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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended July 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission file numbers 1-11331
333-06693
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
(Exact name of registrants as specified in their charters)
Delaware 43-1698480
Delaware 43-1742520
---------------------------- ----------------------------
(State or other jurisdictions of (I.R.S. Employer Identification Nos.)
incorporation or organization)
One Liberty Plaza, Liberty, Missouri 64068
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 792-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Units New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value as of September 16, 1996, of the registrant's Common
Units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $309,414,998.
At September 16, 1996, the registrant had units outstanding as follows:
Ferrellgas Partners, L.P. 14,612,580 Common Units
16,593,721 Subordinated Units
Documents Incorporated by Reference: None
FERRELLGAS PARTNERS, L.P.
FERRELLGAS PARTNERS FINANCE CORP.
1996 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 8
ITEM 3. LEGAL PROCEEDINGS......................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND
RELATED UNITHOLDER MATTERS................................ 9
ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA.......... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS....... 17
ITEM 11. EXECUTIVE COMPENSATION.................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........................................ 23
PART I
ITEM 1. BUSINESS.
Business of Ferrellgas Partners, L.P.
Ferrellgas Partners, L.P. (the "Master Limited Partnership" or the "MLP"),
a publicly traded Delaware limited partnership, was formed April 19, 1994. The
MLP's activities are conducted through its subsidiary Ferrellgas, L.P. (the
"Operating Partnership" or the "OLP"). The MLP, with a 99% limited partner
interest, is the sole limited partner of the Operating Partnership. The MLP and
the Operating Partnership are together referred to herein as the "Partnership".
The Operating Partnership accounts for nearly all of the MLP's consolidated
assets, sales and operating earnings. The MLP's consolidated net earnings also
reflects interest expense related to $160 million of 9 3/8% Senior Secured Notes
issued by the MLP in April 1996.
Business of Ferrellgas, L.P.
The Operating Partnership, a Delaware limited partnership, was formed April
22, 1994, to acquire, own and operate the propane business and assets of
Ferrellgas, Inc. (the "Company", "Ferrellgas", and "General Partner"). The
Company has retained a 1% general partner interest in the MLP and also holds a
1.0101% general partner interest in the Operating Partnership, representing a 2%
general partner interest in the Partnership on a combined basis. As General
Partner of the Partnership, the Company performs all management functions
required for the Partnership.
General
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The discussion that follows focuses on
the Partnership's retail operations and its other operations, which consist
primarily of propane and natural gas liquids trading operations, chemical
feedstocks marketing and wholesale propane marketing, all of which were conveyed
to the Partnership on July 5, 1994. All historical references prior to July 5,
1994 relate to the operations as conducted by the Company.
The General Partner believes that the Partnership is the second largest
retail marketer of propane in the United States (as measured by gallons sold),
serving more than 800,000 residential, industrial/commercial and agricultural
customers in 45 states and the District of Columbia through approximately 523
retail outlets with 283 satellite locations in 38 states (some outlets serve
interstate markets). For the Partnership's fiscal years ended July 31, 1996 and
1995 and the pro forma year ended July 31, 1994, annual retail propane sales
volumes were 650 million, 576 million and 564 million gallons, respectively. The
retail propane business of the Partnership consists principally of transporting
propane purchased through various suppliers to its retail distribution outlets,
then to tanks located on its customers' premises, as well as to portable propane
cylinders.
The General Partner also believes that the Partnership is a leading natural
gas liquids trading company. Annual propane and natural gas liquids trading,
chemical feedstocks and wholesale propane sales volumes were approximately 1.7
billion, 1.5 billion and 1.7 billion gallons during the fiscal years ended July
31, 1996 and 1995 and the pro forma year ended July 31, 1994, respectively.
Retail Operations
Formation
Ferrell Companies, Inc. ("Ferrell"), the parent of Ferrellgas, was founded
in 1939 as a single retail propane outlet in Atchison, Kansas and was
incorporated in 1954. In 1984, a subsidiary was formed under the name
Ferrellgas, Inc. to operate the retail propane business previously conducted by
Ferrell. Ferrell is primarily owned by James E. Ferrell and his family. The
Company's initial growth largely resulted from small acquisitions in the rural
areas of eastern Kansas, northern and central Missouri, Iowa, Western Illinois,
Southern Minnesota, South Dakota and Texas. In July 1984, the Company acquired
propane operations with annual retail sales volumes of approximately 33 million
gallons and in December 1986, the Company acquired propane operations with
annual retail sales volumes of approximately 395 million gallons. These major
acquisitions and many other smaller acquisitions significantly expanded and
diversified the Company's geographic coverage. In July 1994, the propane
business and assets of the Company were contributed to the Partnership.
Business Strategy
The Partnership's business strategy is to continue Ferrellgas' historical
focus on residential and commercial retail propane operations and to expand its
operations through strategic acquisitions of smaller retail propane operations
located throughout the United States and through increased competitiveness and
efforts to acquire new customers. The propane industry is relatively fragmented,
with the ten largest retail distributors possessing approximately 33% of the
total retail propane market and much of the industry consisting of over 5,000
local or regional companies. The Partnership's retail operations account for
approximately 8% of the retail propane purchased in the United States, as
measured by gallons sold. Since 1986, and as of July 31, 1996, Ferrellgas has
acquired 100 smaller independent propane retailers which Ferrellgas believes
were not individually material, except for the acquisition of Skelgas Propane,
Inc. ("Skelgas") in May 1996 and Vision Energy Resources, Inc. ("Vision") in
November 1994. For the fiscal years ended July 31, 1996 to 1992, the Partnership
or its Predecessor invested approximately $108.8 million, $70.1 million, $3.4
million, $0.9 million and, $10.1 million, respectively, to acquire operations
with annual retail sales of approximately 111.8 million, 70.0 million, 2.9
million, 0.7 million, and 8.6 million gallons of propane, respectively.
The Partnership intends to concentrate its acquisition activities in
geographical areas in close proximity to the Company's existing operations and
to acquire propane retailers that can be efficiently combined with such existing
operations to provide an attractive return on investment after taking into
account the efficiencies which may result from such combination. However, the
Partnership will also pursue acquisitions which broaden its geographic coverage.
The Partnership's goal in any acquisition will be to improve the operations and
profitability of these smaller companies by integrating them into the
Partnership's established supply network. The General Partner regularly
evaluates a number of propane distribution companies which may be candidates for
acquisition. The General Partner believes that there are numerous local retail
propane distribution companies that are possible candidates for acquisition by
the Partnership and that the Partnership's geographic diversity of operations
helps to create many attractive acquisition opportunities. The Partnership
intends to fund acquisitions through internal cash flow, external borrowings or
the issuance of additional Common Units. The Partnership's ability to accomplish
these goals will be subject to the continued availability of acquisition
candidates at prices attractive to the Partnership. There is no assurance the
Partnership will be successful in sustaining the recent level of acquisitions or
that any acquisitions that are made will prove beneficial to the Partnership.
In addition to growth through acquisitions, the General Partner
believes that the Partnership may also achieve growth within its existing
propane operations. As a result of its experience in responding to competition
and in implementing more efficient operating standards, the General Partner
believes that it has positioned the Partnership to be more successful in direct
competition for customers. The Partnership currently has marketing programs
underway which focus specific resources toward this effort.
2
Marketing
Natural gas liquids are derived from petroleum products and sold in
compressed or liquefied form. Propane, the predominant type of natural gas
liquid, is typically extracted from natural gas or separated during crude oil
refining. Although propane is gaseous at normal pressures, it is compressed into
liquid form at relatively low pressures for storage and transportation. Propane
is a clean-burning energy source, recognized for its transportability and ease
of use relative to alternative forms of stand alone energy sources.
In the residential and commercial markets, propane is primarily used for
space heating, water heating and cooking. In the agricultural market propane is
primarily used for crop drying, space heating, irrigation and weed control. In
addition, propane is used for certain industrial applications, including use as
engine fuel, which is burned in internal combustion engines that power vehicles
and forklifts and as a heating or energy source in manufacturing and drying
processes.
The retail propane marketing business generally involves large numbers of
small volume deliveries averaging approximately 200 gallons each. The market
areas are generally rural but also include suburban areas where natural gas
service is not available.
The Partnership utilizes marketing programs targeting both new and existing
customers emphasizing its superior ability to deliver propane to customers as
well as its training and safety programs. The Partnership sells propane
primarily to four specific markets: residential, industrial/commercial,
agricultural and other (principally to other propane retailers and as engine
fuel.) During the fiscal year ended July 31, 1996, sales to residential
customers accounted for 60% of retail gross profit, sales to industrial and
other commercial customers accounted for 28% of retail gross profit, sales to
agricultural and other customers accounted for 12% of retail gross profit.
Residential sales have a greater profit margin, more stable customer base and
tend to be less sensitive to price changes than the other markets served by the
Partnership. No single customer of the Partnership accounts for 10% or more of
the Partnership's consolidated revenues.
Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane. The Partnership generally purchases propane in the contract and spot
markets, primarily from natural gas processing plants and major oil companies,
on a short-term basis, therefore, its supply costs fluctuate with market price
fluctuations. Should wholesale propane prices decline in the future, the
Partnership's margins on its retail propane distribution business should
increase in the short-term because retail prices tend to change less rapidly
than wholesale prices. Should the wholesale cost of propane increase, for
similar reasons retail margins and profitability would likely be reduced at
least for the short-term until retail prices can be increased. Retail propane
customers typically lease their storage tanks from their propane distributors.
Approximately 70% of the Partnership's customers lease their tank from the
Partnership. The lease terms and, in some states, certain fire safety
regulations, restrict the filling of a leased tank solely to the propane
supplier that owns the tank. The cost and inconvenience of switching tanks
minimizes a customers tendency to switch among suppliers of propane on the basis
of minor variations in price.
The retail market for propane is seasonal because it is used primarily for
heating in residential and commercial buildings. Consequently, sales and
operating profits are concentrated in the second and third fiscal quarters
(November through April). To the extent necessary, the Partnership will reserve
cash inflows from the second and third quarters for distribution to holders of
Common Units in the first and fourth fiscal quarters. In addition, sales volume
traditionally fluctuates from year to year in response to variations in weather,
prices and other factors, although the Partnership believes that the broad
geographic distribution of its operations helps to minimize exposure to regional
weather or economic patterns. Long-term, historic weather data from the National
Climatic Data Center indicate that the average annual temperatures have remained
relatively constant over the last 30 years with fluctuations occurring on a
year-to-year basis only. During times of colder-than-normal winter weather, the
Company has been able to take advantage of its large, efficient distribution
network to help avoid supply disruptions such as those experienced by some of
its competitors, thereby broadening its long-term customer base.
3
Supply and Distribution
The Partnership purchases propane primarily from major domestic oil
companies. Supplies of propane from these sources have traditionally been
readily available, although no assurance can be given that supplies of propane
will be readily available in the future. As a result of (i) the Partnership's
ability to buy large volumes of propane and (ii) the Partnership's large
distribution system and underground storage capacity, the General Partner
believes that the Partnership is in a position to achieve product cost savings
and avoid shortages during periods of tight supply to an extent not generally
available to other retail propane distributors. The Partnership is not dependent
upon any single supplier or group of suppliers, the loss of which would have a
material adverse effect on the Partnership. For the year ended July 31, 1996, no
supplier at any single delivery point provided more than 10% of the
Partnership's total domestic propane supply. A portion of the Partnership's
propane inventory is purchased under supply contracts which typically have a one
year term and a fluctuating price relating to spot market prices. Certain of the
Partnership's contracts specify certain minimum and maximum amounts of propane
to be purchased thereunder. The Partnership may purchase and store inventories
of propane in order to help insure uninterrupted deliverability during periods
of extreme demand. The Partnership owns three underground storage facilities
with an aggregate capacity of approximately 184 million gallons. Currently,
approximately 111 million gallons of this capacity is leased to third parties.
The remaining space is available for the Partnership's use.
Propane is generally transported from natural gas processing plants and
refineries, pipeline terminals and storage facilities to retail distribution
outlets and wholesale customers by railroad tank cars leased by the Partnership
and highway transport trucks owned or leased by the Partnership. The Partnership
operates a fleet of transport trucks to transport propane from refineries,
natural gas processing plants or pipeline terminals to it's retail distribution
outlets. Common carrier transport trucks may be used during the peak delivery
season in the winter months or to provide service in areas where economic
considerations favor common carrier use. Propane is then transported from the
Partnership's retail distribution outlets to customers by its fleet of 1,435
bulk delivery trucks, which are fitted generally with 2,000 to 3,000 gallon
propane tanks. Propane storage tanks located on the customers' premises are then
filled from the delivery truck. Propane is also delivered to customers in
portable cylinders.
Industry and Competition
Industry
Based upon information contained in the Energy Information Administration's
Annual Energy Review 1995 magazine, propane accounts for approximately 3-4% of
household energy consumption in the United States, an average level which has
remained relatively constant for the past 19 years. It competes primarily with
natural gas, electricity and fuel oil as an energy source principally on the
basis of price, availability and portability. Propane serves as an alternative
to natural gas in rural and suburban areas where natural gas is unavailable or
portability of product is required. Propane is generally more expensive than
natural gas on an equivalent BTU basis in locations served by natural gas,
although propane is often sold in such areas as a standby fuel for use during
peak demands and during interruption in natural gas service. The expansion of
natural gas into traditional propane markets has historically been inhibited by
the capital costs required to expand distribution and pipeline systems. Although
the extension of natural gas pipelines tends to displace propane distribution in
the neighborhoods affected, the Partnership believes that new opportunities for
propane sales arise as more geographically remote neighborhoods are developed.
Propane is generally less expensive to use than electricity for space heating,
water heating and cooking and competes effectively with electricity in those
parts of the country where propane is cheaper than electricity on an equivalent
BTU basis. Although propane is similar to fuel oil in application, market demand
and price, propane and fuel oil have generally developed their own distinct
geographic markets. Because residential furnaces and appliances that burn
propane will not operate on fuel oil, a conversion from one fuel to the other
requires the installation of new equipment. The Partnership's residential retail
propane customers, therefore, will have an incentive to switch to fuel oil only
if fuel oil becomes significantly less expensive than propane. Likewise, the
Partnership may be unable to expand its customer base in areas where fuel oil is
widely used, particularly the Northeast, unless propane becomes significantly
less expensive than fuel oil. Alternatively, many industrial customers who use
propane as a heating fuel have the capacity to switch to other fuels, such as
fuel oil, on the basis of availability or minor variations in price. Propane
generally is becoming increasingly favored over fuel oil and other alternative
sources of fuel as an environmentally preferred energy source.
4
Competition
In addition to competing with marketers of other fuels, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition within the propane distribution industry stems from two
types of participants: the larger multi-state marketers, and the smaller, local
independent marketers. Based upon information contained in the National Propane
Gas Association's LP-Gas Market Facts and the June 1996 issue of LP Gas
magazine, the Partnership believes that the ten largest multi-state retail
marketers of propane, including the Partnership, account for approximately 33%
of the total retail sales of propane in the United States. Based upon
information contained in industry publications, the Partnership also believes no
single marketer has a greater than 10% share of the total market in the United
States and that the Partnership is the second largest retail marketer of propane
in the United States, with a market share of approximately 8% as measured by
volume of national retail propane sales.
Most of the Partnership's retail distribution outlets compete with three or
more marketers or distributors. The principal factors influencing competition
among propane marketers are price and service. The Partnership competes with
other retail marketers primarily on the basis of reliability of service and
responsiveness to customer needs, safety and price. Each retail distribution
outlet operates in its own competitive environment because retail marketers
locate in close proximity to customers to lower the cost of providing service.
The typical retail distribution outlet has an effective marketing radius of
approximately 25 miles.
Other Operations
The other operations of the Partnership consist principally of: (1)
trading, (2) chemical feedstocks marketing and (3) wholesale propane marketing.
The Partnership, through its natural gas liquids trading operations and
wholesale marketing, has become one of the largest independent traders of
propane and natural gas liquids in the United States. The Partnership owns no
properties that are material to these operations. These operations may utilize
available space in the Partnership's underground storage facilities in the
furtherance of these businesses. Because the Partnership possesses a large
distribution system, underground storage capacity and the utility to buy large
volumes of propane, the General Partner believes that the Partnership is in a
position to achieve product cost savings and avoid shortages during periods of
tight supply to an extent not generally available to other retail propane
distributions.
