UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended July 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
- ------------------------------ ------------------------------
(State 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)
Registrant's telephone number, including area code: (816) 792-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Units New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value as of October 1, 1999, of the registrant's Common
Units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $220,740,026.
At October 1, 1999, Ferrellgas Partners, L.P. had units outstanding as follows:
31,307,116 Common Units
0 Subordinated Units
Documents Incorporated by Reference: None
FERRELLGAS PARTNERS, L.P.
FERRELLGAS PARTNERS FINANCE CORP.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
ITEM 1. BUSINESS...................................................1
ITEM 2. PROPERTIES.................................................8
ITEM 3. LEGAL PROCEEDINGS..........................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND
RELATED UNITHOLDER MATTERS..................................9
ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA............10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS..........20
ITEM 11. EXECUTIVE COMPENSATION.......................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...............................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...........................................28
PART I
ITEM 1. BUSINESS.
Business of Ferrellgas Partners, L.P.
Ferrellgas Partners, L.P. (the "Master Limited Partnership" or the "MLP"),
is a Delaware limited partnership which was formed on April 19, 1994. The MLP's
Common Units are listed on the New York Stock Exchange. The MLP's activities are
conducted through its subsidiary Ferrellgas, L.P. (the "Operating Partnership"
or the "OLP"). The MLP, with a 99% limited partner interest, is the sole limited
partner of the Operating Partnership. The MLP and the Operating Partnership are
together referred to herein as the "Partnership". The Operating Partnership
accounts for nearly all of the MLP's consolidated assets, sales and operating
earnings. The MLP's consolidated net earnings also reflect interest expense
related to $160 million of 9 3/8% Senior Secured Notes issued by the MLP in
April 1996.
Business of Ferrellgas, L.P.
The Operating Partnership, a Delaware limited partnership, was formed on
April 22, 1994, to acquire, own and operate the propane business and assets of
Ferrellgas, Inc. (the "Company", "Ferrellgas", and "General Partner"). The
Company has retained a 1% general partner interest in the MLP and also holds a
1.0101% general partner interest in the OLP, representing a 2% general partner
interest in the Partnership on a combined basis. As General Partner of the
Partnership, the Company performs all management functions required for the
Partnership.
General
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The discussion that follows focuses on
the Partnership's retail operations and its other operations, which consist
primarily of propane and natural gas liquids trading and wholesale propane
marketing operations, all of which were conveyed to the Partnership on July 5,
1994. All historical references prior to July 5, 1994 relate to the operations
as conducted by the Company.
The Partnership believes that it is the second largest retail marketer of
propane in the United States as measured by gallons sold, serving more than
800,000 residential, industrial/commercial and agricultural customers in 45
states and the District of Columbia through 520 retail outlets (excluding area
offices) in 38 states, as of July 31, 1999. Some outlets serve interstate
markets. Based upon information contained in industry publications for calendar
year 1998, the Partnership believes that its retail operations account for
approximately 8% of the retail propane gallons sold in the United States. For
the Partnership's fiscal years ended July 31, 1999, 1998 and 1997, annual retail
propane sales volumes were 680 million, 660 million, and 694 million gallons,
respectively. The retail propane business of the Partnership consists
principally of transporting propane purchased in the contract and spot markets,
primarily from major oil companies, to its retail distribution outlets and then
to tanks located on its customers' premises, as well as to portable propane
cylinders.
The Partnership also believes that it is a leading natural gas liquids
trading company. Annual propane and natural gas liquids trading, wholesale
propane and other sales volumes were approximately 0.8 billion, 1.0 billion, and
1.2 billion gallons during the fiscal years ended July 31, 1999, 1998 and 1997,
respectively.
1
Retail Operations
Formation and History
Ferrell Companies, Inc. ("Ferrell"), the parent of Ferrellgas, was founded
in 1939 as a single retail propane outlet in Atchison, Kansas and was
incorporated in 1954. Ferrellgas was formed in 1984 to operate the retail
propane business previously conducted by Ferrell. In July 1994, the propane
business and assets of Ferrellgas were contributed to the Partnership in
connection with the Partnership's initial public offering of Common Units.
Ferrell was previously owned primarily by James E. Ferrell and his family but
was sold in July 1998 to the Ferrell Companies, Inc. Employee Stock Ownership
Trust ("ESOT").
The Company's initial growth largely resulted from small acquisitions in
the rural areas of eastern Kansas, northern and central Missouri, Iowa, western
Illinois, southern Minnesota, South Dakota and Texas. In July 1984, the Company
acquired propane operations with annual retail sales volumes of approximately 33
million gallons and in December 1986, the Company acquired propane operations
with annual retail sales volumes of approximately 395 million gallons. These two
major acquisitions and many other smaller acquisitions significantly expanded
and diversified the Company's geographic coverage. Since 1986, Ferrellgas has
acquired more than 100 smaller independent propane retailers, the largest of
which were Skelgas Propane, Inc. ("Skelgas") acquired in May 1996 and Vision
Energy Resources, Inc. ("Vision") acquired in November 1994. For the fiscal
years ended July 31, 1999 to 1995, the Partnership (or its predecessor) invested
approximately $48.7 million, $13.0 million, $38.8 million, $108.8 million, and
$70.1 million, respectively, to acquire operations with annual retail sales of
approximately 21.5 million, 4.4 million, 20.5 million, 111.8 million, and 70.0
million gallons of propane, respectively. Primarily as a result of this
acquisition strategy, retail propane gallons sold by the Partnership (or its
predecessor) increased from 68 million in fiscal 1986 to 680 million in fiscal
1999. The propane industry is relatively fragmented, with the ten largest retail
distributors possessing approximately 33% of the total retail propane market and
much of the industry consisting of more than 5,000 local or regional
distributors. The Partnership believes the fragmented nature of the propane
industry provides significant opportunities for growth through acquisitions.
Business Strategy
The Partnership's business strategy is to continue its historical focus on
residential and commercial retail propane operations. The Partnership
anticipates that its future growth will be achieved primarily through the
acquisition of smaller retail propane operations throughout the United States
and to a lesser extent through the expansion of its existing customer base by
increased competitiveness and investment in internal growth opportunities. The
Partnership believes that it has obtained a competitive advantage by promoting
an entrepreneurial culture that empowers its employees to be responsive to
individual customer needs. In addition, the Partnership believes this culture is
supported and enhanced by the ownership of Ferrell by the ESOT for the sole
benefit of the Company's employees.
The Partnership intends to concentrate its acquisition activities in
geographical areas in close proximity to the Partnership's existing operations
and to acquire propane retailers that can be efficiently combined with such
existing operations to provide an attractive return on investment after taking
into account the efficiencies which may result from such combination. However,
the Partnership will also pursue acquisitions which broaden its geographic
coverage. The Partnership's goal in any acquisition will be to improve the
operations and profitability of these smaller companies by integrating them into
the Partnership's established supply network. The Partnership regularly
evaluates a number of propane distribution companies which may be candidates for
acquisition. The Partnership believes that there are numerous local retail
propane distribution companies that are possible candidates for acquisition and
that its geographic diversity of operations helps to create many attractive
acquisition opportunities. The Partnership intends to fund acquisitions through
internal cash flow, external borrowings or the issuance of additional Common
Units or other securities. The Partnership's ability to accomplish these goals
will be subject to the continued availability of acquisition candidates at
prices attractive to the Partnership. There is no assurance the Partnership will
be successful in sustaining the recent level of acquisitions or that any
acquisitions that are made will prove beneficial to the Partnership.
2
In addition to growth through acquisitions, the Partnership believes
that it may also achieve growth within its existing propane operations. As a
result of its experience in responding to competition and in implementing more
efficient operating standards, the Partnership believes that it has positioned
itself to be more successful in direct competition for customers. The
Partnership currently has marketing programs underway that focus specific
resources toward this effort.
Marketing
Natural gas liquids are derived from petroleum products and are sold in
compressed or liquefied form. Propane, the predominant type of natural gas
liquid, is typically extracted from natural gas or separated during crude oil
refining. Although propane is gaseous at normal pressures, it is compressed into
liquid form at relatively low pressures for storage and transportation. Propane
is a clean-burning energy source, recognized for its transportability and ease
of use relative to alternative forms of stand alone energy sources.
In the residential and commercial markets, propane is primarily used for
space heating, water heating and cooking. In the agricultural market propane is
primarily used for crop drying, space heating, irrigation and weed control. In
addition, propane is used for certain industrial applications, including use as
engine fuel, which is burned in internal combustion engines that power vehicles
and forklifts, and as a heating or energy source in manufacturing and drying
processes.
The retail propane marketing business generally involves large numbers of
small volume deliveries averaging approximately 200 gallons each. The market
areas are generally rural, but also include suburban areas for industrial
applications where natural gas service is not available.
The Partnership utilizes marketing programs targeting both new and existing
customers by emphasizing its efficiency in delivering propane to customers as
well as its employee training and safety programs. The Partnership sells propane
primarily to three markets: residential, industrial/commercial, and agricultural
and other (principally to other propane retailers and as engine fuel). During
the fiscal year ended July 31, 1999, sales to residential customers accounted
for 56% of retail gross profit, sales to industrial and other commercial
customers accounted for 32% of retail gross profit, and sales to agricultural
and other customers accounted for 12% of retail gross profit. Residential sales
have a greater profit margin, more stable customer base and tend to be less
sensitive to price changes than the other markets served by the Partnership. No
single customer of the Partnership accounted for 10% or more of the
Partnership's consolidated revenues in fiscal 1999.
Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane. The Partnership generally purchases propane in the contract and spot
markets, primarily from major oil companies, on a short-term basis; therefore,
its supply costs fluctuate with market price fluctuations. Should wholesale
propane prices decline in the future, the Partnership's margins on its retail
propane distribution business should increase in the short-term, because retail
prices tend to change less rapidly than wholesale prices. Should the wholesale
cost of propane increase, for similar reasons retail margins and profitability
would likely be reduced, at least for the short-term, until retail prices can be
increased. Retail propane customers typically lease their storage tanks from
their propane distributors. Over 70% of the Partnership's customers lease their
tanks from the Partnership. The lease terms and, in some states, certain fire
safety regulations, require leased tanks to be filled only by the propane
supplier that owns the tank. The cost and inconvenience of switching tanks
minimizes a customer's tendency to switch suppliers of propane on the basis of
minor variations in price.
3
The retail market for propane is seasonal because propane is used primarily
for heating in residential and commercial buildings. Consequently, sales and
operating profits are concentrated in the second and third fiscal quarters
(November through April). In addition, sales volume traditionally fluctuates
from year to year in response to variations in weather, price and other factors,
although the Partnership believes that the broad geographic distribution of its
operations helps to minimize exposure to regional weather or economic patterns.
Long-term, historic weather data from the National Climatic Data Center
indicates that the average annual temperatures have remained relatively constant
over the last 30 years with fluctuations occurring on a year-to-year basis only.
During times of colder-than-normal winter weather, the Company has been able to
take advantage of its large, efficient distribution network to help avoid supply
disruptions such as those experienced by some of its competitors, thereby
broadening its long-term customer base.
Supply and Distribution
The Partnership purchases propane primarily from major domestic oil
companies. Supplies of propane from these sources have traditionally been
readily available, although no assurance can be given that supplies of propane
will be readily available in the future. As a result of (i) the Partnership's
ability to buy large volumes of propane and (ii) the Partnership's large
distribution system and underground storage capacity, the Partnership believes
it is in a position to achieve product cost savings and avoid shortages during
periods of tight supply to an extent not generally available to other retail
propane distributors. The Partnership is not dependent upon any single supplier
or group of suppliers, the loss of which would have a material adverse effect on
the Partnership. For the year ended July 31, 1999, no supplier provided more
than 10% of the Partnership's total propane purchases. A portion of the
Partnership's propane inventory is purchased under supply contracts which
typically have a one year term and a fluctuating price relating to spot market
prices. Additionally, the Partnership will enter into fixed price contracts
which have terms of less than one year. Certain of the Partnership's contracts
specify minimum and maximum amounts of propane to be purchased thereunder. The
Partnership may purchase and store inventories of propane in order to help
insure uninterrupted deliverability during periods of extreme demand. The
Partnership owns three underground storage facilities with an aggregate capacity
of approximately 206 million gallons. Currently, approximately 173 million
gallons of this capacity is leased to third parties. The remaining space is
available for the Partnership's use.
Propane is generally transported from natural gas processing plants and
refineries, pipeline terminals and storage facilities to retail distribution
outlets and wholesale customers by railroad tank cars leased by the Partnership
and highway transport trucks owned or leased by the Partnership. Common carrier
transport trucks may be used during the peak delivery season in the winter
months or to provide service in areas where economic considerations favor common
carrier use. Propane is then transported from the Partnership's retail
distribution outlets to customers by its fleet of 1,586 bulk delivery trucks,
which are fitted generally with 2,000 to 3,000 gallon propane tanks. Propane
storage tanks located on the customers' premises are then filled from the
delivery truck. Propane is also delivered to customers in portable cylinders.
Industry and Competition
Industry
Based upon industry publications, propane accounts for approximately 3% to
4% of household energy consumption in the United States, an average level which
has remained relatively constant for the past two decades. Propane competes
primarily with natural gas, electricity and fuel oil as an energy source
principally on the basis of price, availability and portability. Propane serves
4
as an alternative to natural gas in rural and suburban areas where natural gas
is unavailable or portability of product is required. Propane is generally more
expensive than natural gas on an equivalent BTU basis in locations served by
natural gas, although propane is often sold in such areas as a standby fuel for
use during peak demands and during interruption in natural gas service. The
expansion of natural gas into traditional propane markets has historically been
inhibited by the capital costs required to expand distribution and pipeline
systems. Although the extension of natural gas pipelines tends to displace
propane distribution in the neighborhoods affected, the Partnership believes
that new opportunities for propane sales arise as more geographically remote
neighborhoods are developed. Propane is generally less expensive to use than
electricity for space heating, water heating and cooking and competes
effectively with electricity in those parts of the country where propane is
cheaper than electricity on an equivalent BTU basis. Although propane is similar
to fuel oil in application, market demand and price, propane and fuel oil have
generally developed their own distinct geographic markets. Because residential
furnaces and appliances that burn propane will not operate on fuel oil, a
conversion from one fuel to the other requires the installation of new
equipment. The Partnership's residential retail propane customers, therefore,
will have an incentive to switch to fuel oil only if fuel oil becomes
significantly less expensive than propane. Likewise, the Partnership may be
unable to expand its customer base in areas where fuel oil is widely used,
particularly the Northeast United States, unless propane becomes significantly
less expensive than fuel oil. Alternatively, many industrial customers who use
propane as a heating fuel have the capacity to switch to other fuels, such as
fuel oil, on the basis of availability or minor variations in price. The
Partnership believes that propane generally is becoming increasingly favored
over fuel oil and other alternative sources of fuel as an environmentally
preferred energy source.
Competition
In addition to competing with marketers of other fuels, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition within the propane distribution industry stems from two
types of participants: the larger multi-state marketers, and the smaller, local
independent marketers, including recent entrants such as certain rural electric
cooperatives. Based upon industry publications, the Partnership believes that
the ten largest multi-state retail marketers of propane, including the
Partnership, account for approximately 33% of the total retail sales of propane
in the United States. Based upon information contained in industry publications
for calendar year 1998, the Partnership also believes no single marketer has a
greater than 10% share of the total market in the United States and that the
Partnership is the second largest retail marketer of propane in the United
States, with a market share of approximately 8% as measured by volume of
national retail propane sales.
Most of the Partnership's retail distribution outlets compete with three or
more marketers or distributors. The principal factors influencing competition
among propane marketers are price and service. The Partnership competes with
other retail marketers primarily on the basis of reliability of service and
responsiveness to customer needs, safety and price. Each retail distribution
outlet operates in its own competitive environment because retail marketers
locate in close proximity to customers to lower the cost of providing service.
The typical retail distribution outlet has an effective marketing radius of
approximately 25 miles.
