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, 1999
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 February 18, 1999, the registrants had units or shares outstanding as
follows:
Ferrellgas Partners, L.P. 14,703,298 Common Units
16,593,721 Subordinated 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 31,1999
and July 31, 1998 1
Consolidated Statements of Earnings -
Three and six months ended January 31,1999 and 1998 2
Consolidated Statement of Partners' Capital -
Six months ended January 31, 1999 3
Consolidated Statements of Cash Flows -
Six months ended January 31,1999 and 1998 4
Notes to Consolidated Financial Statements 5
Ferrellgas Partners Finance Corp.
Balance Sheets - January 31, 1999 and July 31, 1998 8
Statements of Earnings - Three and six months ended
January 31, 1999 and 1998 8
Statements of Cash Flows - Six months ended
January 31, 1999 and 1998 9
Notes to Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
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 1999 1998
- ------------------------------------------------------------- ------------- --------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 12,655 $ 16,961
Accounts and notes receivable, net 96,558 50,097
Inventories 30,303 34,727
Prepaid expenses and other current assets 11,315 8,706
------------- --------------
Total Current Assets 150,831 110,491
Property, plant and equipment, net 404,532 395,855
Intangible assets, net 110,092 105,655
Other assets, net 8,434 9,222
------------- --------------
Total Assets $673,889 $621,223
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
- -------------------------------------------------------------
Current Liabilities:
Accounts payable $58,131 $48,017
Other current liabilities 44,334 41,767
Short-term borrowings 27,432 21,150
------------- --------------
Total Current Liabilities 129,897 110,934
Long-term debt 552,675 507,222
Other liabilities 14,990 12,640
Contingencies and commitments
Minority interest 1,370 1,510
Partners' Capital:
Common unitholders (14,703,298 units outstanding
in January 1999 and 14,699,678 outstanding in July 1998) 21,531 27,985
Subordinated unitholders (16,593,721 units outstanding
at both January 1999 and July 1998) 12,543 19,908
General partner (59,117) (58,976)
------------- --------------
Total Partners' Capital (25,043) (11,083)
------------- --------------
Total Liabilities and Partners' Capital $673,889 $621,223
============= ==============
See notes to consolidated financial statements
1
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per unit data)
(unaudited)
For the three months ended For the six months ended
--------------------------- ---------------------------
January January January January
31, 1999 31, 1998 31, 1999 31, 1998
--------------------------------------------------------
Revenues:
Gas liquids and related product sales $216,541 $235,993 $334,543 $379,044
Other 13,536 12,818 25,873 22,972
------------ ------------ ------------ ------------
Total revenues 230,077 248,811 360,416 402,016
Cost of product sold (exclusive of
depreciation, shown separately below) 101,328 130,879 160,040 217,495
------------ ------------ ------------ ------------
Gross profit 128,749 117,932 200,376 184,521
Operating expense 56,240 54,887 107,952 104,952
Depreciation and amortization expense 11,806 10,987 23,117 22,524
Employee stock ownership compensation charge 800 - 1,690 -
General and administrative expense 4,197 3,858 8,865 8,279
Vehicle and tank lease expense 3,173 2,499 6,141 4,811
------------ ------------ ------------ ------------
Operating income 52,533 45,701 52,611 43,955
Interest expense (11,960) (12,598) (23,578) (24,722)
Interest income 386 402 544 799
Loss on disposal of assets (598) (372) (512) (306)
------------ ------------ ------------ ------------
Earnings before minority interest and
extraordinary item 40,361 33,133 29,065 19,726
Minority interest 446 374 371 278
------------ ------------ ------------ ------------
Earnings before extraordinary item 39,915 32,759 28,694 19,448
Extraordinary loss on early extinguishment
of debt, net of minority interest of $130 - - (12,786) -
------------ ------------ ------------ ------------
Net earnings 39,915 32,759 15,908 19,448
General partner's interest in net earnings 399 328 159 195
------------ ------------ ------------ ------------
Limited partners' interest in net earnings $39,516 $32,431 $15,749 $19,253
============ ============ ============ ============
Net earnings per limited partner unit:
Earnings before extraordinary item $ 1.26 $ 1.04 $ 0.91 $ 0.62
Extraordinary loss - - 0.41 -
------------ ------------ ------------ ------------
Net earnings $ 1.26 $ 1.04 $ 0.50 $ 0.62
============ ============ ============ ============
Net earnings per limited partner
unit-assuming dilution:
Earnings before extraordinary item $ 1.26 $ 1.03 $ 0.91 $ 0.61
Extraordinary loss - - 0.41 -
------------ ------------ ------------ ------------
Net earnings $ 1.26 $ 1.03 $ 0.50 $ 0.61
============ ============ ============ ============
See notes to consolidated financial statements.