Trading
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 150 suppliers, however, it also conducts
transactions on the New York Mercantile Exchange. Trading activity is conducted
primarily to generate a profit independent of the retail and wholesale
operations, but is also conducted to insure the availability of propane during
periods of short supply. Propane represents over 44% of the Partnership's total
trading volume, with the remainder consisting principally of various other
natural gas liquids. The Partnership attempts to minimize trading risk through
the enforcement of its trading policies, which include total inventory limits
and loss limits, and attempts to minimize credit risk through credit checks and
application of its credit policies. However, there can be no assurance that
historical experience or the existence of such policies will prevent trading
losses in the future. For the Partnership's fiscal years ended July 31, 1996 and
1995 and the pro forma fiscal year ended July 31, 1994 net revenues of $7.3
million, $5.8 million and $6.8 million, respectively, were derived from trading
activities.
5
Chemical Feedstocks Marketing
The Partnership is also involved in the marketing of refinery and
petrochemical feedstocks. Petroleum by-products are purchased from refineries
and sold to petrochemical plants. The Partnership leases 320 railroad tank cars
to facilitate product delivery. Revenues of $44.4 million, $91.9 million and
$43.0 million were derived from such activities for the Partnership's fiscal
years ended July 31, 1996 and 1995 and the pro forma fiscal year ended July 31,
1994, respectively.
Wholesale Marketing
The Partnership engages in the wholesale distribution of propane to other
retail propane distributors. During the fiscal years ended July 31, 1996 and
1995 and the pro forma year ended July 31, 1994 the Partnership sold 104
million, 96 million and 61 gallons, respectively, of propane to wholesale
customers and had revenues attributable to such sales of $42.6 million, $33.5
million and $22.5 million, respectively.
Employees
The Partnership has no employees and is managed by the General Partner
pursuant to the Partnership Agreement. At July 31, 1996, the General Partner had
3,370 full-time employees and 770 temporary and part-time employees. The number
of temporary and part-time employees is generally higher by approximately
350-500 people during the winter heating season. At July 31, 1996, the General
Partner's full-time employees were employed in the following areas:
Retail Locations 2,817
Transportation and Storage 197
Corporate Offices (Liberty, MO & Houston, TX) 356
==========
Total 3,370
==========
Approximately one percent of the General Partner's employees are
represented by seven local labor unions, which are all affiliated with the
International Brotherhood of Teamsters. The General Partner has not experienced
any significant work stoppages or other labor problems.
The Partnership's supply, trading, chemical feedstocks marketing,
distribution scheduling and product accounting functions are operated primarily
out of the Partnership's offices located in Houston, by a total full-time
corporate staff of 94 people.
Governmental Regulation; Environmental and Safety Matters
From August 1971 until January 1981, the United States Department of Energy
regulated the price and allocation of propane. The Partnership is no longer
subject to any similar regulation.
Propane is not a hazardous substance within the meaning of federal and
state environmental laws. In connection with all acquisitions of retail propane
businesses that involve the purchase of real estate, the Partnership conducts a
due diligence investigation to attempt to determine whether any substance other
than propane has been sold from or stored on any such real estate prior to its
purchase. Such due diligence includes questioning the sellers, obtaining
representations and warranties concerning the sellers' compliance with
environmental laws and visual inspections of the properties, whereby employees
of the General Partner look for evidence of hazardous substances or the
existence of underground storage tanks.
6
With respect to the transportation of propane by truck, the Partnership is
subject to regulations promulgated under the Federal Motor Carrier Safety Act.
These regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation. National Fire
Protection Association Pamphlet No. 58, which establishes a set of rules and
procedures governing the safe handling of propane, or comparable regulations,
have been adopted as the industry standard in a majority of the states in which
the Partnership operates. There are no material environmental claims pending and
the Partnership complies in all material respects with all material governmental
regulations and industry standards applicable to environmental and safety
matters.
Service Marks and Trademarks
The Partnership markets retail propane under the "Ferrellgas" tradename and
uses the tradename "Ferrell North America" for its other operations. In
addition, the Partnership has a trademark on the name "FerrellMeter," its
patented gas leak detection device. The Company contributed all of its rights,
title and interest in such tradenames and trademark in the continental United
States to the Partnership. The General Partner will have an option to purchase
such tradenames and trademark from the Partnership for a nominal value if the
General Partner is removed as general partner of the Partnership other than for
cause. If the General Partner ceases to serve as the general partner of the
Partnership for any other reason, it will have the option to purchase such
tradenames and trademark from the Partnership for fair market value.
Business of Ferrellgas Finance Corp. and Ferrellgas Partners Finance Corp.
Ferrellgas Finance Corp. (the "OLP Finance Corp."), a Delaware corporation,
was formed April 28, 1994, and is a wholly-owned subsidiary of the Operating
Partnership. Ferrellgas Partners Finance Corp. (the "MLP Finance Corp") a
Delaware corporation (together with the OLP Finance Corp., the "Finance Corps.")
was formed on March 28, 1996, and is a wholly-owned subsidiary of the MLP. The
Finance Corps. have nominal assets and do not conduct any operations, but serve
as co-obligors for securities issued by the Operating Partnership and the MLP.
Certain institutional investors that might otherwise be limited in their ability
to invest in securities issued by partnerships by reasons of the legal
investment laws of their states of organization or their charter documents, may
be able to invest in the Operating Partnership's or MLP's securities because the
Finance Corps. are co-obligors. Accordingly, a discussion of the results of
operations, liquidity and capital resources of the Finance Corps. are not
presented. See the Finance Corp's. notes to financial statements for a
discussion of the securities with respect to which the Finance Corps. are
serving as co-obligor.
7
ITEM 2. PROPERTIES.
The Partnership owns or leases the following transportation equipment which
is utilized primarily in retail operations, except for railroad tank cars, which
are used primarily by chemical feedstocks operations.
Owned Leased Total
Truck tractors ................................................... 89 42 131
Transport trailers................................................ 118 10 128
Bulk delivery trucks.............................................. 954 481 1,435
Pickup and service trucks......................................... 1,066 381 1,447
Railroad tank cars......................................................... - 320 320
The highway transport trailers have an average capacity of approximately
9,000 gallons. The bulk delivery trucks are generally fitted with 2,000 to 3,000
gallon propane tanks. Each railroad tank car has a capacity of approximately
30,000 gallons.
A typical retail distribution outlet is located on one to three acres of
land and includes a small office, a workshop, bulk storage capacity of 18,000
gallons to 60,000 gallons and a small inventory of stationary customer storage
tanks and portable propane cylinders that the Partnership provides to its retail
customers for propane storage. The Partnership owns the land and buildings of
about 50% of its retail outlets and leases the remaining facilities on terms
customary in the industry and in the applicable local markets.
Approximately 675,000 propane tanks are owned by the Partnership, most of
which are located on customer property and leased to those customers. The
Partnership also owns approximately 650,000 portable propane cylinders, most of
which are leased to industrial and commercial customers for use in manufacturing
and processing needs, including forklift operations, and to residential
customers for home heating and cooking, and to local dealers who purchase
propane from the Partnership for resale.
The Partnership owns underground storage facilities at Hutchinson, Kansas;
Adamana, Arizona; and Moab, Utah. At July 31, 1996, the capacity of these
facilities approximated 88 million gallons, 88 million gallons and 8 million
gallons, respectively (an aggregate of approximately 184 million gallons).
Currently, approximately 111 million gallons of this capacity is leased to third
parties. The remaining space is available for the Partnership's use.
The Partnership owns the land and two buildings (50,245 square feet of
office space) comprising its corporate headquarters in Liberty, Missouri, and
leases the 18,124 square feet of office space in Houston, Texas, where its
trading, chemical feedstocks marketing and wholesale marketing operations are
primarily located.
The Partnership believes that it has satisfactory title to or valid rights
to use all of its material properties and, although some of such properties are
subject to liabilities and leases and, in certain cases, liens for taxes not yet
currently due and payable and immaterial encumbrances, easements and
restrictions, the Partnership does not believe that any such burdens will
materially interfere with the continued use of such properties in its business,
taken as a whole. In addition, the Partnership believes that it has, or is in
the process of obtaining, all required material approvals, authorizations,
orders, licenses, permits, franchises and consents of, and has obtained or made
all required material registrations, qualifications and filings with, the
various state and local governmental and regulatory authorities which relate to
ownership of the Partnership's properties or the operations of its business.
8
ITEM 3. LEGAL PROCEEDINGS.
Litigation
Propane is a flammable, combustible gas. Serious personal injury and
property damage can occur in connection with its transportation, storage or use.
The Partnership, in the ordinary course of business, is threatened with or is
named as a defendant in various lawsuits which, among other items, seek actual
and punitive damages for product liability, personal injury and property damage.
The Partnership maintains liability insurance policies with insurers in such
amounts and with such coverages and deductibles as the General Partner believes
is reasonable and prudent. However, there can be no assurance that such
insurance will be adequate to protect the Partnership from material expenses
related to such personal injury or property damage or that such levels of
insurance will continue to be available in the future at economical prices. It
is not possible to determine the ultimate disposition of these matters discussed
above; however, management is of the opinion that there are no known claims or
known contingent claims that are likely to have a material adverse effect on the
results of operations or financial condition of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of the
Partnership during the fiscal year ended July 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.
The Common Units, representing common limited partner interests in the
Partnership, are listed and traded on the New York Stock Exchange under the
symbol FGP. The Common Units began trading on June 28, 1994, at an initial
public offering price of $21.00 per Common Unit. As of September 16, 1996, there
were 791 registered Common Unitholders of record. The following table sets forth
the high and low sales prices for the Common Units on the NYSE and the cash
distributions declared per Common Unit for the periods indicated.
Common Unit Price Range Distributions
-----------------------------------------------------------------
High Low Declared per Unit
-------------------------------- -------------------------------- ---------------------------------
1994 1995 1996 1994 1995 1996 1994* 1995 1996
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
First Quarter $22.75 $23.00 $20.88 $21.00 $0.50 $0.50
Second Quarter 22.50 24.50 19.75 21.25 0.50 0.50
Third Quarter 21.25 24.25 19.75 21.88 0.50 0.50
Fourth Quarter $21.13 $22.63 $23.50 $20.75 $20.25 $21.25 $0.15 $0.50 $0.50
* Consisted of the period from the inception of the Partnership on July 5,
1994 through July 31, 1994, a 26-day period. The $0.15 distribution reflected
a pro rata share of the Minimum Quarterly Distribution of $0.50 per Unit
which would have been payable for the full quarter, and was paid in
conjunction with the first quarter 1995 distribution.
The Partnership also has Subordinated Units, all of which are held by the
Company or Ferrell, for which there is no established public trading market.
The Partnership makes quarterly cash distributions of its Available Cash,
as defined by the MLP's Agreement of Limited Partnership (the "Partnership
Agreement"). Available Cash is generally defined as consolidated cash receipts
less consolidated cash disbursements and changes in cash reserves established by
the General Partner for future requirements.
9
The Partnership is a publicly traded limited partnership that is not
subject to federal income tax. Instead, Unitholders are required to report their
allocable share of the Partnership's income, gain, loss, deduction and credit,
regardless of whether the Partnership makes distributions.
ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA.
The following table presents selected consolidated historical and pro forma
financial data of the Partnership and Predecessor.
(in thousands, except per unit data)
Ferrellgas, Inc. and Subsidiaries (Predecessor)
-----------------------------
Ferrellgas Partners L.P.
-----------------------------------------
Historical
Historical Pro Forma Historical Eleven Months Historical
Year Ended July 31, Year Ended Inception to Ended Year Ended July 31,
------------------- July 31, July 31, June 30, ------------------
1996 1995 1994 (1) 1994 1994 1993 1992
--------- --------- --------- --------- --------- ------------------
Income Statement Data:
Total revenues $653,640 $596,436 $526,556 $ 24,566 $501,990 $541,945 $501,129
Depreciation and amortization 37,024 32,014 28,835 2,383 26,452 30,840 31,196
Operating income (loss) 62,506 55,927 68,631 (2,391) 71,522 58,553 56,408
Interest expense 37,983 31,993 28,130 2,662 53,693 60,071 61,219
Earnings (loss) from continuing 24,312 23,820 39,909 (5,026) 12,337 109 (1,700)
operations
Earnings from continuing operations 0.77 0.76 1.29
per unit
Cash distributions declared per unit(3) 2.00 1.65
Balance Sheet Data (at end of period):
Working capital $ 15,294 $ 28,928 $ 34,948 $ 34,948 $ 91,912 $ 74,408 $ 67,973
Total assets 654,295 578,596 477,193 477,193 592,664 573,376 598,613
Payable to (receivable from)
parent and affiliates (4,050) (916) 2,236
Long-term debt 439,112 338,188 267,062 267,062 476,441 489,589 501,614
Stockholder's equity 22,829 11,359 8,808
Partners' Capital:
Common Unitholders $ 71,323 $ 84,489 $ 84,532 $ 84,532
Subordinated Unitholders 71,302 91,824 99,483 99,483
General Partner (2) (58,016) (57,676) (62,622) (62,622)
Operating Data:
Retail propane sales volumes 650,214 575,935 564,224 23,915 540,309 553,413 495,707
(in gallons)
Capital expenditures (4):
Maintenance $ 6,657 $ 8,625 $ 5,688 $ 911 $ 4,777 $ 10,527 $ 10,250
Growth 6,654 11,097 4,032 983 3,049 2,851 3,342
Acquisition 108,803 70,069 3,429 878 2,551 897 10,112
--------- --------- --------- --------- --------- --------- ---------
Total $122,114 $ 89,791 $ 13,149 $ 2,772 $ 10,377 $ 14,275 $ 23,704
========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Earnings (loss) before deprecition, $ 99,530 $ 87,941 $ 97,466 $ (8) $ 97,974 $ 89,393 $ 87,604
amortization interest and taxes(5)
(1) The pro forma year ended July 31, 1994 includes the eleven months ended
June 30, 1994 and historical financial data of the partnership for the
period from inception July 5, 1994 to July 31, 1994 (adjusted principally
for the pro forma effect on interest expense resulting from the early
retirement of debt net of additional borrowings).
(2) Pursuant to the MLP's Agreement of Limited Partnership (the "Partnership
Agreement"), the net loss from continuing operations of $5,026,000 was
allocated 100% to the General Partner from inception of the Partnership to
the last day of the taxable year ending July 31, 1994. An amount equal to
99% of this net loss was reallocated to the limited partners in the taxable
year ending July 31, 1995 based on their ownership percentage. In addition,
the retirement of debt assumed by the Partnership resulted in an
extraordinary loss of approximately $60,062,000 resulting from debt
prepayment premiums, consent fees and the write-off of unamortized discount
and financing costs. In accordance with the Partnership Agreement, this
extraordinary loss was allocated 100% to the General Partner and was not
reallocated to the limited partners in the next taxable year.
(3) No cash distributions were declared by the Partnership from inception to
July 31, 1994. The $0.65 distribution made at the end of the 1995 first
quarter included $0.50 for the first quarter 1995 and $0.15 for the
inception period.
10
(4) The Company's capital expenditures fall generally into three categories:
(i) maintenance capital expenditures, which include expenditures for repair
and replacement of property, plant and equipment; (ii) growth capital
expenditures, which include expenditures for purchases of new propane tanks
and other equipment to facilitate expansion of the Company's customer base
and operating capacity; and (iii) acquisition capital expenditures, which
include expenditures related to the acquisitions of retail propane
operations. Acquisition capital expenditures represent total cost of
acquisition less working capital acquired.
(5) EBITDA is calculated as operating income (loss) plus depreciation and
amortization. EBITDA is not intended to represent cash flow and does not
represent the measure of cash available for distribution. EBITDA is a
non-GAAP measure, but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution. In
addition, EBITDA is not intended as an alternative to earnings (loss) from
continuing operations or net earnings (loss).