Other Operations
The other operations of the Partnership, which do not constitute reportable
segments as described by Statement of Financial Standards No. 131, "Disclosures
about Segments of an Enterprise and Other Information", consist principally of
trading and wholesale propane marketing. The Partnership, through its natural
gas liquids trading and wholesale marketing operations, has become one of the
leading independent traders of propane and natural gas liquids in the United
States. The Partnership owns no properties that are material to these
operations. These operations may utilize available space in the Partnership's
underground storage facilities in the furtherance of these businesses. Because
the Partnership possesses a large distribution system, underground storage
capacity and the ability to buy large volumes of propane, the Partnership
believes that it is in a position to achieve product cost savings and avoid
shortages during periods of tight supply to an extent not generally available to
other retail propane distributors.
5
Trading
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 100 suppliers; however, it also conducts
transactions on the New York Mercantile Exchange. Trading activity is conducted
primarily to generate a profit independent of the retail and wholesale
operations, but is also conducted to insure the availability of propane during
periods of short supply. Propane represents approximately 70% of the
Partnership's total trading volume, with the remainder consisting principally of
various other natural gas liquids. The Partnership attempts to minimize trading
risk through the enforcement of its trading policies, which include total
inventory limits and loss limits, and attempts to minimize credit risk through
credit checks and application of its credit policies. However, there can be no
assurance that historical experience or the existence of such policies will
prevent trading losses in the future. For the Partnership's fiscal years ended
July 31, 1999, 1998 and 1997 net revenues of $7.7 million, $7.5 million, and
$5.5 million, respectively, were derived from trading activities.
Wholesale Marketing
The Partnership engages in the wholesale marketing and distribution of
propane to other retail propane distributors. During the fiscal years ended July
31, 1999, 1998 and 1997, the Partnership sold 103 million, 136 million, and 123
million gallons, respectively, of propane to wholesale customers and had
revenues attributable to such sales of $33.8 million, $49.9 million, and $57.5
million, respectively.
Employees
The Partnership has no employees and is managed by the General Partner
pursuant to the Partnership Agreement. At July 31, 1999, the General Partner had
3,625 full-time employees and 838 temporary and part-time employees. The General
Partner's full-time employees were employed in the following areas:
Retail Locations 3,065
Transportation and Storage 241
Corporate Offices (Liberty, MO & Houston, TX) 319
-----------
Total 3,625
===========
Approximately one percent of the General Partner's employees are
represented by six local labor unions, which are all affiliated with the
International Brotherhood of Teamsters. The General Partner has not experienced
any significant work stoppages or other labor problems.
The Partnership's supply, trading, wholesale marketing, distribution
scheduling and product accounting functions are operated primarily out of the
Partnership's offices located in Houston, by a total full-time corporate staff
of 72 people.
6
Governmental Regulation; Environmental and Safety Matters
From August 1971 until January 1981, the United States Department of Energy
regulated the price and allocation of propane. The Partnership is no longer
subject to any similar regulation.
Propane is not a hazardous substance within the meaning of federal and
state environmental laws. In connection with all acquisitions of retail propane
businesses that involve the purchase of real estate, the Partnership conducts a
due diligence investigation to attempt to determine whether any substance other
than propane has been sold from or stored on any such real estate prior to its
purchase. Such due diligence includes questioning the sellers, obtaining
representations and warranties concerning the sellers' compliance with
environmental laws and visual inspections of the properties.
With respect to the transportation of propane by truck, the Partnership is
subject to regulations promulgated under the Federal Motor Carrier Safety Act.
These regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation ("DOT"). National
Fire Protection Association Pamphlet No. 58, which establishes a set of rules
and procedures governing the safe handling of propane, or comparable
regulations, have been adopted as the industry standard in a majority of the
states in which the Partnership operates.
The Partnership believes it is in material compliance with all governmental
regulations and industry standards applicable to environmental and safety
matters. In June 1998, the DOT established a formal Regulation Negotiation
Committee to address emergency discharge control issues and the Partnership was
granted a seat on this committee. These negotiations were completed successfully
in April of 1999 and the new regulations became effective on July 1, 1999 with
various requirements phased in over the next seven years. The Partnership is in
full compliance with the current regulatory requirements and is working with
both the DOT and outside experts to fully test emergency discharge control
systems that comply with the new requirements as they become effective. The
Partnership expects to meet all regulatory requirements on or before their
effective date.
Service Marks and Trademarks
The Partnership markets retail propane under the "Ferrellgas", "Puget
Propane", "Seacrist Fuels", and "Elk Grove Gas & Oil", tradenames. The
Partnership uses the tradenames "Ferrell North America" and "American Energy
Incorporated" for its wholesale operations and uses the tradename "Ferrell
Transport" for most of its third party hauling and oil field services
operations. In addition, the Partnership has a trademark on the name
"FerrellMeter," its patented gas leak detection device. The Company contributed
all of its rights, title and interest in such tradenames and trademark in the
continental United States to the Partnership. The General Partner will have an
option to purchase such tradenames and trademark from the Partnership for a
nominal value if the General Partner is removed as general partner of the
Partnership other than for cause. If the General Partner ceases to serve as the
general partner of the Partnership for any other reason, it will have the option
to purchase such tradenames and trademark from the Partnership for fair market
value.
Business of Ferrellgas Partners Finance Corp.
Ferrellgas Partners Finance Corp. (the "Finance Corp"), a Delaware corporation,
was formed on March 28, 1996, and is a wholly-owned subsidiary of the MLP. The
Finance Corp has nominal assets and does not conduct any operations, but serves
as a co-obligor for securities issued by the MLP. Accordingly, a discussion of
the results of operations, liquidity and capital resources of the Finance Corp
is not presented. Certain institutional investors that might otherwise be
limited in their ability to invest in securities issued by the MLP by reasons of
the legal investment laws of their states of organization or their charter
documents, may be able to invest in the MLP's securities because the Finance
Corp is a co-obligor. See the notes to the Finance Corp's financial statements
for a discussion of the securities with respect to which the Finance Corp is
serving as a co-obligor.
7
ITEM 2. PROPERTIES.
The Partnership owns or leases the following transportation equipment which
is utilized primarily in retail operations.
Owned Leased Total
Truck tractors .................................................. 87 81 168
Transport trailers................................................ 279 32 311
Bulk delivery trucks.............................................. 690 896 1,586
Pickup and service trucks......................................... 923 540 1,463
Railroad tank cars................................................ - 222 222
The transport trailers have an average capacity of approximately 9,000
gallons. The bulk delivery trucks are generally fitted with 2,000 to 3,000
gallon propane tanks. Each railroad tank car has a capacity of approximately
30,000 gallons.
A typical retail distribution outlet is located on one to three acres of
land and includes a small office, a workshop, bulk storage capacity of 18,000
gallons to 60,000 gallons and a small inventory of stationary customer storage
tanks and portable propane cylinders that the Partnership provides to its retail
customers for propane storage. The Partnership owns the land and buildings of
approximately 50% of its retail outlets and leases the remaining facilities on
terms customary in the industry and in the applicable local markets.
Approximately 715,000 propane tanks are owned by the Partnership, most of
which are located on customer property and leased to those customers. The
Partnership also owns approximately 646,000 portable propane cylinders, most of
which are leased to industrial and commercial customers.
The Partnership owns underground storage facilities at Hutchinson, Kansas;
Adamana, Arizona; and Moab, Utah. At July 31, 1999, the capacity of these
facilities approximated 114 million gallons, 87 million gallons, and 5 million
gallons, respectively (an aggregate of approximately 206 million gallons).
Currently, approximately 173 million gallons of this capacity is leased to third
parties. The remaining space is available for the Partnership's use.
The Partnership owns the land and two buildings (50,245 square feet of
office space) comprising its corporate headquarters in Liberty, Missouri, and
leases 27,696 square feet of office space in Houston, Texas, where its trading
and wholesale marketing operations are primarily located.
The Partnership believes that it has satisfactory title to or valid rights
to use all of its material properties and, although some of such properties are
subject to liabilities and leases and, in certain cases, liens for taxes not yet
currently due and payable and immaterial encumbrances, easements and
restrictions, the Partnership does not believe that any such burdens will
materially interfere with the continued use of such properties in its business,
taken as a whole. In addition, the Partnership believes that it has, or is in
the process of obtaining, all required material approvals, authorizations,
orders, licenses, permits, franchises and consents of, and has obtained or made
all required material registrations, qualifications and filings with, the
various state and local governmental and regulatory authorities which relate to
ownership of the Partnership's properties or the operations of its business.
8
ITEM 3. LEGAL PROCEEDINGS.
Propane is a flammable, combustible gas. Serious personal injury and
property damage can occur in connection with its transportation, storage or use.
The Partnership, in the ordinary course of business, is threatened with or is
named as a defendant in various lawsuits which, among other items, seek actual
and punitive damages for product liability, personal injury and property damage.
The Partnership maintains liability insurance policies with insurers in such
amounts and with such coverages and deductibles as it believes is reasonable and
prudent. However, there can be no assurance that such insurance will be adequate
to protect the Partnership from material expenses related to such personal
injury or property damage or that such levels of insurance will continue to be
available in the future at economical prices. It is not possible to determine
the ultimate disposition of these matters discussed above; however, management
is of the opinion that there are no known claims or known contingent claims that
are likely to have a material adverse effect on the results of operations,
financial condition or cash flows of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of the
Partnership during the fiscal year ended July 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.
The Common Units, representing common limited partner interests in the
Partnership, are listed and traded on the New York Stock Exchange ("NYSE") under
the symbol FGP. The Common Units began trading on June 28, 1994, at an initial
public offering price of $21.00 per Common Unit. As of October 1, 1999, there
were 747 registered Common Unitholders of record. The following table sets forth
the high and low sales prices for the Common Units on the NYSE and the cash
distributions declared per Common Unit for the periods indicated.
Common Unit Price Range
--------------------------------------------- Distributions
High Low Declared per Unit
--------------------- -------------------- ---------------------
1998 1999 1998 1999 1998 1999
---------- ---------- ---------- ---------- ---------- ----------
First Quarter $24.25 $20.94 $22.63 $19.13 $0.50 $0.50
Second Quarter 23.25 21.75 22.00 17.00 0.50 0.50
Third Quarter 22.63 18.88 20.25 16.00 0.50 0.50
Fourth Quarter 21.94 17.94 20.25 16.69 0.50 0.50
During 1994, the Partnership also issued Subordinated Units, all of which
were held by Ferrell, for which there was no established public trading market.
Effective August 1, 1999, the Subordinated Units converted into Common Units and
will be subsequently registered and listed on the NYSE. The Subordinated Units
and the conversion to Common Units are more fully described in Notes C and F to
the Consolidated Financial Statements provided herein.
The Partnership makes quarterly cash distributions of its Available Cash,
as defined by the MLP's Partnership Agreement. Available Cash is generally
defined as consolidated cash receipts less consolidated cash disbursements and
changes in cash reserves established by the General Partner for future
requirements. To the extent necessary, the Partnership will reserve cash inflows
from the second and third quarters for distribution in the first and fourth
fiscal quarters.
9
The Partnership is not subject to federal income taxes. Instead,
Unitholders are required to report their allocable share of the Partnership's
income, gains, losses, deductions and credits, regardless of whether the
Partnership makes distributions.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA.
The following table presents selected consolidated historical financial
data of the Partnership.
(in thousands, except per unit data)
Ferrellgas Partners L.P.
--------------------------------------------------------------
Year Ended July 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ----------- ------------
Income Statement Data:
Total revenues $ 624,149 $ 667,353 $ 804,298 $ 653,640 $ 596,436
Depreciation and amortization 47,257 45,009 43,789 37,024 32,014
ESOP compensation charge 3,295 350 - - -
Operating income 62,339 52,760 68,819 62,506 55,927
Interest expense 46,621 49,129 45,769 37,983 31,993
Earnings before minority interest and
extraordinary loss 14,783 4,943 23,218 24,312 23,820
Basic earnings per limited partner
unit-Earnings before extraordinary loss 0.47 0.16 0.74 0.77 0.76
Cash distributions declared per unit (1) 2.00 2.00 2.00 2.00 1.65
Balance Sheet Data (at end of period):
Working capital $ (4,567) $ (443) $ 18,111 $ 15,294 $ 28,928
Total assets 656,745 621,223 657,076 654,295 578,596
Long-term debt 583,840 507,222 487,334 439,112 338,188
Partners' Capital:
Common Unitholders $ 1,215 $ 27,985 $ 52,863 $ 71,323 $ 84,489
Subordinated Unitholders (10,516) 19,908 50,337 71,302 91,824
General Partner (59,553) (58,976) (58,417) (58,016) (57,676)
Accumulated other comprehensive income (797) - - - -
Operating Data:
Retail propane sales volumes (in 680,477 659,932 693,995 650,214 575,935
gallons)
Capital expenditures (2):
Maintenance $ 10,505 $ 10,569 $ 10,137 $ 6,657 $ 8,625
Growth 15,238 10,060 6,055 6,654 11,097
Acquisition 48,749 13,003 38,780 108,803 70,069
------------ ------------ ------------ ----------- ------------
Total $ 74,492 $ 33,632 $ 54,972 $ 122,114 $ 89,791
============ ============ ============ =========== ============
Supplemental Data:
Adjusted earnings before depreciation,
amortization, interest and taxes (3): $112,891 $98,119 $112,608 $99,530 $87,941
Net cash provided by operating $92,502 $74,337 $75,087 $65,096 $66,030
activities
10
(1) No cash distributions were declared by the Partnership from inception to
July 31, 1994. The $1.65 distribution declared for fiscal year 1995
includes the following (a) a $0.65 distribution made at the end of the 1995
first quarter which included $0.50 for the first quarter of fiscal 1995 and
$0.15 for the period from inception to July 31, 1994, (b) a $0.50
distribution for the second quarter of fiscal 1995, and (c) and a $0.50
distribution for the third quarter of fiscal 1995.
(2) The Partnership's capital expenditures fall generally into three
categories: (i) maintenance capital expenditures, which include capitalized
expenditures for repair and replacement of property, plant and equipment;
(ii) growth capital expenditures, which include expenditures for purchases
of new propane tanks and other equipment to facilitate expansion of the
Partnership's customer base and operating capacity; and (iii) acquisition
capital expenditures, which include expenditures related to the
acquisitions of retail propane operations. Acquisition capital expenditures
represent total cost of acquisition less working capital acquired.
(3) Adjusted EBITDA is calculated as operating income plus depreciation and
amortization and an ESOP related non-cash compensation charge. Adjusted
EBITDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution. Adjusted EBITDA is a non-GAAP
measure, but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution. Adjusted
EBITDA, as defined by the Partnership, may not be comparable to similarly
reported measures reported by other companies. In addition, adjusted EBITDA
is not intended as an alternative to earnings from continuing operations or
net earnings.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is a discussion of the historical financial condition and
results of operations for Ferrellgas Partners, L.P. and its subsidiaries and
should be read in conjunction with the historical consolidated financial
statements and accompanying notes thereto included elsewhere in this Form 10-K.
Forward-looking statements
Statements included in this report that are not historical facts, including
statements concerning possible acquisition growth, regulatory compliance, Year
2000 compliance, and the belief that the OLP will have sufficient funds to meet
its obligations and 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 sufficient funds to pay the Minimum Quarterly
Distribution ($0.50 per Unit) on all Common 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 and their effect on the Partnership's
operations include but are not limited to the following: a) the effect of
weather conditions on demand for propane, b) price and availability of propane
supplies, c) identifying attractive acquisition candidates, acquiring them on
economically acceptable terms, or successfully integrating them into our
existing operations and making cost saving changes, d) the availability of
capacity to transport propane to market areas, e) competition from other energy
sources and within the propane industry, f) operating risks incidental to
transporting, storing, and distributing propane, g) changes in interest rates,
h) governmental legislation and regulations, i) energy efficiency and technology
trends, j) Year 2000 compliance and k) other factors that are discussed in the
Risk Factor section of 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.
