance
with their respective Percentage Interests to the extent of their positive
capital accounts (as maintained under the Partnership Agreement) and, second,
to the General Partner.
39
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of our income, deduction, gain and loss will be
allocated to account for the difference between the tax basis and fair market
value of property contributed to us by the General Partner or any other person
contributing property to us ("Contributed Property"), and to account for the
difference between the fair market value of our assets and their carrying value
on our books at the time of any offering made pursuant to this prospectus. The
effect of these allocations to a unitholder purchasing Common Units pursuant to
this prospectus will be essentially the same as if the tax basis of our assets
were equal to their fair market value at the time of purchase. In addition,
certain items of recapture income will be allocated to the extent possible to
the partner allocated the deduction or curative allocation giving rise to the
treatment of such gain as recapture income in order to minimize the recognition
of ordinary income by some unitholders. Finally, although we do not expect that
our operations will result in the creation of negative capital accounts, if
negative capital accounts nevertheless result, items of our income and gain
will be allocated in an amount and manner sufficient to eliminate the negative
balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the difference between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by
taking into account all the facts and circumstances, including the partner's
relative contributions to the partnership, the interests of the partners in
economic profits and losses, the interest of the partners in cash flow and
other nonliquidating distributions and rights of the partners to distributions
of capital upon liquidation. Counsel is of the opinion that, with the exception
of the allocation of recapture income discussed above, allocations under our
partnership agreement will be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction.
Entity-Level Collections
If we are required or elect under applicable law to pay any federal, state
or local income tax on behalf of any unitholder or the General Partner or any
former unitholder, we are authorized to pay those taxes from our funds. Such
payment, if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat the payment as
a distribution to current unitholders. We are authorized to amend our
partnership agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of Common Units and to adjust subsequent
distributions, so that after giving effect to such distributions, the priority
and characterization of distributions otherwise applicable under our
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner could file a claim for credit or
refund.
Treatment of Short Sales
A unitholder whose Common Units are loaned to a "short seller" to cover a
short sale of Common Units may be considered as having disposed of ownership of
those Common Units. If so, he would no longer be a partner with respect to
those Common Units during the period of the loan and may recognize gain or loss
from the disposition. As a result, during this period, any of our income, gain,
deduction or loss with respect to those Common Units would not be reportable by
the unitholder, any cash distributions received by the unitholder with respect
to those Common Units would be fully taxable and all of such distributions
would appear to be treated as ordinary income. Unitholders desiring to assure
their status as partners and avoid the risk of gain recognition should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their Common Units. The IRS has announced that it is actively
studying issues relating to the tax treatment of short sales of partnership
interests. See also "--Disposition of Common Units--Recognition of Gain or
Loss."
40
Tax-Exempt Organizations and Certain Other Investors
Ownership of Common Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including individual retirement accounts ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business taxable income. Much of
the taxable income derived by such an organization from the ownership of a
Common Unit will be unrelated business taxable income and thus will be taxable
to such a unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Common Units will be considered to be engaged in business in the United States
on account of ownership of Common Units. As a consequence they will be required
to file federal tax returns in respect of their share of our income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, we will withhold (currently at the rate of 39.6%) on actual cash
distributions made quarterly to foreign unitholders. Each foreign unitholder
must obtain a taxpayer identification number from the IRS and submit that
number to our Transfer Agent on a Form W-8 in order to obtain credit for the
taxes withheld. A change in applicable law may require us to change these
procedures.
Because a foreign corporation which owns Common Units will be treated as
engaged in a United States trade or business, such a corporation may be subject
to United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its allocable share of our income and gain (as adjusted
for changes in the foreign corporation's "U.S. net equity") which are
effectively connected with the conduct of a United States trade or business. An
income tax treaty between the United States and the country with respect to
which the foreign corporate unitholder is a "qualified resident" may reduce or
eliminate this tax. In addition, such a unitholder is subject to special
information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS a foreign unitholder who sells or otherwise
disposes of a Common Unit will be subject to federal income tax on gain
realized on the disposition of such Common Unit to the extent that such gain is
effectively connected with a United States trade or business of the foreign
unitholder. Apart from the ruling, a foreign unitholder will not be taxed upon
the disposition of a Common Unit if that foreign unitholder has held less than
5% in value of the Common Units during the five-year period ending on the date
of the disposition and if the Common Units are regularly traded on an
established securities market at the time of the disposition.