(6) In August 1991, the Company revised the estimated useful lives of storage
tanks from 20 to 30 years in order to more closely reflect expected useful
lives of the assets. The effect of the change in accounting estimates
resulted in a favorable impact on loss from continuing operations of
approximately $3.7 million for the fiscal year ended July 31, 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
and pro forma consolidated financial statements and the notes thereto included
elsewhere in this Form 10-K.
General
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The Partnership's revenue is derived
primarily from the retail propane marketing business. The General Partner
believes the Partnership is the second largest retail marketer of propane in the
United States, based on gallons sold, serving more than 800,000 residential,
industrial/commercial and agricultural customers in 45 states and the District
of Columbia through approximately 523 retail outlets and 283 satellite
locations. Annual retail propane sales volumes were 650 million, 576 million and
564 million gallons for the fiscal years ended July 31, 1996, 1995, and 1994 ,
respectively.
The retail propane business of the Partnership consists principally of
transporting propane purchased in the contract and spot markets, primarily from
major oil companies, to its retail distribution outlets and then to tanks
located on the customers' premises, as well as to portable propane cylinders. In
the residential and commercial markets, propane is primarily used for space
heating, water heating and cooking. In the agricultural market, propane is
primarily used for crop drying, space heating, irrigation and weed control. In
addition, propane is used for certain industrial applications, including use as
an engine fuel which is burned in internal combustion engines that power
vehicles and forklifts and as a heating or energy source in manufacturing and
drying processes.
The Partnership is also engaged in the trading of propane and other natural
gas liquids, chemical feedstocks marketing and wholesale propane marketing.
Through its natural gas liquids trading operations and wholesale marketing, the
Partnership is one of the largest independent traders of propane and natural gas
liquids in the United States. In fiscal year 1996, the Partnership's wholesale
and trading sales volume was approximately 1.7 billion gallons of propane and
other natural gas liquids, over 44% of which was propane.
11
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 150 suppliers, however, it also conducts
transactions on the New York Mercantile Exchange. Trading activity is conducted
primarily to generate a profit independent of the retail and wholesale
operations, but is also conducted to insure the availability of propane during
periods of short supply. Propane represents over 44% of the Partnership's total
trading volume, with the remainder consisting principally of various other
natural gas liquids. The Partnership attempts to minimize trading risk through
the enforcement of its trading policies, which include total inventory limits
and loss limits, and attempts to minimize credit risk through credit checks and
application of its credit policies. However, there can be no assurance that
historical experience or the existence of such policies will prevent trading
losses in the future. For the Partnership's fiscal years ended July 31, 1996 and
1995, and the pro forma fiscal year ended July 31, 1994, net revenues from
trading activities were $7.3 million, $5.8 million and $6.8 million,
respectively.
Selected Quarterly Financial Data
(in thousands, except per unit data)
Due to the seasonality of the retail propane business, first and fourth
quarter revenues, gross profit and net earnings are consistently less than the
comparable second and third quarter results. The following presents the
Partnership's selected quarterly financial data for the two years ended July 31,
1996.
Fiscal year ended July 31, 1996
First Quarter Second Quarter Third Quarter Fourth Quarter
(1)
----------------- ----------------- ---------------- -----------------
Revenues $124,588 $238,381 $190,743 $99,928
Gross profit 55,479 111,909 85,480 44,458
Earnings (loss) before
extraordinary loss (7,303) 41,476 18,012 (27,873)
Earnings (loss) before
extraordinary loss per limited
partner unit (0.23) 1.32 0.57 (0.89)
Net earnings (loss) (1) (7,303) 41,476 18,012 (28,838)
(1) Reflects a $965 extraordinary loss on early retirement of debt, net of minority interest of $10.
Fiscal year ended July 31, 1995
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- --------------- ---------------
Revenues 119,413 $ 218,661 $ 168,013 $ 90,349
Gross profit 52,002 95,772 73,254 35,767
Net earnings (loss) (666) 30,527 11,939 (17,980)
Net earnings (loss) per
limited partner unit (0.02) 0.98 0.38 (0.58)
12
Results of Operations
Fiscal Year Ended July 31, 1996 versus Fiscal Year Ended July 31, 1995
Total Revenues. Total revenues increased 9.6% as compared to the prior
year, primarily due to increased retail propane volumes and increased sales
price per retail gallon, partially offset by the decline in revenues from other
operations (net trading operations, wholesale propane marketing and chemical
feedstocks marketing).
Retail volumes increased by 12.9% or 74 million gallons, primarily due to
the impact of colder weather during fiscal 1996 as compared to fiscal 1995 and
acquisition related growth. Fiscal 1996 winter temperatures, as reported by the
American Gas Association, were 14.3% colder than the prior year and 3.0% colder
than normal. Colder winter temperatures also caused higher cost of product which
in turn produced a corresponding increase in sales price per gallon as compared
to the prior fiscal year.
The 28.5% decrease in revenues from other operations to $94,318,000 is
primarily due to a decrease in chemical feedstocks marketing revenues due to a
decrease in sales volume and selling price. Both volume and price decreased as a
result of decreased availability of product from refineries and decreased demand
from petrochemical companies. Unrealized gains and losses on options, forwards,
and futures contracts were not significant in fiscal 1996 and 1995.
The acquisition of Skelgas in May 1996 did not have a significant impact on
fiscal 1996 revenues due to the expected low retail volumes in the fourth
quarter of fiscal 1996. The Partnership expects fiscal 1997 retail propane
revenues to increase primarily due to the full fiscal year impact of the Skelgas
acquisition. Due to, among other factors, the uncertainty in both fiscal 1997
temperature levels and sales price per gallon, the Partnership is unable to
predict the impact of the Skelgas acquisition on future revenues. During the
nine months ended April 30, 1996, Skelgas sold approximately 87 million retail
propane gallons, however, temperatures were 3.0% colder than normal.
Gross Profit. Gross profit increased 15.8% as compared to the 1995 fiscal
year, primarily due to a $28,415,000 increase in retail sales gross margin and
to a lesser extent gross profits from other operations. Retail operations
results increased primarily due to the increase in retail volumes. Other
operations increased $11,027,000 mainly due to the increased activity of a
non-retail transportation operation. This increased activity did not materially
impact income from continuing operations due to the related increase in
operating expenses. Chemical feedstocks is comprised of low margi sales,
therefore, the decrease in revenues did not significantly impact gross profit.
Operating Expenses. Operating expenses increased 17.1% over the prior year.
Depreciation and Amortization. Depreciation and amortization expense increased
15.6% over the prior year due primarily to acquisitions of propane businesses.o
acquisitions of propane businesses.
Depreciation and Amortization. Depreciation and amortization expense
increased 15.6% over the prior year due primarily to acquisitions of propane
businesses.
Interest expense and extraordinary loss. Interest expense increased 18.7%
over the prior year. This increase is primarily the result of the MLP's issuance
of $160,000,000 of 9 3/8% Senior Secured Notes in April 1996 (the "MLP Senior
Notes"), the increased net borrowings from the Operating Partnership's revolving
credit loans during the first nine months of the year, partially offset by
decreasing interest rates during the first nine months of the year. The
Partnership expects interest expense to increase in fiscal 1997 due to the full
year effect of the issuance of the MLP Senior Notes.
The extraordinary charge of $965,000 is due to the write off of unamortized
debt issuance costs as a result of the refinancing of the $50,000,000 of
floating rate debt previously issued by the Operating Partnership. The
Partnership expects interest expense related to this debt to decrease by 2% per
annum in fiscal 1997.
13
Fiscal Year Ended July 31, 1995 versus Pro Forma Year Ended July 31, 1994
The pro forma year ended July 31, 1994 equals the sum of the Predecessor's
eleven months ended June 30, 1994 and the Partnership's one month ended July 31,
1994, adjusted for the effects of the transactions consummated in connection
with the formation of the Partnership (principally related to the reduction in
interest expense resulting from early retirement of debt, net of additional
borrowings).
Total Revenues. Total revenues increased 13.3% to $596,436,000 as compared
to $526,556,000 for the prior year. The increase is attributable to acquisitions
of propane businesses during November 1994 and to revenues from other operations
(net trading operations, wholesale propane marketing and chemical feedstocks
marketing) increasing 82.4% to $131,948,000. The increase in revenues from other
operations is primarily due to an unusually strong demand for chemical
feedstocks driving increased prices and volumes. These increases were offset by
a decrease in revenues from existing retail operations due to warmer
temperatures as compared to normal and to the prior period that have affected
the majority of the Operating Partnership's areas of operation. Unrealized gains
and losses on options, forwards, and futures contracts were not significant in
fiscal 1995 and 1994. Fiscal 1995 winter temperatures, as reported by the
American Gas Association, were 10.3% warmer than normal and 12.4% warmer than
the prior year. The average degree days in regions served by the Company have
historically varied on an annual basis by a greater amount than the average
national degree days.
Gross Profit. Total retail gallons sold increased 2.1% to 576 million as
compared to 564 million for the prior year. This increase is due to sales
contributed by acquisitions, partially offset by warmer temperatures. Despite
the increase in sales volume, gross profit was essentially flat at $256,795,000
as compared with $257,250,000 for the prior year due primarily to the weather
impact on higher margin residential sales. Other operations is comprised of low
margin sales, therefore, the increase in revenues did not impact gross profit
significantly.
Operating Expenses. Operating expenses increased 5.6% to $153,225,000 as
compared to $145,136,000 for the prior year. The increase is primarily
attributable to acquisitions of propane businesses offset by a reduction in
expenses of the base business (primarily personnel and vehicle expenses) as
compared to the prior year.
Depreciation and Amortization. Depreciation and amortization expense
increased 11.0% to $32,014,000 as compared to $28,835,000 for the prior year due
primarily to acquisitions of propane businesses.
Net Earnings. Net earnings decreased to $24,064,000 as compared to
$40,312,000 for the prior year. This decrease is due to acquisition-driven
increases in expenses, including interest expense, combined with the warm
weather impact on gross profit.
Liquidity and Capital Resources
The ability of the MLP to satisfy its obligations is dependent upon future
performance, which will be subject to prevailing economic, financial, business
and weather conditions and other factors, many of which are beyond its control.
For the fiscal year ending July 31, 1997, the General Partner believes that the
OLP will have sufficient funds to meet its obligations and enable it to
distribute to the MLP sufficient funds to permit the MLP to meet its obligations
with respect to the MLP Senior Notes issued in April 1996, and enable it to
distribute the Minimum Quarterly Distribution ($0.50 per Unit) on all Common
Units and Subordinated Units. Future maintenance and working capital needs of
the MLP are expected to be provided by cash generated from future operations,
existing cash balances and the working capital borrowing facility. In order to
fund expansive capital projects and future acquisitions, the OLP may borrow on
existing bank lines or the MLP may issue additional Common Units. Toward this
purpose the MLP maintains a shelf registration statement with the Securities and
Exchange Commission for 1,887,420 Common Units representing limited partner
interests in the MLP. During the year ended July 31, 1996, the MLP issued
213,758 Common Units in connection with the acquisition of propane businesses.
The Common Units may be issued from time to time by the MLP in connection with
the OLP's acquisition of other businesses, properties or securities in business
combination transactions.
14
Operating Activities. Cash provided by operating activities was $65,096,000
for the year ended July 31, 1996, compared to $66,030,000 in the prior year.
This slight decrease is primarily due to the decrease in accounts payable offset
by a decrease in inventories related to the decreased level of chemical
feedstocks operations. Additional factors impacting cash provided from operating
activities include an increase in other liabilities, offset by an increase in
retail accounts receivable primarily due to unfavorable economic conditions.
Investing Activities. On April 30, 1996, the General Partner completed the
acquisition of Skelgas for a cash purchase price of $89,650,000. Following the
closing of the acquisition, the General Partner (i) caused Skelgas and each of
its subsidiaries to be merged into Ferrellgas and (ii) transferred all of the
assets of Skelgas and its subsidiaries to the Operating Partnership. In
exchange, the Operating Partnership assumed substantially all of the
liabilities, whether known or unknown, associated with Skelgas and its
subsidiaries and their propane business (excluding income tax liabilities). In
consideration of the retention by Ferrellgas of certain income tax liabilities,
the Partnership issued 41,203 Common Units to Ferrellgas. The liabilities
assumed by the Operating Partnership included the obligations of Ferrellgas
under a $89,650,000 million Bank of America ("BofA") Acquisition Loan.
Immediately following the transfer of assets and related transactions described
above, the Operating Partnership repaid the BofA Acquisition Loan principally
fromcash proceeds of the MLP Senior Notes and borrowings under the Operating
Partnership's existing acquisition bank credit line. Including the Skelgas
acquisition, the Partnership made total acquisition capital expenditures of
$128,165,000 (including working capital acquired of $19,362,000) in fiscal 1996.
This amount was funded by $108,120,000 debt assumed, $8,116,000 cash payments,
$4,825,000 Common Units issued, and $7,104,000 in other costs and consideration.
During the year ended July 31, 1996, the Partnership made growth and
maintenance capital expenditures of $13,011,000 consisting primarily of the
following: 1) additions to Partnership-owned customer tanks and cylinders, 2)
vehicle lease buyouts, 3) relocating and upgrading district plant facilities,
and 4) development and upgrading computer equipment and software. Capital
requirements for repair and maintenance of property, plant and equipment are
relatively low since technological change is limited and the useful lives of
propane tanks and cylinders, the Partnership's principal physical assets, are
generally long. The Partnership maintains its vehicle and transportation
equipment fleet by leasing light and medium duty trucks and tractors. The
General Partner believes vehicle leasing is a cost effective method for meeting
the Partnership's transportation equipment needs. The Partnership continues
seeking to expand its operations through strategic acquisitions of 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. The Partnership does not have
any material commitments of funds for capital expenditures other than to support
the current level of operations. In fiscal 1997, the Partnership expects growth
and maintenance capital expenditures to increase over fiscal 1996 levels.
Financing Activities. On April 26, 1996, the MLP issued the MLP Senior
Notes. The MLP Senior Notes will be redeemable at the option of the Partnership,
in whole or in part, at any time on or after June 15, 2001. The MLP Senior Notes
will become guaranteed by the OLP on a senior subordinated basis if certain
conditions are met. The Amended and Restated Credit Agreement and the OLP Senior
Note Indenture currently prohibit the OLP from guaranteeing any indebtedness
unless, among meeting other conditions, the fixed charge coverage ratio for the
OLP meets certain levels at prescribed dates. Currently the OLP does not meet
such conditions and, therefore, there can be no assurance as to whether or when
this guarantee will occur. Interest is payable semi-annually in arrears on June
15 and December 15 of each year commencing on December 15, 1996. A portion of
the net proceeds was used to retire outstanding indebtedness of $66,350,000
under the OLP's credit facility. The remaining proceeds were used to retire
$89,650,000 of indebtness assumed from the General Partner pursuant to the
Skelgas acquisition.
15
On July 31, 1996, the OLP amended and restated its $205,000,000 Credit
Facility (the "Credit Facility") with Bank of America National Trust & Savings
Association ("BofA"), as Agent. Among other changes, the amendment increased the
maximum borrowing amount to $255,000,000 and extends the termination date of the
revolving line of credit to July 1999. The unsecured Credit Facility permits
borrowings of up to $185,000,000 on a senior unsecured revolving line of credit
basis to fund general corporate, working capital and acquisition purposes (of
which up to $50,000,000 is available to support letters of credit). The Credit
Facility also provides an unsecured revolving line of credit for additional
working capital needs of $20,000,000.
The Credit Facility also includes an unsecured term loan due June 1, 2001
(the "Refinancing Loan ") which was used to refinance the OLP's $50,000,000
Floating Rate Series B Senior Notes (the "Floating Senior Notes"). On July 31,
1996, the OLP used the proceeds of the Refinancing Loan to redeem the Floating
Senior Notes. The OLP expects interest expense related to this debt to decrease
by 2% per annum.
To offset the variable rate characteristic of the Credit Facility, the OLP
has entered into interest rate collar agreements, expiring between June and
December 1998, with three major banks that effectively limit interest rates on a
certain notional amount between 4.9% and 6.5% under the current pricing
arrangement. At July 31, 1996, the total notional principal amount of these
agreements was $125,000,000.