11
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
(including related computer hardware), financial accounting and reporting
system, supply and distribution accounting and operating system, payroll system,
local and wide area networks and electronic mail systems. The supply and
distribution accounting and operating system, payroll system, financial
accounting and reporting system, the retail propane accounting and operations
system, and the local and wide area networks are believed to be Year 2000
compliant. The Partnership is nearing completion of the conversion of the
electronic mail system and the retail propane computer equipment and expects
both to be Year 2000 compliant by the beginning of November 1999. One of the key
steps to achieving Year 2000 compliance is the installation of new personal
computers at nearly all retail outlets. The Partnership had planned the upgrade
of the these computers for business reasons unrelated to Year 2000 issues. The
Partnership has acquired all necessary computers and is currently in the process
of loading the appropriate software and delivering to each retail location.
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
separate company group to independently test these applications for Year 2000
compliance. To date, no material Year 2000 issues have been identified as a
result of this testing.
There can be no assurance that every system in every location where
Ferrellgas conducts business will function properly on January 1, 2000. In
addition, there are other Year 2000 risks which are beyond the Partnership's
control, any of which if wide spread could have a material adverse affect on the
Partnership's operations. Such risks include, but are not limited to, the
failure of utility and telecommunications companies to provide service. For
these reasons, the Partnership has developed a contingency plan should Year 2000
problems temporarily affect any of our locations. Each Ferrellgas location has
been provided with a contingency plan that contains, among others, procedures to
keep the Partnership's plants operational, to access emergency management
personnel, and to utilize cellular phones.
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
has reviewed its largest suppliers, particularly liquid petroleum gas suppliers,
to obtain appropriate assurances that they are, or will be, Year 2000 compliant.
This review included general public disclosures made by the supplier, general
questionnaires and direct contact with suppliers regarding specific facilities.
While no supplier will provide assurances regarding Year 2000 compliance or the
effect from external factors on their operations, our review has indicated
suppliers are addressing Year 2000 issues. 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 $875,000 to identify and correct its Year 2000 issues. This
12
expense has been primarily related to its critical systems and applications. It
is estimated that in the remaining calendar year 1999 the Partnership will incur
an additional $100,000 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 any Year 2000 issues will delay or eliminate other scheduled
computer upgrades and replacements. Despite the Partnership's efforts to address
and remediate the 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.
General
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The Partnership's revenue is derived
primarily from the retail propane marketing business. The Partnership believes
that it is the second largest retail marketer of propane in the United States,
based on gallons sold, serving more than 800,000 residential,
industrial/commercial and agricultural customers in 45 states and the District
of Columbia through approximately 520 retail outlets (excluding area offices).
Annual retail propane sales volumes were 680 million, 660 million, and 694
million gallons for the fiscal years ended July 31, 1999, 1998, and 1997,
respectively.
The retail propane business of the Partnership consists principally of
transporting propane purchased in the contract and spot markets, primarily from
major oil companies, to its retail distribution outlets and then to tanks
located on the customers' premises, as well as to portable propane cylinders. In
the residential and commercial markets, propane is primarily used for space
heating, water heating and cooking. In the agricultural market, propane is
primarily used for crop drying, space heating, irrigation and weed control. In
addition, propane is used for certain industrial applications, including use as
an engine fuel, which is burned in internal combustion engines that power
vehicles and forklifts, and as a heating or energy source in manufacturing and
drying processes.
The Partnership is also engaged in the trading of propane and other natural
gas liquids and wholesale propane marketing. Through its natural gas liquids
trading and wholesale marketing operations, the Partnership is one of the
leading independent traders of propane and natural gas liquids in the United
States.
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 100 suppliers, however, it also conducts
transactions on the New York Mercantile Exchange. Trading activity is conducted
primarily to generate a profit independent of the retail and wholesale
operations, but is also conducted to insure the availability of propane during
periods of short supply. Propane represents approximately 70% of the
Partnership's total trading volume, with the remainder consisting principally of
various other natural gas liquids. For the Partnership's fiscal years ended July
31, 1999, 1998 and 1997, net revenues from trading activities were $7.7 million,
$7.5 million, and $5.5 million, respectively.
13
Selected Quarterly Financial Data
Due to the seasonality of the retail propane business, first and fourth
quarter revenues, gross profit and net earnings are consistently less than the
comparable second and third quarter results. Other factors affecting the results
of operations include competitive conditions, demand for product, variations in
the weather and fluctuations in propane prices.
The following presents the Partnership's selected quarterly financial data for
the two years ended July 31, 1999.
Fiscal year ended July 31, 1999
(in thousands, except per unit data)
First Quarter(1) Second Quarter Third Quarter Fourth Quarter
----------------- ----------------- ----------------- ----------------
Revenues $130,339 $230,077 $169,892 $93,841
Gross profit 71,627 128,749 99,721 50,664
Earnings (loss) before
extraordinary loss (11,221) 39,915 13,629 (27,540)
Earnings (loss) before
extraordinary loss per
limited partners unit - basic
and diluted (0.35) 1.26 0.43 (0.87)
Net earnings (loss) (1) (24,007) 39,915 13,629 (27,540)
(1) Reflects a $12,786 extraordinary loss on early retirement of debt, net of minority interest of $130.
Fiscal year ended July 31, 1998
(in thousands, except per unit data)
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- --------------- -----------------
Revenues $153,205 $248,811 $175,167 $90,170
Gross profit 66,589 117,932 89,449 50,783
Net earnings (loss) (13,311) 32,759 10,775 (25,280)
Net earnings (loss) per
limited partner unit - basic
and diluted (0.42) 1.04 0.34 (0.80)
Results of Operations
Fiscal Year Ended July 31, 1999 versus Fiscal Year Ended July 31, 1998
Total Revenues. Total gas liquids and related product sales decreased 7.1%
to $578,025,000 as compared to $622,423,000 in the prior year, primarily due to
a decrease in sales price per gallon as a result of the lower wholesale cost of
propane experienced in the current year, the effects of warmer weather, and a
decrease in revenues from wholesale propane marketing, partially offset by the
effect of acquisitions of propane businesses. The winter of fiscal 1999 was
reported as the second warmest winter in recorded history. For the year,
temperatures were 9% warmer than normal and 1% warmer than the same period last
year as reported by the American Gas Association.
14
A generally lower wholesale product cost environment experienced during
fiscal 1999 caused a significant decrease in the sales price per gallon as
compared to fiscal 1998. Retail volumes increased by 3.1% or 20,545,000 gallons,
primarily due to acquisitions.
Gross Profit. Gross profit increased 8.0% to $350,761,000 as compared to
$324,753,000 during fiscal 1998. Retail operations results increased primarily
due to increased retail margins and an increase in volumes attributed to
acquisitions, partially offset by decreased volumes attributed to warmer
weather.
Operating Expenses. Operating expenses increased 3.4% to $205,720,000 in
fiscal 1999 as compared to $199,010,000 in fiscal 1998. This year's operating
expenses increased due to acquisition-related increases in personnel costs,
plant and office expenses, vehicle and other expenses and also due to
performance and merit compensation increases.
Vehicle and Tank Lease Expense. Vehicle and tank lease expense increased by
$2,849,000 due to the utilization of operating lease financing to fund fleet
upgrades and replacements.
Interest Expense. Interest expense decreased 5.1% as compared to the prior
year. This decrease was 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 fixed rate debt and existing revolving credit facility
balances, partially offset by the effect of increased borrowings for acquisition
and growth capital expenditures (see Financing Activities following).
Extraordinary item. During fiscal year 1999, the Partnership recognized an
extraordinary loss of $12,786,000 net of a minority interest of $130,000. The
gross extraordinary loss included a payment of a 5% premium and a write-off of
unamortized financing costs of $2,916,000, resulting primarily from the early
extinguishment of $200,000,000 of its fixed rate senior notes.
Fiscal Year Ended July 31, 1998 versus Fiscal Year Ended July 31, 1997
Total Revenues. Total gas liquids and related product sales decreased 18.1%
to $622,423,000 as compared to $759,941,000 in the prior year, primarily due to
a decrease in sales price per gallon as a result of the unusually higher
wholesale cost of propane experienced in the previous year, the effects of the
warmer weather, partially offset by acquisitions of propane businesses.
A less volatile propane market during fiscal 1998 caused a significant
decrease in the cost of product, which in turn caused a decrease in sales price
per gallon as compared to fiscal 1997. Retail volumes decreased by 4.9% or
34,063,000 gallons, primarily due to the decrease in volumes related to the
unusually warm winter during fiscal 1998, attributable in large part to the El
Nino weather phenomenon. The winter of fiscal 1998 was reported as the third
warmest winter in recorded history. For the year, temperatures were 8% warmer
than normal and 4% warmer than the same period last year as reported by the
American Gas Association. The warmer than normal temperatures were also
compounded by other El Nino related weather factors such as reduced wind chill,
humidity, snow and cloud cover, all of which contributed to lower a demand for
propane and a decrease in earnings for the Partnership.
Gross Profit. Gross profit decreased 2.8% to $324,753,000 as compared to
$334,170,000 during fiscal 1997, primarily due to a decrease in retail sales
gross margin dollars, partially offset by an increase from trading profits.
Retail operations results decreased primarily due to decreased volumes
attributed to the warmer weather, partially offset by the impact of increased
retail margins and the increase in volumes attributed to acquisitions.
Operating Expenses. Operating expenses increased slightly to $199,010,000
in fiscal 1998 as compared to $198,298,000 in fiscal 1997. Fiscal year 1998
operating expenses were impacted by decreased variable expenses, resulting from
reduced gallon deliveries due to the warmer weather, offset by increased
expenses associated with acquisitions.
15
Vehicle and Tank Lease Expense. Vehicle and tank lease expense increased by
$2,694,000 due to the utilization of operating lease financing to fund fleet
upgrades and replacements.
Interest Expense. Interest expense increased 7.3% over the prior year due
primarily to increased borrowings for the financing of acquisitions, partially
offset by a slight decrease in the average interest rate paid by the Partnership
on its variable rate borrowings.
Liquidity and Capital Resources
The ability of the MLP 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.
For the fiscal year ending July 31, 2000, 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") and enable it to distribute the Minumum Quarterly
Distribution ("MQD") ($0.50 per Unit) on all Common Units.
The MLP Senior Secured Notes, the $350,000,000 OLP senior notes ("New
Senior Notes"), the amended and restated OLP credit facility ("Credit Facility")
and the additional OLP revolving credit agreement ("Additional Credit Facility")
(See Financing Activities following) contain several financial tests which
restrict the Partnership's ability to pay distributions, incur indebtedness and
engage in certain other business transactions. 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 includes, but is
not limited to, the payment of the Minimum Quarterly Distribution ("MQD") to
unitholders.
Although the MLP's financial performance during fiscal 1999 was adversely
impacted by unseasonably warm temperatures, the Partnership believes it will
continue to meet the MLP Senior Secured Notes Restricted Payment test during
fiscal 2000, in addition to meeting the other financial tests in the MLP Senior
Secured Notes, New Senior Notes, Credit Facility and Additional Credit Facility
agreements. 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 the MQD
to its Common Unitholders. No assurances can be given, however, that such
alternatives will be successful with respect to any given quarter.
Because certain financial tests were satisfied during fiscal years 1997,
1998 and 1999 pursuant to the Agreement of Limited Partnership of Ferrellgas
Partners, L.P., the Subordinated Units converted to Common Units effective
August 1, 1999. One of the primary financial tests applied to each of the three
consecutive four quarter periods ending on July 31, 1999, and related to making
the MQD on all Common and Subordinated Units. These financial tests are more
fully described in Note C to the Consolidated Financial Statements provided
herein.
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.
16
Toward this purpose, on February 5, 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 reduce indebtedness. Also,
the MLP maintains a shelf registration statement with the Commission for
2,010,484 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.
Operating Activities. Cash provided by operating activities was $92,502,000
for the year ended July 31, 1999, compared to $74,337,000 in the prior year.
This increase was primarily due to increased earnings before an extraordinary
loss on early extinguishment of debt, the increased non-cash employee stock
ownership compensation charge, and the effect of trading operations and
acquisitions on the net increase in receivables, inventory and payables.
Investing Activities. The Partnership made total acquisition capital
expenditures of $50,049,000 during fiscal 1999. This amount was funded by
$43,838,000 cash payments, $6,012,000 of noncompete notes and other
consideration and $199,000 of Common Units issued.
During the year ended July 31, 1999, the Partnership made growth and
maintenance capital expenditures of $25,743,000 primarily for the following
purposes: 1) additions to Partnership-owned underground storage and related
facilities, customer tanks and cylinders, 2) relocating and upgrading district
plant facilities, 3) upgrading computer equipment and software and 4) vehicle
lease buyouts. 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 leases additions to its
vehicle and transportation equipment fleet of light and medium duty trucks and
tractors. The Partnership believes vehicle leasing is a cost effective method
for meeting the Partnership's transportation equipment needs. The Partnership
continues to seek expansion of its operations through strategic acquisitions of
smaller 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 equity securities. The Partnership does
not have any material commitments of funds for capital expenditures other than
to support the current level of operations. In fiscal 2000, the Partnership does
not expect an increase in growth and maintenance capital expenditures as
compared to fiscal 1999 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 ("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 10% fixed rate Senior Notes
("Senior Notes") issued in July 1994, including a 5% call premium, and to repay
outstanding indebtedness under the then existing OLP revolving credit facility.
Because these financing activities occurred at the beginning of fiscal 1999, the
Partnership does not expect a decrease in interest expense resulting from this
transaction during fiscal 2000.
The OLP entered into an additional credit facility agreement on April 30,
1999. This new facility ("Additional Credit Facility") provides for a
$38,000,000 unsecured facility for acquisitions, capital expenditures, and
general corporate purposes. The outstanding Additional Credit Facility balance
at April 29, 2000, may be converted to a term loan and will be due and payable
in full July 2, 2001. See Note E to the Consolidated Financial Statements
included elsewhere in this report for additional information regarding the New
Senior Notes, the Credit Facility and the Additional Credit Facility.
17
On July 17, 1998, all of the outstanding common stock of Ferrell was
purchased by the newly established ESOT. 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. See Note E to the
Consolidated Financial Statements included elsewhere in this report for
additional details regarding the offer to purchase the MLP Senior Secured Notes.
During the fiscal year ended July 31, 1999, the Partnership borrowed
$57,449,000 under its $145,000,000 Credit Facility to fund expected seasonal
working capital needs, business acquisitions, and capital expenditures. In
addition, letters of credit outstanding, used primarily to secure obligations
under certain insurance arrangements, totaled $32,178,000. The Additional Credit
Facility had no borrowings outstanding at July 31, 1999. At July 31, 1999, the
Operating Partnership had $72,022,000 available for general corporate,
acquisition and working capital purposes under its two credit facilities. The
Partnership typically has significant cash needs during the first fiscal quarter
due to seasonal low revenues, increasing inventories and the Partnership's cash
distribution paid in mid-September.
On April 26, 1996, the MLP issued the MLP Senior Secured Notes. These notes
will be redeemable at the option of the Partnership, in whole or in part, at any
time on or after June 15, 2001. Interest is payable semi-annually in arrears on
June 15 and December 15.
To offset the variable rate characteristic of the revolving credit facility
borrowings, the OLP has entered into an interest rate collar agreement, expiring
December 2001 with a major bank, that effectively limits interest rates on a
certain notional amount between 5.05% and 6.5% under the current pricing
arrangement. At July 31, 1999, the total notional principal amount of this
agreement was $25,000,000.
During the year ended July 31, 1999, the Partnership paid cash
distributions of $2.00 per limited partner unit. These distributions covered the
period from May 1, 1998 to April 30, 1999. On August 19, 1999, the Partnership
declared its fourth-quarter cash distribution of $0.50 per limited partner unit,
which was paid September 14, 1999. The Partnership's annualized distribution is
presently $2.00 per limited partner unit.
