UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission file numbers: 1-11331
333-06693
FERRELLGAS PARTNERS, L.P.
FERRELLGAS PARTNERS FINANCE CORP.
(Exact name of registrants as specified in their charters)
Delaware 43-1698480
Delaware 43-1742520
- ---------------------------- -------------------------------
(States or other jurisdictions of (I.R.S. Employer Identification Nos.)
incorporation or organization)
One Liberty Plaza, Liberty, Missouri 64068
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (816) 792-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
At March 14, 2001, the registrants had units or shares outstanding as follows:
Ferrellgas Partners, L.P. 31,307,116 Common Units
4,888,234 Senior Common Units
Ferrellgas Partners
Finance Corp. 1,000 Common Stock
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
FERRELLGAS PARTNERS FINANCE CORP.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets - January 31, 2001 and July 31, 2000 1
Consolidated Statements of Earnings -
Three and six months ended January 31, 2001 and 2000 2
Consolidated Statement of Partners' Capital and Accumulated Other
Comprehensive Income - Six months ended January 31, 2001 3
Consolidated Statements of Cash Flows -
Six months ended January 31, 2001 and 2000 4
Notes to Consolidated Financial Statements 5
FERRELLGAS PARTNERS FINANCE CORP.
Balance Sheets - January 31, 2001 and July 31, 2000 11
Statements of Earnings - Three and six months ended January 31, 2001 and 2000 11
Statements of Cash Flows - Six months ended January 31, 2001 and 2000 12
Notes to Financial Statements 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
January 31, July 31,
ASSETS 2001 2000
- ------------------------------------------------------------------- -------------- ------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 34,938 $14,838
Accounts and notes receivable, net 162,113 89,801
Inventories 95,321 71,979
Prepaid expenses and other current assets 12,623 8,275
-------------- ------------
Total Current Assets 304,995 184,893
Property, plant and equipment, net 499,875 516,183
Intangible assets, net 244,673 256,476
Other assets, net 33,141 10,355
-------------- ------------
Total Assets $1,082,684 $967,907
============== ============
LIABILITIES AND PARTNERS' CAPITAL
- -------------------------------------------------------------------
Current Liabilities:
Accounts payable $156,876 $95,264
Other current liabilities 81,654 77,631
Short-term borrowings 11,745 18,342
-------------- ------------
Total Current Liabilities 250,275 191,237
Long-term debt 724,153 718,118
Other liabilities 16,914 16,176
Contingencies and commitments - -
Minority interest 2,527 2,032
Partners' Capital:
Senior common unitholder (4,888,234 and 4,652,691
units outstanding at January 2001 and July 2000,
redeemable liquidation value - $195,529 and $186,108, respectively) 191,439 179,786
Common unitholders (31,307,116 units outstanding
at both January 2001 and July 2000) (45,018) (80,931)
General partner unitholder (316,233 units outstanding
at both January 2001 and July 2000) (58,147) (58,511)
Accumulated other comprehensive income 541 -
-------------- ------------
Total Partners' Capital 88,815 40,344
-------------- ------------
Total Liabilities and Partners' Capital $1,082,684 $967,907
============== ============
See notes to consolidated financial statements.
1
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per-unit data)
(unaudited)
Three months ended January 31 Six months ended January 31
----------------------------- ----------------------------
2001 2000 2001 2000
------------ -------------- ------------ ------------
Revenues:
Gas liquids and related product sales $612,752 $316,025 $872,849 $457,532
Other 36,446 24,970 46,733 46,202
------------ -------------- ------------ ------------
Total revenues 649,198 340,995 919,582 503,734
Cost of product sold (exclusive of
depreciation, shown separately below) 415,048 178,028 593,291 263,353
------------ -------------- ------------ ------------
Gross profit 234,150 162,967 326,291 240,381
Operating expense 90,345 69,341 155,488 126,518
Depreciation and amortization expense 13,947 13,916 27,978 25,999
General and administrative expense 6,910 5,960 11,627 11,143
Equipment lease expense 8,661 5,586 16,768 9,439
Employee stock ownership plan compensation charge 1,125 1,026 2,194 2,053
Loss on disposal of assets and other 1,983 33 3,154 129
------------ -------------- ------------ ------------
Operating income 111,179 67,105 109,082 65,100
Interest expense (16,106) (14,697) (32,274) (27,278)
Interest income 882 351 1,439 609
------------ -------------- ------------ ------------
Earnings before minority interest 95,955 52,759 78,247 38,431
Minority interest 1,007 573 864 467
------------ -------------- ------------ ------------
Net earnings 94,948 52,186 77,383 37,964
Paid-in-kind distribution to senior common unitholder 4,769 2,140 9,422 2,140
General partner's interest in net earnings 902 500 680 358
after paid-in-kind distribution ------------ -------------- ------------ ------------
Common unitholders' interest in net earnings $89,277 $49,546 $67,281 $35,466
============ ============== ============ ============
Basic and diluted earnings per common unit:
Net earnings after paid-in-kind distribution $ 2.85 $ 1.58 $ 2.15 $ 1.13
============ ============== ============ ============
See notes to consolidated financial statements.
2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND OTHER COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Accumulated
other
Senior General Senior General compre- Total
common Common partner common Common partner hensive partners'
unitholder unitholders unitholder unitholder unitholders unitholder income capital
--------- ----------- ----------- ---------- ------------ ----------- --------- ----------
August 1, 2000 4,652.7 31,307.1 316.2 $ 179,786 $ (80,931) $ (58,511) $ - $ 40,344
Accretion of discount on
senior common units - - - 2,231 (2,209) (22) - -
Contribution from general partner
in connection with ESOP
compensation charge - - - - 2,149 22 - 2,171
Quarterly distributions - - - - (31,308) (316) - (31,624)
Accrued paid-in-kind
distributions 235.5 - - 9,422 (9,328) (94) - -
Comprehensive income:
Net earnings - - - - 76,609 774 - 77,383
Other comprehensive income-
Cumulative effect of
accounting change 709
Net gain on derivative instruments 273
Reclassification adjustments (441)
---------
Total other comprehensive income 541
----------
Comprehensive income 77,924
--------- ----------- -------- ------------ ------------ ----------- --------- ----------
January 31, 2001 4,888.2 31,307.1 316.2 $ 191,439 $ (45,018) $ (58,147) $ 541 $ 88,815
========= =========== ======== ============ ============ =========== ========= ==========
See notes to consolidated financial statements.
3
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended January 31
-----------------------------
2001 2000
-------------- -------------
Cash Flows From Operating Activities:
Net earnings $77,383 $37,964
Reconciliation of net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 27,978 25,999
Employee stock ownership plan compensation charge 2,194 2,053
Other 1,716 2,821
Changes in operating assets and liabilities, net of effects from
business acquisitions and accounts receivable securitization:
Accounts and notes receivable (192,177) (79,282)
Inventories (18,163) (24,881)
Prepaid expenses and other current assets (3,244) (1,828)
Accounts payable 61,612 43,977
Accrued interest expense 1,198 2,207
Other current liabilities 5,828 498
Other liabilities 89 (41)
-------------- -------------
Net cash provided by (used in) operating activities (35,586) 9,487
-------------- -------------
Cash Flows From Investing Activities:
Proceeds from accounts receivable securitization 100,000 -
Business acquisitions, net of cash acquired (4,216) 54,827
Capital expenditures (6,054) (13,597)
Proceeds from sale leaseback transaction - 25,000
Cash paid for acquisition transaction fees - (13,294)
Other 1,070 1,934
-------------- -------------
Net cash provided by investing activities 90,800 54,870
-------------- -------------
Cash Flows From Financing Activities:
Distributions to common unitholders (31,624) (31,623)
Net additions (reductions) to short-term borrowings (6,597) 14,514
Additions to long-term debt 5,897 12,812
Reductions of long-term debt (2,351) (72,552)
Cash paid for debt and lease financing costs (35) (659)
Cash contribution from general partner - 3,571
Other (404) (398)
-------------- -------------
Net cash used in financing activities (35,114) (74,335)
-------------- -------------
Increase (decrease) in cash and cash equivalents 20,100 (9,978)
Cash and cash equivalents - beginning of period 14,838 35,134
-------------- -------------
Cash and cash equivalents - end of period $34,938 $25,156
============== =============
Cash paid for interest $29,521 $23,775
============== =============
See notes to consolidated financial statements.