Tax Treatment of Operations
Accounting Method and Taxable Year
We currently use the fiscal year ending July 31 as our taxable year and we
have adopted the accrual method of accounting for federal income tax purposes.
We have requested permission from the IRS to continue using a fiscal year
ending July 31 as our taxable year but if that permission is not granted, we
may be required to use the calendar year. Each unitholder will be required to
include in income his allocable share of our income, gain, loss and deduction
for our fiscal year ending within or with his taxable year. In addition, a
unitholder who disposes of Common Units following the close of our taxable year
but before the close of his taxable year must include his
41
allocable share of our income, gain, loss and deduction in income for his
taxable year with the result that he will be required to report in income for
his taxable year his distributive share of more than one year of our income,
gain, loss and deduction. See "--Disposition of Common Units--Allocations
Between Transferors and Transferees." In view of our publicly-traded nature, it
may be impossible to determine our appropriate taxable year. If, as a result,
we failed to timely provide information to unitholders, we could be exposed to
certain penalties. We do not expect to incur such penalties and, even if
incurred, do not expect that such penalties would be material.
Initial Tax Basis, Depreciation and Amortization
We will use the tax basis of our various assets for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of such assets. Our assets initially had an aggregate tax basis
equal to the tax basis of the assets in the possession of the General Partner
immediately prior to our formation. The federal income tax burden associated
with the difference between the fair market value of our property and its tax
basis immediately prior to this offering will be borne by partners holding
interests in us prior to this offering. See "--Tax Treatment of
Unitholders--Allocation of Partnership Income, Gain, Loss and Deduction." If we
dispose of depreciable property by sale, foreclosure, or otherwise, all or a
portion of any gain (determined by reference to the amount of depreciation
previously deducted and the nature of the property) may be subject to the
recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions
with respect to property owned by us may be required to recapture such
deductions as ordinary income upon a sale of his interest in us. See "--Tax
Treatment of Unitholders--Allocation of Partnership Income, Gain, Loss and
Deduction" and "--Disposition of Common Units--Recognition of Gain or Loss."
Costs incurred in our organization are being amortized over a period of 60
months. The costs incurred in promoting the issuance of Common Units (i.e.
syndication expenses) must be capitalized and cannot be deducted currently,
ratably or upon our termination. Uncertainties exist regarding the
classification of costs as organization expenses, which may be amortized, and
as syndication expenses, which may not be amortized. Under recently adopted
regulations, underwriting discounts and commissions are treated as a
syndication cost.
Uniformity of Common Units
Because we cannot match transferors and transferees of Common Units,
uniformity of the economic and tax characteristics of the Common Units to a
purchaser of such Common Units must be maintained. In the absence of
uniformity, compliance with a number of federal income tax requirements, both
statutory and regulatory, could be substantially diminished. A lack of
uniformity can result from a literal application of Treasury Regulation Section
1.167(c)-1(a)(6) and Proposed Treasury Regulation Section 1.197-2(g)(3). Any
non-uniformity could have a negative impact on the value of the Common Units.
