UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file numbers: 1-11331
333-06693
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
(Exact name of registrants as specified in their charters)
Delaware 43-1698480
Delaware 43-1742520
---------------------------- -------------------------------
(States or other jurisdictions of (I.R.S. Employer Identification Nos.)
incorporation or organization)
One Liberty Plaza, Liberty, Missouri 64068
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (816) 792-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
At December 14, 2000, the registrants had units or shares outstanding as
follows:
Ferrellgas Partners, L.P. 31,307,116 Common Units
4,769,009 Senior Common Units
Ferrellgas Partners Finance
Corp. 1,000 Common Stock
FERRELLGAS PARTNERS, L.P. and SUBSIDIARIES
FERRELLGAS PARTNERS FINANCE CORP.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Ferrellgas Partners, L.P. and Subsidiaries
Consolidated Balance Sheets - October 31, 2000 and July 31, 2000 1
Consolidated Statements of Earnings -
Three months ended October 31, 2000 and 1999 2
Consolidated Statement of Partners' Capital and Accumulated Other
Comprehensive Income - Three months ended October 31, 2000 3
Consolidated Statements of Cash Flows -
Three months ended October 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Ferrellgas Partners Finance Corp.
Balance Sheets - October 31, 2000 and July 31, 2000 11
Statements of Earnings - Three months ended October 31, 2000 and 1999 11
Statements of Cash Flows - Three months ended October 31, 2000 and 1999 12
Notes to Financial Statements 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
October 31, July 31,
ASSETS 2000 2000
- ---------------------------------------------------------------------- ------------- ---------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 22,129 $14,838
Accounts and notes receivable, net 49,438 89,801
Inventories 77,600 71,979
Prepaid expenses and other current assets 9,559 8,275
------------- ---------------
Total Current Assets 158,726 184,893
Property, plant and equipment, net 510,062 516,183
Intangible assets, net 250,461 256,476
Other assets, net 23,626 10,355
------------- ---------------
Total Assets $ 942,875 $ 967,907
============= ===============
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 128,577 $95,264
Other current liabilities 57,952 77,631
Short-term borrowings 5,428 18,342
------------- ---------------
Total Current Liabilities 191,957 191,237
Long-term debt 724,930 718,118
Other liabilities 15,686 16,176
Contingencies and commitments - -
Minority interest 1,703 2,032
Partners' Capital:
Senior common unitholder (4,769,009 and 4,652,691 units outstanding at October
2000 and July 2000, respectively - liquidation preference $190,760 and
$186,108 at October 2000 and July 2000, respectively) 185,555 179,786
Common unitholders (31,307,116 units outstanding
at both October 2000 and July 2000) (118,638) (80,931)
General partner unitholder (316,233 units outstanding
at both October 2000 and July 2000) (58,891) (58,511)
Accumulated other comprehensive income 573 -
------------- ---------------
Total Partners' Capital 8,599 40,344
------------- ---------------
Total Liabilities and Partners' Capital $ 942,875 $ 967,907
============= ===============
See notes to consolidated financial statements.
1
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per-unit data)
(unaudited)
For the three months ended
----------------------------------------
October 31, 2000 October 31, 1999
------------------ ------------------
Revenues:
Gas liquids and related product sales $260,097 $141,507
Other 10,287 21,232
------------------ ------------------
Total revenues 270,384 162,739
Cost of product sold (exclusive of
depreciation, shown separately below) 178,243 85,325
------------------ ------------------
Gross profit 92,141 77,414
Operating expense 65,143 57,177
Depreciation and amortization expense 14,031 12,083
General and administrative expense 4,717 5,183
Equipment lease expense 8,107 3,853
Employee stock ownership plan compensation charge 1,069 1,027
Loss on disposal of assets and other 1,171 96
------------------ ------------------
Operating loss (2,097) (2,005)
Interest expense (16,168) (12,581)
Interest income 557 258
------------------ ------------------
Loss before minority interest (17,708) (14,328)
Minority interest (143) (106)
------------------ ------------------
Net loss (17,565) (14,222)
Paid-in-kind distribtuion to senior common unitholder 4,653 -
General partner's interest in net loss (222) (142)
------------------ ------------------
Common unitholders' interest in net loss $(21,996) $(14,080)
================== ==================
Basic and diluted loss per common unit:
Net loss after paid-in-kind distribution $ (0.70) $ (0.45)
================== ==================
See notes to consolidated financial statements.
2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND OTHER COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Number of units Accumulated
----------------------------- other
Senior General Senior General compre- Total
common Common partner common Common partner hensive partners'
unitholder unitholders unitholder unitholder unitholders unitholder income capital
------------------------------------------ ------------ --------------------- ----------
August 1, 2000 4,652.7 31,307.1 316.2 $ 179,786 $ (80,931) $ (58,511) $ - $ 40,344
Accretion of discount on
senior common units - - - 1,116 (1,105) (11) - -
Contribution from general partner
in connection with ESOP
compensation charge - - - - 1,048 11 - 1,059
Quarterly distributions - - - - (15,654) (158) - (15,812)
Accrued paid-in-kind
distributions 116.3 - - 4,653 (4,607) (46) - -
Comprehensive income:
Net loss - - - - (17,389) (176) - (17,565)
Other comprehensive income-
Cumulative effect of accounting
change 709
Net loss on derivative instruments (34)
Reclassification adjustments (102)
----------
Total other comprehensive income 573
----------
Comprehensive income (loss) (16,992)
-------- ---------- ------- ------------ ------------ ---------- ---------- ----------
October 31, 2000 4,769.0 31,307.1 316.2 $ 185,555 $ (118,638) $ (58,891) $ 573 $ 8,599
========= ========== ======= ============ ============ ========== ========== ==========
See notes to consolidated financial statements
3
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the three months ended
-------------------------------------
October 31, 2000 October 31, 1999
------------------ -----------------
Cash Flows From Operating Activities:
Net loss $ (17,565) $ (14,222)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization expense 14,031 12,083
Other 2,589 1,965
Changes in operating assets and liabilities,
net of effects from business
acquisitions and accounts receivable securitization:
Accounts and notes receivable (28,990) (26,542)
Inventories (5,047) (29,843)
Prepaid expenses and other current assets (1,284) (8,380)
Accounts payable 33,313 27,616
Accrued interest expense (8,812) (1,715)
Other current liabilities (8,540) (1,244)
Other liabilities (81) 157
------------------ -----------------
Net cash used in operating activities (20,386) (40,125)
------------------ -----------------
Cash Flows From Investing Activities:
Proceeds from accounts receivable securitization 55,000 -
Business acquisitions, net of cash acquired (482) (6,527)
Cash paid for acquisition transaction fees (3,052) -
Capital expenditures (2,568) (6,205)
Other 787 1,468
------------------ -----------------
Net cash provided by (used in) investing activities 49,685 (11,264)
------------------ -----------------
Cash Flows From Financing Activities:
Distributions (15,812) (15,811)
Additions to long-term debt 7,914 10,223
Reductions of long-term debt (999) (1,214)
Net additions (reductions) to short-term borrowings (12,914) 35,479
Minority interest activity (197) (161)
------------------ -----------------
Net cash provided by (used in) financing activities (22,008) 28,516
------------------ -----------------
Increase (decrease) in cash and cash equivalents 7,291 (22,873)
Cash and cash equivalents - beginning of period 14,838 35,134
------------------ -----------------
Cash and cash equivalents - end of period $ 22,129 $ 12,261
================== =================
Cash paid for interest $ 24,393 $ 13,708
================== =================
See notes to consolidated financial statements.