4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001
(UNAUDITED)
A. The financial statements of Ferrellgas Partners, L.P. ("Ferrellgas
Partners") and Subsidiaries (collectively, the "Partnership") reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the interim periods presented. All adjustments to the
financial statements were of a normal, recurring nature, as well as the
accounting change to adopt Statement of Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities. The
information included in this Form 10-Q should be read in conjunction with
"Management's Discussion and Analysis" and the financial statements with
related notes included in the Partnership's annual report on Form 10-K for
the year ended July 31, 2000.
B. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from these estimates.
C. Certain amounts included in the three and six months ended January 31 of
the fiscal 2000 consolidated financial statements have been reclassified to
conform to the three and six months ended January 31 of the fiscal 2001
presentation.
D. The propane industry is seasonal in nature with peak activity during the
winter months. Therefore, the results of operations for the periods ended
January 31, 2001 and 2000 are not necessarily indicative of the
results to be expected for a full year.
E. ACCOUNTS RECEIVABLE SECURITIZATION
During the six months ended January 31, 2001, the Operating Partnership
("Ferrellgas, L.P.") received $100,000,000 in cash in exchange for the
sale and contribution of an interest in a pool of its trade accounts
receivable to its wholly-owned, special purpose subsidiary, Ferrellgas
Receivables, LLC. Ferrellgas Receivables then sold its interest to a
commercial paper conduit of Banc One, NA according to the terms of a
364-day agreement. In accordance with SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," this transaction is reflected on the Partnership's
financial statements as a sale of accounts receivable and an
investment in a subsidiary. The proceeds of these sales are less than
the face amount of the pool of accounts receivable sold. The
difference is classified on the statement of earnings as "Loss on
disposal of assets and other", and approximates the financing cost of
issuing commercial paper backed by these accounts receivable as well
as the associated bad debt expense. See Note F for the accounting
policy implemented to account for "Investment in unconsolidated
subsidiary."
5
F. SUPPLEMENTAL BALANCE SHEET INFORMATION:
Inventories consist of:
JANUARY 31, JULY 31,
(in thousands) 2001 2000
--------------- ---------------
Liquefied propane gas and related products $76,202 $50,868
Appliances, parts and supplies 19,119 21,111
--------------- ---------------
$95,321 $71,979
=============== ===============
In addition to inventories on hand, the Partnership enters into contracts to
buy product for supply purposes. Nearly all of these contracts have terms of
less than one year and most call for payment based on market prices at the
date of delivery. All fixed price contracts have terms of less than one
year. As of January 31, 2001, in addition to the inventory on hand, the
Partnership had committed to take delivery of approximately 3,636,000
gallons at a fixed price for its future retail propane sales.
Property, plant and equipment, net consist of:
JANUARY 31, JULY 31,
(in thousands) 2001 2000
--------------- ---------------
Property, plant and equipment $774,720 $781,548
Less: accumulated depreciation 274,845 265,365
--------------- ---------------
$499,875 $516,183
=============== ===============
In the first quarter of fiscal 2001, the Partnership increased the estimate
of the residual values of its existing customer and storage tanks. This
increase in the residual values resulted from a review by management of
tank values established in an independent valuation obtained in connection
with tank lease financings completed in December 1999 (see Note I). Due to
this change in the tank residual values, depreciation expense decreased by
approximately $2,888,000 and $5,960,000 during the three and six months
ended January 31, 2001, respectively, compared to the depreciation expense
that would have been recorded using the previous estimated residual values.
The change in estimated residual values will continue to affect future
depreciation expense as compared to the depreciation that would have been
recorded using the previous estimated residual values.
Intangible assets, net consist of:
JANUARY 31, JULY 31,
(in thousands) 2001 2000
--------------- ---------------
Intangible assets $420,364 $418,700
Less: accumulated amortization 175,691 162,224
--------------- ---------------
$244,673 $256,476
=============== ===============
6
Other assets, net consist of:
JANUARY 31, JULY 31,
(in thousands) 2001 2000
--------------- ---------------
Other assets, net $11,618 $10,355
Investment in unconsolidated subsidiary 21,523 -
--------------- ---------------
$33,141 $10,355
=============== ===============
The investment in unconsolidated subsidiary represents the Partnership's
investment in Ferrellgas Receivables and is accounted for on the equity
basis. The earnings in the equity of the unconsolidated subsidiary, service
income and the loss on the sale of the receivables are noncash transactions
and are classified as "Loss on disposal of assets and other" in the
statement of earnings. These amounts primarily reflect the financing cost
of issuing commercial paper backed by these accounts receivable as well as
the associated bad debt expense. See discussion of the transactions between
the Partnership and Ferrellgas Receivables in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." See Note E for additional information about the
accounts receivable securitization.
G. CONTINGENCIES
The Partnership is threatened with or named as a defendant in various
lawsuits, which among other items, claim damages for product liability. It
is not possible to determine the ultimate disposition of these matters;
however, management is of the opinion that there are no known claims or
contingent claims that are likely to have a material adverse effect on the
financial condition, results of operations or cash flows of the
Partnership.
H. COMMON UNIT DISTRIBUTIONS
On September 14, 2000, and December 14, 2000, the Partnership paid a cash
distribution of $0.50 per common unit for the quarters ended July 31, 2000
and October 31, 2000, respectively. On February 16, 2001, the Partnership
declared a cash distribution of $0.50 per common unit, payable March 14,
2001, for the quarter ended January 31, 2001.
I. BUSINESS COMBINATIONS
On December 17, 1999, the Partnership purchased Thermogas, LLC from
Williams Natural Gas Liquids, Inc., a subsidiary of The Williams Companies,
Inc. At closing, the Partnership entered into the following noncash
transactions: a) issued $175,000,000 in senior common units to the seller,
b) assumed a $183,000,000 bridge loan, and c) assumed a $135,000,000
operating tank lease. After the conclusion of these acquisition-related
transactions, including the merger of Ferrellgas, L.P. and Thermogas, the
Partnership acquired $61,842,000 of cash, which remained on the Thermogas
balance sheet at the acquisition date.
The total assets contributed to Ferrellgas, L.P. (at the Partnership's
cost basis) have been allocated as follows:
ASSET (IN THOUSANDS) ALLOCATED YEARS OF
COST BASIS USEFUL LIFE
Working capital $ 14,800 Not applicable
Property, plant and equipment 140,227 2-30
Goodwill 85,447 15
Customer list 60,200 15
Assembled workforce 9,600 15
Noncompete agreements 3,071 1-7
7
The fair values and useful lives of tanks are based on an independent
valuation. The fair value and useful lives of all other assets acquired are
based on the Partnership's analysis. As the Partnership has integrated the
operations of Thermogas, it has paid $4,094,000 for termination benefits
and $1,381,000 for exit costs since December 17, 1999. The estimated
liability for termination benefits and exit costs has been reduced by
$1,558,000 with the corresponding adjustment to goodwill. The transaction
has been accounted for as a purchase and, accordingly, the results of
operations of Thermogas have been included in the consolidated financial
statements from the date of acquisition.