See "--Disposition of Common Units--Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property or
adjusted property (to the extent of any unamortized Book-Tax Disparity) using a
rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the basis of such property, or
treat that portion as nonamortizable, to the extent attributable to property
the basis of which is not amortizable consistent with the proposed regulations
under Section 743 (but despite its apparent inconsistency with Treasury
Regulation Section 1.167(c)-1(a)(6) (which is not expected to directly apply to
a material portion of our assets) and Proposed Treasury Regulation Section
1.197-2(g)(3)). See "--Disposition of Common Units--Section 754 Election." To
the extent such Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Regulations and legislative history. If we determine that such
a position cannot reasonably be taken, we may adopt a depreciation and
amortization convention under which all purchasers acquiring Common Units in
the same month would receive depreciation and amortization deductions, whether
attributable to Basis or Section 743(b) basis, based upon the same applicable
rate as if they had purchased a direct interest in our
42
property. If such an aggregate approach is adopted, it may result in lower
annual depreciation and amortization deductions than would otherwise be
allowable to certain unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that such deductions are
otherwise allowable. This convention will not be adopted if we determine that
the loss of depreciation and amortization deductions will have a material
adverse effect on the unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and amortization
convention to preserve the uniformity of the intrinsic tax characteristics of
any Common Units that would not have a material adverse effect on the
unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If such a challenge were
sustained, the uniformity of Common Units might be affected, and the gain from
the sale of Common Units might be increased without the benefit of additional
deductions. See "--Disposition of Common Units--Recognition of Gain or Loss."
Valuation of Partnership Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
Common Units will depend in part on our estimates as to the relative fair
market values, and determinations of the initial tax bases, of our assets.
Although we may from time to time consult with professional appraisers with
respect to valuation matters, we will make many of the relative fair market
value estimates. These estimates and determinations of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or determinations of basis are subsequently found to be
incorrect, the character and amount of items of income, gain, loss or
deductions previously reported by unitholders might change, and unitholders
might be required to adjust their tax liability for prior years.
State and Local Tax Considerations
For a discussion of the state and local tax considerations arising from an
investment in Common Units, see "--State, Local and Other Tax Considerations."
Administrative Matters
Information Returns and Audit Procedures
We intend to furnish to each unitholder, within 60 days after the close of
each calendar year, certain tax information, including a Substitute Schedule
K-1, which sets forth each unitholder's share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this information, which
will generally not be reviewed by counsel, we will use various accounting and
reporting conventions, some of which have been mentioned in the previous
discussion, to determine the unitholder's share of income, gain, loss and
deduction. There is no assurance that any of those conventions will yield a
result which conforms to the requirements of the Code, regulations or
administrative interpretations of the IRS. We cannot assure prospective
unitholders that the IRS will not successfully contend in court that such
accounting and reporting conventions are impermissible. Any such challenge by
the IRS could negatively affect the value of the Common Units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any such audit may require each unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of the unitholder's
own return. Any audit of a unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
Our partnership agreement appoints the General Partner as our Tax Matters
Partner.
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The Tax Matters Partner will make certain elections on our behalf and on
behalf of the unitholders and can extend the statute of limitations for
assessment of tax deficiencies against unitholders with respect to items in our
returns. The Tax Matters Partner may bind a unitholder with less than a 1%
profits interest in us to a settlement with the IRS unless that unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (by which
all the unitholders are bound) of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any unitholder having at least a 1% interest in our profits and by
the unitholders having in the aggregate at least a 5% profits interest.
However, only one action for judicial review will go forward, and each
unitholder with an interest in the outcome may participate. However, if we
elect to be treated as a large partnership (which we do not intend to do
because of the costs of application), a unitholder will not have a right to
participate in settlement conferences with the IRS or to seek a refund.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
Partners in electing large partnerships are required to treat all items from
the partnership's return in a manner consistent with such return.
If we elect to be treated as a large partnership, each partner would take
into account separately his share of the following items, determined at the
partnership level: (1) taxable income or loss from passive loss limitation
activities; (2) taxable income or loss from other activities (such as portfolio
income or loss); (3) net capital gains to the extent allocable to passive loss
limitation activities and other activities; (4) tax exempt interest; (5) a net
alternative minimum tax adjustment separately computed for passive loss
limitation activities and other activities; (6) general credits; (7) low-income
housing credit; (8) rehabilitation credit; (9) foreign income taxes; (10)
credit for producing fuel from a nonconventional source; and (11) any other
items the Secretary of Treasury deems appropriate. Moreover, miscellaneous
itemized deductions would not be passed through to the partners and 30% of such
deductions would be used at the partnership level.