4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000
(unaudited)
A. The financial statements of Ferrellgas Partners, L.P. and Subsidiaries (the
"Partnership") reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the interim periods
presented. All adjustments to the financial statements were of a normal,
recurring nature, as well as the accounting change to adopt Statement of
Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and
Hedging Activities. The information included in this Form 10-Q should be
read in conjunction with Management's Discussion and Analysis and the
financial statements with related notes included in the Partnership's
annual report on Form 10-K for the year ended July 31, 2000.
B. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from these estimates.
C. Certain amounts included in the first quarter of fiscal 2000 consolidated
financial statements have been reclassified to conform to the first quarter
of fiscal 2001 presentation.
D. The propane industry is seasonal in nature with peak activity during the
winter months. Therefore, the results of operations for the periods ended
October 31, 2000 and October 31, 1999 are not necessarily indicative of the
results to be expected for a full year.
E. Accounts Receivable Securitization
During the three months ended October 31, 2000, Ferrellgas, L.P. received
$55,000,000 in cash in exchange for the sale and contribution of an
interest in a pool of its trade accounts receivable to its recently created
wholly-owned, special purpose subsidiary, Ferrellgas Receivables, LLC.
Ferrellgas Receivables then sold its interest to a commercial paper conduit
of Banc One, NA according to the terms of a 364-day agreement. The level of
funding available from this agreement is limited to $60,000,000. In
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," this transaction is
reflected on the Partnership's financial statements as a sale of accounts
receivable and an investment in a subsidiary. The proceeds of these sales
are less than the face amount of the pool of accounts receivable sold. The
difference is classified on the statement of earnings as "Loss on disposal
of assets and other", and approximates the financing cost of issuing
commercial paper backed by these accounts receivable. See Note F for the
accounting policy implemented to account for "Investment in unconsolidated
subsidiary."
5
F. Supplemental Balance Sheet Information:
Inventories consist of:
October 31, July 31,
(in thousands) 2000 2000
--------------- ---------------
Liquefied propane gas and related products $57,182 $50,868
Appliances, parts and supplies 20,418 21,111
--------------- ---------------
$77,600 $71,979
=============== ===============
In addition to inventories on hand, the Partnership enters into contracts to
buy product for supply purposes. Nearly all of these contracts have terms of
less than one year and most call for payment based on market prices at the
date of delivery. All fixed price contracts have terms of less than one
year. As of October 31, 2000, in addition to the inventory on hand, the
Partnership had committed to take delivery of approximately 84,785,000
gallons at a fixed price for its future retail propane sales.
Property, plant and equipment, net consist of:
October 31, July 31,
(in thousands) 2000 2000
--------------- ---------------
Property, plant and equipment $781,069 $781,548
Less: accumulated depreciation 271,007 265,365
--------------- ---------------
$510,062 $516,183
=============== ===============
In the first quarter of fiscal 2001, the Partnership increased the estimate
of the residual values of its existing customer and storage tanks. This
increase in the residual values resulted from a review by management of
tank values established in an independent valuation obtained in connection
with tank lease financings completed in December 1999 (see Note I). Due to
this change in the tank residual values, depreciation expense was decreased
by approximately $3,072,000, compared to the depreciation that would have
been recorded using the previous estimated residual values. The change in
estimated residual values will continue to affect future depreciation
expense as compared to the depreciation that would have been recorded using
the previous estimated residual values.
Intangible assets, net consist of:
October 31, July 31,
(in thousands) 2000 2000
--------------- ---------------
Intangible assets $419,067 $418,700
Less: accumulated amortization 168,606 162,224
--------------- ---------------
$250,461 $256,476
=============== ===============
Other assets, net consist of:
October 31, July 31,
(in thousands) 2000 2000
--------------- ---------------
Other assets, net $10,800 $10,355
Investment in unconsolidated subsidiary 12,826 -
--------------- ---------------
$23,626 $10,355
=============== ===============
The investment in unconsolidated subsidiary represents the Partnership's
investment in Ferrellgas Receivables and is accounted for on the equity
basis. The earnings in the equity of the unconsolidated subsidiary and the
loss on the sale of the receivables are noncash transactions and are
classified as "Loss on disposal of assets and other" in the statement of
earnings. See discussion of the transactions between the Partnership and
Ferrellgas Receivables in Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources. See
Note E for additional information about the accounts receivable
securitization.
6
G. The Partnership is threatened with or named as a defendant in various
lawsuits which, among other items, claim damages for product liability. It
is not possible to determine the ultimate disposition of these matters;
however, management is of the opinion that there are no known claims or
contingent claims that are likely to have a material adverse effect on the
financial condition, results of operations or cash flows of the
Partnership.
H. On September 14, 2000, the Partnership paid a cash distribution of $0.50
per common unit for the quarter ended July 31, 2000. On November 16, 2000,
the Partnership declared its first-quarter cash distribution of $0.50 per
common unit, that was paid on December 14, 2000.
I. Business Combinations
On December 17, 1999, the Partnership purchased Thermogas, LLC from
Williams Natural Gas Liquids, Inc., a subsidiary of The Williams Companies,
Inc. At closing, the Partnership entered into the following noncash
transactions: a) issued $175,000,000 in senior common units to the seller,
b) assumed a $183,000,000 bridge loan, and c) assumed a $135,000,000
operating tank lease. After the conclusion of these acquisition-related
transactions, including the merger of Ferrellgas, L.P. and Thermogas, the
Partnership acquired $61,842,000 of cash, which remained on the Thermogas
balance sheet at the acquisition date.