The MLP Senior Secured Notes, New Senior Notes, Credit Facility and
Additional Credit Facility contain various restrictive covenants applicable to
the MLP and the OLP, the most restrictive relating to additional indebtedness,
sale and disposition of assets, and transactions with affiliates. The MLP and
the OLP are in compliance with all requirements, tests, limitations and
covenants related to the MLP Senior Secured Notes, New Senior Notes, Credit
Facility and Additional Credit Facility. The New Senior Notes and credit
facility agreements have similar restrictive covenants to the Senior Notes and
credit facility agreements that were replaced.
New Accounting Pronouncements
In fiscal 1999, the Partnership adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") and SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). The Partnership implemented SFAS No. 130 by changing the
format of the statement of partners' capital to include the reporting of
comprehensive income. SFAS No. 130 also introduced "accumulated other
comprehensive income", a new balance sheet item, to reflect the cumulative
activity for other comprehensive income. SFAS No. 131 establishes standards for
reporting information about operating segments as well as related disclosures
about products and services, geographic areas, and major customers. In
determining our reportable segments under the provisions of SFAS No. 131, the
Partnership examined the way it organizes its business internally for making
operating decisions and assessing business performance. Based on this
examination, the Partnership has determined that it has a single reportable
18
operating segment which engages in the distribution of propane and related
equipment and supplies. No single customer represents 10% or more of
consolidated revenues. In addition, nearly all of the Partnership's revenues are
derived from sources within the U.S., and all of its long-lived assets are
located in the U.S.
The Financial Accounting Standards Board recently issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", is required to be adopted by the Partnership for the first quarter of
fiscal 2001. The Partnership is currently assessing its impact on the
Partnership's financial position, results of operations and cash flows.
ITEM 7A. 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.
The Partnership has $78,800,000 in variable rate debt outstanding at July
31, 1999. Moreover the Partnership has only $25,000,000 notional amount of
interest rate collar agreements outstanding. Thus, assuming a 100 basis point
change increase 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 financial statements.
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, manage and hedge its exposure to the
volatility of floating commodity prices and to protect its inventory positions.
The Partnership's non-trading activities utilize certain over-the-counter energy
commodity options to limit overall price risk and to hedge its exposure to
inventory price movements.
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 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 $5,041,000 as of July 31, 1999. Actual results may differ.
Further discussion of the risk management activities and accounting for
derivative commodity contracts is contained in the accompanying notes to the
Consolidated Financial Statements.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Partnership's Consolidated Financial Statements and the Independent
Auditors' Reports thereon and the Supplementary Financial Information listed on
the accompanying Index to Financial Statements and Financial Statement Schedules
are hereby incorporated by reference. See Item 7 for Selected Quarterly
Financial Data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
Partnership Management
The General Partner manages and operates the activities of the Partnership,
and the General Partner anticipates that its activities will be limited to such
management and operation. Unitholders do not directly or indirectly participate
in the management or operation of the Partnership. The General Partner owes a
fiduciary duty to the Unitholders.
The General Partner has appointed persons who are neither officers nor
employees of the General Partner or any affiliate of the General Partner to
serve on a committee of the Partnership (the "Audit Committee") with the
authority to review, at the request of the General Partner, specific matters as
to which the General Partner believes there may be a conflict of interest in
order to determine if the resolution of such conflict proposed by the General
Partner is fair and reasonable to the Partnership. The Audit Committee will only
review matters relating to conflicts of interest at the request of the General
Partner, and the General Partner has sole discretion to determine which matters,
if any, to submit to the Audit Committee. In addition, the Audit Committee has
the authority and responsibility for selecting the Partnership's independent
public accountants, reviewing the Partnership's annual audit, and resolving
accounting policy questions. Any matters approved by the Audit Committee will be
conclusively deemed to be fair and reasonable to the Partnership, approved by
all unitholders of the Partnership and not a breach by the General Partner of
any duties it may owe the Partnership or the Unitholders.
The Partnership does not directly employ any of the persons responsible for
managing or operating the Partnership. At July 31, 1999, 3,625 full-time and 838
temporary and part-time individuals were employed by the General Partner.
Directors and Executive Officers of the General Partner
The following table sets forth certain information with respect to the
directors and executive officers of the General Partner at October 11, 1999.
Each of the persons named below is elected to their respective
20
office or offices annually. Only Mr. Ferrell and Mr. Sheldon have entered
into employment agreements with the General Partner. See Employment Agreements.
Director
Name Age Since Position
James E. Ferrell 60 1984 Chairman of the Board and a Director
of the General Partner
Danley K. Sheldon 41 1998 Chief Executive Officer, President and
a Director of the General Partner
Patrick J. Chesterman 49 Executive Vice President and Chief
Operating Officer - Ferrellgas North
America and Ferrellgas-Houston
James M. Hake 39 Senior Vice President, Acquisitions
Kenneth G. Atchley 36 Vice President, Chief Operating
Officer-Western U.S.
Boyd H. McGathey 40 Vice President, Chief Operating
Officer-Eastern U.S.
Kevin T. Kelly 34 Vice President, Chief Financial
Officer and Treasurer
Patrick J. Walsh 46 Vice President, Administration
A. Andrew Levison 43 1994 Director of the General Partner
Elizabeth T. Solberg 60 1998 Director of the General Partner
James E. Ferrell--Mr. Ferrell has been with Ferrell or its predecessors and
its affiliates in various executive capacities since 1965. He served as Chief
Executive Officer until August 1998 and as President until October 1996.
Danley K. Sheldon--Mr. Sheldon was named Chief Executive Officer in August
1998 and was named a director of the Company in July 1998. He has been President
of the Company since October 1996 and was Chief Financial Officer of the Company
from January 1994 until May 1998. He served as Treasurer from 1989 until 1998
and joined the Company in 1986.
Patrick J. Chesterman--Mr. Chesterman was named Executive Vice President
and Chief Operating Officer, Ferrell North America and Ferrellgas-Houston in
April 1998 after having served as Senior Vice President, Supply since September
1997. After joining the Company in June, 1994, he had one-year assignments as
Vice President-Retail Operations, Director of Field Support, and Director of
Human Resources. Prior to joining the Company, Mr. Chesterman was Director of
Fuels Policy and Operations for the U.S. Air Force.
21
James M. Hake--Mr. Hake was named Senior Vice President, Acquisitions in
August 1998. He had been Vice President, Acquisitions of the Company since
October, 1994. He joined the Company in 1986.
Kenneth G. Atchley--Mr. Atchley was named Vice President, Chief Operating
Officer-Western U.S. in August 1998. He served as Regional Vice President since
May 1996. After joining the Company in 1985, he held District Manager and Area
Manager positions.
Boyd H. McGathey--Mr. McGathey was named Vice President, Chief Operating
Officer-Eastern U.S. in August 1998. He served as Regional Vice President since
February 1997. After joining the Company in 1989, he held District Manager and
Area Manager positions.
Kevin T. Kelly--Mr. Kelly was named Vice President and Chief Financial
Officer in May 1998 and Treasurer in August 1998. After joining the company in
June 1996, he served as Director of Finance and Corporate Controller until May
1998. Prior to joining the Company, Mr. Kelly was Manager of Project
Acquisitions with UtiliCorp United, Inc.
Patrick J. Walsh--Mr. Walsh was named Vice President, Administration in
August 1998. Prior to that he was Director, Field Services and Director,
Marketing and Communications. He joined the Company in 1986 when the Company
bought Buckeye Gas Products Company.
A. Andrew Levison---Mr. Levison was elected a Director of the Company in
September 1994. Mr. Levison has been a Managing Director of Donaldson, Lufkin &
Jenrette Securities Corporation since 1989.
Elizabeth T. Solberg---Ms. Solberg was elected a Director of the Company in
July 1998. Ms. Solberg is Executive Vice President and Senior Partner of
Fleishman-Hillard, Inc. and has been with the firm since 1976. She has been
a member of the Board of Directors of Kansas City Life Insurance Company since
1997.
Compensation of the General Partner
The General Partner receives no management fee or similar compensation in
connection with its management of the Partnership and receives no remuneration
other than:
(i) distributions in respect to its 2% general partner interest, on a combined
basis, in the Partnership and the Operating Partnership; and
(ii) reimbursement for all direct and indirect costs and expenses incurred on
behalf of the Partnership, all selling, general and administrative expenses
incurred by the General Partner for or on behalf of the Partnership and all
other expenses necessary or appropriate to the conduct of the business of, and
allocable to, the Partnership. The selling, general and administrative expenses
reimbursed include specific employee benefits and incentive plans for the
benefit of the executive officers and employees of the General Partner.
ITEM 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the compensation for the past three years of
the Company's Chief Executive Officer ("CEO") and the Company's five most highly
compensated executive officers other than
22
the Chief Executive Officer ("named executive officers"), who were serving as
executive officers at the end of the 1999 fiscal year.
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Pay-outs
------------------------- --------------- ---------------
Long-Term
Stock Incentive All Other
Name and Salary Bonus (1) Options(2) Payouts Compensation
Principal Position Year ($) ($) (#) ($) ($)
- --------------------------------- ------ ------------ ------------ --------------- --------------- -----------------
Danley K. Sheldon 1999 344,802 123,420 937,500 --- 12,883 (3)
- ---------------------------------
President and Chief 1998 225,000 50,000 --- --- 20,104
Executive Officer 1997 218,221 --- 30,000 --- 15,440
Patrick J. Chesterman 1999 198,338 110,000 200,000 --- 31,197 (3)
- ---------------------------------
Executive Vice President, 1998 161,500 25,000 --- --- 15,530
and Chief Operating 1997 132,917 --- 20,000 --- 9,087
Officer, Ferrellgas -
Houston
James A. Hake 1999 181,667 55,830 200,000 --- 8,140 (3)
- ---------------------------------
Senior Vice President 1998 120,000 85,000 --- --- 15,887
Acquisitions 1997 120,000 90,000 15,000 --- 13,592
Kenneth G. Atchley 1999 140,003 38,409 200,000 --- 7,485 (3)
- ---------------------------------
Vice President, Chief
Operating Officer-Western
U.S.
Boyd H. McGathey 1999 140,003 24,348 200,000 --- 37,038 (3)
- ---------------------------------
Vice President, Chief
Operating Officer-Eastern
U.S.
Kevin T. Kelly 1999 142,808 25,000 150,000 --- 5,001 (3)
- ---------------------------------
Vice President, Chief 1998 99,014 50,000 --- --- 9,376
Financial Officer
(1) Mr. Sheldon receives a bonus pursuant to his employment agreement. All
other Named Executives participate in the Ferrellgas Annual Incentive Plan.
Awards under both plans are for the year reported, regardless of the year
paid.
(2) In 1999, the awards related to grants of stock options from the Incentive
Compensation Plan, a non-qualified stock option plan of Ferrell Companies,
Inc. In 1997, the awards related to the Ferrellgas, Inc. Unit Option Plan.
(3) Includes for Mr. Sheldon contributions of $11,752 to the employee's 401(k)
and profit sharing plans and compensation of $1,131 resulting from the
payment of life insurance premiums. Includes for Mr. Chesterman $21,517 for
relocation reimbursement, contributions of $8,084 to the employee's 401(k)
and profit sharing plans and compensation of $1,596 resulting from the
payment of life insurance premiums. Includes for Mr. Hake contributions of
$7,530 to the employee's 401(k) and profit sharing plans and compensation
of $610 resulting from the payment of life insurance premiums. Includes for
Mr. Atchley contributions of $6,660 to the em ployee's 401(k) and profit
sharing plans and compensation of $825 resulting from the payment of life
insurance premiums. Includes for Mr. McGathey $28,021 for relocation
reimbursement, contributions of $8,097 to the employee's 401(k) and profit
sharing plans and compensation of $920 resulting from the payment of life
insurance premiums. Includes for Mr. Kelly, contributions of $5,001 to the
employee's 401(k) and profit sharing plans.
Unit Options
On October 14, 1994, the General Partner adopted the Ferrellgas, Inc. Unit
Option Plan (the "Unit Option Plan") pursuant to which key employees are granted
options to purchase the MLP's Subordinated Units. The purpose of the Unit Option
Plan is to encourage certain employees of the General Partner to develop a
proprietary interest in the growth and performance of the Partnership, to
generate an increased incentive to contribute to the Partnership's future
success and prosperity, thus enhancing the value of the Partnership for the
benefit of its Unitholders, and to enhance the ability of the General Partner to
attract and retain key individuals who are essential to progress, growth and
profitability of the Partnership.
23
The General Partner has granted options to purchase Units (the "Unit
Options"), 781,025 of which are outstanding at July 31, 1999, at prices ranging
from $16.80 to $21.67 per unit, which was an estimate of the fair market value
of the Subordinated Units at the time of the grant. The options vest immediately
or over a one to five year period, and expire on the tenth anniversary of the
date of the grant. On July 31, 1999, none of the Unit Options were exercisable.
Effective August 1, 1999, with the conversion of the Subordinated Units, the
units covered by the options are Common Units.
There were no grants of unit options during the 1999 fiscal year to the CEO
and named executive officers.
The following table lists information on the CEO and named executive
officers' exercised/unexercised unit options as of October 15, 1999.
AGGREGATED OPTION/ EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at Fiscal Year-End (#) Fiscal Year-End ($)
------------------------- ---------------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ------------------------------ -------------- -------------- ---------------------- ------------------------------
Danley K. Sheldon 0 0 80,500/19,500 18,375/0
Patrick J. Chesterman 0 0 12,450/17,550 787/0
James M. Hake 0 0 41,250/9,750 9,450/0
Kenneth G. Atchley 0 0 13,188/10,562 1,969/0
Boyd H. McGathey 0 0 7,500/0 1,969/0
Kevin T. Kelly 0 0 3,500/6,500 0/0
Employee Stock Ownership Plan
On July 17, 1998, pursuant to the Ferrell Companies, Inc. Employee
Stock Ownership Plan, a newly formed employee stock ownership trust purchased
all of the outstanding common stock of Ferrell. The purpose of the ESOP is to
provide employees of the General Partner an opportunity for ownership in Ferrell
and indirectly in the Partnership. Ferrell makes contributions to the ESOP which
allows a portion of the shares of Ferrell owned by the ESOP to be allocated to
employees' accounts over time.
Incentive Compensation Plan
On July 17, 1998, a nonqualified stock option plan ("NQP") was
establish by Ferrell to allow upper middle and senior level managers of the
General Partner to participate in the equity growth of Ferrell, and indirectly
in the equity growth of the Partnership. The shares underlying the stock options
are common shares of Ferrell. The following table lists information on the CEO
and the named executive officers' stock options granted in the fiscal year ended
July 31, 1999 .
24
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grant
---------------------------------------------------------------------------------------
Number of
Securities % of Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant date
Name Granted (1) Fiscal Year ($/Share) Date present value $ (2)
- -------------------------- ------------- -------------------- ----------- ------------ -----------------------
Danley K. Sheldon 937,500 25.3 4.10 01-31-18 1,697,984
Patrick J. Chesterman 200,000 5.4 4.10 01-31-18 362,227
James M. Hake 200,000 5.4 4.10 01-31-18 362,227
Kenneth G. Atchley 200,000 5.4 4.10 01-31-18 362,227
Boyd H. McGathey 200,000 5.4 4.10 01-31-18 362,227
Kevin T. Kelly 150,000 4.0 4.10 01-31-18 271,667
(1) The Ferrell NQP stock options vest ratably in 5% to 10% increments over 12
years or 100% upon a change of control, death, disability or retirement of
the participant. Vested options are exercisable in increments based on the
timing of the payoff of Ferrell debt, but in no event later than 20 years
from the date of issuance.
(2) Based on a binomial option valuation model. The key input variables used in
valuing the options were the following: risk-free interest rate of 5.5%;
dividend amount of $0; Ferrell stock price volatility of 10.6%; options
exercised 25% in 2006, 25% in 2007, 10% in years 2009 through 2013, because
this is most likely assuming the Ferrell debt is retired as scheduled. Only
two stock values were used in the computation of volatility as Ferrell
common stock is not publicly traded and has only had two valuations since
the grant date. No adjustments for non-transferability or risk of
forfeiture were made. The actual value, if any, a grantee may realize will
depend on the excess of the Ferrell stock price over the exercise price on
the date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the binomial option
valuation model.