Currently adjustments relating to partnership items for a previous taxable
year are taken into account by those persons who were partners in the previous
taxable year. If we elect to be treated as a large partnership, our partners
would each take into account their share of any adjustments to partnership
items in the year such adjustments are made. Alternatively, a large partnership
could elect to or, in some circumstances, could be required to directly pay the
tax resulting from any such adjustments. In either case, therefore, unitholders
of an electing large partnership could bear significant economic burdens
associated with tax adjustments relating to periods predating their acquisition
of units.
Nominee Reporting
Persons who hold an interest in us as a nominee for another person are
required to furnish to us (1) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (2) whether the beneficial
owner is (A) a person that is not a United States person, (B) a foreign
government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (C) a tax-exempt entity; (3) the
amount and description of Common Units held, acquired or transferred for the
beneficial owner; and (4) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on Common Units they acquire, hold or transfer for their own
account. A penalty of $50 per failure (up to a maximum of $100,000 per calendar
year) is imposed by the Code for failure to report such information to us. The
nominee is required to supply the beneficial owner of the Common Units with the
information furnished to us.
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Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that we
are not subject to the registration requirement on the basis that it will not
constitute a tax shelter. However, the General Partner, as our principal
organizer, has registered us as a tax shelter with the Secretary of the
Treasury in the absence of assurance that we will not be subject to tax shelter
registration and in light of the substantial penalties which might be imposed
if registration is required and not undertaken. The IRS has issued us the
following tax shelter registration number: 94201000010. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN US OR THE CLAIMED
TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. We must
furnish the registration number to the unitholders, and a unitholder who sells
or otherwise transfers a Common Unit in a subsequent transaction must furnish
the registration number to the transferee. The penalty for failure of the
transferor of a Common Unit to furnish the registration number to the
transferee is $100 for each such failure. The unitholders must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss or other benefit generated by us is claimed or our
income is included. A unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for that failure,
will be subject to a $250 penalty for each failure. Any penalties discussed
herein are not deductible for federal income tax purposes. Registration as a
tax shelter may increase the risk of an audit.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith with respect to that
portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
with respect to which there is, or was, "substantial authority" or (ii) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters,"
a term that in this context does not appear to include us. If any item of our
income, gain, loss or deduction included in the distributive shares of
unitholders might result in such an "understatement" of income for which no
"substantial authority" exists, we must disclose the pertinent facts on our
return. In addition, we will make a reasonable effort to furnish sufficient
information for unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
Disposition of Common Units
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Common Units equal to the
difference between the amount realized and the unitholder's tax basis for the
Common Units sold. A unitholder's amount realized will be measured by the sum
of the cash or the fair market value of other property received plus his share
of our
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nonrecourse liabilities. Because the amount realized includes a unitholder's
share of our nonrecourse liabilities, the gain recognized on the sale of Common
Units could result in a tax liability in excess of any cash received from such
sale.
Prior distributions from us in excess of cumulative net taxable income in
respect of a Common Unit which decreased a unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold
at a price greater than the unitholder's tax basis in such Common Unit, even if
the price is less than his original cost.
Should the IRS successfully contest our convention to amortize only a
portion of the Section 743(b) adjustment (described under "--Disposition of
Common Units--Section 754 Election") attributable to an amortizable Section 197
intangible after a sale by the General Partner of Common Units, a unitholder
could realize additional gain from the sale of Common Units than had such
convention been respected. In that case, the unitholder may have been entitled
to additional deductions against income in prior years but may be unable to
claim them, with the result to him of greater overall taxable income than
appropriate. Counsel is unable to opine as to the validity of the convention
but believes such a contest by the IRS to be unlikely because a successful
contest could result in substantial additional deductions to other unitholders.