The total assets contributed to Ferrellgas, L.P. (at the Partnership's cost
basis) have been preliminarily allocated as follows: (a) working capital of
$14,800,000, (b) property, plant and equipment of $145,885,000, (c)
$60,200,000 to customer list with an estimated useful life of 15 years, (d)
$18,500,000 to trademarks with an estimated useful life of 15 years (e)
$9,600,000 to assembled workforce with an estimated useful life of 15
years, (f) $3,071,000 to non-compete agreements with an estimated useful
life ranging from one to seven years, and (g) $65,751,000 to goodwill at an
estimated useful life of 15 years. The estimated fair values and useful
lives of assets acquired are based on a preliminary valuation and are
subject to final valuation adjustments. The Partnership has accrued
$7,033,000 in involuntary employee termination benefits and exit costs,
which it expects to incur within twelve months from the acquisition date as
it implements the integration of the Thermogas operations. This accrual
included $5,870,000 of termination benefits and $1,163,000 of costs to exit
Thermogas activities. As of October 31, 2000, the Partnership has paid
$4,094,000 for termination benefits and $1,154,000 for exit costs. The
Partnership intends to continue its analysis of the net assets of Thermogas
to determine the final allocation of the total purchase price to the
various assets acquired. The transaction has been accounted for as a
purchase and, accordingly, the results of operations of Thermogas have been
included in the consolidated financial statements from the date of
acquisition.
The following financial information assumes that the Thermogas acquisition
occurred as of August 1, 1999 (unaudited):
Three months ended
--------------------------------
October 31, October 31,
(in thousands, except per unit amounts) 2000 1999
Pro Forma
--------------------------------
Total revenues $270,384 $215,838
Net loss (17,565) (25,527)
Common unitholders' interest in net loss (21,996) (29,603)
Basic and diluted loss per common unit $ (0.70) $ (0.95)
7
J. Earnings Per Unit
Below is a calculation of the basic and diluted common units used to
calculate basic and diluted loss per unit on the statements of earnings.
(in thousands, except per unit data)
Three months ended
October 31, October 31,
2000 1999
----------------- ----------------
Common unitholders' interest in net loss $(21,996) $(14,080)
Weighted average common units outstanding 31,307.1 31,305.5
----------------- ----------------
Basic and diluted loss per common unit $ (0.70) $ (0.45)
================= ================
The senior common units have been excluded from common units outstanding as
they are considered contingently issuable common units for which all
necessary conditions for their issuance have not been satisfied as of the
end of the reporting period. In order to compute the basic and diluted loss
per common unit, the distribution paid on senior common units is subtracted
from net loss to arrive at the common unitholders' interest in net loss.
K. Adoption of New Accounting Standards
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133, as amended by
SFAS 137 and SFAS 138, establishes accounting and reporting standards for
derivative instruments and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on
the balance sheet at fair value. The Partnership's overall objective for
entering into derivative contracts for the purchase of product is related
to hedging, risk reduction and to anticipate market movements. Other
derivatives are entered into to reduce interest rate risk associated with
long term debt and lease obligations. Fair value hedges are derivative
financial instruments that hedge the exposure to changes in the fair value
of an asset or a liability or an identified portion thereof attributable to
a particular risk. Cash flow hedges are derivative financial instruments
that hedge the exposure to variability in expected future cash flows
attributable to a particular risk.
Product purchase price risk
Fluctuations in the wholesale cost of propane subject the Partnership to
purchase price risk. During fiscal year 2000, the Partnership purchased
approximately one billion gallons of propane at various prices that were
eventually sold to its customers, exposing the Partnership to future
product price fluctuations. Also, certain forecasted transactions expose
the Partnership to purchase price risk. The Partnership continually
monitors its purchase price exposures and utilizes product hedges to
mitigate the risk of future price fluctuations. Propane is the only product
hedged with the use of product hedge positions. The Partnership uses
derivative products to hedge a portion of its forecasted purchases for up
to one year in the future. These derivatives are designated as cash flow
hedging instruments. Because these derivatives are designated as cash flow
hedges, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income (OCI) and are
recognized in the statement of earnings when the forecasted transaction
impacts earnings. Changes in the fair value of cash flow hedges due to
hedge ineffectiveness are recognized in other revenues on the statement of
earnings. The fair value of these derivatives related to purchase price
risk are classified on the balance sheet as inventories. The Partnership
also purchases and sells derivatives that are not classified as hedges to
manage other risks associated with commodity prices. The changes in fair
value of these derivatives are recognized in other revenue on the statement
of earnings as they occur.
8
The Partnership also uses forward contracts, not designated as hedging
instruments under SFAS 133, to help reduce the price risk related to sales
made to its propane customers. These forward contracts meet the requirement
to qualify as normal purchases and normal sales as defined in SFAS 133, as
amended by SFAS 137 and SFAS 138, and thus are not adjusted to fair market
value.
Interest rate risk
The Partnership also holds $724,930,000 in primarily fixed rate long-term
debt and $158,800,000 in variable rate operating leases. Fluctuations in
interest rates subject the Partnership to interest rate risk. Decreases in
interest rates decrease the fair value of the Partnership's fixed rate
debt, while increases in interest rates subject the Partnership to the risk
of increased interest expense related to its variable rate debt.
The Partnership enters into fair value and cash flow hedges to help reduce
its overall interest rate risk. Interest rate swaps are used to hedge the
exposure to changes in the fair value of fixed rate debt due to changes in
interest rates. Changes in the fair value of the fixed rate debt and any
related fair value hedges are recognized in interest expense on the
statement of earnings as they occur. Interest rate caps are used to hedge
the risk associated with rising interest rates and their affect on
forecasted transactions related to variable rate debt and lease
obligations. These interest rate caps are designated as cash flow hedges
and thus, the effective portions of changes in the fair value of the hedges
are recorded in other comprehensive income (OCI) and are recognized as
interest expense in the statement of earnings when the forecasted
transaction impacts earnings. Changes in the fair value of any cash flow
hedges that are considered ineffective are recognized as interest expense
on the statement of earnings as they occur. Fair value of interest rate
derivatives that are considered fair value or cash flow hedges are
classified either as other assets or as other liabilities on the balance
sheet.
