UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 April 30, 2002
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 May 31, 2002, the registrants had units or shares outstanding as follows:
Ferrellgas Partners, L.P. 36,076,203 Common Units
2,782,211 Senior Units
Ferrellgas Partners Finance Corp. 1,000 Common Stock
FERRELLGAS PARTNERS, L.P. and SUBSIDIARIES
FERRELLGAS PARTNERS FINANCE CORP.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Ferrellgas Partners, L.P. and Subsidiaries
------------------------------------------
Consolidated Balance Sheets - April 30, 2002 (unaudited)
and July 31, 2001 1
Consolidated Statements of Earnings -
Three and nine months ended April 30, 2002 and 2001 (unaudited) 2
Consolidated Statement of Partners' Capital -
Nine months ended April 30, 2002 (unaudited) 3
Consolidated Statements of Cash Flows -
Nine months ended April 30, 2002 and 2001 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Ferrellgas Partners Finance Corp.
---------------------------------
Balance Sheets - April 30, 2002 (unaudited) and July 31, 2001 9
Statements of Earnings - Three and nine months ended
April 30, 2002 and 2001 (unaudited) 9
Statements of Cash Flows - Nine months ended April 30, 2002
and 2001 (unaudited) 10
Notes to Financial Statements (unaudited) 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 11
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
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)
April 30, July 31,
ASSETS 2002 2001
- --------------------------------------------- ------------ ------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 23,899 $ 25,386
Accounts and notes receivable, net 110,347 56,772
Inventories 41,738 65,284
Prepaid expenses and other current assets 7,566 10,504
------------ ------------
Total Current Assets 183,550 157,946
Property, plant and equipment, net 502,710 491,194
Goodwill 124,190 124,190
Intangible assets, net 100,555 108,526
Other assets, net 5,875 14,303
------------ ------------
Total Assets $ 916,880 $896,159
============ ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------------------
Current Liabilities:
Accounts payable $ 50,410 $ 58,274
Other current liabilities 72,593 77,610
Short-term borrowings - -
------------ ------------
Total Current Liabilities 123,003 135,884
Long-term debt 705,044 704,782
Other liabilities 13,628 15,472
Contingencies and commitments - -
Minority interest 2,429 2,034
Partners' Capital:
Senior unitholder (2,782,211 and 2,801,622 units
outstanding at April 2002 and July 2001,
respectively - liquidation preference
$111,288 and $112,065 at April 2002 and July 2001,
respectively) 111,288 112,065
Common unitholders (36,074,703 and 35,908,366 units
outstanding at April 2002 and July 2001,
respectively) 22,077 (12,959)
General partner unitholder (364,391 and 362,711
units outstanding at April 2002 and July 2001,
respectively) (58,497) (58,738)
Accumulated other comprehensive loss (2,092) (2,381)
------------ ------------
Total Partners' Capital 72,776 37,987
------------ ------------
Total Liabilities and Partners' Capital $ 916,880 $896,159
============ ============
See notes to consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per-unit data)
(unaudited)
For the three months ended For the nine months ended
------------------------------ ------------------------------
April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001
-------------- -------------- -------------- --------------
Revenues:
Gas liquids and related product sales $ 269,825 $ 367,503 $ 825,239 $ 1,247,519
Other 17,336 16,891 62,903 67,153
-------------- -------------- -------------- --------------
Total revenues 287,161 384,394 888,142 1,314,672
Cost of product sold (exclusive of
depreciation, shown separately below) 134,640 231,593 461,178 835,580
-------------- -------------- -------------- --------------
Gross profit 152,521 152,801 426,964 479,092
Operating expense 74,686 73,358 212,186 228,846
Depreciation and amortization expense 10,625 14,484 32,844 42,462
General and administrative expense 8,117 6,619 21,574 18,246
Equipment lease expense 5,825 7,618 18,456 24,386
Employee stock ownership plan compensation charge 1,273 1,316 3,856 3,510
Loss on disposal of assets and other 552 1,607 1,830 4,761
-------------- -------------- -------------- --------------
Operating income 51,443 47,799 136,218 156,881
Interest expense (14,717) (14,884) (45,039) (47,158)
Interest income 323 981 1,194 2,420
Other charges - (3,118) - (3,118)
-------------- -------------- -------------- --------------
Earnings before minority interest 37,049 30,778 92,373 109,025
Minority interest 414 376 1,052 1,240
-------------- -------------- -------------- --------------
Net earnings 36,635 30,402 91,321 107,785
Distribution to senior unitholder 2,786 4,888 8,390 14,310
Net earnings available to general partner 338 255 829 935
-------------- -------------- -------------- --------------
Net earnings available to common unitholders $ 33,511 $ 25,259 $ 82,102 $ 92,540
============== ============== ============== ==============
Basic earnings per common unit:
Net earnings available to common unitholders $ 0.93 $ 0.81 $ 2.28 $ 2.96
============== ============== ============== ==============
Diluted earnings per common unit:
Net earnings available to common unitholders $ 0.93 $ 0.81 $ 2.28 $ 2.96
============== ============== ============== ==============
See notes to consolidated financial statements.
2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands)
(unaudited)
Number of units Accumulated
------------------------------------- other
General General compre- Total
Senior Common partner Senior Common partner hensive partners'
unitholder unitholders unitholder unitholder unitholders unitholder loss capital
---------- ------------- ------------ ---------- ----------- ---------- ----------- ----------
August 1, 2001 2,801.6 35,908.4 362.7 $ 112,065 $ (12,959) $ (58,738) $ (2,381) $ 37,987
Contribution in connection with
ESOP compensation charge - - - - 3,779 39 - 3,818
Common unit cash distributions - - - - (54,005) (545) - (54,550)
Senior unit cash and accrued
distributions - - - - (8,277) (197) - (8,474)
Senior units redeemed (19.4) - - (777) - - - (777)
Common unit options exercised - 48.8 0.5 - 821 8 - 829
Common units issued in connection
with acquisitions - 117.5 1.2 - 2,310 23 - 2,333
Comprehensive income:
Net earnings - - - - 90,408 913 - 91,321
Other comprehensive income:
Risk management fair value
adjustment - - - - - - 289 289
---------
Comprehensive income 91,610
---------- ------------- ------------ ---------- ----------- ---------- ----------- ----------
April 30, 2002 2,782.2 36,074.7 364.4 $ 111,288 $ 22,077 $ (58,497) $ (2,092) $ 72,776
========== ============= ============ ========== =========== ========== =========== ==========
See notes to consolidated financial statements.