The following financial information assumes that the Thermogas acquisition
occurred as of August 1, 1999 (unaudited):
SIX MONTHS ENDED
--------------------------------
PRO FORMA
JANUARY 31, JANUARY 31,
(in thousands, except per unit amounts) 2001 2000
Total revenues $919,582 $599,742
Net earnings 77,383 21,123
Common unitholders' interest in net earnings 67,281 12,249
Basic and diluted earnings per common unit $ 2.15 $ 0.39
J. EARNINGS PER UNIT
Below is a calculation of the basic and diluted common units used to
calculate basic and diluted earnings per unit on the statements of
earnings.
(in thousands, except per unit data)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JANUARY 31, JANUARY 31, 2000 JANUARY 31, JANUARY 31,
2001 2000 2001 2000
Common unitholders' interest in net
earnings $89,277 $49,546 $67,281 $35,466
-------------- --------------- --------------- --------------
Weighted average common units
outstanding 31,307.1 31,307.1 31,307.1 31,306.3
Basic and diluted earnings per
common unit $ 2.85 $ 1.58 $ 2.15 $ 1.13
=============== ================ =============== ===============
The senior common units are considered contingently issuable common units
for which all necessary conditions for their issuance have not been
satisfied as of the end of the reporting period and have been excluded from
common units outstanding. In order to compute the basic and diluted
earnings per common unit, the distribution paid-in-kind on senior common
units is subtracted from net earnings to arrive at the common unitholders'
interest in net earnings.
8
K. ADOPTION OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137 and
SFAS 138, establishes accounting and reporting standards for derivative
instruments and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. The Partnership's overall objective for entering into
derivative contracts for the purchase of product is related to hedging,
risk reduction and to anticipate market movements. Other derivatives are
entered into to reduce interest rate risk associated with long term debt
and lease obligations. Fair value hedges are derivative financial
instruments that hedge the exposure to changes in the fair value of an
asset, a liability or an identified portion thereof attributable to a
particular risk. Cash flow hedges are derivative financial instruments that
hedge the exposure to variability in expected future cash flows
attributable to a particular risk.
The Partnership uses cash flow hedges to manage exposure to product
purchase price risk and uses both fair value and cash flow hedges to manage
exposure to interest rate risks.
Product purchase price risk
Fluctuations in the wholesale cost of propane subject the Partnership to
purchase price risk. The Partnership purchases propane at various prices
that are eventually sold to its customers, exposing the Partnership to
future product price fluctuations. Also, certain forecasted transactions
expose the Partnership to purchase price risk. The Partnership continually
monitors and assesses its purchase price exposures and consequently
utilizes product hedges to mitigate the risk of future price fluctuations.
Propane is the only product hedged with the use of product hedge positions.
The Partnership uses derivative products to hedge a portion of its
forecasted purchases for up to one year in the future. These derivatives
are designated as cash flow hedging instruments. Because these derivatives
are designated as cash flow hedges, the effective portions of changes in
the fair value of the derivative are recorded in other comprehensive income
(OCI) and are recognized in the statement of earnings when the forecasted
transaction impacts earnings. Changes in the fair value of cash flow hedges
due to hedge ineffectiveness are recognized in other revenues on the
statement of earnings. The fair value of the derivatives related to
purchase price risk are classified on the balance sheet as inventories. The
Partnership also purchases and sells derivatives that are not classified as
hedges to manage other risks associated with commodity prices. The changes
in fair value of these derivatives are recognized as they occur in other
revenue on the statement of earnings.
The Partnership also uses forward contracts, not designated as hedging
instruments under SFAS 133, to help reduce the price risk related to sales
made to its propane customers. These forward contracts meet the requirement
to qualify as normal purchases and normal sales as defined in SFAS 133, as
amended by SFAS 137 and SFAS 138, and thus are not adjusted to fair market
value.
Interest rate risk
The Partnership also holds $724,153,000 in primarily fixed rate long-term
debt and $158,400,000 in variable rate operating leases. Fluctuations in
interest rates subject the Partnership to interest rate risk. Decreases in
interest rates increase the fair value of the Partnership's fixed rate
debt, while increases in interest rates subject the Partnership to the risk
of increased interest expense related to its variable rate debt and
operating leases.
The Partnership enters into fair value and cash flow hedges to help reduce
its overall interest rate risk. Interest rate swaps are used to hedge the
exposure to changes in the fair value of fixed rate debt due to changes in
interest rates. The fair value of interest rate derivatives that are
considered fair value or cash flow hedges are classified either as other
current or long-term assets or as other current or long-term liabilities on
9
the balance sheet. Changes in the fair value of the fixed rate debt and any
related fair value hedges are recognized as they occur in interest expense
on the statement of earnings. Interest rate caps are used to hedge the risk
associated with rising interest rates and their affect on forecasted
transactions related to variable rate debt and lease obligations. These
interest rate caps are designated as cash flow hedges. Thus, the effective
portions of changes in the fair value of the hedges are recorded in OCI at
interim periods and are recognized as interest expense in the statement of
earnings when the forecasted transaction impacts earnings. Changes in the
fair value of any cash flow hedges that are considered ineffective are
recognized as interest expense on the statement of earnings as they occur.
Effect of adoption of SFAS 133
The adoption of SFAS 133 resulted in an increase in other revenues of
$299,000, an increase in OCI of $709,000 and an increase of $1,008,000 to
inventories as of August 1, 2000. The increase in other revenue is
primarily attributable to increases in the fair value of derivatives not
designated as hedging instruments under SFAS 133. The increase in OCI is
mostly attributable to increases in the value of cash flow hedges for the
fair value of options designated as hedging instruments. The $709,000
related to these derivatives included in OCI as of August 1, 2000, will be
reclassified into earnings during the twelve months ended July 31, 2001, at
the time that the hedged item affects earnings.
Three and six months ended January 31, 2001
Gains and losses related to derivatives held for product price risk
included in OCI are reclassified into earnings at the expiration or
settlement date of the hedged item. The Partnership estimates that $541,000
of net derivative gains included in OCI will be reclassified into
earnings within the next three months.
Hedge ineffectiveness, determined in accordance with SFAS 133, increased
interest expense $381,781 during the six months ended January 31, 2001, due
to the change in the time value of the interest rate cap. No fair value
hedges or cash flow hedges were derecognized or discontinued for the six
months ended January 31, 2001.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 entitled "Revenue Recognition". The bulletin,
as amended, is to be adopted, no later than the fourth fiscal quarter of
fiscal years commencing after December 15, 1999, with retroactive
adjustment to the first fiscal quarter of that year. Management implemented
this bulletin in the first quarter of fiscal 2001 with no material affect
on the Partnership's financial position, results of operations or cash
flows.
Accounting for Securitization
The FASB also recently issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS No. 125's provisions without
reconsideration. The Partnership does not believe that the implementation
of SFAS No. 140 will have a material effect on its financial position,
results of operations and cash flows. See Notes E and F for discussion of
SFAS No. 125's effect on recent accounts receivable transactions. SFAS 125
affects the recognition and reclassification of collateral and disclosures
relating to securitization transactions and collateral and will be
effective for the Partnership's fiscal year ending July 31, 2001.
10
FERRELLGAS PARTNERS FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF FERRELLGAS PARTNERS, L.P.)