Gain or loss recognized by a unitholder (other than a "dealer" in Common
Units) on the sale or exchange of a Common Unit will generally be taxable as
capital gain or loss. Capital gain recognized on the sale of Common Units held
for more than 12 months will generally be taxed at a maximum rate of 20%. A
portion of this gain or loss (which could be substantial), however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Code to the extent attributable to assets giving rise to depreciation
recapture or other "unrealized receivables" or to "inventory items" owned by
us. The term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may exceed net taxable
gain realized upon the sale of the Common Unit and may be recognized even if
there is a net taxable loss realized on the sale of the Common Unit. Thus, a
unitholder may recognize both ordinary income and a capital loss upon a
disposition of Common Units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of Common Units, a unitholder will be
unable to select high or low basis Common Units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to us because,
similar to corporate stock, our interests are evidenced by separate
certificates. Accordingly, Counsel is unable to opine as to the effect such
ruling will have on the unitholders. A unitholder considering the purchase of
additional Common Units or a sale of Common Units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
such ruling.
Certain provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests by treating a taxpayer
as having sold an "appreciated" partnership interest (one in which gain would
be recognized if it were sold, assigned or otherwise terminated at its fair
market value) if the taxpayer or related persons enter into (1) a short sale,
(2) an offsetting notional principal contract or (3) a futures or forward
contract with respect to the same or substantially identical property. The
Secretary of the Treasury is also authorized to issue regulations that treat a
taxpayer that enters in transactions or positions that have substantially the
same effect as the preceding transactions as having constructively sold the
financial position.
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Allocations Between Transferors and Transferees
In general, our taxable income and losses will be determined annually, will
be prorated on a monthly basis and will be subsequently apportioned among the
unitholders in proportion to the number of Common Units owned by each of them
as of the opening of the principal national securities exchange on which the
Common Units are then traded on the first business day of the month (the
"Allocation Date"). However, gain or loss realized on a sale or other
disposition of our assets other than in the ordinary course of business will be
allocated among the unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a unitholder transferring Common
Units in the open market may be allocated income, gain, loss and deduction
accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Common Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the unitholder's
interest), our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise its method of allocation between
transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted under
future Treasury Regulations.
A unitholder who owns Common Units at any time during a quarter and who
disposes of such Common Units prior to the record date set for a cash
distribution with respect to such quarter will be allocated items of
Partnership income, gain, loss and deductions attributable to such quarter but
will not be entitled to receive that cash distribution.
Section 754 Election
We have made the election permitted by Section 754 of the Code. The election
is irrevocable without the consent of the IRS. The election generally permits
us to adjust a Common Unit purchaser's tax basis in our assets ("inside basis")
pursuant to Section 743(b) of the Code to reflect his purchase price. The
Section 743(b) adjustment belongs to the purchaser and not to other partners.
(For purposes of this discussion, a partner's inside basis in our assets will
be considered to have two components: (1) his share of our tax basis in such
assets ("common basis") and (2) his Section 743(b) adjustment to that basis.)
Proposed Treasury Regulations promulgated under Section 743 of the Code
would require, if adopted in their current form, if the remedial allocation
method is adopted (which we have done), a portion of the Section 743(b)
adjustment attributable to recovery property to be depreciated over the
remaining cost recovery period for the Section 704(c) built-in gain.
Nevertheless, the proposed regulations under Section 197 indicate that the
Section 743(b) adjustment attributable to an amortizable Section 197 intangible
should be treated as a newly-acquired asset placed in service in the month when
the purchaser acquires the Common Unit. Under Treasury Regulation Section
1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject
to depreciation under Section 167 of the Code rather than cost recovery
deductions under Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance method. Although
the proposed regulations under Section 743 will likely eliminate many of the
apparent inconsistencies if finalized in their current form, the depreciation
and amortization methods and useful lives associated with the Section 743(b)
adjustment may differ from the methods and useful lives generally used to
depreciate the basis in such properties. Pursuant to our Partnership Agreement,
we are authorized to adopt a convention to preserve the uniformity of Common
Units even if such convention is not consistent with certain Treasury
Regulations. See "--Tax Treatment of Operations--Uniformity of Common Units."