3
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the nine months ended
-------------------------------
April 30, 2002 April 30, 2001
-------------- --------------
Cash Flows From Operating Activities:
Net earnings $ 91,321 $107,785
Reconciliation of net earnings to net cash provided by
operating activities:
Depreciation and amortization expense 32,844 42,462
Employee stock ownership plan compensation charge 3,856 3,510
Minority interest 1,052 1,240
Other 2,043 10,954
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Accounts and notes receivable, net of securitization (15,501) (81,088)
Inventories 23,628 16,447
Prepaid expenses and other current assets 2,938 (3,843)
Accounts payable (5,121) (39,473)
Accrued interest expense (6,593) (9,437)
Other current liabilities (3,493) 3,256
Other liabilities 566 194
------------- --------------
Net cash provided by operating activities 127,540 52,007
------------- --------------
Cash Flows From Investing Activities:
Business acquisitions, net of cash acquired (6,376) (4,343)
Capital expenditures (28,869) (9,210)
Net activity from accounts receivable securitization (31,000) 48,000
Other 2,611 1,051
------------- --------------
Net cash (used in) provided by investing activities (63,634) 35,498
------------- --------------
Cash Flows From Financing Activities:
Distributions (63,044) (47,436)
Additions to long-term debt - 7,648
Reductions of long-term debt (1,715) (21,372)
Net reductions to short-term borrowings - (18,342)
Proceeds from exercise of common unit options 821 -
Redemption of senior units (777) -
Minority interest activity (704) (587)
Other 26 (990)
------------- --------------
Net cash used in financing activities (65,393) (81,079)
------------- --------------
Increase (decrease) in cash and cash equivalents (1,487) 6,426
Cash and cash equivalents - beginning of period 25,386 14,838
------------- --------------
Cash and cash equivalents - end of period $ 23,899 $ 21,264
============= ==============
Cash paid for interest $ 49,900 $ 54,367
============= ==============
See notes to consolidated financial statements.
4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002
(unaudited)
A. Organization
Ferrellgas Partners, L.P. activities are primarily conducted through its
subsidiary Ferrellgas, L.P. Ferrellgas Partners is the sole limited partner
of Ferrellgas, L.P. with an approximate 99% limited partner interest.
Ferrellgas Partners and Ferrellgas L.P. are together referred to as the
Partnership. The general partner of both Ferrellgas Partners and
Ferrellgas, L.P. is Ferrellgas, Inc. which owns a 2% general partner
interest in the combined Partnership.
The consolidated financial statements of Ferrellgas Partners and
Subsidiaries reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the interim periods
presented. All adjustments to the consolidated financial statements were of
a normal, recurring nature, as well as the accounting change to adopt
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangibles Assets." The information included in this Quarterly
Report on 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, 2001.
B. Accounting estimates
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. Reclassifications
Certain amounts, including Goodwill (see Note F), included in the July 31,
2001 consolidated financial statements have been reclassified to conform to
the presentation for April 30, 2002. In fiscal 2001 and after the filing of
the Quarterly Report on Form 10-Q for the quarterly period ended April 30,
2001, the Partnership applied the provisions of Emerging Issues Task Force
(EITF Issue) No. 99-19 "Reporting Revenue Gross as a Principal versus Net
as an Agent" which affects the presentation of certain revenue and cost of
product sold items.
D. Nature of operations
The propane industry is seasonal in nature with peak activity during the
winter months. Therefore, the results of operations for the periods ended
April 30, 2002 and 2001 are not necessarily indicative of the results to be
expected for a full year.
5
E. Supplemental Balance Sheet Information:
Inventories consist of:
April 30, July 31,
(in thousands) 2002 2001
----------- ------------
Liquefied propane gas and related products $22,572 $45,966
Appliances, parts and supplies 19,166 19,318
----------- ------------
$41,738 $65,284
=========== ============
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 April 30, 2002, in addition to the inventory on
hand, the Partnership had committed to take net delivery of approximately
1,007,000 gallons at a fixed price.
Property, plant and equipment, net consist of:
April 30, July 31,
(in thousands) 2002 2001
--------------- ---------------
Property, plant and equipment $804,108 $774,128
Less: accumulated depreciation 301,398 282,934
--------------- ---------------
$502,710 $491,194
=============== ===============
F. Goodwill and Other Intangible Assets - Adoption of SFAS No. 142:
Statement of Financial Accounting Standard (SFAS) No. 142 modified the
financial accounting and reporting for acquired goodwill and other
intangible assets, including the requirement that goodwill and some
intangible assets no longer be amortized. The Partnership adopted SFAS No.
142 beginning in the first quarter of fiscal 2002. This adoption resulted
in a reclassification to goodwill of both assembled workforce and other
assets with remaining book value of $10,019,000. The remaining intangible
assets are subject to amortization. Although there will be no cash flow
effect, the Partnership believes its amortization expense will decrease by
$10,600,000 in fiscal 2002, compared to the amortization that would have
been recorded had the new accounting standard not been adopted. See
additional discussion about the decrease in amortization expense in
Management Discussion and Analysis of Financial Condition and Results of
Operations. This new standard also required the Partnership to test
goodwill for impairment at the time the standard was adopted and also on an
annual basis. The results of the initial impairment test of goodwill
performed at the time the standard was adopted did not have a material
effect on the Partnership's financial position, results of operations or
cash flows. The following disclosures are required by SFAS No. 142.
Intangible assets, net consist of:
April 30, 2002 July 31, 2001
------------------------------ ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Amortization Carrying Amortization
(in thousands) Amount Amount
------------- ---------------- --------------- -----------------
Customer lists $208,010 $(122,829) $207,667 $(114,679)
Non-compete agreement 62,893 (47,519) 60,222 (44,684)
------------- ---------------- --------------- -----------------
Total $270,903 $(170,348) $267,889 $(159,363)
============= ================ =============== =================
6
(in thousands)
Aggregate Amortization Expense:
2002 2001
---- ----
For the nine months ended April 30 $10,984 $13,294
Estimated Amortization Expense:
For the year ended July 31, 2003 11,583
For the year ended July 31, 2004 10,540
For the year ended July 31, 2005 9,961
For the year ended July 31, 2006 9,440
For the year ended July 31, 2007 8,725
For the nine months ended
---------------------------------
April 30, April 30,
(in thousands) 2002 2001
-------------- --------------
Reported net earnings $91,321 $107,785
Add back: Goodwill amortization - 7,789
-------------- --------------
Adjusted net earnings $91,321 $115,574
============== ==============
Basic and diluted earnings per
common unit:
Reported net earnings available to
common unitholders $2.28 $2.96
Goodwill amortization - 0.24
-------------- --------------
Adjusted net earnings available to
common unitholders $2.28 $3.20
============== ==============
G. Contingencies
The Partnership is currently threatened with or named as a defendant in
various lawsuits arising in the ordinary course of business 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. Distributions
On March 14, 2002, the Partnership paid cash distributions of $1.00 and
$0.50 per senior and common unit, respectively, for the quarter ended
January 31, 2002. On May 20, 2002, the Partnership declared its third
fiscal quarter cash distribution of $1.00 and $0.50 per senior and common
unit, respectively, paid on June 14, 2002.