BALANCE SHEETS
JANUARY 31, JULY 31,
ASSETS 2001 2000
- -------------------------------------------------------------------- ------------------ -------------------
(UNAUDITED)
Cash $1,000 $1,000
------------------ -------------------
TOTAL ASSETS $1,000 $1,000
================== ===================
STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------
Common stock, $1.00 par value; 2,000 shares
Authorized; 1,000 shares issued and outstanding $1,000 $1,000
Additional paid in capital 1,378 1,237
Accumulated deficit (1,378) (1,237)
------------------ -------------------
TOTAL STOCKHOLDER'S EQUITY $1,000 $1,000
================== ===================
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------ -------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2001 2000 2001 2000
----------------- ------------------ ------------------ ------------------
General and administrative expense $ 50 $ 50 $ 141 $ 236
----------------- ------------------ ------------------ ------------------
NET LOSS $(50) $(50) $(141) $(236)
================= ================== ================== ==================
See notes to financial statements.
11
FERRELLGAS PARTNERS FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF FERRELLGAS PARTNERS, L.P.)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
--------------------------------------------
JANUARY 31, JANUARY 31,
2001 2000
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(141) $ (236)
------------------- ------------------
Cash used in operating activities (141) (236)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 141 236
------------------- ------------------
Cash provided by financing activities 141 236
------------------ -------------------
Change in cash - -
Cash - beginning of period 1,000 1,000
------------------- ------------------
CASH - END OF PERIOD $1,000 $1,000
================== ===================
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2001
(UNAUDITED)
A. Ferrellgas Partners Finance Corp., a Delaware corporation, was formed on
March 28, 1996,and is a wholly-owned subsidiary of Ferrellgas Partners,L.P.
B. The financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of the interim periods
presented. All adjustments to the financial statements were of a normal,
recurring nature.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and liquidity
and capital resources of the Partnership. Except for the $160,000,000 senior
secured notes issued in April 1996 by Ferrellgas Partners and the related
interest expense, Ferrellgas, L.P. accounts for nearly all of the consolidated
assets, liabilities, sales and earnings of Ferrellgas Partners.
Ferrellgas Partners Finance Corp. has nominal assets and does not conduct
any operations. Accordingly, a discussion of the results of operations and
liquidity and capital resources is not presented.
FORWARD-LOOKING STATEMENTS
Statements included in this report that are not historical facts are
forward-looking statements. These statements include the following:
o whether or not Ferrellgas, L.P. will have sufficient funds to meet its
obligations and to enable it to distribute to Ferrellgas Partners
sufficient funds to permit Ferrellgas Partners to meet its obligations with
respect its $160,000,000 senior secured notes,
o to pay the required distribution on its senior common units, and to pay
the minimum quarterly distribution of $0.50 per common unit,
o the expectation that certain interest rate hedges will terminate,
o the expectation of higher than normal cash provided by operating
activities in the second half of fiscal 2001, and
o the expectation that future periods may not have the same percentage
increase in retail volumes, revenues and expenses as was experienced in the
first half of fiscal 2001.
The forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in or
implied by the statements. The risks and uncertainties and their effect on the
Partnership's operations include but are not limited to the following:
o the effect of weather conditions on demand for propane,
o price and availability of propane supplies,
o price and inventory risk of propane supplies,
o the effect of increasing volatility in commodity prices on the
Partnership's liquidity,
o the timing of collection of accounts receivable,
o the availability of capacity to transport propane to market areas,
o competition from other energy sources and within the propane industry,
o operating risks incidental to transporting, storing, and distributing
propane,
o changes in interest rates,
o governmental legislation and regulations,
o energy efficiency and technology trends,
o the condition of the capital markets in the United States,
o the political and economic stability of the oil producing nations,
o the expectation that the senior common units will be redeemed
in the future with proceeds from an
offering of equity at a price satisfactory to the Partnership, and
o expected savings from the integration of the Thermogas acquisition,
reductions made in personnel and assets related to the existing
Ferrellgas L.P. locations and savings related to the routing and
scheduling improvements, all discussed in "Business - Recent
Initiatives" section of the Partnership's annual report filed on Form
10-K for the year ended July 31, 2000.
13
RESULTS OF OPERATIONS
Due to the seasonality of the retail propane business, results of
operations for the six months ended January 31, 2001 and 2000, are not
necessarily indicative of the results to be expected for a full year. Other
factors affecting the results of operations include competitive conditions,
demand for product, timing of acquisitions, variations in the weather and
fluctuations in propane prices. As the Partnership has grown through
acquisitions, fixed costs such as personnel costs, equipment leases,
depreciation and interest expense have increased. Due to the seasonality of the
retail propane business, these fixed cost increases have caused net losses in
the first and fourth fiscal quarters and net earnings in the second and third
fiscal quarters to be more pronounced.
THREE MONTHS ENDED JANUARY 31, 2001 VS. JANUARY 31, 2000
Total revenues. Total gas liquids and related product sales increased 93.9%
to $612,752,000, primarily due to an increased average sales price per gallon
and increased retail sales volumes.
The average sales price per gallon increased due to the effect of a
significant increase in the wholesale cost of propane during fiscal 2001. The
wholesale cost of propane for the second quarter of fiscal 2001 was
significantly higher compared to the same quarter last year. The wholesale
market price at one of the major supply points, Mt. Belvieu, Texas, averaged
$0.72 per gallon and reached a high of $0.94 during the second quarter of fiscal
2001 compared to an average of $0.47 per gallon in the prior year. Other major
supply points in the United States also experienced significant increases.
Retail sales volumes increased 27.1% to 399,060,000 gallons in the second
quarter of fiscal 2001 as compared to 314,044,000 gallons in the prior year,
primarily due to colder weather and the full quarter effect of the acquisition
of Thermogas completed in December of 1999. For the quarter, temperatures as
reported by the American Gas Association, were 9% colder than normal as compared
to 12% warmer than normal in the prior period's quarter. Other revenues
increased by $11,476,000 primarily due to risk management gains realized in the
second quarter of fiscal 2001 and contributions from Thermogas operations.
Gross profit. Gross profit increased 43.7% to $234,150,000 in the second
quarter of fiscal 2001. Factors increasing gross margin included increased
volume due to colder weather, contributions from the full quarter effect of
Thermogas operations, increased retail margins and risk management gains.
Partially offsetting these factors was reduced volume due to conservation by
customers in response to the higher cost of propane and the related increased
demand caused by the colder weather.
Operating expense. Operating expense increased 30.3% to $90,345,000
primarily due to personnel, plant and office, vehicle and other operating
expenses related to the increased volumes, additional expenses from the full
quarter effect of Thermogas operations, higher vehicle fuel costs and increased
incentives, partially offset by reductions made since the same quarter last year
in personnel, vehicle and other expenses in the existing Ferrellgas operations.
Depreciation and amortization expense. Depreciation and amortization
expense increased 0.2% to $13,947,000 primarily due to the full quarter effect
of the addition of property, plant and equipment, and intangible assets from the
Thermogas acquisition, partially offset by a change in the estimated residual
values used to compute the depreciation of customer and storage tanks. In the
first quarter of fiscal 2001, the Partnership increased the estimate of the
residual values of its existing customer and storage tanks. This increase in the
residual values resulted from a review by management of tank values established
in an independent valuation obtained in connection with tank lease financings
completed in December 1999. Due to this change in the tank residual values,
depreciation expense decreased by approximately $2,888,000, compared to the
depreciation that would have been recorded using the previous estimated residual
values. The change in estimated residual values will continue to affect future
depreciation expense as compared to the depreciation that would have been
recorded using the previous estimated residual values.
14
General and administrative expense. General and administrative expense
increased 15.9% to $6,910,000 primarily due to the increased incentives related
to the improved financial results as compared to the prior period.