At July 31, 1996, $44,500,000 of borrowings were outstanding under the
revolving portion of the Credit Facility. Letters of credit outstanding, used
primarily to secure obligations under certain insurance arrangements, totaled
$26,824,000. At July 31, 1996, the OLP had $133,676,000 available for general
corporate, acquisition and working capital purposes under the Credit Facility.
The Partnership typically has significant cash needs during the first quarter
due to expected low revenues, increasing inventories and the September cash
distribution. The OLP also has outstanding $200,000,000 of 10% Fixed Rate Senior
Notes due 2001.
During the year ended July 31, 1996, the Partnership paid cash
distributions of $2.00 per limited partner unit. These distributions covered the
period from May 1, 1995 to April 30, 1996. On August 19, 1996, the Partnership
declared its fourth-quarter cash distribution of $0.50 per limited partner unit,
which was paid September 13, 1996. The Partnership's annualized distribution is
presently $2.00 per limited partner unit.
The MLP Senior Notes, the OLP Fixed Rate Senior Notes and Credit Facility
contain various restrictive covenants applicable to the MLP, the Operating
Partnership and its subsidiaries, the most restrictive relating to additional
indebtedness, sale and disposition of assets, and transactions with affiliates.
In addition, the Operating Partnership is prohibited from making cash
distributions of the Minimum Quarterly Distribution if a default or event of
default exists or would exist upon making such distribution, or if the Operating
Partnership fails to meet certain coverage tests. The MLP and the Operating
Partnership are in compliance with all requirements, tests, limitations and
covenants related to the MLP Senior Notes, the OLP Fixed Rate Senior Notes and
Credit Facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Partnership's Consolidated Financial Statements and the Reports of
Certified Public Accountants thereon and the Supplementary Financial Information
listed on the accompanying Index to Financial Statements and Financial Statement
Schedules are hereby incorporated by reference. See Item 7 for Selected
Quarterly Financial Data.
16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
Partnership Management
The General Partner manages and operates the activities of the Partnership,
and the General Partner anticipates that its activities will be limited to such
management and operation. Unitholders do not directly or indirectly participate
in the management or operation of the Partnership. The General Partner owes a
fiduciary duty to the Unitholders.
In September 1994, the General Partner appointed two persons who are
neither officers nor employees of the General Partner or any affiliate of the
General Partner to serve on a committee of the Partnership (the "Audit
Committee") with the authority to review, at the request of the General Partner,
specific matters as to which the General Partner believes there may be a
conflict of interest in order to determine if the resolution of such conflict
proposed by the General Partner is fair and reasonable to the Partnership. The
Audit Committee will only review matters relating to conflicts of interest at
the request of the General Partner, and the General Partner has sole discretion
to determine which matters, if any, to submit to the Audit Committee. Any
matters approved by the Audit Committee will be conclusively deemed to be fair
and reasonable to the Partnership, approved by all partners of the Partnership
and not a breach by the General Partner of any duties it may owe the Partnership
or the Unitholders.
The Partnership does not directly employ any of the persons responsible for
managing or operating the Partnership. At July 31, 1996, 3,370 full-time and 770
temporary and part-time individuals were employed by the General Partner.
Directors and Executive Officers of the General Partner
The following table sets forth certain information with respect to the
directors and executive officers of the General Partner. Each of the persons
named below is elected to their respective office or offices annually. None of
the executive officers have entered into employment agreements with the General
Partner.
Director
Name Age Since Position
James E. Ferrell 56 1984 President, Chairman of the Board,
Chief Executive Officer
and a Director of the
General Partner
Danley K. Sheldon 38 Senior Vice President,
Chief Financial
Officer, President-Retail
Operations,Treasurer and Managing
Director
Shahid J. A. Malik 36 Senior Vice President,
Chief Operating Officer,
Ferrell North America and
Managing Director
17
Director
Name Age Since Position
James M. Hake 36 Vice President, Acquisitions
Patrick J. Chesterman 46 Vice President, Retail Operations
Daniel M. Lambert 55 1994 Director of the General Partner
A. Andrew Levison 40 1994 Director of the General Partner
James E. Ferrell--Mr. Ferrell has been with Ferrell or its predecessors and
its affiliates in various executive capacities since 1965.
Danley K. Sheldon--Mr. Sheldon has been Chief Financial Officer of the
Company since January 1994. He was appointed President-Retail Operations in
October 1996 and has served as Treasurer since 1989. He joined the
Company in 1986.
Shahid J. A. Malik--Mr. Malik has been Chief Operating Officer of Ferrell
North America ("FNA") since August, 1994. He joined the Company in February,
1994 as Vice President of Business Development. Prior to joining the Company,
Mr. Malik was Commercial Manager at British Petroleum from 1990 to 1994,
responsible for oil supply, trading and operations of British Petroleum's
business for most of North America.
James M. Hake--Mr. Hake has been Vice President, Acquisitions of the
Company since October, 1994. He joined the Company in 1986.
Patrick J. Chesterman--Mr. Chesterman has been Vice President, Retail
Operations since August, 1996. After joining the Company in June, 1994, he had
one-year assignments as Director of Human Resources and Director of Field
Support. Prior to joining the Company, Mr. Chesterman was Director of Fuels
Policy and Operations for the U.S. Air Force.
Daniel M. Lambert---Dr. Lambert was elected a director of the Company in
September 1994. Dr. Lambert has been President of Baker University in Baldwin
City, Kansas, since July 1, 1987.
A. Andrew Levison---Mr. Levison was elected a director of the Company in
September 1994. Mr. Levison has been a Managing Director of Donaldson, Lufkin &
Jenrette Securities Corporation since 1989. Mr. Levison is also a director of
Rickel Home Centers, Inc., a leading full service home improvement retailer that
operates stores in the Northeastern United States, and Flagstar Companies, Inc.
Compensation of the General Partner
The General Partner receives no management fee or similar compensation in
connection with its management of the Partnership and receives no remuneration
other than:
(i) distributions in respect of its 2% general partner interest, on a
combined basis, in the Partnership and the Operating Partnership; and
(ii) reimbursement for all direct and indirect costs and expenses
incurred on behalf of the Partnership, all selling, general and
administrative expenses incurred by the General Partner for or on behalf of
the Partnership and all other expenses necessary or appropriate to the
conduct of the business of, and allocable to, the Partnership. The selling,
general and administrative expenses reimbursed include specific employee
benefit and incentive plans for the benefit of the executive officers and
employees of the General Partner.
18
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth the compensation for the past three years of
all individuals serving as the Partnership's or its Predecessor's Chief
Executive Officer ("CEO") or acting in a similar capacity during the last
completed fiscal year, regardless of compensation level, and the Company's three
most highly compensated executive officers other than the Chief Executive
Officer ("named executive officers"), who were serving as executive officers at
the end of the 1996 fiscal year.
Long Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
------------------------------------ ----------------------------------------
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation Awards SARs Payouts sation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- --------------------------------- ------ ------------ ---------- ------------ ----------------------------------------------------
James E. Ferrell 1996 480,000 --- --- --- --- 16,801 (1)
Chairman and 1995 480,000 180,000 --- --- --- 36,977
Chief Executive Officer 1994 480,000 --- --- --- --- 22,920
Danley K. Sheldon 1996 177,500 100,000 --- --- --- 13,972 (1)
Senior Vice President, Chief 1995 165,000 50,000 --- --- 70,000 15,897
Financial Officer, 1994 120,185 125,875 --- --- --- 7,693
President-Retail Operations
and Managing Director
Shahid Malik 1996 162,500 165,000 --- --- --- 6,457 (1)
Senior Vice President, Chief 1995 150,000 100,000 --- --- 25,000 9,706
Operating Officer, FNA
and Managing Director
James A. Hake
Vice President, Acquisitions 1996 120,000 85,000 --- --- --- 9,962 (1)
1995 112,583 60,000 --- --- 36,000 10,424
(1) Includes for Mr. Ferrell contributions of $15,189 to the employee's 401(k)
and profit sharing plans and compensation of $1,612 resulting from the
payment of life insurance premiums. Includes for Mr. Sheldon contributions
of $12,850 to the employee's 401(k) and profit sharing plans and
compensation of $1,122 resulting from the payment of life insurance
premiums. Includes for Mr. Malik contributions of $5,598 to the employee
401(k) and profit sharing plans and compensation of $860 resulting from the
payment of life insurance premiums. Includes for Mr. Hake contributions of
$9,236 to the employee's 401(k) and profit sharing plans and compensation
of $726 resulting from the payment of life insurance premiums.
Unit Options
On October 14, 1994, the General Partner adopted the Ferrellgas, Inc. Unit
Option Plan (the "Unit Option Plan"). The purpose of the Unit Option Plan is to
encourage certain employees of the General Partner to develop a proprietary
interest in the growth and performance of the Partnership, to generate an
increased incentive to contribute to the Partnership's future success and
prosperity, thus enhancing the value of the Partnership for the benefit of its
unitholders, and to enhance the ability of the General Partner to attract and
retain key individuals who are essential to progress, growth and profitability
of the Partnership, by giving such employees the opportunity to acquire
Subordinated Units.
19
The Unit Options have the following characteristics: 1) exercise prices
which are an estimate of the fair market value of the Subordinated Units at the
time of grant, 2) vest immediately or over a one to five year period depending
on the employee, 3) exercisable beginning after July 31, 1999, assuming the
subordination period has elapsed, and 4) expire on the tenth anniversary of the
date of grant. Upon conversion of the Subordinated Units held by the General
Partner and its affiliates, the Unit Options granted will convert to Common Unit
Options.
There were no grants of unit options during the 1996 fiscal year to the CEO
and named executive officers.
The following table lists information on the CEO and named executive
officers' exercised/unexercised unit options for the fiscal year ended July 31,
1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FY AND FY-END OPTION SAR VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-The-Money Options/SARs
FY-End (#) at FY-End ($)
------------------------- -----------------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ------------------------ --------------- -------------- ------------------------- ------------------------------
J.E. Ferrell - - - -
D.K. Sheldon 0 0 0/70,000 0/381,500
S.J.A. Malik 0 0 0/25,000 0/136,250
J.M. Hake 0 0 0/36,000 0/196,200
Profit Sharing Plan
The Ferrell Profit Sharing and 401(k) Investment Plan is a qualified
defined contribution plan (the "Profit Sharing Plan"). All full-time employees
of Ferrell or any of its direct or indirect wholly owned subsidiaries with at
least one year of service are eligible to participate in the Profit Sharing
Plan. In regards to the profit sharing portion, the Board of Directors of
Ferrell determines the amount of the annual contribution to the Profit Sharing
Plan, which is purely discretionary. This decision is based on the operating
results of Ferrell for the previous fiscal year and anticipated future cash
needs of the General Partner and Ferrell. The contributions are allocated to the
Profit Sharing Plan participant's based on each participant's wages or salary as
compared to the total of all participants' wages and salaries.
Historically, the annual contribution to the Profit Sharing Plan has been
1% to 7% of each participant's annual wage or salary. The Profit Sharing Plan
also has a cash-or-deferred, or 401(k), feature allowing all full time employees
to specify a portion of their pre-tax and/or after-tax compensation to be
contributed to the Profit Sharing Plan.
Supplemental Savings Plan
The Ferrell Supplemental Savings Plan was established October 1, 1994 in
order to provide certain management or highly compensated employees with
supplemental retirement income which is approximately equal in amount to the
retirement income that would have been provided to members of the select group
of employees under the terms of the 401(k) feature of the Profit Sharing Plan
based on such members' deferral elections thereunder, but which could not be
provided under the 401(k) feature of the Profit Sharing Plan due to application
of certain IRS rules and regulations.
20
Compensation of Directors
The General Partner does not pay any additional remuneration to its
employees (or employees of, or legal counsel to, a direct or indirect
wholly-owned subsidiary) for serving as directors. Directors who are not
employees of the General Partner, a direct or indirect wholly-owned subsidiary,
or counsel to any of the foregoing, receive a fee per meeting of $500, plus
reimbursement for out-of-pocket expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of July 31, 1996,
regarding the beneficial ownership of the Common and Subordinated Units of the
MLP by certain beneficial owners, all directors and named executive officers of
the General Partner and the Partnership, each of the named executive officers
and all directors and executive officers of the General Partner as a group. The
General Partner knows of no other person beneficially owning more than 5% of the
Common Units.
Ferrellgas Partners, L.P.
Units
Name and Address Beneficially Percentage of
Title of Class of Beneficial Owner Owned (1) Class
- ------------------------ --------------------------------------------------- ----------------
Common Units James E. Ferrell 1,214,162 (2) 8.3
Goldman, Sachs & Co. 1,186,495 (3) 8.1
The Goldman Sachs Group 1,186,495 (3) 8.1
Danley K. Sheldon 1,000 *
Shahid J. A. Malik 1,350 (4) *
James M. Hake 400 *
A. Andrew Levison 15,000 *
Daniel M. Lambert 560 *
All Directors and Officers as a Group 1,212,472 8.4
Subordinated Units James E. Ferrell 16,593,721 (2) 100.0
* Less than 1%
(1) Beneficial ownership for the purposes of the foregoing table is defined by
Rule 13d-3 under the Securities Exchange Act of 1934. Under that rule, a
person is generally considered to be the beneficial owner of a security if
he has or shares the power to vote or direct the voting thereof ("Voting
Power") or to dispose or direct the disposition thereof ("Investment
Power") or has the right to acquire either of those powers within sixty
(60) days.
(2) The address for James E. Ferrell is c/o Ferrellgas, Inc., P.O. Box 4644,
Houston, TX, 77210.
Includes (i) 1,210,162 Common Units and 16,593,721 Subordinated Units
held by Ferrellgas, Inc. a wholly owned subsidiary of Ferrell Companies,
Inc. and (ii) 4,000 Common Units held by the Sarah A. Ferrell Trust
of which Elizabeth J. Ferrell, Mr. Ferrell's wife, is a trustee. Mr.Ferrell
is the sole director of Ferrell Companies, Inc.
(3) The address for both Goldman Sachs Group, L.P. and Goldman, Sachs & Co.
is 85 Broad Street, New York, New York, 10004.
Goldman, Sachs & Co., a broker/dealer, and its parent Goldman Sachs Group,
L.P. are deemed to have shared voting power and shared dispositive power
over 1,186,495 Common Units owned by their customers.
(4) Mr. Malik shares Voting and Investment Power with this wife.
21
Compliance With Section 16(a) of the Securities and Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 requires the
General Partner's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10 percent
unitholders are required by SEC regulation to furnish the General Partner with
copies of all Section 16(a) forms.
Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during fiscal year 1996 all filing requirements applicable to its officers,
directors, and greater than 10 percent beneficial owners were met in a timely
manner with the exception of the late filing by the CEO of one Form 4.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a discussion of certain relationships and related
transactions among affiliates of the Partnership.
22
The Partnership has no employees and is managed and controlled by the
General Partner. Pursuant to the Partnership Agreement, the General Partner is
entitled to reimbursement for all direct and indirect expenses incurred or
payments it makes on behalf of the Partnership, and all other necessary or
appropriate expenses allocable to the Partnership or otherwise reasonably
incurred by the General Partner in connection with operating the Partnership's
business. These costs, which totaled $109,637,000 and $100,750,000 for the years
ended July 31, 1996 and 1995 and $7,561,000 from inception to July 31, 1994,
include compensation and benefits paid to officers and employees of the General
Partner, and general and administrative costs. In addition, the conveyance of
the net assets of the Company to the Partnership included the assumption of
specific liabilities related to employee benefit and incentive plans for the
benefit of the officers and employees of the General Partner. The conveyance of
the net assets of the Company to the Partnership is described in Note A of the
Ferrellgas Partners, L.P. notes to the consolidated financial statements.
A. Andrew Levison, a director of the General Partner is a Managing Director
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). DLJ acted as an
underwriter with regard to the private placement of $160,000,000 senior
subordinated notes issued in April 1996 and was paid fees of $4,000,000 in
fiscal 1996. No fees were paid in 1995. DLJ acted as an underwriter with regard
to the public offering of Common Units and Senior Notes as described in Note A
of the Ferrellgas Partners, L.P.'s notes to the consolidated financial
statements and was paid total fees of $5,100,000 during 1994.