Although Counsel is unable to opine as to the validity of such an approach,
we intend to depreciate the portion of a Section 743(b) adjustment attributable
to unrealized appreciation in the value of Contributed Property (to the extent
of any unamortized Book-Tax Disparity) using a rate of depreciation or
amortization
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derived from the depreciation or amortization method and useful life applied to
the Basis of such property, or treat that portion as non-amortizable to the
extent attributable to property the Basis of which is not amortizable. This
method is consistent with the proposed regulations under Section 743 but is
arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6) (which
is not expected to directly apply to a material portion of our assets) and
Proposed Treasury Regulation Section 1.197-2(g)(3). To the extent such Section
743(b) adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules described in the
Regulations and legislative history. If we determine that such position cannot
reasonably be taken, we may adopt a depreciation or amortization convention
under which all purchasers acquiring Common Units in the same month would
receive depreciation or amortization, whether attributable to Basis or Section
743(b) adjustment, based upon the same applicable rate as if they had purchased
a direct interest in our assets. Such an aggregate approach may result in lower
annual depreciation or amortization deductions than would otherwise be
allowable to certain unitholders. See "--Tax Treatment of
Operations--Uniformity of Common Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by us to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than our tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Common Units is higher than such Common Units' share of the aggregate tax basis
of our assets immediately prior to the transfer. In such a case, as a result of
the election, the transferee would have a higher tax basis in his share of our
assets for purposes of calculating, among other items, his depreciation and
depletion deductions and his share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if the transferee's tax
basis in such Common Units is lower than such Common Unit's share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the Common Units may be affected either favorably or
adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by us on the basis of certain assumptions as to the value of our assets
and other matters. There is no assurance that the determinations made by us
will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the
IRS require a different basis adjustment to be made, and should, in our
opinion, the expense of compliance exceed the benefit of the election, we may
seek permission from the IRS to revoke our Section 754 election. If such
permission is granted, a subsequent purchaser of Common Units may be allocated
more income than he would have been allocated had the election not been revoked.
Notification Requirements
A unitholder who sells or exchanges Common Units is required to notify us in
writing of that sale or exchange within 30 days after the sale or exchange and
in any event by no later than January 15 of the year following the calendar
year in which the sale or exchange occurred. We are required to notify the IRS
of that transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply with respect to
a sale by an individual who is a citizen of the United States and who effects
the sale or exchange through a broker. Additionally, a transferee of a Common
Unit will be required to furnish a statement to the IRS, filed with its income
tax return for the taxable year in which the sale or exchange occurred, that
sets forth the amount of the consideration paid for the Common Unit. Failure to
satisfy these reporting obligations may lead to the imposition of substantial
penalties.
Constructive Termination
We will be considered to have been terminated if there is a sale or exchange
of 50% or more of the total interests in our capital and profits within a
12-month period. Our termination will result in the closing of our taxable year
for all unitholders. In the case of a unitholder reporting on a taxable year
other than a fiscal year
48
ending July 31 (or other than a calendar year ending December 31 if we are
required to change our taxable year to a calendar year), the closing of our
taxable year may result in more than 12 months of our taxable income or loss
being includable in his taxable income for the year of termination. New tax
elections required to be made by us, including a new election under Section 754
of the Code, must be made subsequent to a termination, and a termination could
result in a deferral of our deductions for depreciation. A termination could
also result in penalties if we were unable to determine that the termination
had occurred. Moreover, a termination might either accelerate the application
of, or subject us to, any tax legislation enacted prior to the termination.