Equipment lease expense. Equipment lease expense increased 55.0% to
$8,661,000 due to a full quarter effect of the addition of $160,000,000 of
operating tank leases in December 1999, and to a lesser extent to upgrades to
the Partnership's truck fleet.
Loss on disposal of assets and other. Loss on disposal of assets and other
increased $1,950,000 primarily due to the loss on the sale of the pool of
accounts receivable related to the accounts receivable securitization. See Notes
E and F in the Consolidated Financial Statements included elsewhere in this
report for additional information regarding these transactions.
Interest expense. Interest expense increased 9.6% to $16,106,000 due
primarily to the full quarter effect of the increased borrowings related to the
Thermogas acquisition, partially offset by the effect of the reduced credit
facility borrowings during the second quarter of fiscal 2001. The reduced credit
facility borrowings resulted from the funds generated from the accounts
receivable securitization. See discussion of the transactions between the
Partnership and Ferrellgas Receivables in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Forward looking statement. The Partnership does not expect a similar
magnitude of percentage increase in retail volumes, revenues or expenses
in future quarters. The nonrecurring percentage increases experienced
this quarter compared to the same quarter l ast year were primarily as a result
of the impact of the acquisition of Thermogas, the significantly higher
wholesale propane prices experience during fiscal 2001 compared to the same
period last year, and colder winter temperatures this year compared to last
year.
SIX MONTHS ENDED JANUARY 31, 2001 VS. JANUARY 31, 2000
Total revenues. Total gas liquids and related product sales increased 90.8%
to $872,849,000, primarily due an increased average sales price per gallon and
increased retail sales volumes.
The average sales price per gallon increased due to the effect of a
significant increase in the wholesale cost of propane during fiscal 2001. The
wholesale cost of propane for the first half of fiscal 2001 was significantly
higher compared to the first half of fiscal 2000. The wholesale market price at
one of the major supply points, Mt. Belvieu, Texas, averaged $0.67 per gallon
during the first half of fiscal 2001 and reached a high of $0.94 compared to an
average of $0.45 per gallon in the first half of fiscal 2000. Other major supply
points in the United States also experienced significant increases.
Retail sales volumes increased 28.2% to 599,123,000 gallons in the first
half of fiscal 2001 as compared to 467,473,000 gallons for the prior period,
primarily due to the much colder weather and the acquisition of Thermogas
completed in December 1999. For the six months ended January 31, 2001,
temperatures as reported by the American Gas Association were 7% colder than
normal as compared to 11% warmer than normal in the first half of fiscal 2000.
Other revenues increased by $531,000 primarily due to contributions from
Thermogas operations offset by risk management gains realized in the first half
of fiscal 2000 that were greater than during the first half of fiscal 2001.
Gross profit. Gross profit increased 35.7% to $326,291,000, primarily due
to gross profit generated from the acquired Thermogas operations, the colder
than normal weather and increased retail margins. Partially offsetting these
factors was a decrease in volume due to conservation by customers in response to
the higher cost of propane and the related increased demand caused by colder
weather.
15
Operating expense. Operating expense increased 22.9% to $155,488,000
primarily due to personnel, plant and office, vehicle and other operating
expenses related to the acquired Thermogas operations and to a lesser extent the
increased operating expenses related to delivering greater retail volumes than
the prior year, partially offset by reductions made since the prior year in
personnel, vehicles and other expenses in the existing Ferrellgas operations.
General and administrative expense. General and administrative expense
increased 4.3% to $11,627,000 primarily due to the increased incentives related
to the improved financial results as compared to the prior period.
Depreciation and amortization expense. Depreciation and amortization
expense increased 7.6% to $27,978,000 primarily due to the addition of property,
plant and equipment, and intangible assets from the Thermogas acquisition,
partially offset by the change in the estimated residual values used to compute
the depreciation of customer and storage tanks. In the first quarter of fiscal
2001, the Partnership increased the estimate of the residual values of its
existing customer and storage tanks. This increase in the residual values
resulted from a review by management of tank values established in an
independent valuation obtained in connection with tank lease financings
completed in December 1999. Due to this change in the tank residual values,
depreciation expense decreased by approximately $5,960,000, compared to the
depreciation that would have been recorded using the previous estimated residual
values. The change in estimated residual values will continue to affect future
depreciation expense as compared to the depreciation that would have been
recorded using the previous estimated residual values.
Equipment lease expense. Equipment lease expense increased 77.6% to
$16,768,000 due to the addition of the $160,000,000 operating tank leases in
December 1999, and to a lesser extent to upgrades to the Partnership's truck
fleet.
Loss on disposal of assets and other. Loss on disposal of assets and other
increased $3,025,000 primarily due to the loss on the sale of the pool of
accounts receivable related to the accounts receivable securitization. See Notes
E and F in the Consolidated Financial Statements included elsewhere in this
report for additional information regarding these transactions.
Interest expense. Interest expense increased 18.3% to $32,274,000. This
increase is primarily the result of increased borrowings related to the
Thermogas acquisition and to a lesser extent increased interest rates, partially
offset by the effect of the reduced credit facility borrowings during the first
half of fiscal 2001. The reduced credit facility borrowings resulted from the
funds generated from the accounts receivable securitization. See discussion of
the transactions between the Partnership and Ferrellgas Receivables in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Forward looking statement. The Partnership does not expect a similar
magnitude of percentage increase in retail volumes, revenues or expenses in
future periods. The nonrecurring percentage increases experienced the first six
months of this year compared to the same period last year were primarily as a
result of the impact of the acquisition of Thermogas, the significantly higher
wholesale propane prices experience during fiscal 2001 compared to the same
period last year, and colder winter temperatures this year compared to last
year.
LIQUIDITY AND CAPITAL RESOURCES
The ability of the Partnership to satisfy its obligations is dependent upon
future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. Due to the seasonality of the Partnership's retail propane business, a
significant portion of the Partnership's cash flow from operations is typically
generated during the winter heating season which occurs during the Partnership's
second and third fiscal quarters. Typically, the Partnership generates
significantly lower cash flows from operations in its first and fourth fiscal
16
quarters as compared to the second and third quarters, because fixed costs
exceed gross profit during the non-peak season. However, the second quarter of
fiscal 2001 generated lower than historical cash flows from operating
activities, despite recording record operating and net earnings. This lower cash
from operating activities for the quarter was primarily caused by significant
increases in customer receivables related to the significantly higher than
historical retail prices and by increases in retail volumes, and, to a lesser
extent, by increases in the cost of propane inventory. The Partnership expects
to generate higher than normal cash from operating activities in the last six
months of fiscal 2001 as customers remit payment of the receivables billed
during the second quarter of fiscal 2001. Subject to meeting certain financial
tests discussed below, the General Partner ("Ferrellgas, Inc.") believes that
Ferrellgas, L.P. will have sufficient funds available to meet its obligations,
to distribute to Ferrellgas Partners sufficient funds to permit Ferrellgas
Partners to meet its obligations with respect to the $160,000,000 senior secured
notes and to distribute to Ferrellgas Partners sufficient funds to distribute
the minimum quarterly distribution on all common units for the remainder of the
fiscal year.
The Partnership's credit facilities, public debt, private debt, accounts
receivable securitization facility and tank leases contain several financial
tests and covenants which restrict the Partnership's ability to pay
distributions, incur debt and engage in certain other business transactions. In
general, these tests are based on the Partnership's debt to cash flow ratio and
cash flow to interest expense ratio. Ferrellgas, Inc. believes that the most
restrictive of these tests currently are debt incurrence limitations within the
credit facility, tank leases and accounts receivable securitization facility and
limitations on the payment of distributions within the Ferrellgas Partners
senior secured notes. The credit facility, tank leases and accounts receivable
securitization facility limit Ferrellgas, L.P.'s ability to incur debt if
Ferrellgas, L.P. exceeds prescribed ratios of either debt to cash flow or cash
flow to interest expense. The Ferrellgas Partners senior secured notes restrict
payments if a minimum ratio of cash flow to interest expense is not met. This
restriction places limitations on the Partnership's ability to make certain
restricted payments such as the payment of cash distributions to unitholders.
