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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, 1998
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. [ X ]
The aggregate market value as of October 12, 1998, 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 $266,005,660.
At October 12, 1998, Ferrellgas Partners, L.P. had units outstanding as follows:
14,699,678 Common Units
16,593,721 Subordinated Units
Documents Incorporated by Reference: None
FERRELLGAS PARTNERS, L.P.
FERRELLGAS PARTNERS FINANCE CORP.
1998 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
ITEM 1. BUSINESS.......................................................................................1
ITEM 2. PROPERTIES.....................................................................................8
ITEM 3. LEGAL PROCEEDINGS..............................................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND
RELATED UNITHOLDER MATTERS.....................................................................9
ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA..............................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................................................18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS...........................................18
ITEM 11. EXECUTIVE COMPENSATION........................................................................20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...........................................................................26
PART I
ITEM 1. BUSINESS.
Business of Ferrellgas Partners, L.P.
Ferrellgas Partners, L.P. (the "Master Limited Partnership" or the "MLP"),
is a Delaware limited partnership which was formed on April 19, 1994. The MLP's
Common Units are listed on the New York Stock Exchange. The MLP's activities are
conducted through its subsidiary Ferrellgas, L.P. (the "Operating Partnership"
or the "OLP"). The MLP, with a 97% limited partner interest, is the sole limited
partner of the Operating Partnership. The MLP and the Operating Partnership are
together referred to herein as the "Partnership". The Operating Partnership
accounts for nearly all of the MLP's consolidated assets, sales and operating
earnings. The MLP's consolidated net earnings also reflect interest expense
related to $160 million of 9 3/8% Senior Secured Notes issued by the MLP in
April 1996.
Business of Ferrellgas, L.P.
The Operating Partnership, a Delaware limited partnership, was formed on
April 22, 1994, to acquire, own and operate the propane business and assets of
Ferrellgas, Inc. (the "Company", "Ferrellgas", and "General Partner"). The
Company has retained a 1% general partner interest in the MLP and also holds a
1.0101% general partner interest in the 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 Partnership believes that it is the second largest retail marketer of
propane in the United States (as measured by gallons sold), serving more than
800,000 residential, industrial/commercial and agricultural customers in 45
states and the District of Columbia through approximately 566 retail outlets
with 298 satellite locations in 38 states (some outlets serve interstate
markets). Based upon information contained in industry publications for calendar
year 1997, the Partnership believes that its retail operations account for
approximately 8% of the retail propane purchased in the United States as
measured by gallons sold. For the Partnership's fiscal years ended July 31,
1998, 1997 and 1996, annual retail propane sales volumes were 660 million, 694
million, and 650 million gallons, respectively. The retail propane business of
the Partnership consists principally of transporting propane purchased in the
contract and spot markets, primarily from major oil companies, to its retail
distribution outlets and then to tanks located on its customers' premises, as
well as to portable propane cylinders.
The Partnership also believes that it is a leading natural gas liquids
trading company. Annual propane and natural gas liquids trading, chemical
feedstocks and wholesale propane sales volumes were approximately 1.0 billion,
1.2 billion and 1.7 billion gallons during the fiscal years ended July 31, 1998,
1997 and 1996, respectively.
Retail Operations
Formation and History
Ferrell Companies, Inc. ("Ferrell"), the parent of Ferrellgas, was founded
in 1939 as a single retail propane outlet in Atchison, Kansas and was
incorporated in 1954. Ferrell was previously owned primarily by James E. Ferrell
and his family but was sold in July 1998 to the Ferrell Companies, Inc. Employee
Stock Ownership Trust ("ESOT"). Ferrellgas was formed in 1984 to operate the
retail propane business previously conducted by Ferrell. In July 1994, the
propane business and assets of Ferrellgas were contributed to the
Partnership in connection with the Partnership's initial public offering of
Common Units.
The Company's initial growth largely resulted from small acquisitions in
the rural areas of eastern Kansas, northern and central Missouri, Iowa, Western
Illinois, Southern Minnesota, South Dakota and Texas. In July 1984, the Company
acquired propane operations with annual retail sales volumes of approximately 33
million gallons and in December 1986, the Company acquired propane operations
with annual retail sales volumes of approximately 395 million gallons. These two
major acquisitions and many other smaller acquisitions significantly expanded
and diversified the Company's geographic coverage. Since 1986, Ferrellgas has
acquired more than 100 smaller independent propane retailers, the largest of
which were Skelgas Propane, Inc. ("Skelgas") acquired in May 1996 and Vision
Energy Resources, Inc. ("Vision") acquired in November 1994. For the fiscal
years ended July 31, 1998 to 1994, the Partnership (or its predecessor) invested
approximately $13.0 million, $38.8 million, $108.8 million, $70.1 million, and
$3.4 million, respectively, to acquire operations with annual retail sales of
approximately 4.4 million, 20.5 million, 111.8 million, 70.0 million, and 2.9
million gallons of propane, respectively. Primarily as a result of this
acquisition strategy, retail propane gallons sold by the Partnership (or its
predecessor) increased from 68 million in fiscal 1986 to 660 million in fiscal
1998. The propane industry is relatively fragmented, with the ten largest retail
distributors possessing approximately 33% of the total retail propane market and
much of the industry consisting of more than 5,000 local or regional
distributors. The Partnership believes the fragmented nature of the propane
industry provides significant opportunities for growth through acquisitions.
Business Strategy
The goal of the Partnership is to be the leading retail propane company in
the United States. The Partnership believes that it has obtained a competitive
advantage by promoting an entrepreneurial culture that empowers its employees to
be responsive to individual customer needs. In addition, the Partnership
believes this culture is supported and enhanced by the recent transfer of
ownership of Ferrell to the ESOT for the sole benefit of the Company's
employees. The Partnership's business strategy is to continue its historical
focus on residential and commercial retail propane operations. The Partnership
anticipates that its future growth will be achieved primarily through the
acquisition of smaller retail propane operations throughout the United States
and to a lesser extent through the expansion of its existing customer base by
increased competitiveness and investment in internal growth opportunities.
The Partnership intends to concentrate its acquisition activities in
geographical areas in close proximity to the Partnership's existing operations
and to acquire propane retailers that can be efficiently combined with such
existing operations to provide an attractive return on investment after taking
into account the efficiencies which may result from such combination. However,
the Partnership will also pursue acquisitions which broaden its geographic
coverage. The Partnership's goal in any acquisition will be to improve the
operations and profitability of these smaller companies by integrating them into
the Partnership's established supply network. The Partnership regularly
evaluates a number of propane distribution companies which may be candidates for
acquisition. The Partnership believes that there are numerous local retail
propane distribution companies that are possible candidates for acquisition and
that its geographic diversity of operations helps to create many attractive
acquisition opportunities. The Partnership intends to fund acquisitions through
internal cash flow, external borrowings or the issuance of additional Common
Units. 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
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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 Partnership believes
that it may also achieve growth within its existing propane operations. As a
result of its experience in responding to competition and in implementing more
efficient operating standards, the Partnership believes that it has positioned
itself to be more successful in direct competition for customers. The
Partnership currently has marketing programs underway which focus specific
resources toward this effort.