2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(in thousands)
(unaudited)
Number of units
-----------------------
Sub- Sub- Total
Common ordinated Common ordinated General partners'
unitholders unitholders unitholders unitholders partner capital
----------- ------------ ------------ --------- --------- -------------
July 31, 1998 14,699.7 16,593.7 $27,985 $19,908 $(58,976) ($11,083)
Common units issued in
connection with
acquisitions 3.6 - 70 - 1 71
Contribution from general
partner in connection with
ESOP compensation charge - - 114 1,544 15 1,673
Quarterly distributions - - (14,702) (16,594) (316) (31,612)
Net earnings - - 8,064 7,685 159 15,908
----------- ---------- --------- --------- --------- -------------
January 31, 1999 14,703.3 16,593.7 $21,531 $12,543 $(59,117) $(25,043)
=========== ========== ========= ========= ========= =============
See notes to consolidated financial statements
3
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months ended
-------------------------
January January
31, 1999 31, 1998
---------------------------
Cash Flows From Operating Activities:
Net earnings $15,908 $19,448
Reconciliation of net earnings to net cash
provided by operating activities:
Depreciation and amortization 23,117 22,524
Extraordinary loss, net of minority interest 12,786 -
Employee stock ownership compensation charge 1,690 -
Other 2,837 2,911
Changes in operating assets and liabilities
net of effects from business
acquisitions:
Accounts and notes receivable (47,393) (39,795)
Inventories 5,084 16,081
Prepaid expenses and other current assets (2,609) (1,544)
Accounts payable 10,114 6,121
Other current liabilities 2,103 (10,537)
Other liabilities 2,350 263
------------ ------------
Net cash provided by operating activities 25,987 15,472
------------ ------------
Cash Flows From Investing Activities:
Business acquisitions (19,480) (3,577)
Capital expenditures (14,739) (10,081)
Other 1,138 1,986
------------ ------------
Net cash used in investing activities (33,081) (11,672)
------------ ------------
Cash Flows From Financing Activities:
Net additions to short-term borrowings 6,282 20,096
Additions to long-term debt 391,713 7,167
Reductions of long-term debt (350,668) (421)
Cash paid for call premiums and debt issuance costs (12,528) -
Distributions (31,612) (31,566)
Other (399) (358)
------------ ------------
Net cash provided by (used in) financing activities 2,788 (5,082)
------------ ------------
Decrease in cash and cash equivalents (4,306) (1,282)
Cash and cash equivalents - beginning of period 16,961 14,788
------------ ------------
Cash and cash equivalents - end of period $12,655 $13,506
============ ============
Cash paid for interest $20,935 $23,822
============ ============
See notes to consolidated financial statements
4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1999
(unaudited)
A. 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.
B. The preparation of financial statements in conformity with generally
accepted accounting principles ("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. 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, 1999 and January 31, 1998 are not necessarily indicative of the
results to be expected for a full year.
D. Inventories consist of:
January 31, July 31,
(in thousands) 1999 1998
---------------- --------------
Liquefied propane gas and related products $21,618 $ 26,316
Appliances, parts and supplies 8,685 8,411
---------------- --------------
$30,303 $34,727
================ ==============
In addition to inventories on hand, the Partnership enters into contracts
to buy product for supply purposes. Nearly all such contracts have terms of
less than one year and most call for payment based on market prices at date
of delivery. All fixed price contracts have terms of less than one year. As
of January 31, 1999, the Partnership had not committed to take delivery of
a material amount of gallons at a fixed price for its estimated future
retail propane sales.