The law firm of Smith, Gill, Fisher & Butts, a Professional Corporation,
was general counsel to the Partnership, General Partner, Ferrell Companies, Inc.
and their respective subsidiaries and affiliates. David S. Mouber, a director of
Ferrell through July 31, 1994, was a member of such law firm during the pro
forma fiscal year of the Partnership and the Predecessor ended July 31, 1994.
The Partnership, Ferrell and their respective subsidiaries paid such firm fees
of $1,394,000 during the pro forma year ended July 31, 1994.
See Note L to the financial statements in Item 14 for discussion of transactions
involving acquisitions related to the General partner and the Partnership
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
See "Index to Financial Statements" set forth on page F-1.
2. Financial Statement Schedules.
See "Index to Financial Statement Schedules" set forth on page
S-1.
3. Exhibits.
See "Index to Exhibits" set forth on page E-1.
(b) Reports on Form 8-K.
The Partnership filed one Form 8-K during the quarter ended July 31,
1996.
Form 8-K dated May 6, 1996, (as amended on July 12, 1996) reporting
the acquisition by the Operating Partnership of the propane business
of Skelgas Propane, Inc.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FERRELLGAS PARTNERS, L.P.
By Ferrellgas, Inc. (General Partner)
By /s/ James E. Ferrell
James E. Ferrell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/s/ James E. Ferrell Chairman of the Board, 10/15/96
James E. Ferrell Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Daniel M. Lambert Director 10/15/96
Daniel M. Lambert
/s/ A. Andrew Levison Director 10/15/96
A. Andrew Levison
/s/ Danley K. Sheldon Senior Vice President and Chief 10/15/96
Danley K. Sheldon Financial Officer (Principal
Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FERRELLGAS PARTNERS FINANCE CORP.
By /s/ James E. Ferrell
James E. Ferrell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/s/ James E. Ferrell Chairman of the Board, 10/15/96
James E. Ferrell Chief Executive Officer and
Sole Director (Principal
Executive Officer)
/s/ Danley K. Sheldon Senior Vice President and Chief 10/15/96
Danley K. Sheldon Financial Officer (Principal
Financial and Accounting Officer)
INDEX TO EXHIBITS
The exhibits listed on the accompanying Exhibit Index are filed as part
of this report. Exhibits required by Item 601 of Regulation S-K which are not
listed are not applicable.
Exhibit
Number Description
(1) 2.1 Stock Purchase Agreement dated September 30, 1994,
between Ferrellgas, Inc. and Bell
Atlantic Enterprises International, Inc.
(2) 2.2 Agreement for Purchase and Sale of Stock dated
March 23, 1996 between Superior
Propane, Inc. and Ferrellgas, Inc.
(3) 3.1 Agreement of Limited Partnership of Ferrellgas
Partners, L.P.
(4) 4.1 Indenture dated as of July 5, 1994, among Ferrellgas,
L.P., Ferrellgas Finance Corp. and Norwest Bank
Minnesota, National Association, as Trustee, relating
to $200,000,000 10% Series A Fixed Rate Senior Notes
due 2001 and $50,000,000 Series B Floating Rate
Senior Notes due 2001.
(5) 4.2 Indenture dated as of April 26, 1996, among Ferrellgas
Partners, L.P., Ferrellgas Partners Finance Corp.,
Ferrellgas, L.P. as guarantor, and Amercan Bank
National Association, as Trustee, relating to
$160,000,000 9 3/8% Senior Secured Notes due 2006.
(6) 4.3 Registration Rights Agreement dated as of
April, 26, 1996 among Ferrellgas Partners,
L.P., Ferrellgas Partners Finance Corp.,
Ferrellgas, L.P., Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co.
(7) 10.2 Agreement dated as of April 1, 1994, between BP
Exploration & Oil, Inc. and
Ferrellgas, L.P. dba Ferrell North America
(8)# 10.3 Ferrell Companies, Inc. Supplemental Savings Plan.
(9)# 10.4 Ferrellgas, Inc. Unit Option Plan.
(10) 10.5 Contribution, Conveyance and Assumption Agreement
dated as of November 1, 1994 among the Partnership,
the Operating Partnership and Ferrellgas, Inc.
(11) 10.6 First Amendment to Contribution, Conveyance and
Assumption Agreement between Ferrellgas, the
Partnership and the Operating Partnership.
(12) 10.7 Second Amendment to Contribution, Conveyance and
Assumption Agreement between Ferrellgas, the
Partnership and the Operating Partnership.
(13) 10.8 Purchase Agreement dated as of April 23, 1996
between Ferrellgas Partners, L.P., Ferrellgas
Partners Finance Corp., Ferrellgas, Inc.,
Ferrellgas, L.P., Donaldson, Lufkin & Jenrette
Securities Corporation and Goldman, Sachs & Co.
(14) 10.9 Amended and Restated Agreement of Limited Partnership
of Ferrellgas, L.P. dated as of April 23, 1996.
(15) 10.10 Pledge and Security Agreement dated as of April
26, 1996 among Ferrellgas Partners, L.P., Ferrellgas,
Inc., and American Bank National Association, as
collateral agent.
10.11 Amended and Restated Credit Agreement dated as of July
31, 1996, among Ferrellgas, L.P., Stratton Insurance
Company, Inc., Ferrellgas, Inc., Bank of America
National Trust and Savings Association, as agent, and
the other financial institutions party thereto.
E-1
(16) 21.1 List of subsidiaries.
27.1 Financial Data Schedules - Filed only with the EDGAR
version.
# Management contracts or compensatory plans.
(1) Incorporated by reference to the same numbered Exhibit to
Registrant's Registration Statement on
Form S-1 File No. 33-55185 filed with the Commission on
November 14, 1994
(2) Incorporated by reference to Exhibit 2.1 to Registrant's Current
Report on Form 8-K filed on May 6, 1996.
(3) Incorporated by reference to the same numbered Exhibit to the
Registrant's Current Report on Form 8-K filed August 15, 1994.
(4) Incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K filed August 15, 1994.
(5) Incorporated by reference to Exhibit 4.1 to Registrant's Current
Report on Form 8-K filed on May 6, 1996.
(6) Incorporated by reference to Exhibit 4.2 to Registrant's Current
Report on Form 8-K filed on May 6, 1996.
(7) Incorporated by reference to the Exhibit 10.4 to Registrant's
Annual Report on Form 10-K filed on October 20, 1994.
(8) Incorporated by reference to the Exhibit 10.7 to Registrant's
Annual Report on Form 10-K filed on October 17, 1995.
(9) Incorporated by reference to the Exhibit 10.8 to Registrant's
Registration Statement on Form S-1 File No. 33-55185 filed with
the Commission on November 14, 1994
(10) Incorporated by reference to the Exhibit 10.9 to Registrant's
Registration Statement on Form S-1 File No. 33-55185 filed with
the Commission on November 14, 1994
(11) Incorporated by reference to Exhibit 10.8 to Registrant's Annual
Report on Form 10-K filed on October 20, 1994.
(12) Incorporated by reference to the Exhibit 10.11 to Registrant's
Annual Report on Form 10-K filed on October 17, 1995.
(13) Incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K filed on May 6, 1996.
(14) Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q filed on June 12, 1996.
(15) Incorporated by reference to Exhibit 10.2 to Registrant's
Current Report on Form 8-K filed on May 6, 1996.
(16) Incorporated by reference to the Exhibit 21.1 to Registrant's
Registration Statement on Form S-4 File No. 333-06693 filed with
the Commission on July 30, 1996
E-3
INDEX TO FINANCIAL STATEMENTS
Page
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report..........................................................................F-2
Consolidated Balance Sheets - July 31, 1996 and 1995..................................................F-3
Consolidated Statements of Earnings- Years ended July 31, 1996 and 1995,
One month ended July 31, 1994 (Successor),
Eleven months ended June 30, 1994 (Predecessor)..................................................F-4
Consolidated Statements of Stockholder's Equity/Partners' Capital -
Years ended July 31, 1996 and 1995, One month ended July 31, 1994
(Successor), and Eleven months ended June 30, 1994 (Predecessor).................................F-5
Consolidated Statements of Cash Flows - Year ended July 31, 1996 and 1995,
One month ended July 31, 1994 (Successor), and
Eleven months ended June 30, 1994 (Predecessor)..................................................F-6
Notes to Consolidated Financial Statements............................................................F-7
Ferrellgas Partners Finance Corp.
Independent Auditors' Report.........................................................................F-20
Balance Sheets - July 31, 1996 and April 8, 1996 (Date of Inception).................................F-21
Statement of Earnings - From the Date of inception to July 31, 1996..................................F-22
Statement of Stockholder's Equity - From the Date of Inception to July 31, 1996......................F-23
Statement of Cash Flows - From the Date of Inception to July 31,1996.................................F-24
Notes to Financial Statements........................................................................F-25
F-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P.
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas
Partners, L.P. (formerly Ferrellgas, Inc.) and subsidiaries as of July 31, 1996
and 1995, and the related consolidated statements of earnings, partners' capital
and cash flows for the years ended July 31, 1996 and 1995 and for the one month
ended July 31, 1994 (Successor) and the eleven months ended June 30, 1994
(Predecessor). These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ferrellgas Partners, L.P. and
subsidiaries as of July 31, 1996 and 1995, and the results of their operations
and their cash flows for the years ended July 31, 1996 and 1995 and for the one
month ended July 31, 1994 (Successor) and the eleven months ended June 30, 1994
(Predecessor) in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 18, 1996
F-2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
July 31, July 31,
ASSETS 1996 1995
- ---------------------------------------------------------- ---------------- -----------------
Current Assets:
Cash and cash equivalents $ 13,770 $ 29,877
Accounts and notes receivable (net of
allowance for doubtful accounts of $1,169 and
$874 in 1996 and 1995, respectively) 70,118 58,239
Inventories 41,395 44,090
Prepaid expenses and other current assets 5,685 5,884
---------------- -----------------
Total Current Assets 130,968 138,090
Property, plant and equipment, net 403,732 345,642
Intangible assets, net 107,960 86,886
Other assets, net 11,635 7,978
---------------- -----------------
Total Assets $654,295 $578,596
================ =================
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------------------------
Current Liabilities:
Accounts payable $ 48,400 $ 57,729
Other current liabilities 41,754 31,433
Short-term borrowings 25,520 20,000
---------------- -----------------
Total Current Liabilities 115,674 109,162
Long-term debt 439,112 338,188
Other liabilities 12,402 11,398
Contingencies and commitments
Minority interest 2,498 1,211
Partners' Capital:
Common unitholders (14,612,580 and 14,398,942
units outstanding in 1996 and 1995, respectively) 71,324 84,489
Subordinated unitholders (16,593,721 units outstanding
in 1996 and 1995) 71,302 91,824
General partner (58,017) (57,676)
---------------- -----------------
Total Partners' Capital 84,609 118,637
---------------- -----------------
Total Liabilities and Partners' Capital $654,295 $578,596
================ =================
F-3
See notes to consolidated financial statements
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except unit data)
For the year ended July 31, 1994
--------------------------------
For the year For the year One month Eleven months
ended ended ended ended
July 31, 1996 July 31, 1995 July 31, 1994 June 30, 1994
---------------- ---------------- ---------------- ----------------
(Predecessor)
Revenues:
Gas liquids and related product sales $612,593 $565,607 $22,411 $477,285
Other 41,047 30,829 2,155 24,705
---------------- ---------------- ---------------- ----------------
Total revenues 653,640 596,436 24,566 501,990
Cost of product sold (exclusive of
depreciation, shown separately below) 356,314 339,641 13,211 256,095
---------------- ---------------- ---------------- ----------------
Gross profit 297,326 256,795 11,355 245,895
Operating expense 179,462 153,226 10,078 135,058
Depreciation and amortization expense 37,024 32,014 2,383 26,452
General and administrative expense 13,221 11,357 935 8,923
Vehicle leases expense 5,113 4,271 350 3,940
---------------- ---------------- ---------------- ----------------
Operating income (loss) 62,506 55,927 (2,391) 71,522
Interest expense (37,983) (31,993) (2,662) (53,693)
Interest income (including related parties of $1,108
in eleven months ended June 30, 1994) 1,666 1,268 73 3,599
Loss on disposal of assets (1,586) (1,139) (97) (1,215)
---------------- ---------------- ---------------- ----------------
Earnings (loss) before income taxes,
minority interest and extraordinary loss 24,603 24,063 (5,077) 20,213
Income tax provision - - - 7,876
Minority interest 291 243 (51) -
---------------- ---------------- ---------------- ----------------
Earnings (loss) before extraordinary loss 24,312 23,820 (5,026) 12,337
Extraordinary loss on early extinguishment of debt,
net of minority interest of $10 and $607 in year
ended July 31, 1996 and in one month ended
July 31, 1994, respectively, and tax benefit of $531
in eleven months ended June 30, 1994 965 - 59,455 867
---------------- ---------------- ---------------- ----------------
Net earnings (loss) 23,347 23,820 (64,481) $ 11,470
---------------- ================
General partner's interest in net earnings (loss) 233 238 (64,481)
---------------- ---------------- ----------------
Limited partners' interest in net earnings $ 23,114 $ 23,582 $ 0
================ ================ ================
Net earnings per limited partner unit:
Earnings before extraordinary loss $ 0.77 $ 0.76 $ -
Extraordinary loss 0.03 -
---------------- ---------------- ----------------
Net earnings per limited partner unit $ 0.74 $ 0.76 $ -
================ ================ ================
Weighted average number of units outstanding 31,128.8 30,908.1 30,693.7
================ ================ ================
See notes to consolidated financial statements
F-4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY / PARTNERS' CAPITAL
(in thousands)
Number of Additional Total
common Common paid-in Accumulated stockholder's
shares stock capital deficit equity
--------------- ----------- --------------- ------------ ---------------
August 1, 1993 (Predecessor) 1.0 $1 $32,863 $(21,505) $ 11,359
Net earnings - - - 11,470 11,470
--------------- ----------- --------------- ------------ ---------------
June 30, 1994 (Predecessor) 1.0 $1 $32,863 $(10,035) $22,829
=============== =========== =============== ============ ===============
Number of units
-----------------------------
General Total partners'
Common Subordinated Common Subordinated partner capital
------------ --------------- ----------- --------------- ------------ ---------------
April 19, 1994 - - $ - $ - $ - $ -
Contributions in connection
with formation of the
Partnership 14,100.0 16,593.7 84,532 99,483 1,859 185,874
Net loss - - - - (64,481) (64,481)
------------ --------------- ----------- --------------- ------------ ---------------
July 31, 1994 14,100.0 16,593.7 84,532 99,483 (62,622) 121,393
Special allocation of prior
year operating loss - - (2,312) (2,664) 4,976 -
Assets contributed in
connection with acquisitions - - 3,324 3,830 72 7,226
Common units issued in
connection with
acquisitions 298.9 - 6,600 - 66 6,666
Quarterly distributions - - (23,756) (27,380) (518) (51,654)
Adjustments to capital related to
resolution of income tax
contingencies - - 5,145 5,929 112 11,186
Net earnings - - 10,956 12,626 238 23,820
------------ --------------- ----------- --------------- ------------ ---------------
July 31, 1995 14,398.9 16,593.7 84,489 91,824 (57,676) 118,637
Assets contributed in
connection with acquisitions 284 325 6 615
Common units issued in
connection with
acquisitions 213.7 4,825 48 4,873
Quarterly distributions (29,047) (33,188) (628) (62,863)
Net earnings 10,773 12,341 233 23,347
============ =============== =========== =============== ============ ===============
July 31, 1996 14,612.6 16,593.7 $71,324 $71,302 $(58,017) $84,609
See notes to consolidated financial statements.