Marketing
Natural gas liquids are derived from petroleum products and are sold in
compressed or liquefied form. Propane, the predominant type of natural gas
liquid, is typically extracted from natural gas or separated during crude oil
refining. Although propane is gaseous at normal pressures, it is compressed into
liquid form at relatively low pressures for storage and transportation. Propane
is a clean-burning energy source, recognized for its transportability and ease
of use relative to alternative forms of stand alone energy sources.
In the residential and commercial markets, propane is primarily used for
space heating, water heating and cooking. In the agricultural market propane is
primarily used for crop drying, space heating, irrigation and weed control. In
addition, propane is used for certain industrial applications, including use as
engine fuel, which is burned in internal combustion engines that power vehicles
and forklifts and as a heating or energy source in manufacturing and drying
processes.
The retail propane marketing business generally involves large numbers of
small volume deliveries averaging approximately 200 gallons each. The market
areas are generally rural but also include suburban areas for industrial
applications where natural gas service is not available.
The Partnership utilizes marketing programs targeting both new and existing
customers by emphasizing its efficiency in delivering propane to customers as
well as its 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, 1998, sales to residential
customers accounted for 56% of retail gross profit, sales to industrial and
other commercial customers accounted for 31% of retail gross profit, and sales
to agricultural and other customers accounted for 13% 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 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 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
3
(November through April). To the extent necessary, the Partnership will reserve
cash inflows from the second and third quarters for distribution in the first
and fourth fiscal quarters. 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 indicates that the average annual temperatures have remained
relatively constant over the last 30 years with fluctuations occurring on a
year-to-year basis only. During times of colder-than-normal winter weather, the
Company has been able to take advantage of its large, efficient distribution
network to help avoid supply disruptions such as those experienced by some of
its competitors, thereby broadening its long-term customer base.
Supply and Distribution
The Partnership purchases propane primarily from major domestic oil
companies. Supplies of propane from these sources have traditionally been
readily available, although no assurance can be given that supplies of propane
will be readily available in the future. As a result of (i) the Partnership's
ability to buy large volumes of propane and (ii) the Partnership's large
distribution system and underground storage capacity, the Partnership believes
it is in a position to achieve product cost savings and avoid shortages during
periods of tight supply to an extent not generally available to other retail
propane distributors. The Partnership is not dependent upon any single supplier
or group of suppliers, the loss of which would have a material adverse effect on
the Partnership. For the year ended July 31, 1998, no supplier provided more
than 10% of the Partnership's total propane purchases. A portion of the
Partnership's propane inventory is purchased under supply contracts which
typically have a one year term and a fluctuating price relating to spot market
prices. 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 148 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 its 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 1,596
bulk delivery trucks, which are fitted generally with 2,000 to 3,000 gallon
propane tanks. Propane storage tanks located on the customers' premises are then
filled from the delivery truck. Propane is also delivered to customers in
portable cylinders.
Industry and Competition
Industry
Based upon industry publications, propane accounts for approximately 3% to
4% of household energy consumption in the United States, an average level which
has remained relatively constant for the past two decades. Propane competes
primarily with natural gas, electricity and fuel oil as an energy source
principally on the basis of price, availability and portability. Propane serves
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
4
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. The Partnership believes
that propane generally is becoming increasingly favored over fuel oil and other
alternative sources of fuel as an environmentally preferred energy source.
Competition
In addition to competing with marketers of other fuels, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition within the propane distribution industry stems from two
types of participants: the larger multi-state marketers, and the smaller, local
independent marketers. Based upon industry publications, the Partnership
believes that the ten largest multi-state retail marketers of propane, including
the Partnership, account for approximately 33% of the total retail sales of
propane in the United States. Based upon information contained in industry
publications for calendar year 1997, 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 leading independent traders of
propane and natural gas liquids in the United States. The Partnership owns no
properties that are material to these operations. These operations may utilize
available space in the Partnership's underground storage facilities in the
furtherance of these businesses. Because the Partnership possesses a large
distribution system, underground storage capacity and the ability to buy large
volumes of propane, the Partnership believes that it is in a position to achieve
product cost savings and avoid shortages during periods of tight supply to an
extent not generally available to other retail propane distributors.
5
Trading
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 125 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 60% 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, 1998,
1997 and 1996 net revenues of $7.5 million, $5.5 million, and $7.3 million,
respectively, were derived from trading activities.
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 314 tank cars to
facilitate product delivery. Revenues of $15.3 million, $29.8 million and $44.4
million were derived from such activities for the Partnership's fiscal years
ended July 31, 1998, 1997 and 1996, respectively.
Wholesale Marketing
The Partnership engages in the wholesale distribution of propane to other
retail propane distributors. During the fiscal years ended July 31, 1998, 1997
and 1996, the Partnership sold 136 million, 123 million and 104 million gallons,
respectively, of propane to wholesale customers and had revenues attributable to
such sales of $49.9 million, $57.5 million and $42.6 million, respectively.
Employees
The Partnership has no employees and is managed by the General Partner
pursuant to the Partnership Agreement. At July 31, 1998, the General Partner had
3,494 full-time employees and 831 temporary and part-time employees. At July 31,
1998, the General Partner's full-time employees were employed in the following
areas:
Retail Locations 2,933
Transportation and Storage 248
Corporate Offices (Liberty, MO & Houston, TX) 313
==========
Total 3,494
==========
Approximately one percent of the General Partner's employees are
represented by five 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 68 people.
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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.
With respect to the transportation of propane by truck, the Partnership is
subject to regulations promulgated under the Federal Motor Carrier Safety Act.
These regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation ("DOT"). National
Fire Protection Association Pamphlet No. 58, which establishes a set of rules
and procedures governing the safe handling of propane, or comparable
regulations, have been adopted as the industry standard in a majority of the
states in which the Partnership operates.