Property, plant and equipment, net consist of:
January 31, July 31,
(in thousands) 1999 1998
--------------- ---------------
Property, plant and equipment $640,178 $620,783
Less: accumulated depreciation 235,646 224,928
---------------- --------------
$404,532 $395,855
=============== ===============
Intangible assets, net consist of:
January 31, July 31,
(in thousands) 1999 1998
--------------- ---------------
Intangible assets $241,302 $229,186
Less: accumulated amortization 131,210 123,531
---------------- --------------
$110,092 $105,655
=============== ===============
5
E. Long-Term Debt
Long-term debt consists of:
January 31, July 31,
(in thousands) 1999 1998
---------------- ------------
Senior Notes
Fixed rate, 7.16%, due 2005-2013 $350,000 $ -
Fixed rate, 10%, due 2001 (1) - 200,000
Fixed rate, 9.375%, due 2006 160,000 160,000
Credit Agreement
Term loan, 8.5%, due 2001 - 50,000
Revolving credit loans, 6.1% and 8.5%, due 2001 27,568 85,850
Notes payable, 8.3% and 6.7% weighted average interest rates,
respectively, due 1999 to 2007 17,779 13,558
---------------- ------------
555,347 509,408
Less: current portion 2,672 2,186
---------------- ------------
$552,675 $507,222
================ ============
(1) Ferrellgas, L.P. ("the OLP") fixed rate Senior Notes, issued in
June 1994, were redeemed at the option of the OLP on August 5, 1998
with a 5% premium payable concurrent with the issuance of
$350,000,000 of new unsecured OLP Senior Notes ("New Senior
Notes").
On July 1, 1998, the OLP entered into an agreement for the issuance of $350
million of privately placed fixed rate senior notes ("New Senior Notes")
funded August 4, 1998 in five series with maturities ranging from year 2005
through 2013. The proceeds of the offering were used to redeem the OLP
fixed rate Senior Notes issued in June 1994, and to repay outstanding
indebtedness under the Credit Facility.
The OLP also entered into an agreement on July 2, 1998 with the lenders
under the existing Credit Facility for a New Credit Facility effective
August 4, 1998. The New Credit Facility provides for (i) a $40,000,000
unsecured working capital facility subject to an annual reduction in
borrowings to zero for thirty consecutive days, (ii) a $50,000,000
unsecured working capital and general corporate facility, including a
letter of credit facility, and (iii) a $55,000,000 unsecured general
corporate and acquisition facility. The New Credit Facility matures July 2,
2001.
F. 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 individually or in aggregate are likely to have a
material adverse effect on the results of operations or financial condition
of the Partnership.
G. On September 14, 1998, and December 15, 1998, the Partnership paid a cash
distribution of $0.50 per Common and Subordinated Unit for the quarters
ended July 31, 1998 and October 31, 1998. On February 28, 1999, the
Partnership declared its second-quarter cash distribution of $0.50 per
Common and Subordinated Unit, payable March 15, 1999.
6
H. Below is a calculation of the basic and diluted units used to calculate
earnings per basic and diluted unit on the Statement of Earnings.
(in thousands, except per unit data)
Three months ended Six months ended
------------------ ----------------
January 31, January 31, January 31, January 31,
1999 1998 1999 1997
---- ---- ---- ----
Income available to common and
subordinate unitholders $39,516 $32,431 $15,749 $19,253
Weighted average outstanding units
31,297.02 31,293.40 31,295.54 31,257.42
Basic EPU $1.26 $1.04 $0.50 $0.62
================ ================= ================= ================
Income available to common and
subordinate unitholders $39,516 $32,431 $15,749 $19,253
Weighted average outstanding units
31,297.02 31,293.40 31,295.54 31,257.42
Dilutive securities - options 16.52 81.88 22.65 88.91
---------------- ----------------- ----------------- ----------------
Weighted average outstanding units
+ dilutive 31,313.54 31,375.28 31,318.19 31,346.33
Diluted EPU $1.26 $1.03 $0.50 $0.61
================ ================= ================= ================
7
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
BALANCE SHEETS
January 31, July 31,
ASSETS 1999 1998
- -------------------------------------------------------------------- ------------------ -------------------
(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 593 548
Accumulated deficit (593) (548)
------------------ -------------------
Total Stockholder's Equity $1,000 $1,000
================== ===================
STATEMENTS OF EARNINGS
(unaudited)
For the three months ended For the six months ended
--------------------------------------------- ------------------------------------
January 31, January 31 January 31, January 31,
1999 1998 1999 1998
--------------------- --------------------- ------------------ -----------------
General and administrative expense $ 0 $ 115 $ 45 $ 115
--------------------- --------------------- ------------------ -----------------
Net loss $ 0 $(115) $(45) $(115)
===================== ===================== ================== =================
See notes to financial statements.