The cash flow used to determine these financial tests generally is based upon
the Partnership's most recent cash flow performance giving pro forma effect for
acquisitions and divestitures made during the test period.
The Partnership's financial performance during the 2000, 1999 and 1998
fiscal years was adversely impacted by average temperatures that were reported
by the National Oceanic Atmospheric Administration as the warmest in recorded
history. Despite these challenges in prior fiscal years, the Partnership met all
of its financial tests and covenants. These include the debt incurrence tests
within the credit facility, tank leases and accounts receivable securitization
facility and the Ferrellgas Partners senior secured notes restricted payment
test, as well as other financial tests and covenants in the Ferrellgas Partners
senior secured notes, the $350,000,000 senior notes, the $184,000,000 senior
notes, the credit facility, the tank leases and the accounts receivable
securitization facility.
Based upon current estimates of the Partnership's cash flow, Ferrellgas,
Inc. believes that the Partnership will be able to meet all of the required
financial tests and covenants for the remainder of the fiscal year. If the
Partnership were to encounter unexpected downturns in business operations in the
future, such as significantly warmer than normal weather or a volatile cost
environment, the Partnership may not meet certain financial tests in future
quarters. These factors could temporarily restrict the ability of Ferrellgas,
L.P. to incur debt or Ferrellgas Partner's ability to make cash distributions to
its common unitholders. Depending on the circumstances, the Partnership may
consider alternatives to permit the incurrence of debt at Ferrellgas, L.P. or
the continued payment by Ferrellgas Partners of the quarterly cash distribution
to its common unitholders. No assurances can be given, however, that such
alternatives can or will be implemented with respect to any given quarter.
Future maintenance and working capital needs of the Partnership are
expected to be provided by cash generated from future operations, existing cash
balances, the credit facility and the accounts receivable securitization
facility. To fund expansive capital projects and future acquisitions,
Ferrellgas, L.P. may borrow on the existing credit facility, Ferrellgas Partners
or Ferrellgas, L.P. may issue additional debt to the extent permitted under
existing debt agreements or Ferrellgas Partners may issue additional equity
securities, including, among others, common units.
17
Toward this purpose, on February 5, 1999, Ferrellgas Partners filed a shelf
registration statement with the Securities and Exchange Commission for the
periodic sale of up to $300,000,000 in equity and/or debt securities. The
registered securities would be available for sale by the Partnership in the
future to fund acquisitions, to reduce indebtedness or to fund general corporate
purposes.
Ferrellgas Partners also maintains an additional shelf registration
statement with the Securities and Exchange Commission for 2,010,484 common
units. These common units may be issued by Ferrellgas Partners in connection
with the Partnership's acquisition of other businesses, properties or securities
in business combination transactions.
Operating Activities. Cash used in operating activities was $35,586,000 for
the six months ended January 31, 2001, compared to cash provided by operating
activities of $9,487,000 for the six months ended January 31, 2000. This
increased use of operating cash is primarily due to the increased working
capital required to finance operations during the colder winter and
significantly higher wholesale propane cost environment, partially offset by
increased earnings. Accounts receivable, net of the sale of a pool of trade
accounts receivable (see Investing Activities below), increased significantly
during the first half of fiscal 2001 as compared to the prior year due to higher
sales prices and higher retail volumes.
Investing Activities. During the six months ended January 31, 2001,
Ferrellgas, L.P. received $100,000,000 in cash in exchange for the sale and
contribution of an interest in a pool of its trade accounts receivable to its
wholly-owned, special purpose subsidiary, Ferrellgas Receivables. Ferrellgas
Receivables then sold its interest to a commercial paper conduit of Banc One, NA
according to the terms of a 364-day agreement. In accordance with SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" this transaction is reflected on the
Partnership's statements of earnings as a loss on disposal of assets and other
and on the balance sheet as other assets. The proceeds of these sales are less
than the face amount of the pool of accounts receivable sold by an amount that
approximates the financing cost of issuing commercial paper backed by these
accounts receivable. See Notes E and F in the Consolidated Financial Statements
included elsewhere in this report for additional information regarding these
transactions.
During the six months ended January 31, 2001, the Partnership made growth
and maintenance capital expenditures of $6,054,000 consisting primarily of :
o vehicle lease buyouts,
o upgrading computer equipment and software,
o relocating and upgrading district plant facilities, and
o additions to propane storage tanks and cylinders.
The Partnership's capital requirements for repair and maintenance of
property, plant and equipment are relatively low due to limited technological
change and long useful lives of propane tanks and cylinders.
The Partnership leases light and medium duty trucks, tractors and trailers.
The Partnership believes vehicle leasing is a cost-effective method for meeting
its transportation equipment needs. The Partnership purchased $1,515,000 of
vehicles whose lease terms expired in the first half of fiscal 2001. The
Partnership plans to purchase additional vehicles at the end of their lease term
totaling $819,000 in fiscal 2001, $203,000 in fiscal 2002 and $143,000 in fiscal
2003. The Partnership intends to renew other vehicle and tank leases that would
have had buyouts of $7,057,000 in fiscal 2002, $162,169,000 in fiscal 2003,
$4,981,000 in fiscal 2004 and $4,086,000 in fiscal 2005. Historically, the
Partnership has been successful in renewing vehicle leases subject to buyouts.
However, there is no assurance that it will be successful in the future.
18
The Partnership continues to consider opportunities to expand its
operations through strategic acquisitions of small retail propane operations
located throughout the United States. These acquisitions would be funded through
internal cash flow, external borrowings or the issuance of additional
Partnership interests.
Financing Activities. Ferrellgas, L.P.'s credit facility, which expires
June 30, 2003, is unsecured and consists of a $117,000,000 working capital,
general corporate and acquisition facility, including a letter of credit
facility, and a $40,000,000 revolving working capital facility. This $40,000,000
facility is subject to an annual reduction in outstanding balances to zero for
thirty consecutive days. All borrowings under the credit facility bear interest,
at the borrower's option, at a rate equal to either London Interbank Offered
Rate (LIBOR) plus an applicable margin varying from 1.25% to 2.25% or the
bank's base rate plus an applicable margin varying from 0.25% to 1.25%.
The bank's base rate at January 31, 2001 and July 31, 2000 was 9.0% and 9.5%,
respectively. During the six months ended January 31, 2001, the Partnership
repaid $700,000 of its credit facility.
At January 31, 2001, $29,300,000 of borrowings and $36,980,000 of letters
of credit were outstanding under the Ferrellgas, L.P. credit facility. These
borrowings currently carry an average interest rate of 9.86%. At January 31,
2001, Ferrellgas, L.P. had $90,720,000 available for general corporate,
acquisition and working capital purposes under the credit facility and the
accounts receivable facility. Based on the pricing grid contained in the credit
facility, the current borrowing rate for future borrowings under the credit
facility is LIBOR plus 2.25%. The Partnership believes that these facilities
will be sufficient to meet its future working capital needs. However, if the
Partnership were to experience an unexpected significant increase in working
capital requirements, it could exceed its immediately available resources.
Events that could cause increases in working capital requirements include a
significant increase in the cost of propane, a significant delay in the
collections of accounts receivable or increased volatility in commodity prices
related to risk management activities. The Partnership would consider
alternatives to provide increased working capital. No assurances can be given,
however, that such alternatives could be implemented.