The Partnership complies in all material respects with all material
governmental regulations and industry standards applicable to environmental and
safety matters, except that the Partnership was not in compliance with Final
Rule for Continued Operation of the Present Propane Trucks published August 18,
1997 (the "Final Interim Rule") on emergency shut off valves on bobtail
vehicles. The DOT has taken the position that all existing emergency shut off
devices used on propane cargo vessels fail to comply with the existing Emergency
Discharge Control Regulation 49CFR 178.337-11. Accordingly, the DOT has issued a
Final Interim Rule that requires all transporters of propane to implement
revised procedures to ensure immediate activation of the emergency shut off
device in the event of a catastrophic failure of a cargo vehicle's discharge
system. As a result of actions filed by five of the principal multi-state
propane marketers (including the Partnership), the United States District Court
for the Western District of Missouri issued a preliminary injunction against the
DOT in February, 1998, staying and postponing certain provisions of the Final
Interim Rule. As a result of the preliminary injunction, the Partnership is now
in full compliance with the court modified Final Interim Rule for bobtails and
transport vehicles. The Partnership is working with both the DOT and outside
experts to develop a system for bobtail vehicles that complies with the existing
Emergency Discharge Control Regulations as well as the provisions of the Final
Interim Rule. In June 1998, the DOT established a formal Regulation Negotiation
Committee to address these issues and the Partnership was granted a seat on this
committee. At this time, the Partnership cannot determine whether enforcement of
the Final Interim Rule will be permanently enjoined, or the ultimate long-term
cost of compliance with the Final Interim Rule to the Partnership or the propane
industry in general.
Service Marks and Trademarks
The Partnership markets retail propane under the "Ferrellgas" tradename and
uses the tradename "Ferrell North America" for its wholesale 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.
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Business of Ferrellgas Partners Finance Corp.
Ferrellgas Partners Finance Corp. (the "Finance Corp") a Delaware corporation
was formed on March 28, 1996, and is a wholly-owned subsidiary of the MLP. The
Finance Corp has nominal assets and does not conduct any operations, but serves
as a co-obligor for securities issued by the MLP. Certain institutional
investors that might otherwise be limited in their ability to invest in
securities issued by the MLP by reasons of the legal investment laws of their
states of organization or their charter documents, may be able to invest in the
MLP's securities because the Finance Corp is a co-obligor. Accordingly, a
discussion of the results of operations, liquidity and capital resources of the
Finance Corp is not presented. See the Finance Corp's notes to the financial
statements for a discussion of the securities with respect to which the Finance
Corp is serving as a co-obligor.
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 ........................ 92 69 161
Transport trailers..................... 263 14 277
Bulk delivery trucks................... 814 782 1,596
Pickup and service trucks.............. 995 491 1,486
Railroad tank cars..................... - 314 314
The transport trailers have an average capacity of approximately 9,000
gallons. The bulk delivery trucks are generally fitted with 2,000 to 3,000
gallon propane tanks. Each railroad tank car has a capacity of approximately
30,000 gallons.
A typical retail distribution outlet is located on one to three acres of
land and includes a small office, a workshop, bulk storage capacity of 18,000
gallons to 60,000 gallons and a small inventory of stationary customer storage
tanks and portable propane cylinders that the Partnership provides to its retail
customers for propane storage. The Partnership owns the land and buildings of
approximately 50% of its retail outlets and leases the remaining facilities on
terms customary in the industry and in the applicable local markets.
Approximately 697,000 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 626,000 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, 1998, the capacity of these
facilities was approximatly 88 million gallons, 88 million gallons and 8 million
gallons, respectively (an aggregate of approximately 184 million gallons).
Currently, approximately 148 million gallons of this capacity is leased to third
parties. The remaining space is available for the Partnership's use.
The Partnership owns the land and two buildings (50,245 square feet of
office space) comprising its corporate headquarters in Liberty, Missouri, and
leases 27,696 square feet of office space in Houston, Texas, where its trading,
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
8
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.
ITEM 3. LEGAL PROCEEDINGS.
Propane is a flammable, combustible gas. Serious personal injury and
property damage can occur in connection with its transportation, storage or use.
The Partnership, in the ordinary course of business, is threatened with or is
named as a defendant in various lawsuits which, among other items, seek actual
and punitive damages for product liability, personal injury and property damage.
The Partnership maintains liability insurance policies with insurers in such
amounts and with such coverages and deductibles as it believes is reasonable and
prudent. However, there can be no assurance that such insurance will be adequate
to protect the Partnership from material expenses related to such personal
injury or property damage or that such levels of insurance will continue to be
available in the future at economical prices. It is not possible to determine
the ultimate disposition of these matters discussed above; however, management
is of the opinion that there are no known claims or known contingent claims that
are likely to have a material adverse effect on the results of operations 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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.
The Common Units, representing common limited partner interests in the
Partnership, are listed and traded on the New York Stock Exchange ("NYSE") under
the symbol FGP. The Common Units began trading on June 28, 1994, at an initial
public offering price of $21.00 per Common Unit. As of October 12, 1998, there
were 745 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
--------------------- --------------------- ---------------------
1997 1998 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------- ----------
First Quarter $23.50 $24.25 $22.50 $22.63 $0.50 $0.50
Second Quarter 22.88 23.25 20.75 22.00 0.50 0.50
Third Quarter 23.00 22.63 21.13 20.25 0.50 0.50
Fourth Quarter 23.00 21.94 21.25 20.25 0.50 0.50
The Partnership also has issued Subordinated Units, all of which are held
by Ferrell, for which there is no established public trading market.
9
The Partnership makes quarterly cash distributions of its Available Cash,
as defined by the MLP's Partnership Agreement. Available Cash is generally
defined as consolidated cash receipts less consolidated cash disbursements and
changes in cash reserves established by the General Partner for future
requirements.
The Partnership is not subject to federal income taxes. Instead,
Unitholders are required to report their allocable share of the Partnership's
income, gains, losses, deductions and credits, regardless of whether the
Partnership makes distributions.