8
FERRELLGAS PARTNERS FINANCE CORP.
(A wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended
-------------------------------------------
January 31, January 31,
1999 1998
-------------------- --------------------
Cash Flows From Operating Activities:
Net loss $ (45) $ (115)
-------------------- --------------------
Cash used in operating activities (45) (115)
-------------------- --------------------
Cash Flows From Financing Activities:
Capital contribution 45 115
-------------------- --------------------
Cash provided by financing activities 45 115
-------------------- --------------------
Increase (decrease) 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, 1999
(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.
9
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 Ferrellgas Partners, L.P. (the "Partnership" or "MLP").
Except for the $160,000,000 of 9 3/8% Senior Secured Notes issued in April 1996
by the MLP and the related interest expense, Ferrellgas, L.P. (the "Operating
Partnership" or "OLP") accounts for nearly all of the consolidated assets,
liabilities, sales and earnings of the MLP. When the discussion refers to the
consolidated MLP, the term Partnership will be used.
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, including
statements concerning the Partnership's belief that the OLP will have sufficient
funds to meet its obligations to enable it to distribute to the MLP sufficient
funds to permit the MLP to meet its obligations with respect to the MLP Senior
Notes issued in April 1996, and to enable it to distribute the Minimum Quarterly
Distribution ($0.50 per Unit) on all Common Units and Subordinated Units, are
forward-looking statements.
Such 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 include but are not limited to the
following and their effect on the Partnership's operations: a) the effect of
weather conditions on demand for propane, b) price and availability of propane
supplies, c) the availability of capacity to transport propane to market areas,
d) competition from other energy sources and within the propane industry, e)
operating risks incidental to transporting, storing, and distributing propane,
f) changes in interest rates, g) governmental legislation and regulations, h)
energy efficiency and technology trends, i) Year 2000 compliance and j) other
risk factors that are discussed in the Partnership's most recent 1933 Act filing
with the Securities and Exchange Commission, Amendment No. 1 to Form S-3
Registration Statement, as filed February 5, 1999.
Year 2000 Compliance
Many computer systems and applications in use throughout the world today
may not be able to appropriately interpret dates beginning in the year 2000
("Year 2000" issue). As a result, this problem could have adverse consequences
on the operations of companies and the integrity of information processing.
The Partnership began the process in 1997 of identifying and correcting its
computer systems and applications that were exposed to the Year 2000 issue. The
Partnership initially focused on the systems and applications that were
considered critical to its operations and services for supplying propane to its
customers and to its ability to account for those business services accurately.
These critical areas include the retail propane accounting and operations
system, financial accounting and reporting system, local area network and
electronic mail systems. The financial accounting software is considred by the
vendor to be Year 2000 compliant, however, the Partnership will conduct
compliance testing with completion targeted for April 1999. The Partnership
expects that the local and wide area networks will be Year 2000 compliant by
June 1999.The Partnership is curently converting the electronic email and retail
propane operations systems and expects both systems to be Year 2000 compliant
by the beginning of November 1999.
The Partnership has also taken steps to identify other non-critical
applications that may have exposure to the Year 2000 issue. It has established a
test lab for the independent testing of these
10
applications to ensure Year 2000 compatibility. To date, no material Year
2000 issues have been identified as a result of this testing.
The Partnership conducts business with several hundred outside suppliers.