I. Earnings Per Common Unit
Below is a calculation of the basic and diluted earnings per unit as
displayed on the consolidated statements of earnings. For the purpose of
computing diluted earnings per unit, the senior units were excluded. The
senior units are considered contingently issuable common units for which
all necessary conditions for their issuance have not been satisfied as of
the end of the reporting period. In order to compute the basic and diluted
earnings per common unit, the distributions on senior units are subtracted
from net earnings to compute net earnings available to common unitholders.
7
(in thousands, except per unit data)
Three months ended Nine months ended
------------------------------- ------------------------------
April 30 April 30 April 30 April 30
2002 2001 2002 2001
------------- -------------- --------------- ------------
Net earnings available to common
unitholders $33,511 $25,259 $82,102 $92,540
------------- -- -------------- --------------- ------------
Weighted average common units outstanding
36,072.0 31,307.1 36,003.3 31,307.1
Dilutive securities 67.8 - 67.8 -
------------- -------------- --------------- ------------
Weighted average common units
outstanding + dilutive securities 36,139.8 31,307.1 36,071.1 31,307.1
Basic and diluted earnings per common
unit $0.93 $ 0.81 $2.28 $ 2.96
============= ============== =============== ============
J. Adoption of New Accounting Standards
The Financial Accounting Standards Board recently issued SFAS No. 143
"Accounting for Asset Retirement Obligations", SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-lived Assets", and SFAS No. 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections."
SFAS No. 143 requires the recognition of a liability if a company has a
legal or contractual financial obligation in connection with the retirement
of a tangible long-lived asset. The Partnership will implement SFAS No. 143
beginning in the fiscal year ending July 31, 2003, and expects to record a
one-time charge to earnings during the first quarter of fiscal 2003, as a
cumulative change in accounting principle, of between $2,000,000 and
$3,000,000. The Partnership believes the implementation will not have a
material ongoing effect on its financial position, results of operations
and cash flows.
SFAS No. 144 modifies the financial accounting and reporting for long-lived
assets to be disposed of by sale and it broadens the presentation of
discontinued operations to include more disposal transactions. The
Partnership will implement SFAS No. 144 beginning in the fiscal year ending
July 31, 2003, and believes the implementation will not have a material
effect on its financial position, results of operations and cash flows.
SFAS No. 145 eliminates the requirement that material gains and losses
resulting from the early extinguishment of debt be classified as an
extraordinary item in the results of operations. Instead, companies must
evaluate whether the transaction meets both the criteria of being unusual
in nature and infrequent in occurrence. Other aspects of SFAS No. 145
relating to accounting for intangibles assets of motor carriers and
accounting for certain lease modifications do not currently apply to the
Partnership. The Partnership will implement SFAS No. 145 beginning in the
fiscal year ending July 31, 2003, and believes the implementation will not
have a material effect on its financial position, results of operations and
cash flows.
8
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
BALANCE SHEETS
April 30, July 31,
ASSETS 2002 2001
- ------------------------------ ------------------ -------------------
(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 2,055 1,662
Accumulated deficit (2,055) (1,662)
------------------- ------------------
Total Stockholder's Equity $1,000 $1,000
=================== ==================
STATEMENTS OF EARNINGS
(unaudited)
Three Months Ended Nine Months Ended
------------------------------------ -------------------------------------
April 30, April 30, April 30, April 30,
2002 2001 2002 2001
----------------- ------------------ ------------------ ------------------
General and administrative expense $ 298 $ 284 $ 393 $ 425
----------------- ------------------ ------------------ ------------------
Net loss $(298) $(284) $(393) $(425)
================= ================== ================== ==================
See notes to financial statements.
9
FERRELLGAS PARTNERS FINANCE CORP.
(A wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
--------------------------------------------
April 30, April 30,
2002 2001
------------------ -------------------
Cash Flows From Operating Activities:
Net loss $(393) $ (425)
------------------ -------------------
Cash used in operating activities (393) (425)
------------------ -------------------
Cash Flows From Financing Activities:
Capital contribution 393 425
------------------ -------------------
Cash provided by financing activities 393 425
------------------ -------------------
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
APRIL 30, 2002
(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.
10
ITEM 2. 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 of Ferrellgas Partners and its subsidiaries and should be
read in conjunction with the historical consolidated financial statements and
accompanying notes thereto included elsewhere in this Quarterly Report on Form
10-Q.
On January 22, 2002, the Securities and Exchange Commission issued
interpretive Release Nos. 33-8056; 34-45321 recommending various disclosures.
The Partnership has provided the recommended disclosures as follows:
o liquidity and capital resources, including off-balance sheet
arrangements; see discussion in "Liquidity and Capital Resources -
Investing Activities",
o certain trading activities; see discussion regarding the fair value of
the Partnership's risk management trading contracts in "Liquidity and
Capital Resources - Disclosures about Risk Management Activities
Accounted for at Fair Value", and
o transactions with related and certain other parties; see discussion
regarding the nature of these transactions in "Certain Relationships
and Related Transactions" within the Partnership's Annual Report on
Form 10-K filed with the Commission on October 25, 2001.