Profit Sharing Plan
The Ferrell Companies Inc. Profit Sharing and 401(k) Investment Plan is a
qualified defined contribution plan (the "Profit Sharing Plan"). All full-time
employees of Ferrell or any of its direct or indirect wholly owned subsidiaries
with at least one year of service are eligible to participate in the Profit
Sharing Plan. In regards to the profit sharing portion, the Board of Directors
of Ferrell determines the amount of the annual contribution to the Profit
Sharing Plan, which is purely discretionary. This decision is based on the
operating results of Ferrell for the previous fiscal year and anticipated future
cash needs of the General Partner and Ferrell. The contributions are allocated
to the Profit Sharing Plan participants based on each participant's wages or
salary as compared to the total of all participants' wages and salaries.
Historically, the annual contribution to the Profit Sharing Plan has been
1% to 7% of each participant's annual wage or salary. With the establishment of
the ESOP in July 1998, the Company decided to suspended future contributions to
the profit sharing plan beginning with fiscal year 1998. The Profit Sharing Plan
also has a 401(k) feature allowing all full-time employees to specify a portion
of their pre-tax and/or after-tax compensation to be contributed to the Profit
Sharing Plan.
Supplemental Savings Plan
The Ferrell Supplemental Savings Plan was established October 1, 1994 in
order to provide certain management or highly compensated employees with
supplemental retirement income which is approximately equal in amount to the
retirement income that would have been provided to members of the select group
of employees under the terms of the 401(k) feature of the Profit Sharing Plan
based on such members' deferral elections thereunder, but which could not be
provided under the 401(k) feature of the Profit Sharing Plan due to the
application of certain IRS rules and regulations.
25
Employment Agreements
On July 17, 1998, Mr. James E. Ferrell, as Chairman of the Board of the
General Partner, entered into a five year employment agreement with automatic
one year renewals. He receives an annual salary of $120,000 and a bonus based on
the annual increase in the equity value of Ferrell. In addition to his
compensation, Mr. Ferrell participates in the Company's various employee benefit
plans, with the exception of the employee stock ownership plan and the
nonqualified stock option plan of Ferrell.
Also on July 17, 1998, Mr. Danley K. Sheldon, Chief Executive Officer of
the General Partner, entered into an eight year employment agreement, with
automatic one year renewals. He receives an annual salary of $340,000 and an
annual bonus based on the earnings of the Partnership.
Pursuant to the terms of both employment agreements, in the event of either
a termination without cause or resignation for cause, Mr. Ferrell and Mr.
Sheldon are entitled to a cash amount equal to three times the greater of 125%
of their current base salary or the average compensation paid for the prior
three fiscal years, including amounts for the reimbursement of taxes. If a
change of control of Ferrell or the General Partner occurs, Mr. Ferrell and Mr.
Sheldon will receive a cash termination benefit equal to three times the greater
of 125% of their current base salary or the average three year compensation
paid.
Mr. Ferrell's agreement contains a non-compete provision for the period of
time equal to the greater of five years or the time in which certain outstanding
debt of Ferrell is paid in full. The non-compete provision provides that he
shall not directly or indirectly own, manage, control, or engage in any business
with any person whose business is substantially similar to the business of the
Company.
Mr. Sheldon's agreement contains a non-compete provision for a period of
two years following his termination of employment. The non-compete provision
provides that he shall not directly or indirectly own, manage, control, or
engage in any business with any person whose business is substantially similar
to the business of the Company.
Compensation of Directors
The General Partner does not pay any additional remuneration to its
employees for serving as directors, except for the annual salary of $120,000
paid to Mr. Ferrell pursuant to his employment agreement as discussed above in
"Employment Agreements". Beginning in fiscal 1999, directors who are not
employees of the General Partner receive an annual retainer of $16,000. They
also currently receive a fee per meeting of $1,000 if they attend in person and
$500 if they participate by telephone, plus reimbursement for out-of-pocket
expenses.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of October 11, 1999,
regarding the beneficial ownership of the Common Units of the MLP by certain
beneficial owners, all directors and named executive officers of the General
Partner and the Partnership, each of the named executive officers, and all
directors and executive officers of the General Partner as a group. All
Subordinated Units converted to Common Units effective August 1, 1999. The
General Partner knows of no other person beneficially owning more than 5% of the
Common Units.
26
Ferrellgas Partners, L.P.
Units
Name and Address of Beneficial Beneficially Percentage of
Title of Class Owner Owned (1) Class
- ------------------------ --------------------------------------------------- ----------------
Common Units ESOT 17,817,600 (2) 56.9
Goldman, Sachs & Co. 1,729,935 (3) 5.5
The Goldman Sachs Group 1,729,935 (3) 5.5
Danley K. Sheldon 84,500 0.3
Patrick J. Chesterman 12,650 *
James M. Hake 41,650 0.1
Kenneth G. Atchley 15,188 *
Boyd H. McGathey 7,600 *
Kevin T. Kelly 3,765 *
Patrick J. Walsh 8,000 *
James E. Ferrell 10,000 *
Elizabeth T. Solberg 8,200 *
A. Andrew Levison 35,300 0.1
All Directors and Officers as a 226,853 0.7
Group
(1) Beneficial ownership for the purposes of the foregoing table is defined by
Rule 13d-3 under the Securities Exchange Act of 1934. Under that rule, a
person is generally considered to be the beneficial owner of a security if
he has or shares the power to vote or direct the voting thereof ("Voting
Power") or to dispose or direct the disposition thereof ("Investment
Power") or has the right to acquire either of those powers within sixty
(60) days. See "Aggregated Option Exercises In Last Fiscal Year And Fiscal
Year-End Option Values" Table above for the number of common units that
could be acquired by named executive officers through exercising common
unit options.
(2) The address for LaSalle National Bank, the trustee for the Ferrell
Companies, Inc. Employee Stock Ownership Trust ("ESOT") is 125 S. LaSalle
Street, 17th Floor, Chicago, Illinois, 60603.
Includes 17,803,883 Common Units owned by Ferrell which is 100% owned by
the ESOT and 13,717 Common Units owned by Ferrell Propane, Inc., a wholly
owned subsidiary of Ferrellgas, Inc.
(3) The address for both Goldman Sachs Group, L.P. and Goldman, Sachs & Co. is
85 Broad Street, New York, New York, 10004.
Goldman, Sachs & Co., a broker/dealer, and its parent Goldman Sachs Group,
L.P. are deemed to have shared voting power and shared dispositive power
over 1,729,935 Common Units owned by their customers.
Compliance With Section 16(a) of the Securities and Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 requires the
General Partner's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10%
unitholders are required by SEC regulation to furnish the General Partner with
copies of all Section 16(a) forms.
Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's ("Annual Statement of Beneficial Ownership of Securities") were
required for those persons, the General Partner believes that during fiscal year
1999 all filing requirements applicable to its officers, directors, and greater
than 10% beneficial owners were met in a timely manner, except for directors A.
Andrew Levison and Elizabeth T. Solberg, who each filed a Form 4 ("Statement of
Changes in Beneficial Ownership") one month late in November 1998. Each of the
Form 4's related to one transaction.
27
ITEM 13. Certain Relationships and Related Transactions.
Set forth below is a discussion of certain relationships and related
transactions among affiliates of the Partnership.
The Partnership has no employees and is managed and controlled by the
General Partner. Pursuant to the Partnership Agreement, the General Partner is
entitled to reimbursement for all direct and indirect expenses incurred or
payments made on behalf of the Partnership, and all other necessary or
appropriate expenses allocable to the Partnership or otherwise reasonably
incurred by the General Partner in connection with operating the Partnership's
business. These costs, which totaled $143,850,000, $129,808,000 and $128,033,000
for the years ended July 31, 1999, 1998 and 1997, respectively, include
compensation and benefits paid to officers and employees of the General Partner,
and general and administrative costs. In addition, the conveyance of the net
assets of the Company to the Partnership included the assumption of specific
liabilities related to employee benefit and incentive plans for the benefit of
the officers and employees of the General Partner.
During fiscal 1999, two affiliates of the Partnership which are owned by
the chairman of the board, James E. Ferrell, Ferrell International, Ltd. and
Ferrell Resources LLC, paid the Partnership a total of $265,000 for accounting
and administration services. The Partnership believes these transactions were
under terms that were no less favorable to the Partnership than those arranged
with other parties.
Ferrell, the parent of the General Partner, and its other wholly-owned
subsidiaries formerly engaged in various investment activities including, but
not limited to, commodity investments and the trading thereof. The Partnership
from time to time acts as an agent on behalf of Ferrell to purchase and market
natural gas liquids and enter into certain trading activities. The Partnership
charges all direct and indirect expenses incurred in performing this agent role
to Ferrell. During the years ended July 31, 1998 and 1997, the Partnership, as
Ferrell's agent, performed the following services: i) purchased 1,089,929
barrels of propane during 1997, ii) marketed and sold 469,820 and 619,929
barrels, in 1998 and 1997, respectively, and iii) entered into certain hedging
arrangements during 1997. The Partnership charged Ferrell $66,467 and $73,078,
in 1998 and 1997, respectively, for its direct and indirect expenses. Of the
469,820 barrels of propane sold in fiscal year 1998, all of these barrels were
sold to and used by the Partnership at the applicable market prices (an
aggregate of $7,405,200). Of the 619,929 barrels of propane sold in fiscal year
1997, 534,929 barrels were sold to and used by the Partnership at the applicable
market prices (an aggregate of $13,128,765). In addition, during fiscal 1998,
the Partnership sold to Ferrell certain physical and derivative crude oil
commodity contracts totaling 4,120,000 aggregate barrels at a price of
$2,548,927. The Partnership believes these transactions were under terms that
were no less favorable to the Partnership than those arranged with other
parties.
See Note L to the Consolidated Financial Statements in Item 14 for
discussion of transactions involving acquisitions related to the General Partner
and the Partnership.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
See "Index to Financial Statements" set forth on page F-1.
2. Financial Statement Schedules.
See "Index to Financial Statement Schedules" set forth on page S-1.
3. Exhibits.
See "Index to Exhibits" set forth on page E-1.
28
(b) Reports on Form 8-K.
The Partnership did not file a Form 8-K during the quarter ended July 31, 1999.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FERRELLGAS PARTNERS, L.P.
By Ferrellgas, Inc. (General Partner)
By /s/ Danley K. Sheldon
Danley K. Sheldon
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/s/ Danley K. Sheldon President, Chief Executive Officer 10/28/99
Danley K. Sheldon and Director (Principal Executive
Officer)
/s/ James E. Ferrell Chairman of the Board 10/28/99
James E. Ferrell
/s/ A. Andrew Levison Director 10/28/99
A. Andrew Levison
/s/ Elizabeth T. Solberg Director 10/28/99
Elizabeth T. Solberg
/s/ Kevin T. Kelly Vice President and Chief 10/28/99
Kevin T. Kelly Financial Officer (Principal
Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FERRELLGAS PARTNERS FINANCE CORP.
By /s/ Danley K. Sheldon
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/s/ Danley K. Sheldon Chairman of the Board, 10/28/99
Danley K. Sheldon Chief Executive Officer and
Sole Director (Principal
Executive Officer)
/s/ Kevin T. Kelly Chief Financial Officer 10/28/99
Kevin T. Kelly (Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
The exhibits listed on the accompanying Exhibit Index are filed as part
of this report. Exhibits required by Item 601 of Regulation S-K which are not
listed are not applicable.
Exhibit
Number Description
(1) 3.1 Agreement of Limited Partnership of Ferrellgas
Partners, L.P.
(2) 3.2 Articles of Incorporation for Ferrellgas Partners
Finance Corp.
(3) 3.3 Bylaws of Ferrellgas Partners Finance Corp.
(4) 4.1 Indenture dated as of April 26, 1996, among
Ferrellgas Partners, L.P., Ferrellgas
Partners Finance Corp., Ferrellgas, L.P. as
guarantor, and American Bank National
Association, as Trustee, relating to $160,000,000
9 3/8% Senior Secured Notes due 2006.
(5) 4.2 Registration Rights Agreement dated as of
April, 26, 1996, among Ferrellgas Partners,
L.P., Ferrellgas Partners Finance Corp.,
Ferrellgas, L.P., Donaldson, Lufkin &
Jenrette Securities Corporation and Goldman,
Sachs & Co.
(6) 4.3 Ferrellgas, L.P., Note Purchase Agreement Dated as
of July 1, 1998 Re:
$109,000,000 6.99% Senior Notes, Series A, due
August 1, 2005 $37,000,000 7.08% Senior
Notes, Series B, due August 1, 2006 $52,000,000
7.12% Senior Notes, Series C, due
August 1, 2008 $82,000,000 7.24% Senior Notes,
Series D, due August 1, 2010
$70,000,000 7.42% Senior Notes, Series E, due
August 1, 2013.
(7)# 10.1 Ferrell Companies, Inc. Supplemental Savings Plan.
(8)# 10.2 Amended and Restated Ferrellgas, Inc. Unit Option
Plan.
(9) 10.8 Second Amended and Restated Agreement of Limited
Partnership of Ferrellgas, L.P. dated
as of October 14, 1998.
(10) 10.9 Pledge and Security Agreement dated as of April
26, 1996, among Ferrellgas Partners, L.P.,
Ferrellgas, Inc., and American Bank National
Association, as collateral agent.
(11) 10.11 Second Amended and Restated Credit Agreement dated
as of July 2, 1998, among
Ferrellgas, L.P., Ferrellgas, Inc., Bank of America
National Trust and Savings
Association, as administrative agent, and the other
financial institutions party thereto.
(12) 10.12# Ferrell Companies, Inc. 1998 Incentive Compensation
Plan
(13) 10.13# Employment agreement between James E. Ferrell
and Ferrellgas, Inc. dated July 31, 1998.
(14) 10.14# Employment agreement between Danley K.
Sheldon and Ferrellgas, Inc. dated July 31, 1998.
E-1
(15) 10.15 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 thereto.
(16) 10.16 Short-Term Revolving Credit Agreement dated as of
April 30, 1999, among Ferrellgas,
L.P., Ferrellgas, Inc., Bank Of America Trust And
Savings Asssociation, as agent, and
the other financial institutions party hereto.
10.17 Second Amendment to the Second Amended and Restated
Credit Agreement dated as of April 27, 1999, among
Ferrellgas, L.P., Ferrellgas, Inc., Bank of America
National Trust and Savings Association, as agent,
and the other financial institutions party thereto.
21.1 List of subsidiaries.
23.1 Consent of Deloitte & Touche LLP, Independent
Auditors.
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).
- ----------------------------------------------------------------------
# Management contracts or compensatory plans.
(1) Incorporated by reference to the same numbered Exhibit to the
Registrant's Current Report on Form 8-K filed August 15, 1994.
(2) Incorporated by reference to Exhibit same numbered Exhibit to
Registrant's Quarterly Report on Form 10-Q filed on June 13,
1997.
(3) Incorporated by reference to Exhibit same numbered Exhibit to
Registrant's Quarterly Report on Form 10-Q filed on June 13,
1997.
(4) Incorporated by reference to Exhibit 4.1 to Registrant's
Current Report on Form 8-K filed on May 6, 1996.
(5) Incorporated by reference to Exhibit 4.2 to Registrant's
Current Report on Form 8-K filed on May 6, 1996.
(6) Incorporated by reference to the Exhibit 4.4 to Registrant's
Annual Report on Form 10-K filed on
October 29, 1998.
(7) Incorporated by reference to the Exhibit 10.7 to Registrant's
Annual Report on Form 10-K filed
on October 17, 1995.
(8) Incorporated by reference to the Exhibit 10.1 to Registrant's
Registration Statement on Form S-8 File No. 333-87633 filed
with the Commission on September 23, 1999
(9) Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q filed on March 17, 1999.