While no single supplier is considered material to the Partnership, a combined
number could constitute a material amount to the Partnership. The Partnership is
currently reviewing its largest suppliers to obtain appropriate assurances that
they are, or will be, Year 2000 compliant. If compliance by the Partnership's
suppliers is not achieved in a timely manner, it is unknown what effect, if any,
the Year 2000 issue could have on the Partnership's operations.
The Partnership has evaluated its Year 2000 issues and does not expect that
the total cost of related modifications and conversions will have a material
effect on its financial position, results of operations or cash flows. Such
costs are being expensed as incurred. To date, the Partnership has incurred
approximately $100,000 to identify and correct its Year 2000 issues. This
expense has been primarily related to its critical systems and applications. It
is estimated that the Partnership will incur an additional $300,000 to $500,000
to identify and correct its Year 2000 issues. The Partnership does not
anticipate significant purchases of computer software or hardware as a result of
its Year 2000 issue and does not believe that the correction of its Year 2000
issues will delay or eliminate other scheduled computer upgrades and
replacements. Despite the Partnership's efforts to address and remediate its
Year 2000 issue, there can be no assurance that all critical areas and
non-critical applications will continue without interruption through January 1,
2000 and beyond.
Results of Operations
The propane industry is seasonal in nature with peak activity during the
winter months. Due to the seasonality of the business, results of operations for
the three and six months ended January 31, 1999 and 1998, 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, variations in weather and fluctuations in propane prices. As the
Partnership has grown through acquisitions, fixed costs such as personnel costs,
depreciation and interest expense have increased. Over time, these fixed cost
increases have caused variances in losses in the first and fourth quarters and
variances in net income in the second and third quarters to be more pronounced.
Three Months Ended January 31, 1999 vs. January 31, 1998
Total Revenues. Total gas liquids and related product sales decreased 8.2%
to $216,541,000 as compared to $235,993,000 in the second quarter of fiscal
1998, primarily due to decreased sales price per retail and wholesale gallons,
partially offset by an increase in retail sales volume due to the effect of
acquisitions.
Retail and wholesale sales prices per gallon were lower than those in the
same quarter last year due to the lower wholesale cost of propane experienced in
the current year. Retail volumes increased 3.0% to 251,246,000 gallons as
compared to 243,981,000 gallons for the same quarter last year, primarily due to
increased base business residential sales and the effect of acquisitions,
partially offset by the effect of warmer weather than the same period as last
year. Fiscal 1999 winter temperatures, as reported by the American Gas
Association ("AGA"), were 2.6% warmer than the same quarter last year and 9.4%
warmer than normal.
Gross Profit. Gross profit increased 9.2% to $128,749,000 as compared to
$117,932,000 in the second quarter of fiscal 1998, primarily due to increased
retail margins related to favorable wholesale propane costs, and the effect of
acquisitions, partially offset by the effect of warmer temperatures on retail
volumes.
11
Operating Expenses. Operating expenses increased 2.5% to $56,240,000 as
compared to $54,887,000 in the second quarter of fiscal 1998 primarily due to
acquisition related increases in personnel costs, plant and office expenses,
vehicle and other expenses and merit salary increases.
Depreciation and Amortization. Depreciation and amortization expense
increased 7.5% to $11,806,000 as compared to $10,987,000 in the same quarter
last year primarily due to the addition of intangibles and property, plant and
equipment from acquisitions of propane businesses.
Vehicle and Tank Lease Expense. Vehicle and tank lease expense increased by
$674,000 due to the utilization of operating lease financing to fund fleet
upgrades and replacements.
Interest expense. Interest expense decreased 5.1% to $11,960,000 as
compared to $12,598,000 in the second quarter of fiscal 1998. This decrease is
primarily the result of a decrease in the overall average interest rate paid by
the Partnership on its borrowings as a result of the refinancing of the fixed
rate debt and existing revolving credit facility balances (see Financing
Activities below), partially offset by the effect of increased borrowings.
Six Months Ended January 31, 1999 vs. January 31, 1998
Total Revenues. Total gas liquids and related product sales decreased 11.7%
to $334,543,000 as compared to $379,044,000 for the prior period, primarily due
to decreased sales price per retail and wholesale gallons.