F-5
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended July 31, 1994
For the year For the year One month Eleven months
ended ended ended ended
July 31, 1996 July 31, 1995 July 31, 1994 June 30, 1994
-------------- --------------- --------------- ----------------
(Predecessor)
Cash Flows From Operating Activities:
Net earnings (loss) $23,347 $23,820 $(64,481) $11,470
Reconciliation of net earnings (loss) to net
cash from operating activities:
Depreciation and amortization 37,024 32,014 2,383 26,452
Extraordinary loss 965 - 59,455 867
Minority interest 291 243 658
Other 4,478 3,191 22 5,130
Changes in operating assets and liabilities net of
effects from business acquisitions:
Accounts and notes receivable (3,988) (906) 196 (816)
Inventories 7,612 7,388 (5,631) (14,279)
Prepaid expenses and other current assets 765 (3,497) 618 (763)
Accounts payable (10,576) 5,246 (2,809) 16,231
Accrued interest expense 1,270 10,680 (3,448) (4,765)
Other current liabilities 3,649 (11,703) 1,715 7,001
Other liabilities 259 (446) (35) (1,072)
Deferred income taxes - - - 7,667
-------------- --------------- --------------- ----------------
Net cash provided (used) by operating activities 65,096 66,030 (11,357) 53,123
-------------- --------------- --------------- ----------------
Cash Flows From Investing Activities:
Business acquisitions (8,116) (19,677) (874) (2,451)
Cash from acquired company 9,620 - - -
Capital expenditures (13,011) (19,722) (1,894) (7,826)
Other (1,587) 173 31 26
-------------- --------------- --------------- ----------------
Net cash used by investing activities (13,094) (39,226) (2,737) (10,251)
-------------- --------------- --------------- ----------------
Cash Flows From Financing Activities:
Net additions to short-term borrowings 5,520 17,000 3,000 -
Additions to long-term debt 222,268 85,000 265,000 -
Reductions of long-term debt (234,082) (61,400) (477,903) (13,640)
Distributions (62,863) (51,654) - -
Minority interest activity 1,002 (459) (1,202) -
Additional payments to retire debt - - (48,364) (1,190)
Additions to financing costs - - (6,575) (51)
Net issuance of Common Units - - 255,006 -
Cash transfer from predecessor company - - 39,791 -
Other 46 51 (124) (6,330)
-------------- --------------- --------------- ---------------
Net cash provided (used) by financing activities (68,109) (11,462) 28,629 (21,211)
-------------- --------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents (16,107) 15,342 14,535 21,661
Cash and cash equivalents - beginning of period 29,877 14,535 - 32,706
-------------- --------------- --------------- ----------------
Cash and cash equivalents - end of period $13,770 $29,877 $14,535 $54,367
============== =============== =============== ================
Cash paid for interest $34,994 $19,918 $ 6,093 $55,681
============== =============== =============== ================
See notes to consolidated financial statements
F-6
FERRELLGAS PARTNERS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
A. Partnership Organization and Formation
Ferrellgas Partners, L.P. (the "MLP") was formed April 19, 1994, and is a
publicly traded limited partnership, owning a 99% limited partner interest
in Ferrellgas, L.P. (the "Operating Partnership" or "OLP"), both Delaware
limited partnerships, and collectively known as the Partnership. Ferrellgas
Partners, L.P., was formed to acquire and hold a limited partner interest in
the Operating Partnership. The Operating Partnership was formed to acquire,
own and operate the propane business and assets of Ferrellgas, Inc. (the
"Company" or "General Partner"), a wholly-owned subsidiary of Ferrell
Companies, Inc. The Company has retained a 1% general partner interest in
Ferrellgas Partners, L.P. and also holds a 1.0101% general partner interest
in the Operating Partnership, representing a 2% general partner interest in
the Partnership on a combined basis. As General Partner of the Partnership,
the Company performs all management functions required for the Partnership.
On July 5, 1994, the Partnership completed an initial public offering of
13,100,000 Common Units representing limited partner interests (the "Common
Units") at $21 per Common Unit. As of the date of the offering, the
13,100,000 Common Units represented a 41.8% limited partner interest in the
Partnership. Concurrent with the closing of the offering, the Company
contributed all of its propane business and assets to the Partnership
(excluding approximately $39,000,000 in cash, payables to or receivables
from its parent and affiliates and an investment in the Class B Stock of
Ferrell Companies, Inc.) in exchange for 1,000,000 Common Units, 16,593,721
Subordinated Units and Incentive Distribution Rights, representing a 56.2%
limited partner interest in the Partnership, as of the date of the offering,
in addition to the 2% general partner interest in the Partnership.
In connection with the contribution of the propane business and assets by
the Company, the Operating Partnership assumed all of the liabilities,
whether known or unknown, associated with such assets (other than income tax
liabilities). The net book value of the assets contributed to the
Partnership, adjusted for the settlement of a tax contingency (see Note F),
is reported below:
(In thousands)
Total assets conveyed $509,535
Total liabilities assumed 565,471
--------------
Net liabilities $ (55,936)
==============
Supplementary Pro Forma Consolidated Statements of Earnings (Unaudited):
The following pro forma consolidated statement of earnings for the fiscal
year ended July 31, 1994, was derived from the historical statement of
earnings of the Company for the eleven months ended June 30, 1994, and the
statement of earnings of the Partnership from inception to July 31, 1994.
The pro forma consolidated statements of earnings of the Partnership should
be read in conjunction with the consolidated financial statements of the
Partnership and the Company and the notes thereto. The objective of this
data is to show the effects on the historical financial information as if
the Partnership formation had occurred on August 1, 1993.
F-7
The following supplementary pro forma consolidated statements of earnings are
for comparative purposes and are not indicative of the results of future
operations of the Partnership:
(in thousands, except unit amounts)
Audited Audited Pro Forma
July 31, 1996 July 31, 1995 July 31, 1994
------------------ ------------------ -----------------
Revenues:
Gas liquids and related product sales $612,593 $565,607 $499,696
Other 41,047 30,829 26,860
------------------ ------------------ -----------------
Total revenues 653,640 596,436 526,556
Cost of product sold (exclusive of
depreciation, shown separately below) 356,314 339,641 269,306
------------------ ------------------ -----------------
Gross profit 297,326 256,795 257,250
Operating expense 179,462 153,226 145,136
Depreciation and amortization expense 37,024 32,014 28,835
General and administrative expense 13,221 11,357 10,358 (1)
Vehicle leases expense 5,113 4,271 4,290
------------------ ------------------ -----------------
Operating income 62,506 55,927 68,631
Interest expense (37,983) (31,993) (28,130)(2)
Interest income 1,666 1,268 1,123 (3)
Loss on disposal of assets (1,586) (1,139) (1,312)
------------------ ------------------ -----------------
Earnings before minority interest and
extraordinary loss 24,603 24,063 40,312
Minority interest 291 243 403 (4)
------------------ ----------------- ------------------
Earnings before extraordinary loss $ 24,312 $ 23,820 $ 39,909
================== ================== =================
Earnings before extraordinary loss per
limited partner unit $ 0.77 $ 0.76 $ 1.29
================== ================== =================
Weighted average limited partner units 31,128.8 30,908.1 30,693.7
================== ================== =================
(1) Reflects estimated general and administrative costs associated with
the Partnership.
(2) Reflects the adjustment to interest expense resulting from the
early retirement of debt, net of additional borrowings.
(3) Reflects the reduction of interest income to the Partnership as a
result of lower cash balances available for short-term investment
opportunities.
(4) Reflects that portion of earnings from continuing operations
allocated to the General Partner for its ownership in the Operating
Partnership.
F-8
B. Summary of Significant Accounting Policies
(1) Nature of operations: The Partnership is engaged primarily in the sale,
distribution, marketing and trading of propane and other natural gas liquids
throughout the United States. The retail market is seasonal because propane
is used primarily for heating in residential and commercial buildings. The
Partnership serves more than 800,000 residential, industrial/commercial and
agricultural customers.
(2) Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual results could
differ from these estimates. Significant estimates impacting the financial
statements include reserves that have been established for product liability
and other claims.
(3) Principles of consolidation: The accompanying consolidated financial
statements present the consolidated financial position,
results of operations and cash flows of the Partnership and its wholly-owned
subsidiary, Ferrellgas Partners Finance Corp. The Company's 1.0101%
General Partner interest in Ferrellgas, L.P. is accounted for as a minority
interest. All material intercompany profits, transactions and balances
have been eliminated.
(4) Cash and cash equivalents: For purposes of the Consolidated Statements
of Cash Flows, the Partnership considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
(5) Inventories: Inventories are stated at the lower of cost or market
using average cost and actual cost methods.
(6) Property, plant and equipment and intangible assets: Property, plant and
equipment is stated at cost less accumulated depreciation. Expenditures for
maintenance and routine repairs are expensed as incurred. Depreciation is
calculated using the straight-line method based on estimated useful lives of
the assets ranging from two to thirty years. Intangible assets, consisting
primarily of customer location values and goodwill, are stated at cost, net
of amortization calculated using the straight-line method over periods
ranging from 15 to 40 years. Accumulated amortization of intangible assets
totaled $95,801,000 and $81,995,000 as of July 31, 1996 and 1995,
respectively.
(7) Forward, futures and option contracts: The Partnership also enters into
forward and futures purchase/sale agreements and options involving propane
and related products which are used both for trading and overall risk
management purposes. To the extent such contracts are entered into at fixed
prices and thereby subject the Partnership to market risk, the contracts are
accounted for on a mark-to-market basis.
Mark to market adjustments on trading positions are recorded through income.
(8) Income taxes: The Partnership is a limited partnership. As a result, the
Partnership's earnings or loss for Federal income tax purposes is included
in the tax returns of the individual partners. Accordingly, no recognition
has been given to income taxes in the accompanying financial statements of
the Partnership. Net earnings for financial statement purposes may differ
significantly from taxable income reportable to unitholders as a result of
differences between the tax basis and financial reporting basis of assets
and liabilities and the taxable income allocation requirements under the
Partnership agreement.
The Predecessor filed a consolidated Federal income tax return with its
parent and affiliates. Income taxes were computed as though each company
filed its own income tax return in accordance with the tax sharing
agreement. Deferred income taxes were provided as a result of temporary
differences between financial and tax reporting as described in Note M,
using the asset/liability method. Deferred income taxes were recognized for
the tax consequences of temporary differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities.
F-9
(9) Net earnings (loss) per limited partner unit: Net earnings (loss) per
limited partner unit is computed by dividing net earnings, after deducting
the General Partner's 1% interest, by the weighted average number of
outstanding Common Units, Subordinated Units and the dilutive effect
(if any) of subordinated unit options. As described in Note F, the 1994 net
loss before extraordinary loss of approximately $5,026,000, and the 1994
extraordinary loss from early extinguishment of debt of approximately
$59,455,000, net of $607,000 minority interest, were allocated 100% to
the General Partner. Accordingly, there was no net earnings per limited
partner unit calculation attributable to the limited partners from
inception to July 31, 1994.
In accordance with the terms of the Partnership Agreement, the Partnership
reallocated 99% of the initial year's net loss before extraordinary loss
($4,976,000) based on ownership percentages to the limited partners in 1995.
The fiscal 1995 special allocation of the prior year operating loss to the
limited partners resulted in a reduction in equity of $0.16 per limited
partner unit.
(10) Adoption of new accounting standard: Effective August 1, 1996, SFAS No.
123, "Accounting for Stock-Based Compensation," will require increased
disclosure of compensation expense arising from stock compensation plans
(including the Partnership's unit option plan.) The Statement encourages
rather than requires entities to adopt a new method that accounts for stock
compensation awards based on their estimated fair value at the date they are
granted. Entities will be permitted, however, to continue accounting under
APB Opinion No. 25 which requires compensation cost to be recognized based
on the excess, if any, between the quoted market price of the units at the
date of grant and the amount an employee must pay to acquire the units. The
Partnership will continue to apply APB No. 25 in its consolidated financial
statements and will disclose pro forma net income and earnings per unit in a
footnote to its consolidated financial statements, determined as if the new
method were applied.
C. Quarterly Distributions of Available Cash
The Partnership makes quarterly cash distributions of all of its "Available
Cash", generally defined as consolidated cash receipts less consolidated
cash disbursements and net changes in reserves established by the General
Partner for future requirements. These reserves are retained to provide for
the proper conduct of the Partnership business, or to provide funds for
distributions with respect to any one or more of the next four fiscal
quarters.
Distributions by the Partnership in an amount equal to 100% of its Available
Cash will generally be made 98% to the Common and Subordinated Unitholders
(the "Unitholders") and 2% to the General Partner, subject to the payment of
incentive distributions to the holders of Incentive Distribution Rights to
the extent that certain target levels of cash distributions are achieved. To
the extent there is sufficient Available Cash, the holders of Common Units
have the right to receive the "Minimum Quarterly Distribution" ($0.50 per
Unit), plus any "arrearages", prior to any distribution of Available Cash to
the holders of Subordinated Units. Common Units will not accrue arrearages
for any quarter after the "Subordination Period" (as defined below) and
Subordinated Units will not accrue any arrearages with respect to
distributions for any quarter.
In general, the Subordination Period will continue indefinitely until the
first day of any quarter beginning on or after August 1, 1999, in which (i)
distributions of Available Cash equal or exceed the Minimum Quarterly
Distribution on the Common Units and the Subordinated Units for each of the
three consecutive four quarter periods immediately preceding such date and
(ii) the Partnership has invested at least $50 million in acquisitions and
capital additions or improvements to increase the operating capacity of the
Partnership. Prior to the end of the Subordination Period (but not prior to
August 1, 1997), 5,531,240 Subordinated Units held by the Company will
convert into Common Units if (i) distributions of Available Cash on the
Common Units and Subordinated Units equaled or exceeded the Minimum
Quarterly Distribution for each of the two consecutive four-quarter period
preceding August 1, 1997, and (ii) the operating cash generated by the
Partnership in each of such four-quarter periods equaled or exceeded 125% of
the Minimum Quarterly Distribution on all Common Units and all Subordinated
Units. Upon expiration of the Subordination Period, all remaining
Subordinated Units will convert to Common Units.
F-10
The Partnership makes distributions of all of its Available Cash within 45
days after the end of each fiscal quarter ending January, April, July and
October to holders of record on the applicable record date.
D. Supplemental Balance Sheet Information
Inventories consist of:
(in thousands) 1996 1995
-------------- --------------
Liquefied propane gas and related products $33,366 $37,550
Appliances, parts and supplies 8,029 6,540
-------------- --------------
$41,395 $44,090
============== ==============
In addition to inventories on hand, the Partnership enters into
contracts to buy product for supply purposes. All such contracts have
terms of less than one year and call for payment based on market prices
at date of delivery.
Property, plant and equipment consist of:
(in thousands) 1996 1995
------------- --------------
Land and improvements $ 26,024 $ 21,380
Buildings and improvements 39,376 29,117
Vehicles 55,860 46,199
Furniture and fixtures 22,074 23,336
Bulk equipment and district facilities 43,203 37,086
Tanks and customer equipment 403,770 357,167
Other 5,800 6,825
------------- --------------
596,107 521,110
Less: accumulated depreciation 192,375 175,468
------------- --------------
$403,732 $345,642
============== =============
Depreciation expense totaled $25,101,000, $21,649,000, $1,602,000, and
$17,659,000, for the years ended July 31, 1996, 1995, the one month
ended July 31, 1994, and the eleven months ended June 30, 1994,
respectively.
F-11
Other current liabilities consist of:
(in thousands) 1996 1995
-------------- -------------
Accrued insurance $ 3,157 $ 2,345
Accrued interest 14,242 12,972
Accrued payroll 7,062 4,036
Other 17,293 12,080
-------------- --------------
$41,754 $31,433
============== =============
E. Long-Term Debt
Long-term debt consists of:
(in thousands) 1996 1995
------------- ------------
Senior Notes
Fixed rate, 10%, due 2001 (1) $200,000 $200,000
Floating rate, 9.3125% due 2001 (1) - 50,000
Fixed rate, 9.375%, due 2006 (2) 160,000 -
Credit Agreement
Term loan, 6%, due 2001 (3) 50,000 -
Term loan, 7.3125%, due 1997 - 15,000
Revolving credit loans, 8.25%, due 1999 (3) 18,980 70,000
Notes payable, 5.7% and 5.6% weighted average interest rates,
respectively, due 1996 to 2006 (4) 11,742 3,983
------------- ------------
440,722 338,983
Less: current portion 1,610 795
------------- ------------
$439,112 $338,188
============= ============
(1) The OLP fixed rate Senior Notes, issued in June, 1994, are general
unsecured obligations of the OLP and rank on an equal basis in right of payment
with all senior indebtedness of the OLP and senior to all subordinated
indebtedness of the OLP. The floating rate senior notes bore interest at the
London Interbank Offered Rate ("LIBOR") plus 3.125% and had mandatory sinking
fund payments of $5,000,000 in 1999 and 2000. On July 31, 1996, the OLP
refinanced these notes with an unsecured term loan from its amended and restated
Credit Facility bearing interest at LIBOR plus a certain percentage depending on
various factors. The current rate at July 31, 1996 was 6.0%.