E-2
(10) Incorporated by reference to Exhibit 10.2 to Registrant's
Current Report on Form 8-K filed on
May 6, 1996.
(11) Incorporated by reference to the Exhibit 10.11 to Registrant's
Annual Report on
Form 10-K filed on October 29, 1998.
(12) Incorporated by reference to the Exhibit 10.12 to Registrant's
Annual Report on
Form 10-K filed on October 29, 1998.
(13) Incorporated by reference to the Exhibit 10.13 to Registrant's
Annual Report on
Form 10-K filed on October 29, 1998.
(14) Incorporated by reference to the Exhibit 10.14 to Registrant's
Annual Report on
Form 10-K filed on October 29, 1998.
(15) Incorporated by reference to the Exhibit 10.2 to Registrant's
Quarterly Report on
Form 10-Q filed on March 17, 1999.
(16) Incorporated by reference to the Exhibit 10.1 to Registrant's
Quarterly Report on
Form 10-Q filed on June 14, 1998.
E-3
INDEX TO FINANCIAL STATEMENTS
Page
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report..........................................................................F-2
Consolidated Balance Sheets - July 31, 1999 and 1998..................................................F-3
Consolidated Statements of Earnings - Year ended July 31, 1999, 1998 and 1997.........................F-4
Consolidated Statements of Partners' Capital - Year ended
July 31, 1999, 1998 and 1997.....................................................................F-5
Consolidated Statements of Cash Flows - Year ended July 31, 1999, 1998 and 1997.......................F-6
Notes to Consolidated Financial Statements............................................................F-7
Ferrellgas Partners Finance Corp.
Independent Auditors' Report.........................................................................F-19
Balance Sheets - July 31, 1999 and 1998..............................................................F-20
Statements of Earnings - Year ended July 31, 1999, 1998 and
1997...........................................................................................F-21
Statements of Stockholder's Equity - Year ended July 31, 1999, 1998 and
1997...........................................................................................F-22
Statements of Cash Flows - Year ended July 31, 1999, 1998 and
1997............................................................................................F-23
Notes to Financial Statements........................................................................F-24
F-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P. and Subsidiaries
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas
Partners, L.P. and subsidiaries as of July 31, 1999 and 1998, and the related
consolidated statements of earnings, partners' capital and other comprehensive
income and cash flows for each of the three years in the period ending July 31,
1999. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Ferrellgas Partners, L.P. and
subsidiaries as of July 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ending July 31,
1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 14, 1999
F-2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
July 31, July 31,
ASSETS 1999 1998
- --------------------------------------------------------- ---------------- ----------------
Current Assets:
Cash and cash equivalents $ 35,134 $ 16,961
Accounts and notes receivable (net of
allowance for doubtful accounts of $1,296 and
$1,381 in 1999 and 1998, respectively) 58,380 50,097
Inventories 24,645 34,727
Prepaid expenses and other current assets 6,780 8,706
---------------- ----------------
Total Current Assets 124,939 110,491
Property, plant and equipment, net 405,292 395,855
Intangible assets, net 118,117 105,655
Other assets, net 8,397 9,222
---------------- ----------------
Total Assets $656,745 $621,223
================ ================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------------------------------
Current Liabilities:
Accounts payable $60,754 $48,017
Other current liabilities 48,266 41,767
Short-term borrowings 20,486 21,150
---------------- ----------------
Total Current Liabilities 129,506 110,934
Long-term debt 583,840 507,222
Other liabilities 12,144 12,640
Contingencies and commitments (Note H) - -
Minority interest 906 1,510
Partners' Capital:
Common unitholders (14,710,765 and 14,699,678 units
outstanding in 1999 and 1998, respectively) 1,215 27,985
Subordinated unitholders (16,593,721 units outstanding
in 1999 and 1998) (10,516) 19,908
General partner (59,553) (58,976)
Accumulated other comprehensive income (797) -
---------------- ----------------
Total Partners' Capital (69,651) (11,083)
---------------- ----------------
Total Liabilities and Partners' Capital $656,745 $621,223
================ ================
See notes to consolidated financial statements.
F-3
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per unit data)
For the year ended July 31,
--------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Gas liquids and related product sales $578,025 $622,423 $759,941
Other 46,124 44,930 44,357
----------- ----------- -----------
Total revenues 624,149 667,353 804,298
Cost of product sold (exclusive of
depreciation, shown separately below) 273,388 342,600 470,128
----------- ----------- -----------
Gross profit 350,761 324,753 334,170
Operating expense 205,720 199,010 198,298
Depreciation and amortization expense 47,257 45,009 43,789
Employee stock ownership plan compensation charge 3,295 350 -
General and administrative expense 19,174 17,497 15,831
Vehicle and tank lease expense 12,976 10,127 7,433
----------- ----------- -----------
Operating income 62,339 52,760 68,819
Interest expense (46,621) (49,129) (45,769)
Interest income 1,216 1,695 2,002
Loss on disposal of assets (1,842) (174) (1,439)
----------- ----------- -----------
Earnings before minority interest
and extraordinary loss 15,092 5,152 23,613
Minority interest 309 209 395
----------- ----------- -----------
Earnings before extraordinary loss 14,783 4,943 23,218
Extraordinary loss on early extinguishment of debt,
net of minority interest of $130 (12,786) - -
----------- ----------- -----------
Net earnings 1,997 4,943 23,218
General partner's interest in net earnings 20 49 232
----------- ----------- -----------
Limited partners' interest in net earnings $ 1,977 $ 4,894 $ 22,986
=========== =========== ===========
Basic earnings per limited partner unit:
Earnings before extraordinary loss $ 0.47 $ 0.16 $ 0.74
Extraordinary loss (0.41) - -
----------- ----------- -----------
Net earnings $ 0.06 $ 0.16 $ 0.74
=========== =========== ===========
Diluted earnings per limited partner unit
Earnings before extraordinary loss $ 0.47 $ 0.16 $ 0.73
Extraordinary loss (0.41) - -
----------- ----------- -----------
Net earnings $ 0.06 $ 0.16 $ 0.73
=========== =========== ===========
See notes to consolidated financial statements.
F-4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND OTHER COMPREHENSIVE INCOME
(in thousands)
Accumulated
Number of units other
-------------------------- compre-
Common Subordinated General hensive Total partners'
Common Subordinated Unitholders Unitholders partner income capital
----------- -------------- ------------------------- ----------- ---------- -------------
August 1, 1996 14,612.6 16,593.7 $71,324 $71,302 $ (58,017) $ - $84,609
Quarterly distributions - - (29,224) (33,188) (632) - (63,044)
Net earnings - - 10,763 12,223 232 - 23,218
----------- -------------- ---------- -------------- ----------- ---------- -------------
July 31, 1997 14,612.6 16,593.7 52,863 50,337 (58,417) - 44,783
Common units issued in
connection with acquisitions 87.1 - 2,000 - 20 - 2,020
Contribution from general
partner in connection with
ESOP compensation charge - - 23 320 4 - 347
Quarterly distributions - - (29,356) (33,188) (632) - (63,176)
Net earnings - - 2,455 2,439 49 - 4,943
----------- -------------- ---------- -------------- ----------- ---------- -------------
July 31, 1998 14,699.7 16,593.7 27,985 19,908 (58,976) - (11,083)
Common units issued in
connection with acquisitions 11.1 - 197 - 2 - 199
Contribution from general
partner in connection with
ESOP compensation charge - - 219 3,010 33 - 3,262
Quarterly distributions - - (29,409) (33,188) (632) - (63,229)
Comprehensive income:
Net earnings - - 2,223 (246) 20 - 1,997
Other comprehensive income-
Pension liability adjustment- - - - - (797) (797)
-------------
Comprehensive income 1,200
----------- -------------- ---------- -------------- ----------- ---------- -------------
July 31, 1999 14,710.8 16,593.7 $1,215 $ (10,516) $ (59,553) $ (797) $ (69,651)
=========== ============== ========== ============== =========== ========== =============
F-5
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended July 31,
----------------------------------------------------
1999 1998 1997
--------------- ---------------- ----------------
Cash Flows From Operating Activities:
Net earnings $1,997 $4,943 $23,218
Reconciliation of net earnings to net
cash from operating activities:
Depreciation and amortization 47,257 45,009 43,789
Employee stock ownership plan compensation charge 3,295 350
Minority interest 309 209 395
Extraordinary loss 12,786 - -
Other 4,487 5,236 6,056
Changes in operating assets and liabilities,
net of effects from business
acquisitions:
Accounts and notes receivable (9,565) 9,313 6,685
Inventories 11,382 8,052 (906)
Prepaid expenses and other current assets 1,926 200 (3,221)
Accounts payable 12,737 8,695 (9,078)
Accrued interest expense 2,152 (157) (1,171)
Other current liabilities 4,235 (7,799) 9,368
Other liabilities (496) 286 (48)
--------------- ---------------- ----------------
Net cash provided by operating activities 92,502 74,337 75,087
--------------- ---------------- ----------------
Cash Flows From Investing Activities:
Business acquisitions (43,838) (9,839) (36,114)
Capital expenditures (25,743) (20,629) (16,192)
Other 3,286 4,539 3,068
--------------- ---------------- ----------------
Net cash used in investing activities (66,295) (25,929) (49,238)
--------------- ---------------- ----------------
Cash Flows From Financing Activities:
Distributions (63,229) (63,176) (63,044)
Additions to long-term debt 408,113 21,094 45,463
Reductions of long-term debt (338,613) (2,759) (2,640)
Cash paid for call premiums and debt issuance costs (12,827) - -
Net reductions to short-term borrowings (664) (636) (3,734)
Minority interest activity (818) (798) (818)
Other 4 40 (58)
--------------- ---------------- ----------------
Net cash used in financing activities (8,034) (46,235) (24,831)
--------------- ---------------- ----------------
Increase in cash and cash equivalents 18,173 2,173 1,018
Cash and cash equivalents - beginning of period 16,961 14,788 13,770
--------------- ---------------- ----------------
Cash and cash equivalents - end of period $35,134 $16,961 $14,788
=============== ================ ================
Cash paid for interest $42,310 $46,546 $44,516
=============== ================ ================
See notes to consolidated financial statements.
F-6
FERRELLGAS PARTNERS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Partnership Organization and Formation
Ferrellgas Partners, L.P. (the "MLP") was formed April 19, 1994, and is a
publicly traded limited partnership, owning a 99% limited partner interest
in Ferrellgas, L.P. (the "Operating Partnership" or "OLP"). The MLP and the
OLP are both Delaware limited partnerships, and are collectively referred to
as the Partnership. Ferrellgas Partners, L.P. was formed to acquire and hold
a limited partner interest in the Operating Partnership. The Operating
Partnership was formed to acquire, own and operate the propane business and
assets of Ferrellgas, Inc. (the "Company" or "General Partner"), a
wholly-owned subsidiary of Ferrell Companies, Inc. ("Ferrell"). Ferrell has
a 56% limited partnership interest in Ferrellgas Partners, L.P. The Company
has retained a 1% general partner interest in Ferrellgas Partners, L.P. and
also holds a 1.0101% general partner interest in the Operating Partnership,
representing a 2% general partner interest in the Partnership on a combined
basis. As General Partner of the Partnership, the Company performs all
management functions required for the Partnership.
On July 17, 1998, 100% of the outstanding common stock of Ferrell was
purchased primarily from Mr. James E. Ferrell and his family by a newly
established leveraged employee stock ownership trust ("ESOT") established
pursuant to the Ferrell Companies, Inc. Employee Stock Ownership Plan
("ESOP"). The purpose of the ESOP is to provide employees of the Company an
opportunity for ownership in Ferrell and indirectly in the Partnership. As
contributions are made by Ferrell to the ESOP in the future, shares of
Ferrell are allocated to employees' ESOP accounts.
B. Summary of Significant Accounting Policies
(1) Nature of operations: The Partnership is engaged primarily in the sale,
distribution, marketing and trading of propane and other natural gas liquids
throughout the United States. The retail market is seasonal because propane
is used primarily for heating in residential and commercial buildings. The
Partnership serves more than 800,000 residential, industrial/commercial and
agricultural customers.
(2) Accounting estimates: 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. Significant estimates impacting the financial
statements include reserves that have been established for product liability
and other claims.
(3) Principles of consolidation: The accompanying consolidated financial
statements present the consolidated financial position, results of
operations and cash flows of the Partnership and its wholly-owned
subsidiary, Ferrellgas Partners Finance Corp. The Company's 1.0101% General
Partner interest in Ferrellgas, L.P. is accounted for as a minority
interest. All material intercompany profits, transactions and balances have
been eliminated.
F-7
(4) Cash and cash equivalents: For purposes of the Consolidated Statements
of Cash Flows, the Partnership considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
(5) Inventories: Inventories are stated at the lower of cost or market
using average cost and actual cost methods.
(6) Property, plant and equipment and intangible assets: Property, plant and
equipment is stated at cost less accumulated depreciation. Expenditures for
maintenance and routine repairs are expensed as incurred. Depreciation is
calculated using the straight-line method based on the estimated useful
lives of the assets ranging from two to thirty years. Intangible assets,
consisting primarily of customer location values, goodwill, and noncompete
notes, are stated at cost, net of amortization calculated using the
straight-line method over periods ranging from 5 to 40 years. Accumulated
amortization of intangible assets totaled $139,273,000 and $123,531,000 as
of July 31, 1999 and 1998, respectively. The Partnership, using its best
estimates based on reasonable and supportable assumptions and projections,
reviews for impairment of long-lived assets and certain identifiable
intangibles to be held and used whenever events or changes in circumstances
indicate that the carrying amount of its assets might not be recoverable and
has concluded no financial statement adjustment is required.
(7) Accounting for derivative commodity contracts: The Partnership enters
into commodity forward and futures purchase/sale agreements and commodity
options involving propane and related products which are used for trading
and risk management purposes in connection with its trading activities. To
the extent such contracts are entered into at fixed prices and thereby
subject the Partnership to market risk, the contracts are accounted for
using the fair value method. Under the fair value method, derivatives are
carried on the balance sheet at fair value with changes in that value
recognized in earnings. The Partnership classifies all earnings from
derivative commodity contracts as other revenue on the statement of
earnings.
(8) Revenue recognition: Sales are recognized by the Partnership when
product is delivered or shipped to its customers.
(9) Income taxes: The Partnership is a limited partnership. As a result, the
Partnership's earnings or losses for Federal income tax purposes are
included in the tax returns of the individual partners. Accordingly, no
recognition has been given to income taxes in the accompanying financial
statements of the Partnership. Net earnings for financial statement purposes
may differ significantly from taxable income reportable to unitholders as a
result of differences between the tax basis and financial reporting basis of
assets and liabilities and the taxable income allocation requirements under
the Partnership Agreement.
(10) Net earnings per limited partner unit: Net earnings (loss) per limited
partner unit is computed by dividing net earnings, after deducting the
General Partner's 1% interest, by the weighted average number of outstanding
Common Units, Subordinated Units and the dilutive effect (if any) of Unit
Options in accordance with Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings Per Share". The only effect of the application
of SFAS No. 128 on the earnings per share was a decrease of $0.01 per unit
in fiscal year 1997 to net earnings per limited partner unit. This decrease
was due to including the effect of assuming the conversion of 143,000 Unit
Options in the denominator of the dilutive per-unit computation.
F-8
(11) Unit and stock-based compensation: The Partnership accounts for its
Unit Option Plan and the Ferrell Companies Incentive Compensation Plan under
the provisions of Accounting Principles Board ("APB") No. 25, "Accounting
for Stock Issued to Employees," and makes the pro forma information
disclosures required under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
(12) Segment information: In fiscal 1999, the Partnership adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for reporting
information about operating segments as well as related disclosures about
products and services, geographic areas, and major customers. In determining
the Partnership's reportable segments under the provisions of SFAS No. 131,
the Partnership examined the way it organizes its business internally for
making operating decisions and assessing business performance. Based on this
examination, the Partnership has determined that it has a single reportable
operating segment which engages in the distribution of propane and related
equipment and supplies. No single customer represents 10% or more of
consolidated revenues. In addition, nearly all of the Partnership's revenues
are derived from sources within the U.S., and all of its long-lived assets
are located in the U.S.