ITEM 6. SELECTED HISTORICAL 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 Partners L.P. (Predecessor)
--------------------------------------------------------------------------------- -------------
Pro Forma Historical Historical
Eleven
Historical Year Ended Inception Months Ended
to
Year Ended July 31, July 31, July 31, June 30,
------------------------------------------------------
1998 1997 1996 1995 1994 (1) 1994 1994
------------- ------------ ------------- ------------- ------------- ------------ -------------
Income Statement Data:
Total revenues $ 667,353 $ 804,298 $ 653,640 $ 596,436 $ 526,556 $ 24,566 $ 501,990
Depreciation and 45,009 43,789 37,024 32,014 28,835 2,383 26,452
amortization
ESOP compensation charge 350
Operating income (loss) 52,760 68,819 62,506 55,927 68,631 (2,391) 71,522
Interest expense 49,129 45,769 37,983 31,993 28,130 2,662 53,693
Earnings (loss) from 4,943 23,218 24,312 23,820 39,909 (5,026) 12,337
continuing operations
Earnings from continuing 0.16 0.74 0.77 0.76 1.29
operations per unit
Cash distributions 2.00 2.00 2.00 1.65
declared per unit (3)
Balance Sheet Data (at end of period):
Working capital $ (443) $ 18,111 $ 15,294 $ 28,928 $ 34,948 $ 34,948 $ 91,912
Total assets 621,223 657,076 654,295 578,596 477,193 477,193 592,664
Pay to (rec from) parent and (4,050)
affiliates
Long-term debt 507,222 487,334 439,112 338,188 267,062 267,062 476,441
Stockholder's equity 22,829
Partners' Capital:
Common Unitholders $ 27,985 $ 52,863 $ 71,323 $ 84,489 $ 84,532 $ 84,532
Subordinated Unitholders 19,908 50,337 71,302 91,824 99,483 99,483
General Partner (2) (58,976) (58,417) (58,016) (57,676) (62,622) (62,622)
Operating Data:
Retail propane sales 659,932 693,995 650,214 575,935 564,224 23,915 540,309
volumes (in gallons)
Capital expenditures
(4):
Maintenance $ 10,569 $ 10,137 $ 6,657 $ 8,625 $ 5,688 $ 911 $ 4,777
Growth 10,060 6,055 6,654 11,097 4,032 983 3,049
Acquisition 13,003 38,780 108,803 70,069 3,429 878 2,551
------------- ------------ ------------- ------------- ------------- ------------ -------------
Total $ 33,632 $ 54,972 $ 122,114 $ 89,791 $ 13,149 $ 2,772 $ 10,377
============= ============ ============= ============= ============= ============ =============
Supplemental Data:
Earnings (loss) before depreciation, amortization,
interest and taxes (5) $ 98,119 $ 112,608 $ 99,530 $ 87,941 $ 97,466 $ (8) $ 97,974
(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).
10
(2) Pursuant to the MLP's 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.
(4) The Partnership'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
Partnership's customer base and operating capacity; and (iii) acquisition
capital expenditures, which include expenditures related to the
acquisitions of retail propane operations. Acquisition capital expenditures
represent total cost of acquisition less working capital acquired.
(5) EBITDA is calculated as operating income (loss) plus depreciation and
amortization and an ESOP related non-cash compensation charge. 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).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is a discussion of the historical financial condition and
results of operations for Ferrellgas Partners, L.P. and its subsidiaries and
should be read in conjunction with the historical consolidated financial
statements and accompanying notes thereto included elsewhere in this Form 10-K.
Forward-looking statements
Statements included in this report that are not historical facts, including
statements concerning the Partnership's belief that the OLP will have sufficient
funds to meet its obligations to enable it to distribute to the MLP sufficient
funds to permit the MLP to meet its obligations with respect to the MLP Senior
Secured Notes issued in April 1996, and to enable it to distribute the Minimum
Quarterly Distribution ($0.50 per Unit) on all Common Units and Subordinated
Units, are forward-looking statements.
Such statements are subject to risks and uncertainties that could cause
actual results to differ materially from those expressed in or implied by the
statements. The risks and uncertainties include but are not limited to the
following and their effect on the Partnership's operations: a) the effect of
weather conditions on demand for propane, b) price and availability of propane
supplies, c) the availability of capacity to transport propane to market areas,
d) competition from other energy sources and within the propane industry, e)
operating risks incidental to transporting, storing, and distributing propane,
f) changes in interest rates g) governmental legislation and regulations, h)
energy efficiency and technology trends i) Year 2000 compliance and j) other
factors that are discussed in the Partnership's filings with the Securities and
Exchange Commission.
11
Year 2000 Compliance
Many computer systems and applications in use throughout the world today
may not be able to appropriately interpret dates beginning in the year 2000
("Year 2000" issue). As a result, this problem could have adverse consequences
on the operations of companies and the integrity of information processing.
The Partnership began the process in 1997 of identifying and correcting its
computer systems and applications that were exposed to the Year 2000 issue. The
Partnership initially focused on the systems and applications that were
considered critical to its operations and services for supplying propane to its
customers and to its ability to account for those business services accurately.
These critical areas include the retail propane accounting and operations
system, financial accounting and reporting system, local area network and
electronic mail systems. The Partnership expects that these critical areas will
be Year 2000 compliant by December 31, 1999.
The Partnership has also taken steps to identify other non-critical
applications that may have exposure to the Year 2000 issue. It has established a
test lab for the independent testing of these applications to ensure Year 2000
compatibility. To date, no material Year 2000 issues have been identified as a
result of this testing.
The Partnership conducts business with several hundred outside suppliers.
While no single supplier is considered material to the Partnership, a combined
number could constitute a material amount to the Partnership. The Partnership is
currently reviewing their largest suppliers to obtain appropriate assurances
that they are, or will be, Year 2000 compliant. If compliance by the
Partnership's suppliers is not achieved in a timely manner, it is unknown what
effect, if any, the Year 2000 issue could have on the Partnership's operations.
The Partnership has evaluated its Year 2000 issues and does not expect that
the total cost of related modifications and conversions will have a material
effect on its financial position, results of operations or cash flows. Such
costs are being expensed as incurred. To date, the Partnership has currently
incurred approximately $100,000 to identify and correct its Year 2000 issues.
This expense has been primarily related to its critical systems and
applications. It is estimated that the Partnership will incur an additional
$300,000 to $500,000 during the next fiscal year to identify and correct its
Year 2000 issues. The Partnership does not anticipate significant purchases of
computer software or hardware as a result of its Year 2000 issue and does not
believe that the correction of its Year 2000 issues will delay or eliminate
other scheduled computer upgrades and replacements.
General
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The Partnership's revenue is derived
primarily from the retail propane marketing business. The Partnership believes
that it is the second largest retail marketer of propane in the United States,
based on gallons sold, serving more than 800,000 residential,
industrial/commercial and agricultural customers in 45 states and the District
of Columbia through approximately 566 retail outlets and 298 satellite
locations. Annual retail propane sales volumes were 660 million, 694 million,
and 650 million gallons for the fiscal years ended July 31, 1998, 1997, and
1996, 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.
12
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 leading independent traders of propane and natural gas
liquids in the United States.
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 125 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 60% of the Partnership's total
trading volume, with the remainder consisting principally of various other
natural gas liquids. For the Partnership's fiscal years ended July 31, 1998,
1997 and 1996, net revenues from trading activities were $7.5 million, $5.5
million and $7.3 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. Other factors affecting the results
of operations include competitive conditions, demand for product, variations in
the weather and fluctuations in propane prices.
The following presents the Partnership's selected quarterly financial data for
the two years ended July 31, 1998.