(2) The MLP fixed rate Senior Secured Notes issued in April 1996, will be
redeemable at the option of the MLP, in whole or in part, at any time on or
after June 15, 2001. The notes are secured by the MLP's partnership interest in
the OLP. The notes will become guaranteed by the OLP on a senior subordinated
basis if certain conditions are met. The OLP's Credit Agreement related to the
Credit Facility ("Credit Agreement") and the OLP Indenture relating to the
$200,000,000 Senior Notes ("OLP Indenture") currently prohibit the OLP from
guaranteeing any indebtedness unless, among meeting other conditions, the fixed
charge coverage ratio for the OLP meets certain levels at prescribed dates.
Currently the OLP does not meet such conditions and, therefore, there can be no
assurance as to whether or when this guarantee will occur. The Senior Secured
Notes bear interest from the date of issuance, payable semi-annually in arrears
on June 15 and December 15 of each year commencing on December 15, 1996.
F-12
(3) On July 31, 1996, the OLP amended and restated its $205,000,000 Credit
Facility (the "Credit Facility") with a major bank, as Agent. The unsecured
Credit Facility now consists of a $50,000,000 term loan facility, a $185,000,000
revolving credit facility for general corporate, working capital and acquisition
purposes (of which $50,000,000 is available to support letters of credit) and a
$20,000,000 revolving working capital facility, which is subject to an annual
reduction in outstandings to $0 for 30 consecutive days. All borrowings under
the current pricing arrangement bear interest at either LIBOR plus 0.50% or the
Bank's Base rate, depending on the nature of the borrowing. The Bank's Base rate
at July 31, 1996 was 8.25%. To offset the variable rate characteristic of the
Credit Facility, the OLP entered into interest rate collar agreements, expiring
between June and December 1998, with three major banks limiting interest rates
on a notional amount of $125,000,000 to between 4.9% and 6.5%.
(4) The notes payable are secured by approximately $4,714,000 and
$1,413,000 of property and equipment at July 31, 1996 and 1995, respectively.
At July 31, 1996 and 1995, $25,520,000 and $20,000,000, respectively, of
short-term borrowings were outstanding under the revolving line of credit
and letters of credit outstanding, used primarily to secure obligations
under certain insurance arrangements, totaled $26,824,000 and $24,471,000,
respectively.
The OLP Indenture and Credit Agreement contain various restrictive
covenants applicable to the Operating Partnership and its subsidiaries, the
most restrictive relating to additional indebtedness, sale and disposition
of assets, and transactions with affiliates. In addition, the Operating
Partnership is prohibited from making cash distributions of the Minimum
Quarterly Distribution if a default or event of default exists or would
exist upon making such distribution, or if the Operating Partnership fails
to meet certain coverage and capital expenditure tests. The Partnership is
in compliance with all requirements, tests, limitations and covenants
related to the Senior Note Indenture and Credit Agreement.
Annual principal payments on long-term debt for each of the next five
fiscal years are $1,610,000 in 1997, $2,356,000 in 1998, $20,619,000 in
1999, $1,685,000 in 2000, and $52,514,000 in 2001.
During fiscal year 1996, the Partnership recognized an extraordinary loss
from the write off of unamortized financing costs of approximately
$965,000, net of minority interest of $10,000, resulting from the early
extinguishment of $50,000,000 of its floating rate senior notes. During the
one month ended July 31, 1994, the Partnership recognized an extraordinary
loss from the debt premium and write off of financing costs of $59,455,000,
net of minority interest of $607,000, resulting from the early
extinguishment of $477,600,000 of indebtedness of the Company assumed by
the Operating Partnership. During the eleven months ended June 30, 1994,
the Predecessor recognized an extraordinary loss from debt premium and
write off of financing costs of approximately $867,000, net of income tax
benefit of $531,000, resulting from the early extinguishment of $11,900,000
of its fixed rate senior notes.
F. Partners' Capital
Partners' capital consists of 14,612,580 Common Units representing a 46%
limited partner interest, 16,593,721 Subordinated Units representing a 53%
limited partner interest, and a 1% General Partner interest.
The Agreement of Limited Partnership of Ferrellgas Partners, L.P. (the
"Partnership Agreement") contains specific provisions for the allocation of
net earnings and loss to each of the partners for purposes of maintaining
the partner capital accounts. In addition, the Partnership Agreement
contains special provisions for the allocation of the extraordinary loss
from the retirement of indebtedness, and the net loss from operations of
the Partnership from the closing date on July 5, 1994, to July 31, 1994. In
accordance with these special provisions of the Partnership Agreement, the
extraordinary loss of $59,455,000, net of $607,000 minority interest, was
allocated 100% to the General Partner and was not reallocated to the
limited partners. The net loss from operations of approximately $5,026,000
was allocated 100% to the General Partner from inception of the Partnership
to the last day of the taxable year ending July 31, 1994. An amount equal
to 99% of this net loss was reallocated to the limited partners in the year
ending July 31, 1995 based on their ownership percentages. (See Note B.)
F-13
During the Subordination Period, the Partnership may issue up to 7,000,000
Common Units (excluding Common Units issued in connection with conversion
of Subordinated Units into Common Units) or an equivalent number of
securities ranking on a parity with the Common Units and an unlimited
number of partnership interests junior to the Common Units without a
Unitholder vote. The Partnership may also issue additional Common Units
during the Subordination Period in connection with acquisitions if certain
cash flow criteria are met. After the Subordination Period, the Partnership
Agreement authorizes the General Partner to cause the Partnership to issue
an unlimited number of additional general and limited partner interests and
other equity securities of the Partnership for such consideration and on
such terms and conditions as shall be established by the General Partner
without the approval of any Unitholders.
The Partnership maintains a shelf registration statement for Common Units
representing limited partner interests in the Partnership. The Common Units
may be issued from time to time by the Partnership in connection with the
Partnership's acquisition of other businesses, properties or securities in
business combination transactions.
In connection with the formation of the Partnership, the General Partner
contributed certain assets and liabilities. Pursuant to an examination by
the Internal Revenue Service, certain adjustments which relate to these
contributed assets resulted in additional deferred taxes recorded by the
General Partner. This noncash adjustment retroactively increased the basis
of the assets the General Partner contributed to the Operating Partnership
by $11,300,000 which, in turn, caused an increase to the General Partner's
contributed capital which was allocated pro rata among all partners. In
addition, Operating Partnership goodwill also increased by $11,300,000 (to
be amortized prospectively over a period of 15 years). These adjustments
were not material to the Partnership's financial position or its results of
operations or liquidity, nor have they impacted the limited partners' tax
basis in the Partnership units.
G. Transactions with Related Parties
The Partnership has no employees and is managed and controlled by the
General Partner. Pursuant to the Partnership Agreement, the General Partner
is entitled to reimbursement for all direct and indirect expenses incurred
or payments it makes on behalf of the Partnership, and all other necessary
or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business. These costs, which totaled $109,637,000 and
$100,750,000 for the years ended July 31, 1996 and 1995, respectively, and
$7,561,000 from inception to July 31, 1994, include compensation and
benefits paid to officers and employees of the General Partner, and general
and administrative costs. In addition, the conveyance of the net assets of
the Company to the Partnership described in Note A included the assumption
of specific liabilities related to employee benefit and incentive plans for
the benefit of the officers and employees of the General Partner. See note
L for discussion of transactions involving acquisitions related to the
General Partner and the Partnership.
A. Andrew Levison, a director of the General Partner is a Managing Director
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). DLJ acted
as an underwriter with regard to the private placement of $160,000,000
Senior Secured Notes issued in April 1996 and was paid fees of $4,000,000
in 1996. No fees were paid in 1995. DLJ acted as an underwriter with regard
to the public offering of Common Units and Senior Notes, and was paid total
fees of $5,100,000 during 1994.
F-14
The law firm of Smith, Gill, Fisher & Butts, a Professional Corporation was
general counsel to the Partnership, General Partner, Ferrell Companies,
Inc. ("Ferrell") and their respective subsidiaries and affiliates during
the pro forma fiscal year of the Partnership and the Predecessor ended July
31, 1994. David S. Mouber, a director of Ferrell through July 31, 1994, was
a member of such law firm. The Partnership, Ferrell and their respective
subsidiaries paid such firm fees of $1,394,000 during the pro forma fiscal
year ended July 31, 1994.
H. Contingencies and Commitments
The Partnership is threatened with or named as a defendant in various
lawsuits which, among other items, claim damages for product liability. It
is not possible to determine the ultimate disposition of these matters;
however, management is of the opinion that there are no known claims or
known contingent claims that are likely to have a material adverse effect
on the results of operations or financial condition of the Partnership.
Certain property and equipment is leased under noncancellable operating
leases which require fixed monthly rental payments and which expire at
various dates through 2016. Rental expense under these leases totaled
$12,054,000, $11,233,000, $725,000, and $9,556,000 for the years ended July
31, 1996 and 1995, the one month ended July 31, 1994, and the eleven months
ended June 30, 1994, respectively. Future minimum lease commitments for
such leases are $10,566,000 in 1997, $7,336,000 in 1998, $5,377,000 in
1999, $3,871,000 in 2000, $1,714,000 in 2001 and $601,000 thereafter.
I. Employee Benefits
The Partnership has no employees and is managed and controlled by the
General Partner. The Partnership assumed all liabilities, which included
specific liabilities related to the following employee benefit plans for
the benefit of the officers and employees of the General Partner.
The General Partner and its parent, Ferrell Companies, Inc., ("FCI") have a
defined contribution profit-sharing plan which covers substantially all
employees with more than one year of service. Contributions are made to the
plan at the discretion of FCI's Board of Directors. This plan, which
qualifies under section 401(k) of the Internal Revenue Code, also provides
for matching contributions under a cash or deferred arrangement based upon
participant salaries and employee contributions to the plan. Contributions
for the years ended July 31, 1996 and July 31, 1995, were $1,160,000 and
$1,300,000 under the profit sharing provision and were $1,388,000 and
$1,407,000 under the 401(k) provision. There were no contributions under
the profit sharing provision or 401(k) provision of the plan from inception
to July 31, 1994. Contributions during the eleven months ended June 30,
1994 were $1,200,000 under the profit sharing provision, and $1,445,000
under the 401(k) provision.
J. Unit Options
On October 14, 1994, the General Partner adopted the Ferrellgas, Inc. Unit
Option Plan (the "Unit Option Plan"), which currently authorizes the
issuance of options (the "Unit Options") covering up to 850,000
Subordinated Units to certain officers and employees of the General
Partner. The Unit Options have the following characteristics: 1) exercise
prices ranging from $16.80 to $21.67 per unit, which is an estimate of the
fair market value of the Subordinated Units at the time of grant, 2) vest
immediately or over a one to five year period, 3) exercisable beginning
after July 31, 1999, assuming the subordination period has elapsed, and 4)
expire on the tenth anniversary of the date of grant. Upon conversion of
the Subordinated Units held by the General Partner and its affiliates, the
Unit Options granted will convert to Common Unit Options.
F-15
Units Price per Unit
---------------------- --------------------------
Outstanding, July 31, 1994 - -
Granted 775,000 $16.80-$18.54
Canceled (73,500) 16.80
---------------------- --------------------------
Outstanding, July 31, 1995 701,500 16.80 - 18.54
Granted 99,750 19.88 - 21.67
Canceled (132,825) 16.80 - 19.88
---------------------- --------------------------
Outstanding, July 31, 1996 668,425 $16.80 - $21.67
---------------------- --------------------------
Options exercisable, July 31, 1996 0
---------------------- --------------------------
Options available for future grants 181,575
---------------------- --------------------------
K. Disclosures About Off Balance Sheet Risk and Fair Value of Financial
Instruments
The carrying amount of cash and cash equivalents approximate fair value
because of the short maturity of the instruments. Short-term borrowings
approximates fair value as of July 31, 1996 and 1995. The estimated fair
value of the Partnership's long-term debt was $440,122,000 and $347,485,000
as of July 31, 1996 and 1995, respectively. The fair value is estimated
based on quoted market prices adjusted for discounted cash flows.
Interest Rate Collar Agreements. The Partnership has entered into various
interest rate collar agreements involving the exchange of fixed and
floating interest payment obligations without the exchange of the
underlying principal amounts. At July 31, 1996, the total notional
principal amount of these agreements was $125,000,000. The counterparties
to these agreements are large financial institutions. The interest rate
collar agreements subject the Partnership to financial risk that will vary
during the life of these agreements in relation to market interest rates.
The mark to market adjustment applicable to the portion of the notional
amount in excess of variable rate indebtedness at July 31, 1996 was not
material to the financial position or the results of operations of the
Partnership.
Option Contracts. The Partnership is a party to certain option contracts,
involving various liquefied petroleum products, for overall risk management
purposes in connection with its trading activities. Contracts are executed
with private counterparties and to a lesser extent on national mercantile
exchanges. Open contract positions are summarized below.
Forward and Futures Contracts. The Partnership is a party to certain
forward and futures contracts for trading purposes. Net gains from trading
activities were $7,323,000, $5,818,000, $331,000, and $6,458,000 for the
years ended July 31, 1996, 1995, the one month ended July 31, 1994, and the
eleven months ended June 30, 1994, respectively. Such contracts permit
settlement by delivery of the commodity. Open contract positions are
summarized below (assets are defined as purchases or long positions and
liabilities are sales or short positions).
F-16
As of July 31
(In thousands, except price per gallon data)
Derivative Commodity Instruments Held for Commodity Instruments Held for
Purposes Other than Trading Trading Purposes
(Options) (Forward and Futures)
------------------------------------------- --------------------------------------------------
1996 1995 1996 1995
-------------------- ------------------- ----------------------- -----------------------
Asset Liab. Asset Liab. Asset Liab. Asset Liab.
--------- ---------- -------- ---------- ----------- ----------- ----------- -----------
Volume
(gallons) - (21) 1,071 (9,765) 178,011 (153,990) 170,057 (129,198)
Price (cent)/gal) - 30 16-36 16-36 24-65 24-2025 13-45 14-52
Maturity 8/96- 8/95- 8/95- 8/96- 8/96- 8/95- 8/95-
Dates - 12/96 1/96 1/96 7/97 3/37 1/96 1/96
Contract
Amounts ($) - (1,575) 380 (3,572) 64,223 (62,917) 57,419 (43,605)
Fair Value ($) - (1,541) 340 (3,758) 65,972 (62,623) 57,463 (43,504)
Unrealized
gain(loss) ($) - 34 (40) (186) 1,749 294 44 101
Risks related to these contracts arise from the possible inability of
counterparties to meet the terms of their contracts and changes in
underlying product prices. The Partnership attempts to minimize market risk
through the enforcement of its trading policies, which include total
inventory limits and loss limits, and attempts to minimize credit risk
through application of its credit policies.
L. Acquisitions
On April 30, 1996, the General Partner consummated the purchase of all of
the stock of Skelgas Propane, Inc. ("Skelgas"), a subsidiary of Superior
Propane, Inc. of Toronto, Canada for a cash purchase price of $89,650,000,
subject to final working capital adjustments.
As of May 1, 1996, the General Partner (i) caused Skelgas and each of its
subsidiaries to be merged into the General Partner and (ii) transferred all
of the assets of Skelgas and its subsidiaries to the Operating Partnership.
In exchange, the Operating Partnership assumed substantially all of the
liabilities, whether known or unknown, associated with Skelgas and its
subsidiaries and their propane business (excluding income tax liabilities).