Forward-looking statements
Statements included in this report include forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. These forward-looking statements are
identified as any statement that does not relate strictly to historical or
current facts. They use words such as "anticipate," "believe," "intend," "plan,"
"projection," "forecast," "strategy," "position," "continue," "estimate,"
"expect," "may," "will," or the negative of those terms or other variations of
them or by comparable terminology. In particular, statements, express or
implied, concerning future operating results, or the ability to generate sales,
income or cash flow are forward-looking statements. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The Partnership's future results may differ materially from those
expressed in these forward-looking statements. Many of the factors that will
determine these results are beyond the Partnership's ability to control or
predict. These statements include, but are not limited to, the following:
o whether Ferrellgas, L.P. will have sufficient funds 1) 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 its $160,000,000 senior secured notes and 2) assuming
all quarterly financial tests required by various financing
instruments are met, to pay the required distribution on its senior
units and the minimum quarterly distribution of $0.50 per common unit,
o whether or not the Partnership will continue to meet all of the
quarterly financial tests required by various financing instruments,
and
o whether the fiscal 2002 decrease in gas liquids sales, equipment
lease, interest expense, depreciation and amortization expense as
compared to fiscal 2001 will continue during the remainder of fiscal
2002.
Readers of this report should not put undue reliance on any forward-looking
statements. 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 risks, which are more fully described in the Partnership's Securities
Act filings:
o the retail propane industry is a mature one,
o the effect of weather conditions on demand for propane,
11
o increases in propane prices may cause higher levels of conservation by
the Partnership's customers,
o price, availability and inventory risk of propane supplies, including
risk management activities,
o the timing of collections of the Partnership's accounts receivable and
increases in product costs and demand may decrease its working capital
availability,
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, including the litigation risks which may not be covered by
insurance,
o the Partnership may not be successful in making acquisitions,
o changes in interest rates, including the refinancing of long-term
financing at favorable interest rates,
o governmental legislation and regulations,
o energy efficiency and technology trends may affect demand for propane,
o the condition of the capital markets in the United States,
o the political and economic stability of the oil producing nations,
o the Partnership may sell additional limited partner interests, thus
diluting existing interests of unitholders,
o the distribution priority to the Partnership's common units owned by
the public terminates no later than December 31, 2005,
o the holder of the Partnership's senior units may have the right in the
future to convert the senior units into common units,
o the holder of the Partnership's senior units may be able to sell the
senior units or convert into common units with special indemnification
rights available to the holder from the Partnership,
o a redemption of the senior units may be dilutive to the Partnership's
common unitholders,
o the terms of the senior units limit the Partnership's use of proceeds
from sales of equity and the rights of the common unitholders,
o the current holder of the senior units has a special voting exemption
if the senior units convert into common units, and
o the expectation that the remaining senior units will be redeemed in
the future with proceeds from an offering of equity at a price
satisfactory to the Partnership.
Results of Operations
Due to the seasonality of the retail distribution of propane, results of
operations for the nine months ended April 30, 2002 and 2001, 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, general economic conditions in the
United States, variations in the weather and fluctuations in commodity prices.
As the Partnership has grown through acquisitions, fixed costs such as
personnel costs, equipment leases, depreciation and interest expense have
increased. Historically, due to the seasonality of the Partnership's business,
these fixed cost increases have caused net losses in the first and fourth fiscal
quarters and net earnings in the second and third fiscal quarters to be more
pronounced.
Three Months Ended April 30, 2002 vs. April 30, 2001
Gas liquids and related product sales. Total gas liquids and related
product sales decreased 26.6% to $269,825,000, due primarily to a significant
decrease in the average propane sales price per gallon.
The average propane sales price per gallon decreased due primarily to the
effect of a significant decrease in the wholesale cost of propane. In addition,
retail sales volumes decreased 3.4% to 240,385,000 gallons in the third quarter
of fiscal 2002 as compared to the third quarter of fiscal 2001, primarily due to
12
the effects of the weak national economy and to a lesser extent warmer weather
than in the same quarter last fiscal year. For the quarter, national
temperatures as reported by the National Oceanic and Atmospheric Administration,
were 3% warmer than the prior year's quarter. In addition, retail sales volumes
were negatively impacted by the carryover effect of warmer January temperatures
that were 17% warmer than normal.
Other revenues. Other revenues increased slightly to $17,336,000 for the
third quarter compared to the same quarter last year, primarily due to increased
material and appliance sales.
Cost of product sold. Cost of product sold decreased 41.9% to $134,640,000
primarily due to the effect of a significant decline in the wholesale cost of
propane during the third quarter of fiscal 2002 compared to the third quarter of
fiscal 2001. The propane wholesale market price at one of the major supply
points, Mt. Belvieu, Texas, averaged $0.35 per gallon during the third quarter
of fiscal 2002 compared to an average of $0.60 per gallon in the prior year
quarter. Other major supply points in the United States also experienced
significant declines in propane prices. However, cost of product sold was
increased by a change in risk management trading results during the third
quarter of fiscal 2002. Exceptional gains from risk management trading
activities recognized in the third quarter of fiscal 2001 were not repeated for
the same period this year, causing an increase to cost of sales of $16,875,000.
See additional discussion regarding risk management trading activities in
"Quantitative and Qualitative Disclosures about Market Risk."
Gross profit. Gross profit was nearly unchanged compared to the third
quarter of last year, primarily due to the effect of the increase in retail
margins per gallon which exceeded the strong retail margin performance realized
in the prior year's quarter, offset by the decrease in risk management trading
gains.
Operating expense. Operating expense increased 1.8% to $74,686,000,
primarily due to the timing of performance-based incentive compensation expense
resulting from the favorable operating results, which were substantially offset
by reduced vehicle and other operating expenses.
General and administrative expense. General and administrative expense
increased 22.6% to $8,117,000, primarily due to the timing of performance-based
incentive compensation expense resulting from the favorable operating results
this quarter.
Depreciation and amortization expense. Depreciation and amortization
expense decreased 26.6% to $10,625,000 primarily due to the implementation of
SFAS No. 142, which eliminated routine goodwill amortization. See further
discussion of the implementation of SFAS No. 142 in Note F to the consolidated
financial statements.
Equipment lease expense. Equipment lease expense decreased 23.5% to
$5,825,000 due to the effect of significantly lower interest rates on variable
rate operating tank leases this quarter as compared to the prior year's quarter.
See further discussion about these leases in the "Liquidity and Capital
Resources - Investing Activities" and "Financing Activities."
Loss on disposal of assets and other. Loss on disposal of assets and other
decreased $1,055,000 to $552,000 primarily due to a decrease in the loss on
disposal of fixed assets and a decrease in the expenses related to the transfer
of accounts receivables pursuant to the accounts receivable securitization
facility. See further discussion about this facility in "Liquidity and Capital
Resources - Investing Activities" and "Financing Activities."