Retail and wholesale sales prices per gallon were lower than those during
the prior period due to the lower wholesale cost of propane experienced in the
current period. Retail volumes decreased less than 1% to 395,928,000 gallons as
compared to 398,476,000 gallons for the year ago period, primarily due to the
effect of warmer weather than the prior year, partially offset by increased base
business residential sales volumes and the effect of acquisitions. Fiscal 1999
winter temperatures, as reported by the AGA, were 4.1% warmer than the same
period as last year and 11.7% warmer than normal.
Gross Profit. Gross profit increased 8.6% to $200,376,000 as compared to
$184,521,000 in the year ago period, primarily due to the effect of increased
retail margins related to favorable wholesale propane costs and the effect of
acquisitions, partially offset by the effect of warmer temperatures on retail
volumes.
Operating Expenses. Operating expenses increased 2.9% to $107,952,000 as
compared to $104,952,000 in the first half of fiscal 1998 primarily due to
acquisition related increases in personnel costs, plant and office expenses, and
vehicle and other expenses and merit salary increases.
Depreciation and Amortization. Depreciation and amortization expense
increased 2.6% to $23,117,000 as compared to $22,524,000 for the same period
last year primarily due to the addition of intangibles and property, plant and
equipment from acquisitions of propane businesses.
Vehicle and Tank Lease Expense. Vehicle and tank lease expense increased by
$1,330,000 due to the utilization of operating lease financing to fund fleet
upgrades and replacements.
Interest expense. Interest expense decreased 4.6% to $23,578,000 as
compared to $24,722,000 in the first half of fiscal 1998. This decrease is
primarily the result of a decrease in the overall average interest rate paid by
the Partnership on its borrowings, partially offset by the effect of increased
borrowings.
The extraordinary charge is due primarily to the payment of a $10,000,000
call premium related to the refinancing of $200,000,000 of fixed rate debt on
August 5, 1998. The remaining costs relate to the write off of unamortized debt
issuance costs related to refinancing of the fixed rate debt and revolving
credit facility balances. (see Financing Activities below).
12
Liquidity and Capital Resources
The ability of the MLP to satisfy its obligations is dependent upon future
performance of the OLP, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. For the fiscal year ending July 31, 1999, the General Partner believes
that the OLP will have sufficient funds to meet its obligations and enable it to
distribute to the MLP sufficient funds to permit the MLP to meet its obligations
with respect to the $160,000,000 senior secured notes issued in April 1996 ("MLP
Senior Secured Notes").
The MLP Senior Secured Notes, the $350,000,000 OLP senior notes ("New
Senior Notes") and the amended and restated OLP credit facility ("New Credit
Facility") contain several financial tests which restrict the Partnership's
ability to pay distributions, incur indebtedness and engage in certain other
business transactions (See Financing Activities below). These tests, in general,
are based on the ratio of the MLP's and OLP's consolidated cash flow to fixed
charges, primarily interest expense. Because the Partnership is more highly
leveraged at the MLP than at the OLP, the tests related to the MLP Senior
Secured Notes are more sensitive to fluctuations in consolidated cash flows and
fixed charges. The most sensitive of the MLP related tests restricts the
Partnership's ability to make certain Restricted Payments which include, but are
not limited to, the payment of the Minimum Quarterly Distribution ("MQD") to
unitholders.
Although the MLP's financial performance during fiscal 1999 has been
adversely impacted by unseasonably warmer temperatures, the Partnership believes
it will continue to meet the MLP Senior Secured Notes Restricted Payment test
during fiscal 1999, in addition to meeting the other financial tests in the MLP
Senior Secured Notes, New Senior Notes and New Credit Facility. However, if the
OLP were to encounter any unexpected downturns in business operations, it could
result in the Partnership not meeting certain financial tests in future
quarters, including but not limited to, the MLP Senior Secured Notes Restricted
Payment test. Depending on the circumstances, the Partnership would pursue
alternatives to permit the continued payment of MQD to its Common Unitholders.