Fiscal year ended July 31, 1998
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- --------------- ---------------
Revenues $153,205 $248,811 $175,167 $90,170
Gross profit 66,589 117,932 89,449 50,783
Net earnings (loss) (13,311) 32,759 10,775 (25,280)
Net earnings (loss) per
limited partner unit (0.42) 1.04 0.34 (0.80)
Fiscal year ended July 31, 1997
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ----------------- ---------------- -----------------
Revenues $167,860 $347,056 $192,873 $96,509
Gross profit 66,288 138,258 82,844 46,780
Net earnings (loss) (10,790) 49,430 7,685 (23,107)
Net earnings (loss) per
limited partner unit (0.34) 1.57 0.24 (0.73)
Results of Operations
Fiscal Year Ended July 31, 1998 versus Fiscal Year Ended July 31, 1997
Total Revenues. Total revenues decreased 17.0% to $667,353,000 as compared
to $804,298,000 in the prior year, primarily due to a decrease in sales price
per gallon as a result of the unusually higher wholesale cost of propane
experienced in the previous year, the effects of the warmer weather, and a
13
decrease in revenues from other operations (net trading operations, wholesale
propane marketing and chemical feedstocks marketing), partially offset by
acquisitions of propane businesses.
A less volatile propane market during fiscal 1998 caused a significant
decrease in the cost of product, which in turn caused a decrease in sales price
per gallon as compared to fiscal 1997. Retail volumes decreased by 4.9% or
34,063,000 gallons, primarily due to the decrease in volumes related to the
unusually warm winter during fiscal 1998, attributable in large part to the El
Nino weather phenomenon. The winter of fiscal 1998 was reported as the second
warmest winter in recorded history. For the year, temperatures were 8% warmer
than normal and 4% warmer than the same period last year as reported by the
American Gas Association. The warmer than normal temperatures were also
compounded by other El Nino related weather factors such as reduced wind chill,
humidity, snow and cloud cover, all of which contributed to a lower demand for
propane and a decrease in earnings for the Partnership.
The 29.7% decrease in revenues from other operations to $73,123,000 is due
to a decrease in wholesale sales price per gallon and a decrease in chemical
feedstocks marketing revenues. Wholesale marketing sales price per gallon
decreased primarily due to the decrease in the cost of product compared to last
year. Chemical feedstocks volumes decreased as a result of decreased marketing
demand from petrochemical companies.
Gross Profit. Gross profit decreased 2.8% to $324,753,000 as compared to
$334,170,000 during fiscal 1997, primarily due to a decrease in retail sales
gross margin dollars, partially offset by an increase from trading profits.
Retail operations results decreased primarily due to decreased volumes
attributed to the warmer weather, partially offset by the impact of increased
retail margins and the increase in volumes attributed to acquisitions.
Operating Expenses. Operating expenses increased slightly to $199,010,000
in fiscal 1998 as compared to $198,298,000 in fiscal 1997. This year's operating
expenses were impacted by decreased variable expenses, resulting from reduced
gallon deliveries due to the warmer weather, offset by increased expenses
associated with acquisitions.
Vehicle and Tank Lease Expense. Vehicle and tank lease expense increased by
$2,694,000 due to the utilization of operating lease financing to fund fleet
upgrades and replacements.
Interest Expense. Interest expense increased 7.3% over the prior year due
primarily to increased borrowings for the financing of acquisitions, partially
offset by a slight decrease in the average interest rate paid by the Partnership
on its variable rate borrowings.
Fiscal Year Ended July 31, 1997 versus Fiscal Year Ended July 31, 1996
Total Revenues. Total revenues increased 23.0% to $804,298,000 as compared
to $653,640,000 in the prior year, primarily due to increased sales price per
retail gallon, increased retail propane volumes, and to a lesser extent an
increase in revenues from other operations (net trading operations, wholesale
propane marketing and chemical feedstocks marketing).
A volatile propane market during the first half of fiscal 1997 caused a
significant increase in the cost of product which in turn caused an increase in
sales price per gallon. Retail volumes increased by 6.7% or 44 million gallons,
primarily due to the increase in volumes related to acquisitions partially
offset by the effect of warmer weather during fiscal 1997 as compared to fiscal
1996 and by customer conservation efforts. Fiscal 1997 winter temperatures, as
reported by the American Gas Association, were 6% warmer than the prior year and
4% warmer than normal.
The 10.2% increase in revenues from other operations to $103,971,000 was
due to an increase in wholesale marketing volumes and sales price per gallon,
partially offset by a decrease in chemical feedstocks marketing revenues.
Wholesale marketing volumes increased primarily due to the effect of
acquisitions, while prices increased as a result of increased cost of product.
Chemical feedstocks volumes decreased as a result of decreased availability of
14
product from refineries and decreased demand from petrochemical companies.
Unrealized gains and losses on options, forwards, and futures contracts were not
significant at July 31, 1997 and 1996, respectively.
Gross Profit. Gross profit increased 12.4% to $334,170,000 as compared to
$297,326,000 in the 1996 fiscal year, primarily due to an increase in retail
sales gross margin, partially offset by a decrease in gross profits from other
operations. Retail operations results increased primarily due to the increase in
volumes attributed to acquisitions and an increase in retail margins, partially
offset by the effect of warmer weather and customer conservation efforts.
Wholesale marketing and chemical feedstocks was comprised of low margin sales,
therefore, the net increase in revenues did not significantly affect gross
profit.
Operating Expenses. Operating expenses increased 10.5% to $198,298,000 as
compared to $179,462,000 in the prior year primarily due to acquisition related
increases in personnel costs, plant and office expenses, and vehicle and other
expenses, partially offset by favorable general liability claims experience.
Depreciation and Amortization. Depreciation and amortization expense
increased 18.3% to $43,789,000 as compared to $37,024,000 for the prior year due
primarily to acquisitions of propane businesses.
Interest Expense. Interest expense increased 20.5% over the prior year.
This increase was primarily the result of the MLP's issuance of $160,000,000 of
9 3/8% Senior Secured Notes in April 1996, the proceeds of which were primarily
used to fund acquisitions made in fiscal 1996, partially offset by an overall
decrease in interest rates on borrowings during the year.
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, 1999, the General Partner believes that the
OLP will have sufficient funds to meet its obligations and enable it to
distribute to the MLP sufficient funds to permit the MLP to meet its obligations
with respect to the $160,000,000 senior secured notes issued in April 1996 ("MLP
Senior Secured Notes").
The MLP Senior Secured Notes, the $350,000,000 OLP senior notes ("New
Senior Notes") and the amended and restated OLP credit facility ("New Credit
Facility") agreements contain several financial tests which restrict the
Partnership's ability to pay distributions, incur indebtedness and engage in
certain other business transactions (See Financing Activities below). These
tests, in general, are based on the ratio of the MLP's and OLP's consolidated
cash flow to fixed charges, primarily interest expense. Because the Partnership
is more highly leveraged at the MLP than at the OLP, the tests related to the
MLP Senior Secured Notes are more sensitive to fluctuations in consolidated cash
flows and fixed charges. The most sensitive of the MLP related tests restricts
the Partnership's ability to make certain Restricted Payments which includes,
but is not limited to, the payment of the Minimum Quarterly Distribution ("MQD")
to unitholders.