State, Local and Other Tax Considerations
In addition to federal income taxes, unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property. Although an analysis of
those various taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We currently conduct
business in 45 states. A unitholder will be required to file state income tax
returns and to pay state income taxes in some or all of the states in which we
do business or own property and may be subject to penalties for failure to
comply with those requirements. In certain states, tax losses may not produce a
tax benefit in the year incurred (if, for example, we have no income from
sources within that state) and also may not be available to offset income in
subsequent taxable years. Some of the states may require that we, or we may
elect to, withhold a percentage of income from amounts to be distributed to a
unitholder who is not a resident of the state. Withholding, the amount of which
may be greater or less than a particular unitholder's income tax liability to
the state, generally does not relieve the non-resident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amounts distributed
by us. See "--Tax Treatment of Unitholders--Entity-Level Collections." Based on
current law and our estimate of future operations, we anticipate that any
amounts required to be withheld will not be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities of his
investment in us. Accordingly, each prospective unitholder should consult, and
must depend upon, his own tax counsel or other advisor with regard to those
matters. Further, it is the responsibility of each unitholder to file all state
and local, as well as U.S. federal, tax returns that may be required of such
unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in us.
USE OF PROCEEDS
Unless otherwise specified in a related prospectus supplement, the net
proceeds received by us from the sale of the Securities will be used for
general business purposes, including debt repayment, the financing of future
acquisitions, capital expenditures and working capital.
PLAN OF DISTRIBUTION
We may sell the Securities directly, through agents, or to or through
underwriters or dealers (possibly including our affiliates). The prospectus
supplement contains the specific information about the terms of the Securities
offering, including:
. the names of any underwriters, dealers or agents;
. the offering price;
. underwriting discounts;
. sales agents' commissions;
49
. other forms of underwriter or agent compensation;
. discounts, concessions or commissions that underwriters may pass on to
other dealers; and
. any exchange on which the Securities are listed.
We may change the offering price, underwriter discounts or concessions, or
the price to dealers when necessary. Discounts or commissions received by
underwriters or agents and any profits on the resale of Securities by them may
constitute underwriting discounts and commissions under the Securities Act of
1933.
Unless we state otherwise in the prospectus supplement, underwriters will
need to meet certain requirements before purchasing Securities. Underwriters
will be required to purchase all of the Securities offered if any are
purchased. Agents will act on a "best efforts" basis during their appointment.
We will also state the net proceeds from the sale in the prospectus supplement.
Any brokers or dealers that participate in the distribution of the
Securities may be "underwriters" within the meaning of the Securities Act of
1933 for such sales. Profits, commissions, discounts or concessions received by
any such broker or dealer may be underwriting discounts and commissions under
the Securities Act of 1933.
When necessary, we may fix Securities distribution using changeable, fixed
prices, market prices at the time of sale, prices related to market prices, or
negotiated prices.
We may agree to indemnify underwriters, dealers or agents who participate in
the distribution of the Securities against certain liabilities including
liabilities under the Securities Act of 1933. We may also reimburse
underwriters, dealers or agents for payments they are required to make in
connection with the offering, or we may make such payments directly.
Underwriters, dealers and agents, and their affiliates may conduct business
with us and our affiliates in the ordinary course of their business.
LEGAL MATTERS
Unless otherwise indicated in the applicable prospectus supplement, certain
legal matters relating to the Securities being offered will be passed upon for
us by Andrews & Kurth L.L.P. If certain legal matters in connection with an
offering of Securities made by this prospectus and a related prospectus
supplement are passed on by counsel for the underwriters of such offering, that
counsel will be named in the applicable prospectus supplement relating to that
offering.
EXPERTS
The consolidated financial statements and the related financial statement
schedules incorporated in this prospectus by reference from Ferrellgas
Partners, L.P. Annual Report on Form 10-K for the year ended July 31, 1998,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports, which are incorporated herein by reference, and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated balance sheet of Ferrellgas, Inc. and Subsidiaries as of
July 31, 1998, filed as an exhibit to the registration statement of which this
prospectus is a part, has been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and is included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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