Interest expense. Interest expense decreased 1.1% to $14,717,000 primarily
due to reduced borrowings on the Partnership's credit facility offset by the
effect of the termination of an interest rate swap agreement in the fourth
quarter of fiscal 2001.
13
Nine Months Ended April 30, 2002 vs. April 30, 2001
Gas liquid and related product sales. Total gas liquids and related product
sales decreased 33.8% to $825,239,000, due to both a significant decrease in the
average propane sales price per gallon and a significant decrease in retail
propane sales volume.
The average propane sales price per gallon decreased due to the effect of a
significant decrease in the wholesale cost of propane. In addition, retail sales
volumes decreased 15.0% to 720,690,000 gallons in the first nine months of
fiscal 2002 as compared to the same period of fiscal 2001, primarily due to the
effects of the significantly warmer than normal weather and to a lesser extent
the weak national economy. The heating season of fiscal 2002 (November through
March) was the third warmest in recorded United States history, according to the
National Oceanic and Atmospheric Administration data, with national average
temperatures 12% warmer than normal compared to 5% colder than normal for the
same period last year. During the peak winter heating season (December through
February) average national temperatures were 14% warmer than normal.
Other revenues. Other revenues decreased 6.3% to $62,903,000, for the first
nine months compared to the same period last year, primarily due to lower
appliance sales and service labor related to effects of the weak national
economy.
Cost of product sold. Cost of product sold decreased 44.8% to $461,178,000
primarily due to the effect of a significant decline in the wholesale cost of
propane during the first nine months of fiscal 2002 and to the effect for
reduced volumes delivered compared to the same period last year. The propane
wholesale market price at one of the major supply points, Mt. Belvieu, Texas,
averaged $0.37 per gallon during the first nine months of fiscal 2002 compared
to an average of $0.67 per gallon for the same period in the prior year. Other
major supply points in the United States also experienced significant declines
in propane prices. Another factor that caused a decrease in the cost of product
sold was a 15% decline in retail sales volumes for the nine-month period ended
April 30, 2002. However, cost of product sold was increased by a change in risk
management trading results in the first nine months of fiscal 2002. Exceptional
gains from risk management trading activities recognized in the first nine
months of fiscal 2001 were not repeated for the same period this year, causing
an increase to cost of sales of $38,071,000. See additional discussion regarding
risk management trading activities in "Quantitative and Qualitative Disclosures
about Market Risk."
Gross profit. Gross profit decreased 10.9% to $426,964,000, primarily due
to the effect of a significant decrease in retail propane volumes and to a
lesser extent, the decrease in risk management trading gains. These factors were
partially offset by an increase in retail margin per gallon, which exceeded the
retail margin per gallon performance realized in the first nine months of fiscal
2001.
Operating expense. Operating expense decreased 7.3% to $212,186,000,
primarily due to decreased bad debt and variable operating expenses resulting
from the decreased retail volumes delivered to customers in the first
nine-months of fiscal 2002 as compared to the same period last year.
General and administrative expense. General and administrative expense
increased 18.2% to $21,574,000, primarily due to increased performance-based
incentive compensation expense and increased expenses related to the operational
improvement initiative discussed in "Liquidity and Capital Resources - Investing
Activities."
Depreciation and amortization expense. Depreciation and amortization
expense decreased 22.7% to $32,844,000 primarily due to the implementation of
SFAS No. 142, which eliminated routine goodwill amortization. See further
discussion of the implementation of SFAS No. 142 in Note F to the consolidated
financial statements.
14
Equipment lease expense. Equipment lease expense decreased 24.3% to
$18,456,000 due to significantly lower interest rates on variable rate operating
leases as compared to the same period last year. See further discussion about
these leases in "Liquidity and Capital Resources - Investing Activities" and
"Financing Activities."
Loss on disposal of assets and other. Loss on disposal of assets and other
decreased $2,931,000 to $1,830,000 primarily due to a decrease in the expenses
related to the transfer of accounts receivables pursuant to the accounts
receivable securitization facility. See further discussion about this facility
in "Liquidity and Capital Resources - Investing Activities" and "Financing
Activities."
Interest expense. Interest expense decreased 4.5% to $45,039,000 primarily
due to reduced borrowings and significantly lower interest rates on the
Partnership's credit facility. This decrease was partially offset by the effect
of the termination of an interest rate swap agreement in the fourth quarter of
fiscal 2001.
Forward looking statements. The Partnership expects the declines in gas
liquid sales and cost of product sold experienced in the three quarters of
fiscal 2002 to continue in the fourth quarter of fiscal 2002 as compared to the
same periods in fiscal 2001. These expected declines in gas liquid sales and
cost of product sold, which are largely offsetting, are due to the effects of
significantly lower wholesale propane prices experienced during fiscal 2002 as
compared to last year.
Due to the implementation of SFAS No. 142, which eliminated routine
goodwill amortization, the Partnership expects a similar depreciation and
amortization expense variance during the third quarter to continue the remainder
of the fiscal year. In addition, the current lower interest rate environment is
expected to lead to a continued decrease in equipment lease expense in the
fourth quarter of fiscal 2002 compared to the same quarter last year.
Liquidity and Capital Resources
The ability of the Partnership to satisfy its obligations is dependent upon
future performance, which will be subject to prevailing economic, financial,
business, and weather conditions and other factors, many of which are beyond its
control. During fiscal 2002 the United States experienced unusually mild
temperatures that were approximately 12% warmer than normal during the heating
season (November through March) and 14% warmer than normal during the peak
winter heating season (December through February). These temperatures rank as
the third warmest heating season and fifth warmest peak winter heating season in
the National Oceanic and Atmospheric Administration's 107-year history.
Moreover, the weather has been significantly warmer than normal in four of the
last five winter heating seasons. Despite these challenges, the Partnership will
pay a full $0.50 distribution on all common units on June 14, 2002. This
distribution represents the thirty-first consecutive full $0.50 distribution
paid to the common unitholders dating back to October 1994.