Effect of adoption of SFAS 133
The adoption of SFAS 133 resulted in an increase in earnings of $299,000
and an increase in OCI of $709,000 as of August 1, 2000. The increase in
earnings is primarily attributable to net gains in the fair value of
derivatives not designated as hedging instruments under SFAS 133. The
increase in OCI is mostly attributable to net gains on cash flow hedges for
the fair value of options designated as hedging instruments. The net gains
related to these derivatives included in OCI as of August 1, 2000, will be
reclassified into earnings during the twelve months ended July 31, 2001, at
the same time that that hedged item affects earnings. The Partnership uses
cash flow hedges to manage exposures to product purchase price risk and
uses both fair value and cash flow hedges to manage exposure to interest
rate risks.
Three months ended October 31, 2000
Gains and losses related to derivatives held for product price risk
included in OCI are reclassified into earnings at the expiration or
settlement date of the hedged item. The Partnership estimates that $573,000
of net derivative gains included in other comprehensive income will be
reclassified into earnings within the next twelve months.
Hedge ineffectiveness, determined in accordance with SFAS 133, had no
impact on earnings for the three months ended October 31, 2000. No fair
value hedges or cash flow hedges were derecognized or discontinued for the
three months ended October 31, 2000.
9
Revenue Recognition
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 entitled "Revenue Recognition".
The bulletin, as amended, is to be adopted, if needed, no later than the
fourth fiscal quarter of fiscal years commencing after December 15, 1999,
with retroactive adjustment to the first fiscal quarter of that year.
Management implemented this bulletin in the first quarter of fiscal 2001
with no material affect on the Partnership's financial position, results of
operations or cash flows.
Accounting for Securitization
The FASB also recently issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS No. 125's provisions without
reconsideration. The Partnership is currently assessing the effect of SFAS
No. 140 on its financial position, results of operations and cash flows.
See Notes E and F for discussion of SFAS No. 125's effect on recent
accounts receivable transactions. SFAS 125 affects the recognition and
reclassification of collateral and disclosures relating to securitization
transactions and collateral and will be effective for the Partnership's
fiscal year ending July 31, 2001.
10
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
BALANCE SHEETS
October 31, July 31,
ASSETS 2000 2000
- -------------------------------------------------------------------- ------------------ -------------------
(unaudited)
Cash $1,000 $1,000
------------------ -------------------
Total Assets $1,000 $1,000
================== ===================
STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------
Common stock, $1.00 par value; 2,000 shares
Authorized; 1,000 shares issued and outstanding $1,000 $1,000
Additional paid in capital 1,328 1,237
Accumulated deficit (1,328) (1,237)
------------------ -------------------
Total Stockholder's Equity $1,000 $1,000
================== ===================
STATEMENTS OF EARNINGS
(unaudited)
Three Months Ended
-------------------------------------
October 31, October 31,
2000 1999
------------------ ------------------
General and administrative expense $ 91 $ 186
----------------- ------------------
Net loss $(91) $(186)
================== ==================
See notes to financial statements.
11
FERRELLGAS PARTNERS FINANCE CORP.
(A wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
--------------------------------------------
October 31, October 31,
2000 1999
------------------ -------------------
Cash Flows From Operating Activities:
Net loss $(91) $ (186)
-------------------
------------------
Cash used in operating activities (91) (186)
------------------ -------------------
Cash Flows From Financing Activities:
Capital contribution 91 186
-------------------
------------------
Cash provided by financing activities 91 186
------------------ -------------------
Change in cash - -
Cash - beginning of period 1,000 1,000
------------------ -------------------
Cash - end of period $1,000 $1,000
================== ===================
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
(unaudited)
A. Ferrellgas Partners Finance Corp., a Delaware corporation, was formed on
March 28, 1996, and is a wholly-owned subsidiary of Ferrellgas Partners,
L.P.
B. The financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of the interim periods
presented. All adjustments to the financial statements were of a normal,
recurring nature.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and liquidity
and capital resources of Ferrellgas Partners, L.P.. Except for the $160,000,000
of 9 3/8% Senior Secured Notes issued in April 1996 by Ferrellgas Partners and
the related interest expense, Ferrellgas, L.P. accounts for nearly all of the
consolidated assets, liabilities, sales and earnings of Ferrellgas Partners.
Ferrellgas Partners Finance Corp. has nominal assets and does not conduct
any operations. Accordingly, a discussion of the results of operations and
liquidity and capital resources is not presented.
Forward-looking statements
Statements included in this report that are not historical facts are
forward-looking statements. These statements include whether or not Ferrellgas,
L.P. will have sufficient funds to meet its obligations and to enable it to
distribute to Ferrellgas Partners sufficient funds to permit Ferrellgas Partners
to meet its obligations with respect to the $160,000,000 of Senior Notes issued
by Ferrellgas Partners in April 1996, and to pay the required distribution on
its senior common units, and to pay the minimum quarterly distribution of $0.50
per common unit.
The forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in or
implied by the statements. The risks and uncertainties and their effect on the
Partnership's operations include but are not limited to the following:
o the effect of weather conditions on demand for propane,
o price and availability of propane supplies,
o price and inventory risk of propane supplies,
o the effect of increasing volatility in commodity prices on the
Partnership's liquidity,
o the timing of collection of accounts receivable,
o the availability of capacity to transport propane to market areas,
o competition from other energy sources and within the propane industry,
o operating risks incidental to transporting, storing, and distributing
propane,
o changes in interest rates,
o governmental legislation and regulations,
o energy efficiency and technology trends,
o the condition of the capital markets in the United States,
o the political and economic stability of the oil producing nations,
o the expectation that the senior common units will be redeemed in the
future with proceeds from an offering of equity at a
price satisfactory to the Partnership, and
o expected savings from the integration of the Thermogas acquisition,
reductions made in personnel and assets related to the existing Ferrellgas,
L.P. locations and savings related to the routing and scheduling
improvements, all discussed in "Business Recent Initiatives" section of the
Partnership's annual report filed on Form 10-K for the year ended July 31,
2000.
Results of Operations
Due to the seasonality of the retail propane business, results of
operations for the three months ended October 31, 2000 and 1999, are not
necessarily indicative of the results to be expected for a full year. Other
factors affecting the results of operations include competitive conditions,
demand for product, timing of acquisitions, variations in the weather and
fluctuations in propane prices. As the Partnership has grown through
acquisitions, fixed costs such as personnel costs, equipment leases,
depreciation and interest expense have increased. Historically, these fixed cost
increases have caused net losses in the first and fourth fiscal quarters and net
income in the second and third fiscal quarters to be more pronounced.