No assurances can be given, however, that such alternatives will be successful
with respect to any given quarter.
Provided that certain remaining financial tests are satisfied, on August 1,
1999, the subordination period will end and the Subordinated Units will convert
to Common Units. The financial tests, which apply to each of the three
consecutive four quarter periods ending on July 31, 1999, are related to making
the MQD on all Common and Subordinated Units. The Partnership met such financial
tests for the four quarter periods ended July 31, 1997 and July 31, 1998,
respectively and made the Minimum Quarterly Distribution on all Units for the
two quarters ended October 31, 1998 and January 31, 1999, respectively. There
can be no assurance that the Partnership will meet the remaining financial tests
for the four quarter period ending July 31, 1999, and that the Subordinated
Units will convert to Common Units on August 1, 1999.
Future maintenance and working capital needs of the Partnership are
expected to be provided by cash generated from future operations, existing cash
balances and the working capital borrowing facility. In order to fund expansive
capital projects and future acquisitions, the OLP may borrow on existing bank
lines, the MLP or OLP may issue additional debt or the MLP may issue additional
equity securities, including among others, Common Units.
Toward this purpose, on January 25, 1999, the MLP filed a shelf
registration statement with the Securities and Exchange Commission (the
"Commission") for the periodic sale of up to $300,000,000 in debt and/or equity
securities. The registered securities would be available for sale by the
Partnership in the future to fund acquisitions or to pay down existing higher
cost indebtedness. Also, the Partnership maintains a shelf registration
statement with the Commission for 1,800,322 Common Units representing limited
partner interests in the MLP. The Common Units may be issued from time to time
by the MLP in connection with the OLP's acquisition of other businesses,
properties or securities in business combination transactions.
13
Operating Activities. Cash provided by operating activities was $25,987,000
for the six months ended January 31, 1999, compared to $15,472,000 for the prior
period. This increase in cash is primarily due to increased earnings before
extraordinary loss and favorable changes in other current liabilities, including
accrued profit sharing. Beginning in July 1998, profit sharing compensation
costs were replaced by a non-cash employee stock ownership plan compensation
expense.
Investing Activities. During the six months ended January 31, 1999, the
Partnership made total acquisition capital expenditures of $23,847,000. This
amount was funded by $19,480,000 cash payments, $4,295,000 of noncompete notes,
$71,000 of common units issued.
During the six months ended January 31, 1999, the Partnership made growth
and maintenance capital expenditures of $14,739,000 consisting primarily of the
following: 1) relocating and upgrading district plant facilities, 2) additions
to Partnership-owned customer tanks and cylinders, 3) vehicle lease buyouts, and
4) upgrading computer equipment and software. Capital requirements for repair
and maintenance of property, plant and equipment are relatively low since
technological change is limited and the useful lives of propane tanks and
cylinders, the Partnership's principal physical assets, are generally long.
The Partnership meets its vehicle and transportation equipment fleet needs
by leasing light and medium duty trucks and tractors. The General Partner
believes vehicle leasing is a cost effective method for meeting the
Partnership's transportation equipment needs. The Partnership continues seeking
to expand its operations through strategic acquisitions of retail propane
operations located throughout the United States. These acquisitions will be
funded through internal cash flow, external borrowings or the issuance of
additional Partnership interests. The Partnership does not have any material
commitments of funds for capital expenditures other than to support the current
level of operations. In fiscal 1999, the Partnership expects growth and
maintenance capital expenditures to increase slightly over fiscal 1998 levels.
Financing Activities. On August 4, 1998, the OLP issued $350,000,000 of new
privately placed unsecured senior notes ("New Senior Notes") and entered into a
$145,000,000 revolving credit facility ("New Credit Facility") with its existing
banks. The proceeds of the New Senior Notes, which include five series with
maturities ranging from year 2005 through 2013 at an average fixed interest rate
of 7.16%, were used to redeem $200,000,000 of OLP fixed rate Senior Notes
("Senior Notes") issued in July 1994, including a 5% call premium, and to repay
outstanding indebtedness under the existing OLP revolving credit facility
("Credit Facility"). As a result of these financings, the Partnership expects to
realize a decrease in interest expense during fiscal 1999 as compared to the
prior year.