Effective June 2, 2000, Ferrellgas, L.P. entered into an interest rate cap
agreement with Bank of America, related to variable quarterly rent payments due
pursuant to two tank lease agreements. The variable quarterly rent payments are
determined based upon a floating LIBOR based interest rate. The cap agreement,
which expires June 30, 2003, requires Bank of America to pay Ferrellgas, L.P. at
the end of each March, June, September and December the excess, if any, of the
applicable three month floating LIBOR interest rate over a cap of 9.3%, applied
to the unamortized amount outstanding each quarter under the two operating tank
lease agreements. The total obligation under these two operating tank lease
agreements as of January 31, 2001 was $158,400,000.
Effective April 27, 2000, the Partnership entered into an interest rate
swap agreement with Bank of America, related to the semi-annual interest payment
due on the $160,000,000 fixed rate senior secured notes due 2006. The swap
agreement, which expires June 15, 2006, requires Bank of America to pay the
stated fixed interest rate (annual rate 9.375%) pursuant to the $160,000,000
senior secured notes, equaling $7,500,000 every six months due on each June 15
and December 15. In exchange, the Partnership is required to make quarterly
floating interest rate payments on the 15th of March, June, September and
December based on an annual interest rate equal to the three month LIBOR
interest rate plus 1.655% applied to the same notional amount of $160,000,000.
Bank of America has a one-time opportunity to terminate this agreement without a
cancellation premium in June 2001. Based on its evaluation of the current
interest rate market, the Partnership believes that Bank of America will
terminate this agreement in June 2001, although there is no assurance that it
will do so. If Bank of America terminates the swap agreement, the Partnership
will resume paying the stated fixed interest rate (annual rate 9.375%)
subsequent to June 15, 2001.
19
On February 28, 2000, Ferrellgas, L.P. issued $184,000,000 of privately
placed unsecured senior notes. The proceeds of these senior notes, which include
three series with maturities ranging from year 2006 through 2009 and an average
fixed interest rate of 8.8%, were used to retire $183,000,000 of Ferrellgas,
L.P. bridge loan financing assumed in connection with the Thermogas acquisition.
On December 17, 1999, the Partnership purchased Thermogas from Williams
Natural Gas Liquids, Inc., a subsidiary of The Williams Companies, Inc. Part of
the consideration paid to Williams at closing by the Partnership was
$175,000,000 in newly issued senior common units. Williams has the right to
convert any outstanding senior common units into common units at a premium on
February 1, 2002 or upon the occurrence of a material event. However, the
Partnership intends to redeem the senior common units at par value prior to the
date of conversion. No assurances can be given that the Partnership will be
successful in securing the financing to redeem the senior common units.
On December 6, 1999, Ferrellgas, L.P. entered into a $25,000,000 operating
tank lease involving the sale-leaseback of a portion of its customer tanks with
Banc of America Leasing & Capital, LLC. This operating lease has a term that
expires June 30, 2003 and may be extended for two additional one-year periods at
the option of Ferrellgas, L.P., if such extension is approved by the lessor. On
December 17, 1999, immediately prior to the closing of the Thermogas
acquisition, Thermogas entered into a $135,000,000 operating tank lease
involving a portion of its customer tanks, with Banc of America Leasing &
Capital, LLC. In connection with the acquisition of Thermogas, Ferrellgas, L.P.
assumed all obligations under the $135,000,000 operating tank lease, which have
terms and conditions similar to the December 6, 1999, $25,000,000 operating tank
lease discussed above. The Partnership intends to renew both leases for the two
additional one-year periods, subject to lessor approval. Following the renewal
periods, the Partnership intends to refinance these leases, however, there can
be no assurance that the Partnership will be successful in obtaining this
refinancing or lessor approval for the renewals. See related discussion in the
Investing Activities section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
On August 4, 1998, Ferrellgas, L.P. issued the privately placed unsecured
$350,000,000 senior notes. The senior notes include five series with maturities
ranging from year 2005 through 2013 at an average fixed interest rate of 7.16%.
On February 16, 2001, the Partnership declared an in-kind distribution of
$1.00 per senior common unit payable by the issuance of additional senior common
units and a cash distribution of $0.50 per common unit, that will be paid on
March 14, 2001.
Adoption of New Accounting Standards. The Financial Accounting Standards
Board (FASB) recently issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS
133, as amended by SFAS 137 and SFAS 138, establishes accounting and reporting
standards for derivative instruments and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. The Partnership's overall
objective for entering into derivative contracts for the purchase of product is
related to hedging, risk reduction and to anticipate market movements. Other
derivatives are entered into to reduce interest rate risk associated with long
term debt and lease obligations. Fair value hedges are derivative financial
instruments that hedge the exposure to changes in the fair value of an asset or
a liability or an identified portion thereof attributable to a particular risk.
Cash flow hedges are derivative financial instruments that hedge the exposure to
variability in expected future cash flows attributable to a particular risk.
The Partnership uses cash flow hedges to manage exposures to product
purchase price risk and uses both fair value and cash flow hedges to manage
exposure to interest rate risks.
20
Product purchase price risk
Fluctuations in the wholesale cost of propane subject the Partnership to
purchase price risk. The Partnership purchases propane at various prices that
are eventually sold to its customers, exposing the Partnership to future product
price fluctuations. Also, certain forecasted transactions expose the Partnership
to purchase price risk. The Partnership continually monitors and assesses its
purchase price exposures and consequently utilizes product hedges to mitigate
the risk of future price fluctuations. Propane is the only product hedged with
the use of product hedge positions. The Partnership uses derivative products to
hedge a portion of its forecasted purchases for up to one year in the future.
These derivatives are designated as cash flow hedging instruments. Because these
derivatives are designated as cash flow hedges, the effective portions of
changes in the fair value of the derivative are recorded in OCI and are
recognized in the statement of earnings when the forecasted transaction impacts
earnings. Changes in the fair value of cash flow hedges due to hedge
ineffectiveness are recognized in other revenues on the statement of earnings.
The fair value of the derivatives related to purchase price risk are classified
on the balance sheet as inventories. The Partnership also purchases and sells
derivatives that are not classified as hedges to manage other risks associated
with commodity prices. The changes in fair value of these derivatives are
recognized as they occur in other revenue on the statement of earnings.
The Partnership also uses forward contracts, not designated as hedging
instruments under SFAS 133, to help reduce the price risk related to sales made
to its propane customers. These forward contracts meet the requirement to
qualify as normal purchases and normal sales as defined in SFAS 133, as amended
by SFAS 137 and SFAS 138, and thus are not adjusted to fair market value.
Interest rate risk
The Partnership also holds $724,153,000 in primarily fixed rate long-term
debt and $158,400,000 in variable rate operating leases. Fluctuations in
interest rates subject the Partnership to interest rate risk. Decreases in
interest rates increase the fair value of the Partnership's fixed rate debt,
while increases in interest rates subject the Partnership to the risk of
increased interest expense related to its variable rate debt and operating
leases.
The Partnership enters into fair value and cash flow hedges to help reduce
its overall interest rate risk. Interest rate swaps are used to hedge the
exposure to changes in the fair value of fixed rate debt due to changes in
interest rates. The fair value of interest rate derivatives that are considered
fair value or cash flow hedges are classified either as other current or
long-term assets or as other current or long-term liabilities on the balance
sheet. Changes in the fair value of the fixed rate debt and any related fair
value hedges are recognized as they occur in interest expense on the statement
of earnings. Interest rate caps are used to hedge the risk associated with
rising interest rates and their affect on forecasted transactions related to
variable rate debt and lease obligations. These interest rate caps are
designated as cash flow hedges. Thus, the effective portions of changes in the
fair value of the hedges are recorded in OCI at interim periods and are
recognized as interest expense in the statement of earnings when the forecasted
transaction impacts earnings. Changes in the fair value of any cash flow hedges
that are considered ineffective are recognized as interest expense on the
statement of earnings as they occur.