13
Three Months Ended October 31, 2000 vs. October 31, 1999
Total Revenues. Total gas liquids and related product sales increased 83.8%
to $260,097,000 in the first quarter of fiscal 2001 as compared to $141,507,000
in the first quarter of fiscal 2000, primarily due to increased retail sales
volume and an increased average sales price per gallon.
Retail sales volumes increased 30.4% to 200,063,000 gallons in the first
quarter of fiscal 2001 as compared to 153,429,000 gallons in the first quarter
of fiscal 2000, primarily due to the acquisition of Thermogas. The average sales
price per gallon increased due to the effect of a significant increase in the
wholesale cost of propane. The wholesale cost of propane for the first quarter
of fiscal 2001 was significantly higher compared to the first quarter of fiscal
2000. The wholesale market price at one of the major supply points, Mt. Belvieu,
Texas, averaged $0.614 per gallon during the first quarter of fiscal 2001
compared to an average of $0.431 per gallon in the first quarter of fiscal 2000.
Other major supply points in the United States experienced similar increases.
Other revenues decreased by $10,945,000 primarily due to significant risk
management gains realized in the first quarter of fiscal 2000 that were not
repeated during the first quarter of fiscal 2001, partially offset by
contributions from Thermogas operations.
Gross Profit. Gross profit increased 19.0% to $92,141,000 in the first
quarter of fiscal 2001 as compared to $77,414,000 in the first quarter of fiscal
2000, primarily due to gross profit generated from the acquired Thermogas
operations and, to a lesser extent, increased retail margins, partially offset
by the decrease in other revenues.
Operating Expense. Operating expense increased 13.9% to $65,143,000 in the
first quarter of fiscal 2001 as compared to $57,177,000 in the first quarter of
fiscal 2000 primarily due to personnel, plant and office, vehicle and other
operating expenses related to the acquired Thermogas operations partially offset
by reductions made since the first quarter of fiscal 2000 in personnel, vehicles
and other expenses in the existing Ferrellgas operations.
Depreciation and Amortization. Depreciation and amortization expense
increased 16.1% to $14,031,000 in the first quarter of fiscal 2001 as compared
to $12,083,000 in the first quarter of fiscal 2000 primarily due to the addition
of property, plant and equipment, and intangible assets from the Thermogas
acquisition, partially offset by the change in the estimated residual values
used to compute the depreciation of customer and storage tanks. In the first
quarter of fiscal 2001, the Partnership increased the estimate of the residual
values of its existing customer and storage tanks. This increase in the residual
values resulted from a review by management of tank values established in an
independent valuation obtained in connection with tank lease financings
completed in December 1999. Due to this change in the tank residual values,
depreciation expense was decreased by approximately $3,072,000, compared to the
depreciation that would have been recorded using the previous estimated residual
values. The change in estimated residual values will continue to affect future
depreciation expense as compared to the depreciation that would have been
recorded using the previous estimated residual values.
Equipment Lease Expense. Equipment lease expense increased 110.4% to
$8,107,000 in the first quarter of fiscal 2001 as compared to $3,853,000 in the
first quarter of fiscal 2000 due to the addition of Thermogas operating leases,
and to a lesser extent to upgrades to the Partnership's truck fleet.
Interest expense. Interest expense increased 28.5% to $16,168,000 in the
first quarter of fiscal 2001 as compared to $12,581,000 in the first quarter of
fiscal 2000. This increase is primarily the result of increased borrowings
related to the Thermogas acquisition, partially offset by the effect of the
reduced borrowings during the first quarter of fiscal 2001 resulting from the
funds generated from the accounts receivable securitization. See discussion of
the transactions between the Partnership and Ferrellgas Receivables, LLC in
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations - Liquidity and Capital Resources.
14
Liquidity and Capital Resources
The ability of the Partnership to satisfy its obligations is dependent upon
future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. Due to the seasonality of the Partnership's retail propane business, a
significant portion of the Partnership's cash flow from operations is typically
generated during the winter heating season which occurs during the Partnership's
second and third fiscal quarters. Typically, the Partnership generates negative
cash flow from operations in its first and fourth fiscal quarters, because fixed
costs exceed gross profit during the non-peak season. Consistent with prior
years, the first quarter ending October 31, 2000, generated negative cash flows
from operations and is typically the time period when the Partnership utilizes
other sources of funds to meet its obligations. Subject to meeting certain
financial tests discussed below, Ferrellgas, Inc. believes that Ferrellgas, L.P.
will have sufficient funds available to meet its obligations, to distribute to
Ferrellgas Partners sufficient funds to permit Ferrellgas Partners to meet its
obligations with respect to the $160,000,000 senior secured notes issued in
April 1996 and to distribute to Ferrellgas Partners sufficient funds to
distribute the minimum quarterly distribution on all common units for the
quarter ending January 31, 2001.
The Partnership's credit facilities, public debt, private debt, accounts
receivable securitization facility and tank leases contain several financial
tests and covenants which restrict the Partnership's ability to pay
distributions, incur debt and engage in certain other business transactions. In
general, these tests are based on the Partnership's debt to cash flow ratio and
cash flow to interest expense ratio. Ferrellgas, Inc. believes that the most
restrictive of these tests currently are debt incurrence limitations within the
credit facility, tank leases and accounts receivable securitization facility and
limitations on the payment of distributions within the Ferrellgas Partners
senior secured notes. The credit facility, tank leases and accounts receivable
securitization facility limit Ferrellgas, L.P.'s ability to incur debt if
Ferrellgas, L.P. exceeds prescribed ratios of either debt to cash flow or cash
flow to interest expense. The Ferrellgas Partners senior secured notes restrict
payments if a minimum ratio of cash flow to interest expense is not met. This
restriction places limitations on the Partnership's ability to make certain
restricted payments such as the payment of cash distributions to unitholders.
The cash flow used to determine these financial tests generally is based upon
the Partnership's most recent cash flow performance giving pro forma effect for
acquisitions and divestitures made during the test period.
The Partnership's financial performance during the 2000, 1999 and 1998
fiscal years has been adversely impacted by average temperatures that were
reported by the National Oceanic Atmospheric Administration as the warmest in
recorded history. In addition, during fiscal 2000, the Partnership experienced
high product costs which negatively impacted retail margins. Despite these
challenges, the Partnership has continued to meet all of its financial tests and
covenants. These include the debt incurrence tests within the credit facility,
tank leases and accounts receivable securitization facility and the Ferrellgas
Partners senior secured notes restricted payment test, as well as other
financial tests and covenants in the Ferrellgas Partners senior secured notes,
the $350 million senior notes, the $184 million senior notes, the credit
facility, the tank leases and the accounts receivable securitization facility.