Although the MLP's financial performance during fiscal 1998 was adversely
impacted by the El Nino weather pattern and associated unseasonably warmer
temperatures, the Partnership believes it will continue to meet the MLP Senior
Secured Notes Restricted Payment test during fiscal 1999, in addition to meeting
the other financial tests in the MLP Senior Secured Notes, New Senior Notes and
New Credit Facility. However, if the Partnership were to encounter any
unexpected downturns in business operations, it could result in the Partnership
not meeting certain financial tests in future quarters, including but not
limited to, the MLP Senior Secured Notes Restricted Payment test. Depending on
the circumstances, the Partnership would pursue alternatives to permit the
continued payment of MQD to its Common Unitholders. No assurances can be given,
however, that such alternatives will be successful with respect to any given
quarter.
15
On August 1, 1999, the subordination period will end and the Subordinated
Units will convert to Common Units, provided that certain remaining financial
tests, which are related to making the MQD on all Common and Subordinated Units,
are satisfied for each of the three consecutive four quarter periods ending on
July 31, 1999. The Partnership met such financial tests for the four quarter
periods ended July 31, 1997 and July 31, 1998, respectively. There can be no
assurance that the Partnership will meet the remaining financial tests in the
subsequent four quarter period and that the Subordinated Units will convert to
Common Units on August 1, 1999.
Future maintenance and working capital needs of the Partnership are
expected to be provided by cash generated from future operations, existing cash
balances and the working capital borrowing facility. In order to fund expansive
capital projects and future acquisitions, the OLP may borrow on existing bank
lines, the MLP or OLP may issue additional debt or the MLP may issue additional
Common Units. Toward this purpose the MLP maintains a shelf registration
statement with the Securities and Exchange Commission for 1,800,322 Common Units
representing limited partner interests in the MLP. The Common Units may be
issued from time to time by the MLP in connection with the OLP's acquisition of
other businesses, properties or securities in business combination transactions.
Operating Activities. Cash provided by operating activities was $74,337,000
for the year ended July 31, 1998, compared to $75,087,000 in the prior year.
This small decrease was primarily due to the decreased inventory and increased
accounts payable partially offset by decreased net income as compared to July
31, 1997. These results were caused primarily by a decrease in propane prices,
the decrease in volumes held in inventory and reduced retail volume activity as
compared to those experienced during fiscal 1997.
Investing Activities. The Partnership made total acquisition capital
expenditures of $12,670,000 (including ($333,000) of working capital)
during fiscal 1998. This amount was funded by $9,839,000 cash payments,
$2,000,000 in Common Units and $831,000 in other costs and consideration.
During the year ended July 31, 1998, the Partnership made growth and
maintenance capital expenditures of $20,629,000 primarily for the following
purposes: 1) additions to Partnership-owned customer tanks and cylinders, 2)
relocating and upgrading district plant facilities, 3) upgrading computer
equipment and software and 4) vehicle lease buyouts. Capital requirements for
repair and maintenance of property, plant and equipment are relatively low since
technological change is limited and the useful lives of propane tanks and
cylinders, the Partnership's principal physical assets, are generally long. The
Partnership maintains its vehicle and transportation equipment fleet by leasing
light and medium duty trucks and tractors. The Partnership believes vehicle
leasing is a cost effective method for meeting the Partnership's transportation
equipment needs. The Partnership continues to seek expansion of its operations
through strategic acquisitions of smaller retail propane operations located
throughout the United States. These acquisitions will be funded through internal
cash flow, external borrowings or the issuance of additional Partnership
interests. The Partnership does not have any material commitments of funds for
capital expenditures other than to support the current level of operations. In
fiscal 1999, the Partnership does not expect a significant increase in growth
and maintenance capital expenditures as compared to fiscal 1998 levels.
Financing Activities. On August 4, 1998, the OLP issued $350,000,000 of new
privately placed unsecured senior notes ("New Senior Notes") and entered into a
$145,000,000 revolving credit facility ("New Credit Facility") with its existing
banks. The proceeds of the New Senior Notes, which include five series with
maturities ranging from year 2005 through 2013 at an average fixed interest rate
of 7.16%, were used to redeem $200,000,000 of OLP fixed rate Senior Notes
("Senior Notes") issued in July 1994, including a 5% call premium, and to repay
outstanding indebtedness under the existing OLP revolving credit facility
("Credit Facility"). As a result of these financings, the Partnership expects to
realize a decrease in interest expense during fiscal 1999. See Note E to the
audited financial statements included elsewhere in this report for additional
information regarding the New Senior Notes and the New Credit Facility.
On July 17, 1998, all of the outstanding common stock of Ferrell was
purchased by a newly established ESOT. As a result of this change in control in
the ownership of Ferrell and indirectly in the General Partner, the MLP,
16
pursuant to the MLP Senior Secured Note Indenture, was required to offer to
purchase the outstanding notes at a price of 101% of the principal amount
thereof. See Note E to the audited financial statements included elsewhere in
this report for additional details regarding the offer to purchase the MLP
Senior Secured Notes.
During the fiscal year ended July 31, 1998, the Partnership borrowed
$20,458,000 under its $255,000,000 Credit Facility to fund expected seasonal
working capital needs, business acquisitions, and capital expenditures. In
addition, letters of credit outstanding, used primarily to secure obligations
under certain insurance arrangements, totaled $29,056,000. Giving affect to the
issuance of the New Senior Notes and the New Credit Facility completed August 4,
1998, the OLP would have had $96,944,000 million available for general
corporate, acquisition and working capital purposes under the New Credit
Facility at July 31, 1998. The Partnership typically has significant cash needs
during the first quarter due to expected low revenues, increasing inventories
and the Partnership's cash distribution paid in mid-September.
On April 26, 1996, the MLP issued the MLP Senior Secured Notes. These notes
will be redeemable at the option of the Partnership, in whole or in part, at any
time on or after June 15, 2001. Interest is payable semi-annually in arrears on
June 15 and December 15.
To offset the variable rate characteristic of the revolving credit facility
borrowings, the OLP has entered into interest rate collar agreements, expiring
between October 1998 and December 2001 with two 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, 1998, the total notional principal
amount of these agreements was $100,000,000.
During the year ended July 31, 1998, the Partnership paid cash
distributions of $2.00 per limited partner unit. These distributions covered the
period from May 1, 1997 to April 30, 1998. On August 19, 1998, the Partnership
declared its fourth-quarter cash distribution of $0.50 per limited partner unit,
which was paid September 14, 1998. The Partnership's annualized distribution is
presently $2.00 per limited partner unit.
The MLP Senior Secured Notes, New Senior Notes and New 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.