Due to the seasonality of the retail propane distribution business, a
significant portion of the Partnership's cash flow from operations is typically
generated during the winter heating season which occurs during the Partnership's
second and third fiscal quarters. Typically, the Partnership generates
significantly lower cash flows from operations in its first and fourth fiscal
quarters as compared to the second and third quarters because fixed costs exceed
gross profit during the non-peak season. Subject to meeting the financial tests
discussed below, the Partnership's general partner, Ferrellgas, Inc., believes
that Ferrellgas, L.P. will have sufficient funds available to meet its
obligations, and 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. In addition, the general partner believes that Ferrellgas,
L.P. will have sufficient funds available to distribute to Ferrellgas Partners
sufficient cash to pay the required quarterly distribution on the senior units
and the minimum quarterly distribution on all common units during the remainder
of the non-heating season, which covers the fourth quarter of fiscal 2002 and
the first quarter of fiscal 2003 when the Partnership will typically experience
lower cash flows from operating activities.
15
The Partnership's credit facilities, public debt, private debt, accounts
receivable securitization facility and certain operating tank leases contain
several financial tests and covenants restricting 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. The general partner believes that the
most restrictive of these tests currently are debt incurrence limitations within
the credit facility, operating tank leases and accounts receivable
securitization facility and limitations on the payment of distributions within
the Ferrellgas Partners' senior secured notes. The credit facility, operating
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. 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 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 credit facilities, public debt,
private debt, accounts receivable securitization facility and certain operating
tank leases do not contain repayment provisions related to a decline in the
credit rating of the Partnership.
Based upon current estimates of the Partnership's cash flow, the general
partner believes that the Partnership will be able to continue to meet all of
the required quarterly financial tests and covenants. However, if the
Partnership were to encounter unexpected downturns in business operations in the
future, such as continued significantly warmer than normal weather as
experienced during most of this heating season, a volatile energy commodity cost
environment or continued economic downturn, the Partnership may not meet the
applicable financial tests in immediate future quarters. This could have a
materially adverse effect on the Partnership's operating capacity and cash flows
and could restrict the ability of the Partnership to incur debt or to make cash
distributions to its unitholders, even if sufficient funds were available.
Depending on the circumstances, the Partnership may consider alternatives to
permit the incurrence of debt or the continued payment of the quarterly cash
distribution to its unitholders. No assurances can be given, however, that such
alternatives can or will be implemented with respect to any given quarter.
Future capital expenditures 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 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. On June 5, 2001, the
Partnership issued almost $90,000,000 worth of equity pursuant to this
registration statement and currently has the ability to sell approximately
$210,000,000 more in equity and/or debt.
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 provided by operating activities was
$127,540,000 for the nine months ended April 30, 2002, compared to cash provided
by operating activities of $52,007,000 for the nine months ended April 30, 2001.
This increase in the cash provided by operations is primarily due to the
16
significant decrease in the retail sales prices and its effect on accounts
receivable this fiscal year. Due to the seasonality of the retail distribution
of propane, cash from operating activities for the nine months ended April 30,
2002 and 2001, is not necessarily indicative of the cash from operations
expected for a full year.
Investing Activities. During the first nine months of fiscal 2002, the
Partnership made growth and maintenance capital cash expenditures of $28,869,000
consisting primarily of the following:
o purchase and development of computer hardware and software primarily
related to the operational improvement initiative discussed in the
following paragraph,
o upgrading district plant facilities,
o vehicle lease buyouts, and
o additional propane storage tanks and cylinders.
During fiscal 2001, the Partnership completed a review of its key business
processes to identify areas where it can use technology and process enhancements
to improve its operations. Specifically, the Partnership has identified areas
where it can reduce operating expenses and improve customer satisfaction in the
near future. These areas include improvements to the routing and scheduling of
customer deliveries, customer administration and operational workflow. During
fiscal 2002, the Partnership has allocated considerable resources, including the
purchase and development of computer hardware and software, toward these
improvements and intends to continue to fund the necessary capital requirements
primarily from excess cash from operations generated during its record
performance in fiscal 2001. For the nine months ended April 30, 2002, the
Partnership incurred growth and maintenance capital expenditures of $19,557,000
related to this initiative. Other than this initiative, the Partnership's
capital requirements for repair and maintenance of property, plant and equipment
are expected to remain relatively low due to limited technological change and
long useful lives of propane tanks and cylinders.
The Partnership leases computers, light and medium duty trucks, tractors
and trailers. The Partnership believes vehicle leasing is a cost-effective
method for meeting its transportation and technology equipment needs. The
Partnership purchased $825,000 of vehicles whose lease terms expired in the
first nine months of fiscal 2002.
The Partnership utilizes an accounts receivable securitization facility for
the purpose of providing the Partnership with additional short-term working
capital funding, especially during the winter heating months. As part of this
364-day facility, the Partnership transfers an interest in a pool of its trade
accounts receivable to Ferrellgas Receivables, LLC, a wholly-owned, qualifying
special purpose entity, which sells its interest to a commercial paper conduit
of Banc One, NA. The Partnership does not provide any guarantee or similar
support to the collectability of these receivables. The Partnership structured
the facility using a wholly-owned, qualifying special purpose entity in order to
facilitate the transaction as required by Banc One, N.A. and to comply with the
Partnership's various debt covenants. The Partnership remits daily to this
special purpose entity funds collected on its pool of trade receivables. This
unconsolidated entity, together with the accounts receivable securitization
facility, provides additional working capital liquidity to the Partnership at
interest rates approximately one-half of one percent lower than borrowings from
the Partnership's credit facility, based on the most recent twelve month period.
The level of funding available from this facility is currently limited to the
lesser of $60,000,000 or qualified trade accounts receivable. At April 30, 2002,
there was no funding from this facility. During the first nine months of fiscal
2002, the funding outstanding from this facility was reduced by $31,000,000.
This decrease in funding resulted from reduced liquidity needs of the
Partnership caused primarily by the significant decrease in the amount of
account receivables outstanding and lower inventory levels caused primarily from
the lower wholesale propane cost environment experienced for most of this fiscal
year as compared to last year. This facility was renewed effective September 25,
2001 for a one-year commitment with Banc One, N.A. In accordance with SFAS No.
140, this transaction is reflected on the Partnership's consolidated financial
statements as a sale of accounts receivable and an investment in an
unconsolidated subsidiary. The Partnership intends to refinance/renew this
facility by September 2002, however no assurances can be given that such
17
refinance/renewal will be obtained or, if obtained, such refinance/renewal will
be on terms equally favorable to the Partnership. See further discussion about
this facility in "Liquidity and Capital Resources - Investing Activities" of the
Partnership's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on October 25, 2001.