Based upon current estimates of the Partnership's cash flow, Ferrellgas,
Inc. believes that the Partnership will be able to meet all of the required
financial tests and covenants for the quarter ending January 31, 2001. However,
due to the lower than expected operating results experienced during fiscal 2000,
if the Partnership were to encounter additional unexpected downturns in business
operations, such as significantly warmer than normal weather or a volatile cost
environment, the Partnership may not meet certain financial tests during
immediate future quarters. These factors could temporarily restrict the ability
of Ferrellgas, L.P. to incur debt or Ferrellgas Partner's ability to make cash
distributions to its common unitholders. Depending on the circumstances, the
Partnership may consider alternatives to permit the incurrence of debt at
Ferrellgas, L.P. or the continued payment by Ferrellgas Partners of the
quarterly cash distribution to its common unitholders. No assurances can be
given, however, that such alternatives can or will be implemented with respect
to any given quarter.
15
Future maintenance and working capital needs of the Partnership are
expected to be provided by cash generated from future operations, existing cash
balances, the credit facility and the accounts receivable securitization
facility. To fund expansive capital projects and future acquisitions,
Ferrellgas, L.P. may borrow on the existing credit facility, Ferrellgas Partners
or Ferrellgas, L.P. may issue additional debt to the extent permitted under
existing debt agreements or Ferrellgas Partners may issue additional equity
securities, including, among others, common units.
Toward this purpose, on February 5, 1999, Ferrellgas Partners filed a shelf
registration statement with the Securities and Exchange Commission for the
periodic sale of up to $300,000,000 in equity and/or debt securities. The
registered securities would be available for sale by the Partnership in the
future to fund acquisitions, to reduce indebtedness or to fund general corporate
purposes.
Ferrellgas Partners also maintains an additional shelf registration
statement with the Securities and Exchange Commission for 2,010,484 common
units. These common units may be issued by Ferrellgas Partners in connection
with the Partnership's acquisition of other businesses, properties or securities
in business combination transactions.
Operating Activities. Cash used in operating activities was $20,387,000 for
the three months ended October 31, 2000, compared to cash used in operating
activities of $40,125,000 for the three months ended October 31, 1999. This
decreased use of cash is primarily due to the timing of receipts and payments
related to risk management activities and to a lesser extent higher working
capital requirements resulting from the increased costs of propane and the
acquisition of Thermogas.
Investing Activities. During the first quarter of fiscal 2001,
the Partnership made growth and maintenance capital
expenditures of $2,568,000 consisting primarily of the following:
o relocating and upgrading district plant facilities,
o vehicle lease buyouts,
o upgrading computer equipment and software, and
o additions to propane storage tanks and cylinders.
The Partnership's capital requirements for repair and maintenance of
property, plant and equipment are relatively low due to limited technological
change and long useful lives of propane tanks and cylinders.
The Partnership leases light and medium duty trucks, tractors and trailers.
The Partnership believes vehicle leasing is a cost-effective method for meeting
its transportation equipment needs. The Partnership purchased $217,000 of
vehicles whose lease terms expired in the first quarter of fiscal 2001. The
Partnership plans to purchase vehicles at the end of their lease term totaling
$1,169,000 in fiscal 2001, $203,000 in fiscal 2002 and $143,000 in fiscal 2003.
The Partnership intends to renew other vehicle and tank leases that would have
had buyouts of $452,000 in fiscal 2001, $7,057,000 in fiscal 2002, $162,569,000
in fiscal 2003, $4,981,000 in fiscal 2004 and $4,086,000 in fiscal 2005.
Historically, the Partnership has been successful in renewing vehicle leases
subject to buyouts. However, there is no assurance that it will be successful in
the future.
The Partnership continues to seek to expand 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 interests.
Financing Activities. During the three months ended October 31, 2000,
Ferrellgas, L.P. received $55,000,000 in cash in exchange for the sale and
contribution of an interest in a pool of its trade accounts receivable to its
recently created wholly-owned, special purpose subsidiary, Ferrellgas
Receivables. Ferrellgas Receivables then sold its interest to a commercial paper
conduit of Banc One, NA according to the terms of a 364-day agreement. The level
of funding available from this accounts receivable facility agreement is limited
to $60,000,000. In accordance with SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" this
transaction is reflected on the Partnership's financial statements as a sale of
accounts receivable and an investment in a subsidiary. The proceeds of these
16
sales are less than the face amount of the pool of accounts receivable sold by
an amount that approximates the financing cost of issuing commercial paper
backed by these accounts receivable. See Notes E and F in the Consolidated
Financial Statements included elsewhere in this report for additional
information regarding these transactions.
Ferrellgas, L.P.'s credit facility, which expires June 30, 2003, is
unsecured and consists of a $117,000,000 working capital, general corporate and
acquisition facility, including a letter of credit facility, and a $40,000,000
revolving working capital facility. This $40,000,000 facility is subject to an
annual reduction in outstanding balances to zero for thirty consecutive days.
All borrowings under the credit facility bear interest, at the borrower's
option, at a rate equal to either London Interbank Offered Rate plus an
applicable margin varying from 1.25 percent to 2.25 percent or the bank's base
rate plus an applicable margin varying from 0.25 percent to 1.25 percent. The
bank's base rate at October 31, 2000 and July 31, 2000 was 9.5%. During the
three months ended October 31, 2000, the Partnership repaid $5,000,000 of its
credit facility.
At October 31, 2000, $25,000,000 of borrowings and $51,827,500 of letters
of credit were outstanding under the Ferrellgas, L.P. credit facility. These
borrowings currently carry an interest rate of 8.94%. At October 31, 2000,
Ferrellgas, L.P. had $85,172,500 available for general corporate, acquisition
and working capital purposes under the credit facility and the accounts
receivable facility. Based on the pricing grid contained in the credit facility,
the current borrowing rate for future borrowings under the credit facility is
London Interbank Offered Rate plus 2.25%. The Partnership believes that during
fiscal 2001 these facilities will be sufficient to meet its working capital
needs. However, if the Partnership were to experience an unexpected significant
increase in working capital requirements, it could exceed its immediately
available resources. Events that could cause increases in working capital
requirements include a significant increase in the cost of propane compared to
current levels, a significant delay in the collections of accounts receivable or
increased volatility in commodity prices related to risk management activities.
The Partnership would consider alternatives to provide increased working
capital. No assurances can be given, however, that such alternatives can or will
be implemented.