In consideration of the retention by the General Partner of certain income
tax liabilities, the Partnership issued 41,203 Common Units to the General
Partner. The liabilities assumed by the Operating Partnership included the
$89,650,000 loan agreement under which the General Partner borrowed funds
to pay the purchase price for Skelgas. Immediately following the transfer
of assets and related transactions described above, the Operating
Partnership repaid the loan with cash and borrowings under the Operating
Partnership's existing acquisition bank credit line. Certain working
capital adjustments occurred after the acquisition that resulted in a
reduction of the amount paid for the acquisition of Skelgas and the total
assets acquired. The total assets contributed to the Operating Partnership
(at the General Partner's cost basis) have been preliminarily allocated as
follows: (i) working capital of $17,951,000, (ii) property, plant and
equipment of $62,178,000 and (iii) and the balance to intangible assets. In
total, during the year ended July 31, 1996, the Partnership made
acquisitions and received contributions of businesses valued at
$128,165,000 (including working capital acquired of $19,362,000). This
amount was funded by $8,116,000 of cash payments and the following noncash
transactions: $108,120,000 debt assumed, $4,825,000 issuance of Partnership
units, and $7,104,000 other costs and consideration.
F-17
On November 1, 1994, the General Partner purchased all of the capital stock
of Vision Energy Resources, Inc. ("Vision") for a cash purchase price of
$45 million. Immediately following the closing of the purchase of Vision,
the General Partner (i) caused Vision and each of its subsidiaries to be
merged into the General Partner (except for a trucking subsidiary which
dividended substantially all of its assets to the General Partner) and
(ii) transferred all of the assets of Vision and its Subsidiaries to the
Operating Partnership. As a result of the contribution, the Operating
Partnership assumed substantially all of the liabilities, whether known or
unknown, associated with Vision and its subsidiaries (excluding income
tax liabilities), including the obligation of the General Partner under a
$45,000,000 loan agreement under which the General Partner borrowed
funds to pay the purchase price for Vision. In consideration of the
retention by the General Partner of certain income tax liabilities, the
Partnership issued 138,392 Common Units to the General Partner. The
Operating Partnership also recorded a contribution of $7,300,000 from the
General Partner, representing the excess of the value of the assets over
the liabilities conveyed and the units issued to the General Partner.
This contribution is allocated to each partner based on their relative
ownership percentages following the closing of the Vision acquisition.
In total, during the year ended July 31, 1995, the Partnership made
acquisitions and received contributions of businesses valued at
$80,651,000 (including working capital acquired of $3,282,000). This amount
was funded by $19,677,000 cash payments and the following noncash
transactions: $45,000,000 debt assumed, $7,300,000 contributed capital,
$6,600,000 issuance of Partnership units, and $2,074,000 other costs and
consideration.
All transactions have been accounted for similar to purchase accounting and,
accordingly, the results of operations of all acquisitions have been
included in the consolidated financial statements from their dates of
contribution. The following pro forma financial information assumes the
Skelgas and Vision transactions occurred at the beginning of each of the
periods presented and also includes the pro forma effects of the
Partnership's issuance of the $160,000,000 of 9 3/8% Senior Notes in April
1996 (as described in Note E):
(in thousands, except per unit amounts)
(unaudited) Pro Forma Year Pro Forma Year
Ended Ended July 31,
July 31, 1996 1995
----------------- -----------------
Total revenues $732,372 $684,340
Income before extraordinary loss 21,734 22,387
Net earnings 20,769 22,387
Net earnings per limited partner unit $ 0.66 $ 0.72
F-18
M. Income Taxes (Predecessor)
As stated Note B, the Partnership's earnings or loss for Federal income tax
purposes is included in the tax returns of the individual partners.
Accordingly, no recognition has been given to income taxes in the
accompanying financial statements of the Partnership. For the Predecessor
period, income tax expense consisted of deferred taxes of $7,136,000 and
current taxes of $209,000. Nearly all of the expense was allocated to
operating activities. Deferred taxes result from temporary differences in
the recognition of income and expense for tax and financial statement
purposes. The significant temporary differences and related deferred tax
provision related to net operating loss carryforwards. For Federal income
tax purposes, the Company had net operating loss carryforwards of
approximately $201,000,000 at June 30, 1994 available to offset future
taxable income. These net operating loss carryforwards expire at various
dates through 2009. The difference between the effective tax rate of 39%
and the statutory federal rate of 35% was primarly state income taxes.
F-19
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas Partners Finance Corp.
Liberty, Missouri
We have audited the accompanying balance sheets of Ferrellgas Partners Finance
Corp. (a wholly-owned subsidiary of Ferrellgas Partners, L.P.), as of July 31,
1996 and April 8, 1996, and the related statement of earnings, stockholder's
equity and cash flows for the period from inception (April 8, 1996) to July 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Ferrellgas Partners Finance Corp. as of July
31, 1996 and April 8, 1996, and the results of its operations and its cash flows
for the period from inception (April 8, 1996) to July 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 18, 1996
F-20
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
BALANCE SHEETS
July 31, April 8,
1996 1996
----------------- -----------------
ASSETS
-----------------------------------------------------------------
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 42 0
Accumulated deficit (42) 0
----------------- -----------------
Total Stockholder's Equity 1,000 1,000
----------------- -----------------
Total Liabilities and Stockholder's Equity $1,000 $1,000
================= =================
See notes to financial statements
F-21
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENT OF EARNINGS
From inception
to July 31,
1996
-----------------
Revenues $ -
General and administrative expense 42
-----------------
Net loss $(42)
=================
See notes to financial statements
F-22
Ferrellgas Partners Finance Corp.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.
Statements of Stockholder's Equity
Total
Common stock Additional Accumulated stockholder's
-----------------------------
Shares Dollars paid in capital deficit equity
------------ ----------- ------------------------------------- -----------------
April 8, 1996 0 $ 0 - $ 0 $ 0
------------ ----------- ----------------- ------------------ -----------------
Capital Contribution 1,000 1,000 $42 - 1,042
Net loss - - - (42) (42)
------------ ----------- ----------------- ------------------ -----------------
July 31, 1996 1,000 $1,000 $42 $(42) $1,000
============ =========== ================= ================== =================
See notes to financial statements
F-23
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENT OF CASH FLOWS
From Inception to
July 31, 1996
----------------------
Cash Flows From Operating Activities:
Net loss $ (42)
----------------------
Cash used by operating activities (42)
----------------------
Cash Flows From Financing Activities:
Capital Contribution 1,042
----------------------
Cash provided by financing activities 1,042
----------------------
Increase (decrease) in cash 1,000
Cash - beginning of period 0
----------------------
Cash - end of period $1,000
======================
See notes to financial statements
F-24
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
A. Formation
Ferrellgas Partners, Finance Corp. (the "Finance Corp."), a Delaware
corporation, was formed on March 28, 1996 and is a wholly-owned
subsidiary of Ferrellgas Partners, L.P. (the "Partnership").
The Partnership contributed $1,000 to the Finance Corp. on April 8, 1996
in exchange for 1,000 shares of common stock.
B. Commitment
On April 26, 1996, the Partnership issued $160,000,000 of 9 3/8% Senior
Secured Notes due 2006 (the "Senior Notes"). The Senior Notes will be
redeemable at the option of the Partnership, in whole or in part, at any
time on or after June 15, 2001. The Senior Notes will become guaranteed
by the Operating Partnership (the "OLP") on a senior subordinated basis
if certain conditions are met. Certain OLP's credit agreements and the
indentures currently prohibit the OLP from guaranteeing any indebtedness
unless, among meeting other conditions, the fixed charge coverage ratio
for the OLP meets certain levels at prescribed dates. Currently the OLP
does not meet such conditions and, therefore, there can be no assurance
as to whether or when this guarantee will occur. Interest is payable
semi-annually in arrears on June 15 and December 15 of each year
commencing on December 15, 1996. The Finance Corp. serves as a
co-obligor for the Senior Notes.
C. Income Taxes
Income taxes have been computed as though the Company files its own
income tax return. Deferred income taxes are provided as a result of
temporary between financial and tax reporting using the asset/liability
method. Deferred income taxes are recognized for the tax consequences of
temporary differences between the financial statement carrying amounts
and tax basis of existing assets and liabilities.
Due to the inability of the Company to utilize the deferred tax benefit
of $17 associated with the current year net operating loss carryforward
of $40 expiring July 31, 2011, a valuation allowance has been provided
on the full amount of the deferred tax asset. Accordingly, there is no
net deferred tax benefit for the period ended July 31, 1996 and there is
no net deferred tax asset as of July 31, 1996.
F-25
INDEX TO FINANCIAL STATEMENT SCHEDULES
1
Page
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report on Schedules......................................................................S-2
Schedule I Parent Company Only Balance Sheets as of July 31, 1996 and 1995, and
Statements of Earnings and Cash Flows for the Years ended July 31, 1996,
1995 and the One month ended July 31, 1994...................................................S-3
Schedule II Valuation and Qualifying Accounts for the Years ended July 31, 1996
and 1995, the One month ended July 31, 1994 and the Eleven months ended
June 30, 1994................................................................................S-6
S-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P.
Liberty, Missouri
We have audited the consolidated financial statements of Ferrellgas Partners,
L.P. (formerly Ferrellgas, Inc.), and subsidiaries as of July 31, 1996, and
1995, (Successor), and for the years ended July 31,1996, and 1995, for the one
month ended July 31, 1994 (Successor), and for the eleven months ended June 30,
1994 (Predecessor) and have issued our report thereon dated September 18, 1996.
Our audit also included the financial statement schedules listed at Item 14(a)2.
These financial statement schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information therein set forth.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 18, 1996
S-2
Ferrellgas Partners, L.P.
Parent Only
Balance Sheet
(in thousands)
ASSETS July 31, 1996 July 31, 1995
- ---------------------------------------------------- ------------------- --------------------
Cash and cash equivalents $ 1
Investment in Ferrellgas, L.P. 244,771 $118,638
Other assets, net 4,693
------------------- --------------------
Total Assets $249,465 $118,638
=================== ====================
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------------------
Other current liabilities $ 4,856 $ 1
Long term debt 160,000
Partners' Capital
Common unitholders 71,323 84,489
Subordinated unitholders 71,302 91,824
General partner (58,016) (57,676)
------------------- --------------------
Total Partners' Capital 84,609 118,637
------------------- --------------------
Total Liabilities and Partners' Capital $249,465 $118,638
=================== ====================
S-3
Schedule I
Ferrellgas Partners, L.P.
Parent Only
Statement of Earnings
(in thousands)
For the Year Ended Inception to
---------------------------------------
July 31, 1996 July 31, 1995 July 31, 1994
------------------ ------------------ -------------------
Equity in earnings (loss) of Ferrellgas, L.P. $27,508 $23,821 $(64,481)
Operating expense 0 1 -
Interest expense 4,161
------------------ ------------------ -------------------
Net earnings (loss) $23,347 $23,820 $(64,481)
================== ================== ===================
S-4
Schedule I
Ferrellgas Partners, L.P.
Parent Only
Statements of Cash Flows
(in thousands)
For the Year Ended
------------------------------------- Inception to
July 31, 1996 July 31, 1995 July 31, 1994
---------------- ---------------- ---------------
Cash Flows From Operating Activities:
Net earnings (loss) $23,347 $23,820 $(64,481)
Reconciliation of net earnings (loss) to
net cash from operating activities:
Amortization of capitalized financing costs 161
Equity in (earnings) loss of Ferrellgas, L.P. (27,508) (23,821) 64,481
Other current assets (4,854)
Distributions received from Ferrellgas, L.P. 62,863 51,654 -
Increase in other current liabilities 4,855 1 -
---------------- ---------------- ---------------
Net cash provided by operating activities 58,864 51,654 -
---------------- ---------------- ---------------
Cash Flows From Investing Activities:
Investment in Ferrellgas, L.P. - - (255,006)
---------------- ---------------- ---------------
Net cash used by investing activities - - (255,006)
---------------- ---------------- ---------------
Cash Flows From Financing Activities:
Distributions to partners (62,863) (51,654) -
Additions to long-term debt 160,000
Contribution to subsidiary (156,000)
Net issuance of Common Units - - 255,006
---------------- ---------------- ---------------
Net cash provided (used) by financing activities (58,863) (51,654) 255,006
---------------- ---------------- ---------------
Increase in cash and cash equivalents 1 - -
Cash and cash equivalents - beginning of period - - -
---------------- ---------------- ---------------
Cash and cash equivalents - end of period $1 $ - $ -
================ ================ ===============
Supplemental disclosure of noncash financing activity:
Effective July 5, 1994, substantially all of the propane assets and liabilities of Ferrellgas, Inc. were conveyed
at historical cost to Ferrellgas, L.P. in return for 1,000,000 Common Units, 16,593,721 Subordinated Units
and the Incentive Distribution Rights of Ferrellgas Partners, L.P., as well as a 2% general partner interest
in Ferrellgas Partners, L.P. and Ferrellgas, L.P., on a combined basis. Net liabilities assumed by
Ferrellgas, L.P., adjusted for the settlement of a tax contingency, are as follows:
July 5, 1994
----------------
Cash $ 39,791
Accounts receivable 50,747
Inventories 37,931
Prepaid expenses and other current assets 2,660
Property, plant and equipment, net 293,729
Intangible assets, net 75,350
Other assets 9,327
----------------
Total assets conveyed 509,535
----------------
Accounts payable 49,177
Other current liabilities 30,296
Long-term debt, net 476,441
Other non-current liabilities 9,557
----------------
Total liabilities assumed 565,471
----------------
Net liabilities assumed by Ferrellgas, L.P. $(55,936)
================
S-5
Schedule II
Ferrellgas partners, L.P. and Subsidiary
Valuation and Qulaifying Accounts
(in thousands)
Balance at Charged to Deductions Balance
beginning cost/ Other (amounts at end
Description of period expenses Additions (A) charged-off) of period
- ----------------------------------- ------------ -------------------------------------------------------------
Year ended July 31, 1996
Allowance for doubtful accounts $ 874 $ 1,151 $ 702 $ 1,558 $ 1,169
Accumulated amortization:
Intangible assets $ 81,995 $11,620 $ 2,946 $ 760 $95,801
Other assets $ 3,337 $ 1,742 $ 975 $ 1,407 $ 4,647
Year ended July 31, 1995
Allowance for doubtful accounts $ 798 $ 1,191 $ 400 $ 1,515 $ 874
Accumulated amortization:
Intangible assets $ 68,489 $ 9,997 $ 3,509 $ - $81,995
Other assets $ 1,860 $ 368 $ 1,109 $ - $ 3,337
Inception to July 31, 1994 (B)
Allowance for doubtful accounts $ 906 $ 119 $ - $ 227 $ 798
Accumulated amortization:
Intangible assets $ 67,730 $ 759 $ - $ - $68,489
Other assets $ 9,845 $ 23 $ - $ 8,008 $ 1,860
Eleven months ended June 30, 1994 (Predecessor)
Allowance for doubtful accounts $ 607 $ 1,569 $ - $ 1,270 $ 906
Accumulated amortization:
Intangible assets $ 59,181 $ 8,549 $ - $ - $67,730
Other assets $ 7,592 $ 2,626 $ - $ 373 $ 9,845
(A) On April 30, 1996, the General Partner purchased all of the capital
stock of Skelgas, Inc. On May 1, 1996 the General Partner contributed
the assets and substantially all of the liabilities associated with
Skelgas, Inc. to the OperatingPartnership.The amounts reflected as
"Other Additions" represent valuation and qualifying accounts
assumedby the Operating Partnership in connection with the
contribution by the General Partner.
On November 1, 1994, the General Partner purchased all of the capital
stock of Vision Energy Resources, Inc. Immediately following the close
of the purchase, the General Partner contributed the assets and
substantially all of the liabilities associated with Vision Energy
Resources, Inc. to the Operating Partnership. The amounts reflected as
"Other Additions" represent valuation and qualifying accounts assumed
by the Operating Partnership in connection with the contribution by
the General Partner.
(B) On July 5, 1994, substantially all of the propane assets and
liabilities of Ferrellgas, Inc. were conveyed at historical cost to
Ferrellgas, L.P. Total allowance for uncollectible receivables,
accumulated amortization of intangible assets and accumulated
amortization of other assets transferred to Ferrellgas, L.P. was $906,
$67,730 and $9,845, respectively.