The Partnership continues to consider opportunities to expand its
operations through strategic acquisitions of retail propane operations located
throughout the United States. During the nine months ended April 30, 2002, the
Partnership made total acquisition capital expenditures of approximately
$10,872,000 pursuant to the acquisition of two retail propane companies. This
amount was funded by approximately $6,376,000 of cash payments, the issuance of
$2,325,000 in common units and $2,171,000 in notes and other consideration.
Financing Activities. Ferrellgas, L.P.'s credit facility, which expires
June 30, 2003, is an unsecured facility and consists of the following:
o a $117,000,000 working capital, general corporate and acquisition
facility, including a letter of credit sub-facility, and
o a $40,000,000 revolving working capital facility, which is subject to
an annual reduction in outstanding balances to zero for thirty
consecutive days.
The Partnership intends to renew this facility, however, there are no assurances
that the new facility will be renewed or on terms at least as favorable as the
existing agreement. 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, based upon the Partnership's debt to cash flow ratio,
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
rates at April 30, 2002 and April 30, 2001 were 5.5% and 8.5%, respectively. See
"Investing Activities" for a discussion of additional cash availability related
to the accounts receivable facility agreement.
At April 30, 2002, $40,714,000 of letters of credit were outstanding under
this credit facility at an average interest rate of 3.5%. Letters of credit are
currently used to cover obligations primarily relating to requirements for
insurance coverage and risk management activities. Based on the pricing grid
contained in the credit facility, the current borrowing rate for future
borrowings under the credit facility is LIBOR plus 1.75%.
At April 30, 2002, Ferrellgas, L.P. had a total of $176,286,000 of funding
available under two facilities:
o $116,286,000 available for general corporate, acquisition and working
capital purposes under the credit facility, and
o $60,000,000 of funding available from the accounts receivable
securitization facility.
The Partnership believes that the liquidity available from these facilities will
be sufficient to meet its future working capital needs. However, if the
Partnership were to experience an unexpected significant increase in working
capital requirements, it could exceed its immediately available resources.
Events that could cause increases in working capital borrowings or letter of
credit requirements include, but are not limited to the following:
o a significant increase in the cost of propane,
o a significant delay in the collections of accounts receivable,
o increased volatility in energy commodity prices related to risk
management activities,
o increased liquidity requirements imposed by insurance providers,
o a significant downgrade in the Partnership's credit rating, or
o decreased vendor credit.
18
If one or more of these events caused a significant use of available funding,
the Partnership would consider alternatives to provide increased working capital
funding. No assurances can be given, however, that such alternatives could be
implemented.
On September 14, 2001, December 14, 2001 and March 14, 2002 the Partnership
paid cash distributions of $1.00 and $0.50 per senior and common unit,
respectively, for each of the quarters ended July 31, 2001, October 31, 2001 and
January 31, 2002, respectively. Cash distributions increased by $15,608,000
during the nine-month period primarily due to 1) cash distributions of
$8,410,000 paid on the senior units as compared to in-kind distributions paid on
these senior units in the first nine months of fiscal 2001 and 2) cash
distributions of $6,750,000 paid on the 4,500,000 common units issued in June
2001. On June 14, 2002, the Partnership paid its third fiscal quarter cash
distribution of $1.00 and $0.50 per senior and common unit.
In December 1999, Ferrellgas, L.P. entered into a $25,000,000 operating
lease involving a portion of its customer tanks. Also in December 1999,
Ferrellgas, L.P. assumed a $135,000,000 operating lease involving a portion of
the Thermogas acquisition related customer tanks. Both arrangements utilize a
structure referred to as a synthetic operating lease, using a special purpose
entity as lessor and Ferrellgas, L.P. as lessee; thus, the assets and
liabilities of the special purpose entities are not included on the
Partnership's consolidated balance sheet. The Partnership made $6,749,000 of
rent payments related to these leases for the most recent nine-month period.
Both arrangements have terms that expire June 30, 2003. Prior to the end of the
lease terms, the Partnership intends to secure additional financing in order to
either lease or purchase the related customer tanks. No assurances can be given
that such financing will be obtained or, if obtained, such financing will be on
terms equally favorable to the Partnership. See further discussion about these
lease arrangements in "Liquidity and Capital Resources - Investing Activities"
and in "Liquidity and Capital Resources - Financing Activities" of the
Partnership's Annual Report filed under Form 10-K with the Commission on October
25, 2001.
The Partnership has provided information summarizing its liquidity and
capital resources in the following discussion and table below. In addition, the
Partnership has provided similar information in previous Securities Act filings
with regards to its off-balance sheet financing arrangements, which include:
o the accounts receivable securitization facility (see "Investing
Activities" above),
o the operating tank leases entered into during December 1999, and
o various equipment operating leases.
In addition, the Partnership leases property, computers, light and medium
duty trucks, tractors and trailers. These arrangements are accounted for as
operating leases by the Partnership. See further discussion about these leases
in "Liquidity and Capital Resources - Investing Activities" and in "Liquidity
and Capital Resources - Financing Activities" of the Partnership's Annual Report
on Form 10-K filed with the Securities and Exchange Commission on October 25,
2001.
The following table summarizes the Partnership's long-term debt obligations
as of April 30, 2002:
(in thousands) Principal Payments due by Pay Period
-------------------------------------- ------------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
-------------------------------------- ------------ ------------- ------------ ---------------- ---------------
Long-term debt, including current
portion of long-term debt $707,329 $2,285 $4,802 $331,997 $368,245
-------------------------------------- ------------ ------------- ------------ ---------------- ---------------
The following tables summarizes the Partnership's future minimum rental
commitments under non-cancelable operating lease agreements (including the tank
and equipment operating leases discussed above) as of April 30, 2002. The
summary presents the future minimum rental payments and, should the Partnership
elect to do so, the buyout amounts necessary to purchase the equipment at the
end of the lease terms.
19
(in thousands) Future Minimum Rental and Buyout Amounts
---------------------------------------- ----------- ------------- ------------ ------------- --------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------- ----------- ------------- ------------ ------------- --------------
Operating leases rental payment $77,092 $28,216 $ 29,190 $14,192 $5,494
---------------------------------------- ----------- ------------- ------------ ------------- --------------
Operating leases buyouts 185,360 5,889 168,194 8,706 2,571
---------------------------------------- ----------- ------------- ------------ ------------- --------------
At April 30, 2002, the Partnership had no borrowings outstanding on its
credit facility. The Partnership had letters of credit outstanding in the amount
of $40,714,000 used primarily to cover obligations relating to requirements for
insurance coverage. At April 30, 2002, the Partnership did not have any funding
from its accounts receivable securitization facility. As of April 30, 2002, in
addition to the inventory on hand, the Partnership had committed to take net
delivery of approximately 1,007,000 gallons at a fixed price.