Effect of adoption of SFAS 133
The adoption of SFAS 133 resulted in an increase in other revenues of
$299,000, an increase in OCI of $709,000 and an increase of $1,008,000 to
inventories as of August 1, 2000. The increase in other revenues is primarily
attributable to increases in the fair value of derivatives not designated as
hedging instruments under SFAS 133. The increase in OCI is mostly attributable
to increases in the value of cash flow hedges for the fair value of options
designated as hedging instruments. The $709,000 related to these derivatives
included in OCI as of August 1, 2000, will be reclassified into earnings during
the twelve months ended July 31, 2001, at the time that the hedged item affects
earnings.
21
Three and six months ended January 31, 2001
Gains and losses related to derivatives held for product price risk included
in OCI are reclassified into earnings at the expiration or settlement date of
the hedged item. The Partnership estimates that $541,000 of net derivative gains
included OCI will be reclassified into earnings within
the next three months.
Hedge ineffectiveness, determined in accordance with SFAS 133, increased
interest expense $381,781 during the six months ended January 31, 2001, due to
the change in the time value of the interest rate cap. No fair value hedges or
cash flow hedges were derecognized or discontinued for the six months ended
January 31, 2001.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 entitled "Revenue Recognition". The bulletin, as
amended, is to be adopted, no later than the fourth fiscal quarter of fiscal
years commencing after December 15, 1999, with retroactive adjustment to the
first fiscal quarter of that year. Management implemented this bulletin in the
first quarter of fiscal 2001 with no material affect on the Partnership's
financial position, results of operations or cash flows.
Accounting for Securitization
The FASB also recently issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS No. 125's provisions without reconsideration. The Partnership
does not believe that the implementation of SFAS No. 140 will have a material
effect on its financial position, results of operations and cash flows. See
Notes E and F for discussion of SFAS No. 125's effect on recent accounts
receivable transactions. SFAS 125 affects the recognition and reclassification
of collateral and disclosures relating to securitization transactions and
collateral and will be effective for the Partnership's fiscal year ending July
31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Partnership's market risk sensitive
instruments and positions is the potential loss arising from adverse changes in
commodity prices. Additionally, the Partnership seeks to mitigate its interest
rate risk exposure on variable rate debt and operating leases by interest rate
cap agreements. At January 31, 2001, the Partnership had $189,300,000 in
variable rate debt, after considering the effect of the swap transaction, which
originated in fiscal 2000. If the swap is terminated, the Partnership's variable
rate debt would immediately decrease by $160,000,000, while the fixed rate debt
will increase by a corresponding amount. Thus, the swap related interest
expense reduction of $1,665,000 to be recognized in fiscal 2001 is not expected
to repeat in future years. At January 31, 2001, the Partnership had $158,400,000
outstanding in variable rate operating leases and an equal amount of interest
rate cap agreements outstanding to hedge the related variable rate exposure. The
operating leases were entered into during fiscal 2000. Thus, assuming the swap
is terminated in June 2001 and a 100 basis point increase in the variable
interest rate to the Partnership during fiscal 2001, the interest rate risk
related to the variable rate debt, the operating tank leases and the associated
interest rate cap agreements would be an increase of $1,870,000. The Partnership
would also begin paying the fixed rate of 9.375% on its $160,000,000 senior
secured notes.
The Partnership's risk management activities utilize certain types of
energy commodity forward contracts and swaps traded on the over-the-counter
financial markets and futures traded on the New York Mercantile Exchange to
anticipate market movements, manage and hedge its exposure to the volatility of
floating commodity prices and to protect its inventory positions. The
Partnership also utilizes certain over-the-counter energy commodity options to
limit overall price risk and to hedge its exposure to inventory price movements.
22
Market risks associated with energy commodities are monitored daily by
senior management for compliance with the Partnership's risk management trading
policy. This policy includes specific dollar exposure limits, limits on the term
of various contracts and volume limits for various energy commodities. The
Partnership also utilizes loss limits and daily review of open positions to
manage exposures to changing market prices.
Market, Credit and Liquidity Risk. New York Mercantile Exchange traded
futures are guaranteed by the New York Mercantile Exchange and have nominal
credit risk. The Partnership is exposed to credit risk associated with forwards,
swaps and option transactions in the event of nonperformance by counterparties.
For each counterparty, the Partnership analyzes its financial condition prior to
entering into an agreement, establishes credit limits and monitors the
appropriateness of each limit. The change in market value of Exchange-traded
futures contracts requires daily cash settlement in margin accounts with
brokers. Forwards and most other over-the-counter instruments are generally
settled at the expiration of the contract term. The Partnership attempts to
balance favorable and unfavorable positions with counterparties in order to
minimize the risk of collateral requirements for over-the-counter instruments.
Sensitivity Analysis. The Partnership has prepared a sensitivity analysis
to estimate the exposure to market risk of its energy commodity positions.
Forward contracts, futures, swaps and options were analyzed assuming a
hypothetical 10% change in forward prices for the delivery month for all energy
commodities. The potential loss in future earnings from these positions from a
10% adverse movement in market prices of the underlying energy commodities is
estimated at $4,650,000 as of January 31, 2001. The preceding hypothetical
analysis is limited because changes in prices may or may not equal 10%, thus,
actual results may differ.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
10.1 First Amendment to the Third Amended and Restated Credit
Agreement dated as of December 28, 2000, among Ferrellgas,
L.P., Ferrellgas, Inc., Bank of America National Trust and
Savings Association, as administrative agent, and the
other financial institutions party thereto.
10.2 Omnibus Amendment Agreement No. 3, Dated As Of December 28,
2000, In Respect Of Ferrellgas, L.P. TRUST NO. 1999-A
Participation Agreement Lease Intended As Security Loan
Agreement Each Dated As Of December 1, 1999.
10.3 Omnibus Amendment Agreement No. 3 Dated As Of December 28,
2000 in respect of THERMOGAS TRUST NO. 1999-A
Participation Agreement Lease Intended as Security
Loan Agreement Each Dated As Of December 15, 1999
10.4 First Amendment to the Receivables Purchase Agreement
dated as of January 17, 2001 among Ferrellgas Receivables,
L.L.C., as seller, Ferrellgas, L.P., as Servicer, Jupiter
Secruritization Corporation, the financial institutions
from time to time party hereto, and Bank One, N.A., main
office Chicago, as agent.
10.5 First Amendment to the Receivable Interest Sale Agreement
dated as of January 17, 2001 between Ferrellgas, L.P., as
Originator, and Ferrellgas Receivables, L.L.C., as buyer.
(B) REPORTS ON FORM 8-K
The Partnership filed one Form 8-K during the quarter ended January
31, 2001. On December 21, 2000, a Form 8-K reported that the July
31, 2000, balance sheet of Ferrellgas, Inc., the General Partner of
Ferrellgas Partners, L.P, had been audited by an independent
auditor.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FERRELLGAS PARTNERS, L.P.
By Ferrellgas, Inc. (General Partner)
Date: March 14, 2001 By /s/ Kevin T. Kelly
-------------------------------------
Kevin T. Kelly
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
FERRELLGAS PARTNERS FINANCE CORP.
Date: March 14, 2001 By /s/ Kevin T. Kelly
-------------------------------------
Kevin T. Kelly
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)