The MLP and the Operating Partnership are in compliance with all requirements,
tests, limitations and covenants related to the MLP Senior Secured Notes, the
New Senior Notes and New Credit Facility. The New Senior Notes and the New
Credit Facility agreements have similar restrictive covenants to the Senior
Notes and Credit Facility agreements that were replaced.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in the Partnership's market risk sensitive
instruments and positions is the potential loss arising from adverse changes in
commodity prices. Additionally, the Partnership seeks to mitigate its interest
rate risk exposure on variable rate debt by entering into interest rate collar
agreements. After giving effect to the refinancing of the debt that occurred in
August 1998, the Partnership had redeemed nearly all of the variable rate debt
outstanding at July 31, 1998. Moreover, as of the date of this Form 10-K, the
Partnership had only $25,000,000 notional amount of interest rate collar
agreements effectively outstanding. Thus, assuming a material change in the
variable interest rate to the Partnership, the interest rate risk related to the
variable rate debt and the associated interest rate collar agreements is not
material to the financial statements.
The Partnership's trading activities utilize certain types of energy
commodity forward contracts and swaps traded on the over-the-counter financial
markets and futures traded on the New York Mercantile Exchange ("NYMEX" or
"Exchange") to anticipate market movements, manage and hedge its exposure to the
volatility of floating commodity prices and to protect its inventory positions.
The Partnership's non-trading activities utilize certain over-the-counter energy
commodity options to limit overall price risk and to hedge its exposure to
inventory price movements.
17
Market risks associated with energy commodities are monitored daily for
compliance with the Partnership's trading policy. This policy includes specific
dollar exposure limits, limits on the term of various contracts and volume
limits for various energy commodities. The Partnership also utilizes loss limits
and daily review of open positions to manage exposures to changing market
prices.
Market and Credit Risk. NYMEX traded futures are guaranteed by the Exchange
and have nominal credit risk. The Partnership is exposed to credit risk
associated with futures, swaps and option transactions in the event of
nonperformance by counterparties. For each counterparty, the Partnership
analyzes the financial condition prior to entering into an agreement,
establishes credit limits and monitors the appropriateness of each limit. The
change in market value of Exchange-traded futures contracts requires daily cash
settlement in margin accounts with brokers. Forwards and most other
over-the-counter instruments are generally settled at the expiration of the
contract term.
Sensitivity Analysis. The Partnership has prepared a sensitivity analysis
to estimate the exposure to market risk of its energy commodity positions.
Forward contracts, futures, swaps and options were analyzed assuming a
hypothetical 10% change in forward prices for the delivery month for all energy
commodities. The potential loss in future earnings from these positions from a
10% adverse movement in market prices of the underlying energy commodities is
estimated at $2,707,000 as of July 31, 1998. Actual results may differ.
Further discussion of the risk management activities and accounting for
derivative commodity contracts is contained in the accompanying notes to the
consolidated financial statements.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
Partnership Management
The General Partner manages and operates the activities of the Partnership,
and the General Partner anticipates that its activities will be limited to such
management and operation. Unitholders do not directly or indirectly participate
in the management or operation of the Partnership. The General Partner owes a
fiduciary duty to the Unitholders.
The General Partner has appointed persons who are neither officers nor
employees of the General Partner or any affiliate of the General Partner to
serve on a committee of the Partnership (the "Audit Committee") with the
authority to review, at the request of the General Partner, specific matters as
to which the General Partner believes there may be a conflict of interest in
order to determine if the resolution of such conflict proposed by the General
Partner is fair and reasonable to the Partnership. The Audit Committee will only
review matters relating to conflicts of interest at the request of the General
Partner, and the General Partner has sole discretion to determine which matters,
if any, to submit to the Audit Committee. 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.
18
The Partnership does not directly employ any of the persons responsible for
managing or operating the Partnership. At July 31, 1998, 3,494 full-time and 831
temporary and part-time individuals were employed by the General Partner.
Directors and Executive Officers of the General Partner
The following table sets forth certain information with respect to the
directors and executive officers of the General Partner at August 31, 1998. Each
of the persons named below is elected to their respective office or offices
annually. Only Mr. Ferrell and Mr. Sheldon have entered into employment
agreements with the General Partner. See Employment Agreements.
Director
Name Age Since Position
James E. Ferrell 59 1984 Chairman of the Board and a
Director of the General
Partner
Danley K. Sheldon 40 1998 Chief Executive Officer,
President and a Director
of the General Partner
Patrick J. Chesterman 48 Executive Vice President
James M. Hake 38 Senior Vice President,
Acquisitions
Kenneth G. Atchley 35 Vice President, Chief
Operating Officer-Western
U.S.
Boyd H. McGathey 39 Vice President, Chief
Operating Officer-Eastern
U.S.
Kevin T. Kelly 33 Vice President, Chief
Financial Officer and
Treasurer
A. Andrew Levison 42 1994 Director of the General
Partner
Elizabeth T. Solberg 59 1998 Director of the General
Partner
James E. Ferrell--Mr. Ferrell has been with Ferrell or its predecessors and
its affiliates in various executive capacities since 1965. He served as Chief
Executive Officer until August 1998 and as President until October 1996.
Danley K. Sheldon--Mr. Sheldon was named Chief Executive Officer in August
1998 and was named a director of the Company in July 1998. He has been President
of the Company since October 1996 and was Chief Financial Officer of the Company
from January 1994 until May 1998. He served as Treasurer from 1989 until 1998
and joined the Company in 1986.
Patrick J. Chesterman--Mr. Chesterman was named Executive Vice President in
April 1998 after having served as Senior Vice President, Supply since September
1997. After joining the Company in June, 1994, he had one-year assignments as
Vice President-Retail Operations, Director of 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.
James M. Hake--Mr. Hake was named Senior Vice President, Acquisitions in
August 1998. He had been Vice President, Acquisitions of the Company since
October, 1994. He joined the Company in 1986.
Kenneth G. Atchley--Mr. Atchley was named Vice President, Chief Operating
Officer-Western U.S. in August 1998. He served as Regional Vice President since
May 1996. After joining the Company in 1985, he held District Manager and Area
Manager positions.
19
Boyd H. McGathey--Mr. McGathey was named Vice President, Chief Operating
Officer-Eastern U.S. in August 1998. He served as Regional Vice President since
February 1997. After joining the Company in 1989, he held District Manager and
Area Manager positions.
Kevin T. Kelly--Mr. Kelly was named Chief Financial Officer and Treasurer
in May 1998 and August 1998, respectively. After joining the Company in June
1996, he served as Director of Finance and Corporate Controller until May 1998.
Prior to joining the Company, Mr. Kelly was Manager of Project Acquisitions with
UtiliCorp United, Inc.
A. Andrew Levison---Mr. Levison was elected a director of the Company in
September 1994. Mr. Levison has been a Managing Director of Donaldson, Lufkin &
Jenrette Securities Corporation since 1989.