Adoption of New Accounting Standards. The Financial Accounting Standards
Board recently issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets", and SFAS No. 145 "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 143 requires the recognition of a liability if a company has a
legal or contractual financial obligation in connection with the retirement of a
tangible long-lived asset. The Partnership will implement SFAS No. 143 beginning
in the fiscal year ending July 31, 2003, and expects to record a one-time charge
to earnings during the first quarter of fiscal 2003, as a cumulative change in
accounting principle, of between $2,000,000 and $3,000,000. The Partnership
believes the implementation will not have a material effect on the its financial
position, results of operations and cash flows.
SFAS No. 144 modifies the financial accounting and reporting for long-lived
assets to be disposed of by sale and it broadens the presentation of
discontinued operations to include more disposal transactions. The Partnership
will implement SFAS No. 144 beginning in the fiscal year ending July 31, 2003,
and believes the implementation will not have a material effect on its financial
position, results of operations and cash flows.
SFAS No. 145 eliminates the requirement that material gains and losses
resulting from the early extinguishment of debt be classified as an
extraordinary item in the results of operations. Instead, companies must
evaluate whether the transaction meets both the criteria of being unusual in
nature and infrequent in occurrence. Other aspects of SFAS No. 145 relating to
accounting for intangibles assets of motor carriers and accounting for certain
lease modifications do not currently apply to the Partnership. The Partnership
will implement SFAS No. 145 beginning in the fiscal year ending July 31, 2003,
and believes the implementation will not have a material effect on its financial
position, results of operations and cash flows.
Disclosures about Risk Management Activities Accounted for at Fair Value
The following table summarizes the change in the unrealized fair value of
risk management contracts for the three and nine months ended April 30, 2002.
This table summarizes the contracts where the Partnership remains exposed to
market risk:
Three Months Ended Nine Months Ended
(in thousands) April 30, 2002 April 30, 2002
-------------------------------------------------------- ------------------------- ------------------------
Unrealized fair value of contracts outstanding at
beginning of period $(2,625) $ 5,900
-------------------------------------------------------- ------------------------- ------------------------
Change in unrealized fair value (2,018) (10,453)
-------------------------------------------------------- ------------------------- ------------------------
Unrealized fair value of contracts outstanding at
April 30, 2002 $(4,643) $(4,643)
-------------------------------------------------------- ------------------------- ------------------------
20
The following table summarizes the maturity of these risk management contracts
carried at fair value for the valuation methodologies utilized by the
Partnership as of April 30, 2002. This table summarizes the contracts where the
Partnership remains exposed to market risk:
(in thousands) Fair Value of Contracts at Period-End
----------------------------------------------------------- --------------------- ----------------------
Maturity less than Maturity in excess
Source of Fair Value 1 year of 1 year
----------------------------------------------------------- --------------------- ----------------------
Prices actively quoted $ 478 $ -
----------------------------------------------------------- --------------------- ----------------------
Prices provided by other external sources (5,121) -
----------------------------------------------------------- --------------------- ----------------------
Prices based on models and other
Valuation methods - -
----------------------------------------------------------- --------------------- ----------------------
Unrealized fair value of contracts outstanding at April
30, 2002 $(4,643) $ -
----------------------------------------------------------- --------------------- ----------------------
See additional discussion about market, counter-party credit and liquidity risks
related to the Partnership's risk management trading and other than trading
activities in "Quantitative and Qualitative Disclosures about Market Risk."
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. The Partnership's risk management trading activities utilize
certain types of energy commodity forward contracts, options, swaps traded on
the over-the-counter financial markets and futures traded on the New York
Mercantile Exchange to manage and hedge its exposure to the volatility of
floating commodity prices and to protect its inventory positions. The
Partnership's risk management other than trading activities also utilize certain
over-the-counter energy commodity forward contracts to limit overall price risk
and options to hedge its exposure to inventory price movements. The Partnership
includes the results from its risk management other than trading activities in
its discussion and analysis of retail margin per gallon included in our
discussion of Gross Profit.
Market risks associated with energy commodities are monitored daily by
senior management for compliance with the Partnership's trading and other than
trading risk management policies. These policies include specific dollar
exposure limits, limits on the term of various contracts and volume limits for
various energy commodities. The Partnership also utilizes loss limits and daily
review of open positions to manage exposures to changing market prices.
Market, Credit and Liquidity Risk. New York Mercantile Exchange traded
futures are guaranteed by the New York Mercantile Exchange and have nominal
credit risk. The Partnership is exposed to credit risk associated with forwards,
swaps and option transactions in the event of nonperformance by counter-parties.
For each counter-party, 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. In order to minimize the
liquidity risk of cash, margin or collateral requirements of counter-parties for
over-the-counter instruments, the Partnership attempts to balance maturities and
positions with individual counter-parties. Historically, the Partnership's risk
management activities have not experienced significant credit related losses in
any year or with any individual counter-party. The Partnership's risk management
contracts do not contain material repayment provisions related to a decline in
the credit rating of the Partnership.
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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 used in the Partnership risk
management trading activities were analyzed assuming a hypothetical 10% adverse
change in 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
$2,000,000. The preceding hypothetical analysis is limited because changes in
prices may or may not equal 10%, thus actual results may differ.
Additionally, the Partnership seeks to mitigate its variable rate interest
rate risk exposure on operating leases by entering into interest rate cap
agreements. At April 30, 2002, the Partnership had $156,400,000 outstanding in
variable rate operating leases and an equal amount of interest rate cap
agreements outstanding to hedge the related variable rate exposure. Thus,
assuming a one percent increase in the variable interest rate to the
Partnership, the interest rate risk related to the variable rate debt, the
operating leases and the associated interest rate cap agreements would be a
decrease to earnings of $1,557,000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Not applicable.
(b) Reports on Form 8-K
The Partnership furnished one Form 8-K during the quarter ended April 30, 2002.
Items
Date of Report Reported Financial Statements Filed
- ---------------------------- -------- --------------------------
Furnished February 20, 2002 9 None
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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: June 13, 2002 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: June 13, 2002 By /s/ Kevin T. Kelly
------------------------------------------
Kevin T. Kelly
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
23