Effective April 27, 2000, the Partnership entered into an interest rate
swap agreement with Bank of America, related to the semi-annual interest payment
due on the $160,000,000 fixed rate Senior Notes due 2006. The swap agreement,
which expires June 15, 2006, requires Bank of America to pay the stated fixed
interest rate (annual rate 9.375%) pursuant to the $160,000,000 senior notes,
equaling $7,500,000 every six months due on each June 15 and December 15. In
exchange, the Partnership is required to make quarterly floating interest rate
payments on the 15th of March, June, September and December based on an annual
interest rate equal to the three month London Interbank Offered Rate interest
rate plus 1.655% applied to the same notional amount of $160,000,000. Bank of
America has a one-time opportunity to terminate this agreement without a
cancellation premium in June 2001.
Effective June 2, 2000, Ferrellgas, L.P. entered into an interest rate cap
agreement with Bank of America, related to variable quarterly rent payments due
pursuant to two tank lease agreements. The variable quarterly rent payments are
determined based upon a floating London Interbank Offered Rate based interest
rate. The cap agreement, which expires June 30, 2003, requires Bank of America
to pay Ferrellgas, L.P. at the end of each March, June, September and December
the excess, if any, of the applicable three month floating London Interbank
Offered Rate interest rate over a cap of 9.3%, applied to the unamortized amount
outstanding each quarter under the two operating tank lease agreements. The
total obligation under these two operating tank lease agreements as of October
31, 2000 was $158,800,000.
17
On February 28, 2000, Ferrellgas, L.P. issued $184 million of privately
placed unsecured senior notes. The proceeds of the $184 million senior notes,
which include three series with maturities ranging from year 2006 through 2009
and an average fixed interest rate of 8.8%, were used to retire $183,000,000 of
Ferrellgas, L.P. bridge loan financing assumed in connection with the Thermogas
acquisition.
On December 6, 1999, Ferrellgas, L.P. entered into a $25,000,000 operating
tank lease involving the sale-leaseback of a portion of its customer tanks with
Banc of America Leasing & Capital, LLC. This operating lease has a term that
expires June 30, 2003 and may be extended for two additional one-year periods at
the option of Ferrellgas, L.P., if such extension is approved by the lessor. On
December 17, 1999, immediately prior to the closing of the Thermogas
acquisition, Thermogas entered into a $135,000,000 operating tank lease
involving a portion of its customer tanks, with Banc of America Leasing &
Capital, LLC. In connection with the acquisition of Thermogas, Ferrellgas, L.P.
assumed all obligations under the $135,000,000 operating tank lease, which have
terms and conditions similar to the December 6, 1999, $25,000,000 operating tank
lease discussed above. The Partnership intends to renew both leases for the two
additional one-year periods, subject to lessor approval. Following the renewal
periods, the Partnership intends to refinance these leases, however, there can
be no assurance that the Partnership will be successful in obtaining this
refinancing or lessor approval for the renewals. See related discussion in the
Investing Activities section of Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources.
On August 4, 1998, Ferrellgas, L.P. issued the privately placed unsecured
$350 million senior notes. The senior notes include five series with maturities
ranging from year 2005 through 2013 at an average fixed interest rate of 7.16%.
On December 17, 1999, the Partnership purchased Thermogas from Williams
Natural Gas Liquids, Inc., a subsidiary of The Williams Companies, Inc. Part of
the consideration paid to Williams at closing by the Partnership was
$175,000,000 in newly issued senior common units. Williams has the right to
convert any outstanding senior common units into common units at a premium on
February 1, 2002 or upon the occurrence of a material event. However, the
Partnership intends to redeem the senior common units at par value prior to the
date of conversion. No assurances can be given that the Partnership will be
successful in securing the financing to redeem the senior common units.
On November 16, 2000, the Partnership declared an in-kind distribution of
$1.00 per senior common unit payable by the issuance of additional senior common
units and a cash distribution of $0.50 per common unit, that was paid on
December 14, 2000.
Adoption of New Accounting Standards. The Financial Accounting Standards
Board ("FASB") recently issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133, as amended by SFAS 137 and SFAS 138, establishes accounting and
reporting standards for derivative instruments and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. The Partnership's overall
objective for entering into derivative contracts for the purchase of product is
related to hedging, risk reduction and to anticipate market movements. Other
derivatives are entered into to reduce interest rate risk associated with long
term debt and lease obligations. Fair value hedges are derivative financial
instruments that hedge the exposure to changes in the fair value of an asset or
a liability or an identified portion thereof attributable to a particular risk.
Cash flow hedges are derivative financial instruments that hedge the exposure to
variability in expected future cash flows attributable to a particular risk.
18
Product purchase price risk
Fluctuations in the wholesale cost of propane subject the Partnership to
purchase price risk. During fiscal year 2000, the Partnership purchased
approximately one billion gallons of propane at various prices that were
eventually sold to its customers, exposing the Partnership to future product
price fluctuations. Also, certain forecasted transactions expose the Partnership
to purchase price risk. The Partnership continually monitors its purchase price
exposures and utilizes product hedges to mitigate the risk of future price
fluctuations. Propane is the only product hedged with the use of product hedge
positions. The Partnership uses derivative products to hedge a portion of its
forecasted purchases for up to one year in the future. These derivatives are
designated as cash flow hedging instruments. Because these derivatives are
designated as cash flow hedges, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income (OCI) and are
recognized in the statement of earnings when the forecasted transaction impacts
earnings. Changes in the fair value of cash flow hedges due to hedge
ineffectiveness are recognized in other revenues on the statement of earnings.
The fair value of these derivatives related to purchase price risk are
classified on the balance sheet as inventories. The Partnership also purchases
and sells derivatives that are not classified as hedges to manage other risks
associated with commodity prices. The changes in fair value of these derivatives
are recognized in other revenue on the statement of earnings as they occur.
The Partnership also uses forward contracts, not designated as hedging
instruments under SFAS 133, to help reduce the price risk related to sales made
to its propane customers. These forward contracts meet the requirement to
qualify as normal purchases and normal sales as defined in SFAS 133, as amended
by SFAS 137 and SFAS 138, and thus are not adjusted to fair market value.
Interest rate risk
The Partnership also holds $724,930,000 in primarily fixed rate long-term
debt and $158,800,000 in variable rate operating leases. Fluctuations in
interest rates subject the Partnership to interest rate risk. Decreases in
interest rates decrease the fair value of the Partnership's fixed rate debt,
while increases in interest rates subject the Partnership to the risk of
increased interest expense related to its variable rate debt.