On July 17, 1998, all of the outstanding common stock of Ferrell Companies,
Inc. ("Ferrell") was purchased by a newly established Employee Stock Ownership
Trust. As a result of this change in control in the ownership of Ferrell and
indirectly in the General Partner, the MLP, pursuant to the MLP Senior Secured
Note Indenture, was required to offer to purchase the outstanding notes at a
price of 101% of the principal amount thereof. The offer to purchase was made on
July 27, 1998 and expired August 26, 1998. Upon the expiration of the offer, the
MLP accepted for purchase $65,000 of the notes which were all of the notes
tendered pursuant to the offer. The MLP assigned its right to purchase the notes
to a third party.
During the six months ended January 31, 1999, the Partnership borrowed
$6,282,000 from its Credit Facility to fund working capital, business
acquisitions, and capital expenditure needs. At January 31, 1999, $55,000,000 of
borrowings were outstanding under the revolving portion of the Credit Facility.
Letters of credit outstanding, used primarily to secure obligations under
certain insurance arrangements, totaled $22,915,000. At January 31, 1999, the
Operating Partnership had $67,085,000 available for general corporate,
acquisition and working capital purposes under the Credit Facility. On February
18, 1999, the Partnership declared a cash distribution of $0.50 per Common and
Subordinated Unit, payable March 15, 1999.
14
Adoption of New Accounting Standards. The Financial Accounting Standards
Board recently issued the following new accounting standards: SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information", SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS Nos. 130, 131 and 132 are
required to be adopted by the Partnership for the fiscal year ended July 31,
1999. The adoption of SFAS Nos. 130 and 132 are not expected to have a material
effect on the Partnership's financial position or results of operations. The
Partnership is currently assessing the impact of SFAS No. 131 on disclosure
requirements for the next year. SFAS No. 133 is required to be adopted by the
Partnership for the fiscal year ended July 31, 2000. The Partnership is
currently assessing its impact on the Partnership's financial position and
results of operations.
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 by entering into interest rate collar
agreements. As of January 31, 1999, the Partnership had only $55,000,000 of
variable rate debt and $25,000,000 notional amount of interest rate collar
agreements effectively outstanding. Thus, assuming a material change in the
variable interest rate to the Partnership, the interest rate risk related to the
variable rate debt and the associated interest rate collar agreements is not
material to the Partnership's financial position.
The Partnership's trading 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 ("NYMEX" or
"Exchange") to anticipate market movements and manage its exposure to the
volatility of floating commodity prices and to protect its inventory positions.
Market risks associated with energy commodities are monitored daily for
compliance with the Partnership's 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 and Credit Risk. NYMEX traded futures are guaranteed by the Exchange
and have nominal credit risk. The Partnership is exposed to credit risk
associated with forwards, futures, swaps and option transactions in the event of
nonperformance by counterparties. For each counterparty, the Partnership
analyzes the 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.
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 $1,300,000 as of January 31, 1999. Actual results may differ.
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Second Amended and Restated Agreement of Limited
Partnership of Ferrellgas, L.P. dated as of
October 14, 1998.
10.2 First Amendment to the Second Amended and Restated Credit
Agreement dated as of October 9, 1998, among Ferrellgas,
L.P., Ferrellgas, Inc., Bank Of America National Trust And
Savings Association, as agent, and the other financial
institutions party hereto.
27.1 Financial Data Schedule - Ferrellgas Partners, L.P. (filed
in electronic format only)
27.2 Financial Data Schedule-Ferrellgas Partners Finance Corp.
(filed in electronic format only)
(b) Reports on Form 8-K
None filed during quarter ended January 31, 1999.
16
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 17, 1999 By /s/ Kevin T. Kelly
-------------------------------------------------
Kevin T. Kelly
Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
FERRELLGAS PARTNERS FINANCE CORP.
Date: March 17, 1999 By /s/ Kevin T. Kelly
-------------------------------------------------
Kevin T. Kelly
Chief Financial Officer (Principal
Financial and Accounting Officer)
17