(13) Adoption of new accounting standards: In fiscal 1999, the Partnership
adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The
Partnership implemented SFAS No. 130 by modifying the format of the
statement of partners' capital to include the reporting of comprehensive
income for an adjustment to a pension liability. SFAS No. 130 also
introduced a new balance sheet item "accumulated other comprehensive income"
to reflect the cumulative activity for other comprehensive income. The
Financial Accounting Standards Board recently issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", is required to be adopted by the Partnership beginning
in the first quarter of fiscal 2001. The Partnership is currently assessing
its impact on the Partnership's financial position, results of operations
and cash flows.
C. Quarterly Distributions of Available Cash
The Partnership makes quarterly cash distributions of all of its "Available
Cash", generally defined as consolidated cash receipts less consolidated
cash disbursements and net changes in reserves established by the General
Partner for future requirements. These reserves are retained to provide for
the proper conduct of the Partnership business, or to provide funds for
distributions with respect to any one or more of the next four fiscal
quarters.
Distributions by the Partnership in an amount equal to 100% of its Available
Cash will generally be made 98% to the Common and Subordinated Unitholders
(the "Unitholders") and 2% to the General Partner, subject to the payment of
incentive distributions to the holders of Incentive Distribution Rights to
the extent that certain target levels of cash distributions are achieved. To
the extent there is sufficient Available Cash, the holders of Common Units
have the right to receive the "Minimum Quarterly Distribution" ($0.50 per
Unit), plus any "arrearages", prior to any distribution of Available Cash to
the holders of Subordinated Units. Common Units will not accrue arrearages
for any quarter after the "Subordination Period" (as defined below) and
Subordinated Units will not accrue any arrearages with respect to
distributions for any quarter.
In general, the Partnership Agreement provides that the Subordination Period
will continue indefinitely until the first day of any quarter beginning on
or after August 1, 1999, in which (i) distributions of Available Cash
constituting Cash from Operations (as defined in the Partnership Agreement)
equal or exceed the Minimum Quarterly Distribution on the Common Units and
F-9
the Subordinated Units for each of the three consecutive four quarter periods
immediately preceding such date and (ii) the Partnership has invested at
least $50,000,000 in acquisitions and capital additions or improvements to
increase the operating capacity of the Partnership. Management has reported
that the Subordinated Units converted into Common Units effective August 1,
1999.
The Partnership makes distributions of all of its Available Cash within 45
days after the end of each fiscal quarter ending January, April, July and
October to holders of record on the applicable record date.
D. Supplemental Balance Sheet Information
Inventories consist of:
(in thousands) 1999 1998
-------------- --------------
Liquefied propane gas and related products $15,480 $26,316
Appliances, parts and supplies 9,165 8,411
-------------- --------------
$24,645 $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
the date of delivery. All fixed price contracts have terms of less than
one year. As of July 31, 1999, in addition to the inventory on hand, the
Partnership had committed to take delivery of approximately 59,280,000
gallons at a fixed price for its estimated future retail propane sales.
Property, plant and equipment consist of:
(in thousands) 1999 1998
------------- --------------
Land and improvements $ 32,776 $ 30,368
Buildings and improvements 43,577 40,557
Vehicles 50,897 50,810
Furniture and fixtures 28,626 22,397
Bulk equipment and district facilities 71,693 66,150
Tanks and customer equipment 418,598 404,532
Other 4,369 5,969
------------- --------------
650,536 620,783
Less: accumulated depreciation 245,244 224,928
------------- --------------
$405,292 $395,855
============== =============
Depreciation expense totaled $30,772,000, $30,034,000, and $29,960,000
for the years ended July 31, 1999, 1998, and 1997, respectively.
F-10
Other current liabilities consist of:
(in thousands) 1999 1998
-------------- -------------
Accrued insurance $4,300 $ 4,563
Accrued interest 15,065 12,914
Accrued payroll 11,821 8,635
Other 17,080 15,655
-------------- -------------
$48,266 $41,767
============== =============
E. Long-Term Debt
Long-term debt consists of:
(in thousands) 1999 1998
------------- ------------
Senior Notes
Fixed rate, 7.16% due 2005-2013 (1) $350,000 $ -
Fixed rate, 10%, due 2001 (2) 200,000
Fixed rate, 9.375%, due 2006 (3) 160,000 160,000
Credit Agreement
Term loan, 8.5% - 50,000
Revolving credit loans, 6.0% and 8.5% weighted average interest
rates, respectively, due 2001 (4) (5) 58,314 85,850
Notes payable, 7.3% and 6.7% weighted average interest rates,
respectively, due 1999 to 2007 (6) 18,154 13,558
------------- ------------
586,468 509,408
Less: current portion 2,628 2,186
------------- ------------
$583,840 $507,222
============= ============
(1) The new OLP fixed rate Senior Notes ("New Senior Notes"), issued in
August 1998, are general unsecured obligations of the OLP and rank
on an equal basis in right of payment with all senior indebtedness
of the OLP and senior to all subordinated indebtedness of the OLP.
The outstanding principal amount of the Series A, B, C, D and E
Notes shall be due on August 1, 2005, 2006, 2008, 2010, and 2013,
respectively. In general, the Notes may not be prepaid prior to
maturity at the option of the Partnership.
(2) The old 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 paid concurrent with the issuance of the New Senior Notes.
F-11
(3) The MLP fixed rate Senior Secured Notes ("Senior Secured Notes"),
issued in April 1996, will be redeemable at the option of the MLP,
in whole or in part, at any time on or after June 15, 2001. The
notes are secured by the MLP's partnership interest in the OLP. The
Senior Secured Notes bear interest from the date of issuance,
payable semi-annually in arrears on June 15 and December 15 of each
year. Due to a change of control in the ownership of the General
Partner on July 17, 1998 as a result of the ESOP transaction
described in Note A, the MLP was required, pursuant to the MLP
fixed rate Senior Secured Note Indenture, to offer to purchase the
outstanding MLP fixed rate Senior Secured Notes at a price of 101%
of the principal amount thereof plus accrued and unpaid interest.
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, thus the notes remain outstanding.
(4) At July 31, 1999, the unsecured $145,000,000 Credit Facility (the
"Credit Facility"), expiring July 2001, consisted of a $50,000,000
unsecured working capital and general corporate facility including
a letter of credit facility, a $55,000,000 unsecured general
corporate and acquisition facility and a $40,000,000 revolving
working capital facility, which is subject to an annual reduction
in outstanding balances to zero for thirty consecutive days. All
borrowings under the Credit Facility bear interest at either LIBOR
plus an applicable margin varying from 0.425% to 1.375% or the
bank's base rate, depending on the nature of the borrowing. The
bank's base rate at July 31, 1999 and 1998 was 8.0% and 8.5%,
respectively. To offset the variable rate characteristic of the
Credit Facility, the OLP entered into a interest rate collar
agreement, expiring December 2001, with a major bank limiting the
floating rate portion of LIBOR-based loan interest rates on a
notional amount of $25,000,000 to between 5.05% and 6.5%.
(5) The OLP entered into a credit facility agreement on April 30, 1999.
This new facility ("Additional Credit Facility") provides for a
$38,000,000 unsecured facility for acquisitions, capital
expenditures, and general corporate purposes. The outstanding
Additional Credit Facility balance at April 29, 2000, may be
converted to a term loan and will be due and payable in full July
2, 2001. There was not an outstanding balance on this facility at
July 31, 1999.
(6) The notes payable are secured by approximately $2,893,000 and
$3,729,000 of property and equipment at July 31, 1999 and 1998,
respectively.
At July 31, 1999 and 1998, $20,486,000 and $21,150,000, respectively,
of short-term borrowings were outstanding under the credit facility and
letters of credit outstanding, used primarily to secure obligations under
certain insurance arrangements, totaled $32,178,000 and $29,056,000,
respectively.
The Senior Secured Notes, the New Senior Notes, the Credit Facility and
Additional Credit Facility Agreements contain various restrictive covenants
applicable to the MLP and OLP and its subsidiaries, the most restrictive
relating to additional indebtedness, sale and disposition of assets, and
transactions with affiliates. In addition, the Partnership is prohibited
from making cash distributions of the Minimum Quarterly Distribution if a
default or event of default exists or would exist upon making such
distribution, or if the Partnership fails to meet certain coverage tests.
The Partnership is in compliance with all requirements, tests, limitations
and covenants related to the Senior Secured Note Indenture, the New Senior
Note Indenture, Credit Facility and Additional Credit Facility agreements.
The New Senior Notes and the Credit Facility agreements have similar
restrictive covenants to the Senior Note Indenture and credit facility
agreement that were replaced.
F-12
The annual principal payments on long-term debt for each of the next five
fiscal years are $2,628,000 in 2000, $3,808,000 in 2001, $1,755,000 in
2002, $1,891,000 in 2003 and $2,031,000 in 2004.
During fiscal year 1999, the Partnership recognized an extraordinary loss
of $12,786,000 net of minority interest of $130,000. The gross
extraordinary loss included a payment of a 5% premium and a write-off of
unamortized financing costs of $2,916,000, resulting primarily from the
early extinguishment of $200,000,000 of its fixed rate senior notes.
F. Partners' Capital
Partners' capital consists of 14,710,765 Common Units representing a 46%
limited partner interest, 16,593,721 Subordinated Units representing a 53%
limited partner interest, and a 1% General Partner interest.
The Agreement of Limited Partnership of Ferrellgas Partners, L.P. (the
"Partnership Agreement") contains specific provisions for the allocation of
net earnings and loss to each of the partners for purposes of maintaining
the partner capital accounts.
Effective, August 1, 1999, the Subordination Period ended and the
Subordinated Units converted to Common Units, because certain financial
tests, which were primarily related to making the Minimum Quarterly
Distribution on all Units, were satisfied for each of the three consecutive
four quarter periods ending on July 31, 1999. The Partnership Agreement
allows the General Partner to issue an unlimited number of additional
Partnership general and limited interests and other equity securities of
the Partnership for such consideration and on such terms and conditions as
shall be established by the General Partner without the approval of any
Unitholders.
The Partnership maintains a shelf registration statement for Common Units
representing limited partner interests in the Partnership. The Common Units
may be issued from time to time by the Partnership in connection with the
Partnership's acquisition of other businesses, properties or securities in
business combination transactions. The Partnership also maintains another
shelf registration statement for the issuance of Common Units, Deferred
Participation Units, Warrants and Debt Securities.
G. Transactions with Related Parties
The Partnership has no employees and is managed and controlled by the
General Partner. Pursuant to the Partnership Agreement, the General Partner
is entitled to reimbursement for all direct and indirect expenses incurred
or payments it makes on behalf of the Partnership, and all other necessary
or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business. These costs, which totaled $143,850,000,
$129,808,000, and $128,033,000 for the years ended July 31, 1999, 1998 and
1997, respectively, include compensation and benefits paid to officers and
employees of the General Partner, and general and administrative costs.
During fiscal 1999, Ferrell International Limited and Ferrell Resources,
LLC, two affiliates of the Partnership which are owned by the General
Partner's chairman of the board, James E. Ferrell, paid the Partnership a
total of $265,000 for accounting and administration services. The
Partnership believes these transactions were under terms that were no less
favorable to the Partnership than those available with other parties.
F-13
Prior to the ESOP transaction completed on July 17, 1998, Ferrell, the
parent of the General Partner and its other wholly-owned subsidiaries,
engaged in various investment activities including, but not limited to,
commodity investments and the trading thereof. The Partnership from time to
time acted as an agent on behalf of Ferrell to purchase and market natural
gas liquids and enter into certain trading activities. The Partnership
charged all direct and indirect expenses incurred in performing this agent
role to Ferrell. During the years ended July 31, 1998 and July 31, 1997,
the Partnership, as Ferrell's agent, performed the following services: a)
purchased 1,089,929 barrels of propane during 1997, b) marketed and sold
469,820 and 619,929 barrels in 1998 and 1997 respectively, and c) entered
into certain hedging arrangements in 1997. The Partnership charged Ferrell
$66,467 and $73,078 in 1998 and 1997, respectively, for its direct and
indirect expenses related to these transactions. All of the 469,820 barrels
of propane sold in fiscal year 1998 were sold to and used by the
Partnership at the applicable market prices (an aggregate of $7,405,200).
Of the 619,929 barrels of propane sold in fiscal year 1997, 534,929 were
sold to and used by the Partnership at the applicable market prices (an
aggregate of $13,128,765). In addition, during fiscal 1998, the Partnership
sold to Ferrell certain physical and derivative crude oil commodity
contracts totaling 4,120,000 aggregate barrels at a price of $2,548,927.
Management believes these transactions were under terms that were no less
favorable to the Partnership than those available with other parties.
Subsequent to the close of the ESOP transaction, Ferrell divested of its
wholly-owned subsidiaries that were engaged in these commodity and trading
activities.
H. Contingencies and Commitments
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
results of operations, financial condition and cash flows of the
Partnership.
Certain property and equipment is leased under noncancellable operating
leases which require fixed monthly rental payments and which expire at
various dates through 2018. Rental expense under these leases totaled
$19,595,000, $17,095,000, and $13,169,000, for the years ended July 31,
1999, 1998 and 1997, respectively. Future minimum lease commitments for
such leases are $15,846,000 in 2000, $13,094,000 in 2001, $9,931,000 in
2002, $5,229,000 in 2003, $1,563,000 in 2004 and $2,161,000 thereafter.
I. Employee Benefits
The Partnership has no employees and is managed and controlled by the
General Partner. The Partnership assumes all liabilities, which include
specific liabilities related to the following employee benefit plans for
the benefit of the officers and employees of the General Partner.
Ferrell makes contributions to the ESOT which causes a portion of the
shares of Ferrell owned by the ESOT to be allocated to employees' accounts
over time. The allocation of Ferrell shares to employee accounts causes a
non-cash compensation charge to be incurred by Ferrell, equivalent to the
fair value of such shares allocated. The Partnership is not obligated to
fund or make contributions to the ESOT. Nevertheless, due to the benefit
received by the Company's employees from participating in the ESOP, the
non-cash compensation charge is also recorded by the Partnership.
The General Partner and its parent Ferrell have a defined contribution
profit-sharing plan which covers substantially all employees with more than
one year of service. Contributions were made to the plan at the discretion
F-14
of Ferrell's Board of Directors. With the establishment of the ESOP in July
1998, the Company suspended future contributions to the profit sharing plan
beginning with fiscal year 1998. The profit sharing plan, which qualifies
under section 401(k) of the Internal Revenue Code, also provides for
matching contributions under a cash or deferred arrangement based upon
participant salaries and employee contributions to the plan. These matching
contributions are not affected by the establishment of the ESOP.
Contributions for the year ended July 31, 1997, were $3,000,000 under the
profit sharing provision, and for the years ended July 31, 1999, 1998 and
1997, respectively, were $2,110,000, $1,693,000, and $1,542,000 under the
401(k) provision.
J. Unit Options of the Partnership and Stock Options of Ferrell Companies, Inc.
The Ferrellgas, Inc. Unit Option Plan (the "Unit Option Plan") currently
authorizes the issuance of options (the "Unit Options") covering up to
850,000 of the MLP's units to certain officers and employees of the General
Partner. Effective August 1, 1999, with the conversion of the Subordinated
Units, the units covered by the options are Common Units. The Unit Options
are exercisable beginning after July 31, 1999, at exercise prices ranging
from $16.80 to $21.67 per unit, which was an estimate of the fair market
value of the Subordinated Units at the time of the grant. The options vest
immediately or over a one to five year period, and expire on the tenth
anniversary of the date of the grant.