The Partnership enters into fair value and cash flow hedges to help reduce
its overall interest rate risk. Interest rate swaps are used to hedge the
exposure to changes in the fair value of fixed rate debt due to changes in
interest rates. Changes in the fair value of the fixed rate debt and any related
fair value hedges are recognized in interest expense on the statement of
earnings as they occur. Interest rate caps are used to hedge the risk associated
with rising interest rates and their affect on forecasted transactions related
to variable rate debt and lease obligations. These interest rate caps are
designated as cash flow hedges and thus, the effective portions of changes in
the fair value of the hedges are recorded in other comprehensive income (OCI)
and are recognized as interest expense in the statement of earnings when the
forecasted transaction impacts earnings. Changes in the fair value of any cash
flow hedges that are considered ineffective are recognized as interest expense
on the statement of earnings as they occur. Fair value of interest rate
derivatives that are considered fair value or cash flow hedges are classified
either as other assets or as other liabilities on the balance sheet.
Effect of adoption of SFAS 133
The adoption of SFAS 133 resulted in an increase in earnings of $299,000 and an
increase in OCI of $709,000 as of August 1, 2000. The increase in earnings is
primarily attributable to net gains in the fair value of derivatives not
designated as hedging instruments under SFAS 133. The increase in OCI is mostly
attributable to net gains on cash flow hedges for the fair value of options
designated as hedging instruments. The net gains related to these derivatives
included in OCI as of August 1, 2000, will be reclassified into earnings during
the twelve months ended July 31, 2001, at the same time that that hedged item
affects earnings. The Partnership uses cash flow hedges to manage exposures to
product purchase price risk and uses both fair value and cash flow hedges to
manage exposure to interest rate risks.
19
Three months ended October 31, 2000
Gains and losses related to derivatives held for product price risk
included in OCI are reclassified into earnings at the expiration or settlement
date of the hedged item. The Partnership estimates that $573,000 of net
derivative gains included in other comprehensive income will be reclassified
into earnings within the next twelve months.
Hedge in effectiveness, determined in accordance with SFAS 133, had no
impact on earnings for the three months ended October 31, 2000. No fair value
hedges or cash flow hedges were derecognized or discontinued for the three
months ended October 31, 2000.
Revenue Recognition
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 entitled "Revenue Recognition". The
bulletin, as amended, is to be adopted, if needed, no later than the fourth
fiscal quarter of fiscal years commencing after December 15, 1999, with
retroactive adjustment to the first fiscal quarter of that year. Management
implemented this bulletin in the first quarter of fiscal 2001 with no material
affect on the Partnership's financial position, results of operations or cash
flows.
Accounting for Securitization
The FASB also recently issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS No. 125's provisions without reconsideration. The Partnership
is currently assessing the effect of SFAS No. 140 on its financial position,
results of operations and cash flows. See Notes E and F for discussion of SFAS
No. 125's effect on recent accounts receivable transactions. SFAS 125 affects
the recognition and reclassification of collateral and disclosures relating to
securitization transactions and collateral and will be effective for the
Partnership's fiscal year ending July 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Partnership's market risk sensitive
instruments and positions is the potential loss arising from adverse changes in
commodity prices. Additionally, the Partnership seeks to mitigate its interest
rate risk exposure on variable rate debt and operating leases by interest rate
collar and cap agreements. At October 31, 2000, the Partnership had $185,000,000
in variable rate debt and $25,000,000 notional amount of interest rate collar
agreements outstanding, after considering the effect of the swap transaction.
The variable rate debt increased in fiscal 2000 by $160,000,000 due to the swap
transaction. At October 31, 2000, the Partnership had $158,800,000 outstanding
in variable rate operating leases and $158,800,000 notional amount of interest
rate collar agreements outstanding to hedge the related variable rate exposure.
Both the operating leases and interest rate collar agreements were entered into
in fiscal 2000. Thus, assuming a 100 basis point increase in the variable
interest rate to the Partnership during fiscal 2001, the interest rate risk
related to the variable rate debt, the operating tank leases, the swap
transaction and the associated interest rate collar and cap agreements would be
an increase of $2,986,000.
20
The Partnership's risk management activities utilize certain types of
energy commodity forward contracts and swaps traded on the over-the-counter
financial markets and futures traded on the New York Mercantile Exchange to
anticipate market movements, manage and hedge its exposure to the volatility of
floating commodity prices and to protect its inventory positions. The
Partnership also utilizes certain over-the-counter energy commodity options to
limit overall price risk and to hedge its exposure to inventory price movements.
Market risks associated with energy commodities are monitored daily by
senior management for compliance with the Partnership's risk management trading
policy. This policy includes specific dollar exposure limits, limits on the term
of various contracts and volume limits for various energy commodities. The
Partnership also utilizes loss limits and daily review of open positions to
manage exposures to changing market prices.
Market, Credit and Liquidity Risk. New York Mercantile Exchange traded
futures are guaranteed by the New York Mercantile Exchange and have nominal
credit risk. The Partnership is exposed to credit risk associated with futures,
swaps and option transactions in the event of nonperformance by counterparties.
For each counterparty, the Partnership analyzes its financial condition prior to
entering into an agreement, establishes credit limits and monitors the
appropriateness of each limit. The change in market value of Exchange-traded
futures contracts requires daily cash settlement in margin accounts with
brokers. Forwards and most other over-the-counter instruments are generally
settled at the expiration of the contract term. The Partnership attempts to
balance favorable and unfavorable positions with counterparties in order to
minimize the risk of collateral requirements for over-the-counter instruments.
Sensitivity Analysis. The Partnership has prepared a sensitivity analysis
to estimate the exposure to market risk of its energy commodity positions.
Forward contracts, futures, swaps and options were analyzed assuming a
hypothetical 10% change in forward prices for the delivery month for all energy
commodities. The potential loss in future earnings from these positions from a
10% adverse movement in market prices of the underlying energy commodities is
estimated at $8,418,000 as of October 31, 2000. The preceding hypothetical
analysis is limited because changes in prices may or may not equal 10%, thus,
actual results may differ.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K
The Partnership did not file a Form 8-K during the quarter ended
October 31, 2000.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FERRELLGAS PARTNERS, L.P.
By Ferrellgas, Inc. (General Partner)
Date: December 15, 2000 By /s/ Kevin T. Kelly
------------------------------------
Kevin T. Kelly
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
FERRELLGAS PARTNERS FINANCE CORP.
Date: December 15, 2000 By /s/ Kevin T. Kelly
------------------------------------
Kevin T. Kelly
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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