Number Weighted Average Weighted
of Exercise Price Average Fair
Units Value
-----------------------------------------------
Outstanding, July 31, 1996 668,425 $17.38
Granted 216,500 20.23 $0.52
Forfeited (157,325) 18.02
-------------
Outstanding, July 31, 1997 727,600 18.09
Granted 118,500 19.47 0.47
Forfeited (64,100) 19.16
-------------
Outstanding, July 31, 1998 782,000 18.21
Granted 40,000 18.54 0.39
Forfeited (40,975) 18.15
-------------
Outstanding, July 31, 1999 781,025
-------------
Options exercisable, July 31, 1999 0
-------------
Options Outstanding at July 31, 1999
-------------------------------------------------
Range of option prices at end of year $16.80-$21.67
Weighted average remaining contractual life 6.9 years
The Ferrell Companies, Inc. nonqualified stock option plan (the "NQP") was
established by Ferrell Companies, Inc. ("Ferrell") to allow upper middle
and senior level managers of the General Partner to participate in the
equity growth of Ferrell and, indirectly in the equity growth of the
Partnership. The shares underlying the stock options are common shares of
Ferrell, therefore, there is no potential dilution of the Partnership. The
Ferrell NQP stock options vest ratably in 5% to 10% increments over 12
years or 100% upon a change of control, death, disability or retirement of
the participant. Vested options are exercisable in increments based on the
timing of the payoff of Ferrell debt, but in no event later than 20 years
from the date of issuance.
F-15
The Partnership accounts for stock-based compensation using the intrinsic
value method prescribed in APB No. 25 and related Interpretations.
Accordingly, no compensation cost has been recognized for the Unit Option
Plan, or for the NQP. Had compensation cost for these plans been determined
based upon the fair value at the grant date for awards under these plans,
consistent with the methodology prescribed under SFAS No. 123, the
Partnership's net income and earnings per share would have been reduced as
noted in the table below:
1999 1998 1997
------------- ------------- -------------
Net earnings as reported $1,997 $4,943 $23,218
Pro forma adjustment (465) (40) (29)
------------- ------------- -------------
Net earnings adjusted $1,532 $4,903 $23,189
============= ============= =============
Pro forma basic and diluted net earnings per
limited partner share $0.05 $0.16 $0.73
============= ============= =============
The fair value of the unit options granted during the 1999, 1998 and 1997
fiscal years were determined using a binomial option valuation model with the
following assumptions: a) distribution amount of $0.50 per unit per quarter for
1999, 1998 and 1997, b) average Common Unit price volatilities of 18.1%, 16.2%
and 16.9% were used as an estimate of Subordinated Unit volatility for 1999,
1998 and 1997, respectively, c) the risk-free interest rates used were 5.5%,
5.7% and 5.9%, for 1999, 1998 and 1997, respectively and d) the expected life of
the option used was 5 years for 1999, 1998 and 1997. The fair value of the
Ferrell Companies, Inc. NQP stock options granted during the 1999 fiscal year
was determined using a binomial option valuation model with the following
assumptions: a) no dividends, b) average stock price volatility of 10.6%, c) the
risk-free interest rate used was 5.5% and d) expected life of the options
between 8 and 15 years.
K. Disclosures About Off Balance Sheet Risk and Fair Value of Financial
Instruments
The carrying amount of current financial instruments approximates fair
value because of the short maturity of the instruments. The estimated fair
value of the Partnership's long-term debt was $568,459,000 and $524,612,000
as of July 31, 1999 and 1998, respectively. The fair value is estimated
based on quoted market prices.
Interest Rate Collar Agreements. The Partnership has entered into various
interest rate collar agreements involving the exchange of fixed and
floating interest payment obligations without the exchange of the
underlying principal amounts. At July 31, 1999 and 1998, the total notional
principal amount of these agreements was $25,000,000 and $100,000,000,
respectively, and the fair value of these agreements was immaterial to the
financial position, results of operations or cash flows of the Partnership.
The counterparties to these agreements are large financial institutions.
The interest rate collar agreements subject the Partnership to financial
risk that will vary during the life of these agreements in relation to
market interest rates.
Option Commodity Contracts. The Partnership is a party to certain option
contracts, involving various liquefied petroleum products, for risk
management purposes in connection with its trading activities. Such
contracts do not meet the criteria for classification as hedge
transactions. Contracts are executed with private counterparties and to a
lesser extent on national mercantile exchanges. Open contract positions are
summarized below.
F-16
Forward, Futures and Swaps Commodity Contracts. The Partnership is a party
to certain forward, futures and swaps contracts for trading purposes. Such
contracts do not meet the criteria for classification as hedge
transactions. Net gains from trading activities were $7,699,000,
$7,464,000, and $5,476,000, for the years ended July 31, 1999, 1998, and
1997, respectively. Such contracts permit settlement by delivery of the
commodity. Open contract positions are summarized below (assets are defined
as purchases or long positions and liabilities are sales or short
positions).
As of July 31
(In thousands, except price per gallon data) Derivative Commodity
Derivative Commodity Instruments Held for Instruments Held for
Purposes Other than Trading Trading Purposes
(Options) (Forwards, Futures and Swaps)
------------------------------------------- ---------------------------------------------------
1999 1998 1999 1998
-------------------- ------------------- ----------------------- -----------------------
Asset Liab. Asset Liab. Asset Liab. Asset Liab.
--------- ---------- -------- ---------- ----------- ----------- ---------- ------------
Volume (gallons) 3,245 (22,648) 3,927 (13,444) 2,814,698 (2,720,295) 568,949 (628,573)
Price (cent)/gal) 23-39 27-55 31 49-18 19-49 19-49 35-23 35-24
Maturity 8/99- 8/99 8/98- 8/98- 8/99- 8/99- 8/98- 8/98-
Dates 3/00 3/00 12/98 2/99 12/01 12/01 12/99 12/99
Contract Amounts
($) 10,775 (13,973) 8,295 (19,757) 1,232,209 (1,215,341) 181,541 (201,497)
Fair Value ($) 10,941 (15,850) 7,901 (19,538) 1,337,924 (1,318,526) 186,696 (203,162)
Unrealized gain
(loss) ($) 166 (1,877) (394) 219 105,715 (103,185) 5,155 (1,665)
Risks related to these contracts arise from the possible inability of the
counterparties to meet the terms of their contracts and changes in
underlying product prices. The Partnership attempts to minimize market risk
through the enforcement of its trading policies, which include total
inventory limits and loss limits, and attempts to minimize credit risk
through application of its credit policies.
L. Business Combinations
During the year ended July 31, 1999, the Partnership made acquisitions of
11 businesses valued at $50,049,000. This amount was funded by $43,838,000
cash payments, $199,000 in Common units and noncash transactions totaling
$6,012,000 in the issuance of noncompete notes and other costs and
consideration.
During the year ended July 31, 1998, the Partnership made acquisitions of
four businesses valued at $12,670,000. This amount was funded by $9,839,000
cash payments, $2,000,000 in common units and noncash transactions totaling
$831,000 in the issuance of noncompete notes and other costs and
consideration.
F-17
During the year ended July 31, 1997, the Partnership made acquisitions of
eight businesses valued at $40,200,000. This amount was funded by
$36,114,000 cash payments and noncash transactions totaling $4,086,000 in
the issuance of noncompete notes and other costs and consideration.
All transactions have been accounted for using the purchase method of
accounting and, accordingly, the results of operations of all acquisitions
have been included in the consolidated financial statements from their
dates of acquisition. The pro forma effect of these transactions was not
material to the results of operations.
F-18
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas Partners Finance Corp.
Liberty, Missouri
We have audited the accompanying balance sheets of Ferrellgas Partners Finance
Corp. (a wholly-owned subsidiary of Ferrellgas Partners, L.P.), as of July 31,
1999, and 1998 and the related statement of earnings, stockholder's equity and
cash flows for each of the three years in the period ended July 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Ferrellgas Partners Finance Corp. as of July
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended July 31, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 14, 1999
F-19
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-woned subsidiary of Ferrellgas Partners, L.P.)
BALANCE SHEET
July 31, July 31,
ASSETS 1999 1998
- ------------------------------------------------------------------ ----------------- ------------------
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 774 548
Accumulated deficit (774) (548)
----------------- ------------------
Total Stockholder's Equity 1,000 1,000
----------------- ------------------
Total Liabilities and Stockholder's Equity $1,000 $1,000
================= ==================
See notes to financial statements
F-20
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF EARNINGS
For the year ended July 31,
------------------------------------------------------------
1999 1998 1997
----------------- ----------------- ----------------
Revenues $- $- $-
General and administrative expense 226 221 285
----------------- ----------------- ----------------
Net loss $(226) $(221) $(285)
================= ================= ================
See notes to financial statements
F-21
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF STOCKHOLDER'S EQUITY
Common stock Total
----------------------------- Additional Accumulated stockholder's
Shares Dollars paid in capital deficit equity
------------- ------------ ------------------------------------- -----------------
August 1, 1996 1,000 $1,000 $42 $(42) $1,000
Capital contribution - - 285 - 285
Net loss - - - (285) (285)
------------- ------------ ------------------ ----------------- -----------------
July 31, 1997 1,000 1,000 327 (327) 1,000
Capital contribution - - 221 - 221
Net loss - - - (221) (221)
------------- ------------ ------------------ ----------------- -----------------
July 31, 1998 1,000 1,000 548 (548) 1,000
Capital contribution - - 226 - 226
Net loss - - - (226) (226)
------------- ------------ ------------------ ----------------- -----------------
July 31, 1999 1,000 $1,000 $774 $(774) $1,000
============= ============ ================== ================= =================
See notes to financial statements
F-22
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF CASH FLOWS
For the year ended July 31,
----------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Cash Flows From Operating Activities:
Net loss $(226) $(221) $(285)
----------------- ----------------- -----------------
Cash used by operating activities (226) (221) (285)
----------------- ----------------- -----------------
Cash Flows From Financing Activities:
Capital contribution 226 221 285
----------------- ----------------- -----------------
Cash provided by financing activities 226 221 285
----------------- ----------------- -----------------
Change in cash 0 0 0
Cash - beginning of period 1,000 1,000 1,000
----------------- ----------------- -----------------
Cash - end of period $1,000 $1,000 $1,000
================= ================= =================
See notes to financial statements
F-23
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
NOTES TO FINANCIAL STATEMENTS
A. Formation
Ferrellgas Partners, Finance Corp. (the "Finance Corp."), a
Delaware corporation, was formed on March 28, 1996 and is a
wholly-owned subsidiary of Ferrellgas Partners, L.P.
(the "Partnership").
The Partnership contributed $1,000 to the Finance Corp. on April 8,
1996 in exchange for 1,000 shares of common stock.
B. Commitment
On April 26, 1996, the Partnership issued $160,000,000 of 9 3/8% Senior
Secured Notes due 2006 (the "Senior Notes"). The Senior Notes will be
redeemable at the option of the Partnership, in whole or in part, at
any time on or after June 15, 2001. Interest is payable semi-annually
in arrears on June 15 and December 15 of each year. The Finance Corp.
serves as a co-obligor for the Senior Notes.
C. Income Taxes
Income taxes have been computed as though the Company files its own
income tax return. Deferred income taxes are provided as a result of
temporary differences between financial and tax reporting using the
asset/liability method. Deferred income taxes are recognized for the
tax consequences of temporary differences between the financial
statement carrying amounts and tax basis of existing assets and
liabilities.
Due to the inability of the Company to utilize the deferred tax benefit
of $320 associated with the current year net operating loss
carryforward of $823, which expire at various dates through July 31,
2014, a valuation allowance has been provided on the full amount of the
deferred tax asset. Accordingly, there is no net deferred tax benefit
for the year ended July 31, 1999 or 1998 and there is no net deferred
tax asset as of July 31, 1999 or July 31, 1998.
F-24
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report on Schedules...................................S-2
Schedule I Parent Company Only Balance Sheets as of July 31, 1999 and
1998, and Statements of Earnings and Cash Flows for the Years
ended July 31, 1999, 1998, and 1997 S-3
Schedule II Valuation and Qualifying Accounts for the
Years ended July 31, 1999, 1998
and 1997..................................................S-6
S-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P. and Subsidiaries
Liberty, Missouri
We have audited the consolidated financial statements of Ferrellgas
Partners, L.P., and subsidiaries as of July 31, 1999 and 1998, and for each of
the three years ended July 31, 1999, and have issued our report thereon dated
September 14, 1999. Our audit also included the financial statement schedules
listed at Item 14(a)2. These financial statement schedules are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion based on our audit. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 14, 1999
S-2
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
BALANCE SHEET
(in thousands)
ASSETS July 31, 1999 July 31, 1998
- ----------------------------------------------------- ---------------- -----------------
Cash and cash equivalents $ 1 $ 1
Investment in Ferrellgas, L.P. 88,758 148,013
Other assets, net 3,466 2,778
---------------- -----------------
Total Assets $ 92,225 $ 150,792
================ =================
LIABILITIES AND PARTNERS' CAPITAL
- -----------------------------------------------------
Other current liabilities $ 1,876 $ 1,875
Long term debt 160,000 160,000
Partners' Capital
Common unitholders 1,215 27,985
Subordinated unitholders (10,516) 19,908
General partner (59,553) (58,976)
Accumulated other comprehensive income (797) -
---------------- -----------------
Total Partners' Capital (69,651) (11,083)
---------------- -----------------
Total Liabilities and Partners' Capital $ 92,225 $ 150,792
================ =================
S-3
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
STATEMENTS OF EARNINGS
(in thousands)
For the Year Ended
---------------------------------------------------------
July 31, 1999 July 31, 1998 July 31, 1997
---------------- ----------------- -----------------
Equity in earnings of Ferrellgas, L.P. $ 17,511 $ 20,462 $ 38,673
Operating expense - 5 27
Interest expense 15,514 15,514 15,428
---------------- ----------------- -----------------
Net earnings $ 1,997 $ 4,943 $ 23,218
================ ================= =================
S-4
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended
---------------------------------------------------------
July 31, 1999 July 31, 1998 July 31, 1997
----------------- ----------------- ----------------
Cash Flows From Operating Activities:
Net earnings $ 1,997 $ 4,943 $ 23,218
Reconciliation of net earnings to
net cash from operating activities:
Amortization of capitalized financing costs 513 513 511
Equity in earnings of Ferrellgas, L.P. (17,690) (20,671) (39,068)
Other current assets (1,201) 3 879
Distributions received from Ferrellgas, L.P. 79,430 78,176 80,085
Increase (decrease) in other current liabilities 1 (1) (2,980)
----------------- ----------------- ----------------
Net cash provided by operating activities 63,050 62,963 62,645
----------------- ----------------- ----------------
Cash Flows From Financing Activities:
Distributions to partners (63,229) (63,176) (63,044)
Net advance from affiliate 179 213 399
----------------- ----------------- ----------------
Net cash used by financing activities (63,050) (62,963) (62,645)
----------------- ----------------- ----------------
Increase in cash and cash equivalents - - -
Cash and cash equivalents - beginning of period 1 1 1
----------------- ----------------- ----------------
Cash and cash equivalents - end of period $ 1 $ 1 $ 1
================= ================= ================
S-5
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to Deductions Balance
beginning cost/ Other (amounts at end
Description of period expenses Additions charged-off) of period
- ---------------------------------------- -------------- -------------- -------------- --------------- --------------
Year ended July 31, 1999
Allowance for doubtful accounts $1,381 $1,622 $40 $1,787 $1,296
Accumulated amortization:
Intangible assets 123,531 15,742 0 0 139,273
Other assets 9,054 1,686 0 5,735 5,005
Year ended July 31, 1998
Allowance for doubtful accounts 1,234 3,003 0 2,856 1,381
Accumulated amortization:
Intangible assets 109,211 14,320 0 0 123,531
Other assets 6,753 2,301 0 0 9,054
Year ended July 31, 1997
Allowance for doubtful accounts 1,169 2,604 0 2,539 1,234
Accumulated amortization:
Intangible assets 95,801 13,410 0 0 109,211
Other assets 4,647 2,106 0 0 6,753
S-6