Elizabeth T. Solberg---Ms. Solberg was elected a director of the Company in
July 1998. Ms. Solberg is Executive Vice President and Senior Partner of
Fleishman-Hillard, Inc. and has been with the firm since 1976. She has been a
member of the board of directors of Kansas City Life Insurance Company since
1997.
Compensation of the General Partner
The General Partner receives no management fee or similar compensation in
connection with its management of the Partnership and receives no remuneration
other than:
(i) distributions in respect to its 2% general partner interest, on a
combined basis, in the Partnership and the Operating Partnership; and
(ii) reimbursement for all direct and indirect costs and expenses incurred on
behalf of the Partnership, all selling, general and administrative expenses
incurred by the General Partner for or on behalf of the Partnership and all
other expenses necessary or appropriate to the conduct of the business of, and
allocable to, the Partnership. The selling, general and administrative expenses
reimbursed include specific employee benefits and incentive plans for the
benefit of the executive officers and employees of the General Partner.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth the compensation for the past three years of
the Company's Chief Executive Officer ("CEO") and the Company's four 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
1998 fiscal year.
20
Long-Term Compensation
-------------------------------
Annual Compensation Awards Pay-outs
------------------------- --------------- ---------------
Stock Long-Term
Options/ Incentive All Other
Name and Salary Bonus SARs Payouts Compensation
Principal Position Year ($) ($) (#) ($) ($)
- --------------------------------- ------ ------------ ------------ --------------- --------------- ----------------
James E. Ferrell 1998 465,000 --- --- --- 37,067 (1)
- ---------------------------------
Chairman and Chief Executive 1997 480,000 --- --- --- 32,126
Officer 1996 480,000 --- --- --- 16,801
Danley K. Sheldon 1998 225,000 50,000 --- --- 20,104 (1)
- ---------------------------------
President and Treasurer 1997 218,221 --- 30,000 --- 15,440
1996 177,500 100,000 --- --- 13,972
Patrick J. Chesterman 1998 161,500 25,000 --- --- 15,530 (1)
- ---------------------------------
Exec. Vice President 1997 132,917 --- 20,000 --- 9,087
James A. Hake 1998 120,000 85,000 --- --- 15,887 (1)
- ---------------------------------
Vice President, Acquisitions 1997 120,000 90,000 15,000 --- 13,592
1996 120,000 85,000 --- --- 9,962
Kevin T. Kelly 1998 99,014 50,000 --- --- 9,376 (1)
- ---------------------------------
Vice President, Chief
Financial Officer
(1) Includes for Mr. Ferrell contributions of $20,059 to the employee's 401(k)
and profit sharing plans and compensation of $17,008 resulting from the
payment of life insurance premiums. Includes for Mr. Sheldon contributions
of $20,104 to the employee's 401(k) and profit sharing plans. Includes for
Mr. Chesterman contributions of $14,584 to the employee 401(k) and profit
sharing plans and compensation of $946 resulting from the payment of life
insurance premiums. Includes for Mr. Hake contributions of $15,161 to the
employee's 401(k) and profit sharing plans and compensation of $726
resulting from the payment of life insurance premiums. Includes for Mr.
Kelly contributions of $9,376 to the employee's 401(k) and profit sharing
plans.
Unit Options
On October 14, 1994, the General Partner adopted the Ferrellgas, Inc. Unit
Option Plan (the "Unit Option Plan") pursuant to which key employees are granted
options to purchase the MLP's Subordinated Units. The purpose of the Unit Option
Plan is to encourage certain employees of the General Partner to develop a
proprietary interest in the growth and performance of the Partnership, to
generate an increased incentive to contribute to the Partnership's future
success and prosperity, thus enhancing the value of the Partnership for the
benefit of its Unitholders, and to enhance the ability of the General Partner to
attract and retain key individuals who are essential to progress, growth and
profitability of the Partnership.
The Unit Options are exercisable beginning after July 31, 1999, assuming
the subordination period has lapsed, at prices ranging from $16.80 to $21.67 per
unit, which is an estimate of the fair market value of the Subordinated Units at
the time of the grant. The options vest immediately or over a one to five year
period, and expire on the tenth anniversary of the date of the grant. Upon
conversion of the Subordinated Units held by the General Partner and its
affiliates, outstanding Subordinated Unit Options will convert to Common Unit
Options.
There were no grants of unit options during the 1998 fiscal year to the CEO
and named executive officers.
The following table lists information on the CEO and named executive
officers' exercised/unexercised unit options for the fiscal year ended July 31,
1998.
21
AGGREGATED OPTION/SAR EXERCISES IN LAST FY AND FY-END OPTION SAR VALUES
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options/SARs In-The-Money Options/SARs
at FY-End (#) at FY-End ($)
---------------------- -----------------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---------------------------- --------------- ------------- ---------------------- ------------------------------
James E. Ferrell - - - -
Danley K. Sheldon 0 0 0/100,000 0/305,800
Patrick J. Chesterman 0 0 0/30,000 0/32,680
James M. Hake 0 0 0/51,000 0/156,975
Kevin T. Kelly 0 0 0/10,000 0/6,850
Employee Stock Ownership Plan
On July 17, 1998, pursuant to the Ferrell Companies, Inc. Employee
Stock Ownership Plan, a newly formed employee stock ownership trust purchased
all of the outstanding common stock of Ferrell. The purpose of the ESOP is to
provide employees of the General Partner an opportunity for ownership in Ferrell
and indirectly in the Partnership. Ferrell is expected to make future
contributions to the ESOP which will cause a portion of the shares of Ferrell
owned by the ESOP to be allocated to employees' accounts over time.
Incentive Compensation Plan
On July 17, 1998, a nonqualified stock option plan was establish by
Ferrell to allow upper middle and senior level managers of the General Partner
to participate in the equity growth of Ferrell and, indirectly in the equity
growth of the Partnership. The shares underlying the stock options are common
shares of Ferrell. No options under this plan had been granted as of July 31,
1998.
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 participants based on each participant's wages or salary as
compared to the total of all participants' wages and salaries.
Historically, the annual contribution to the Profit Sharing Plan has been
1% to 7% of each participant's annual wage or salary. With the establishment of
the ESOP in July 1998, the Company decided to suspended future contributions to
the profit sharing plan beginning with fiscal year 1998. The Profit Sharing Plan
also has a 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
22
of employees under the terms of the 401(k) feature of the Profit Sharing Plan
based on such members' deferral elections thereunder, but which could not be
provided under the 401(k) feature of the Profit Sharing Plan due to the
application of certain IRS rules and regulations.
Employment Agreements
On July 17, 1998, Mr. James E. Ferrell, as Chairman of the Board of the
General Partner, entered into a five year employment agreement with automatic
one year renewals. He will receive an annual salary of $120,000 and a bonus
based on the annual increase in the equity value of Ferrell. In addition to his
compensation, Mr. Ferrell participates in the Company's various employee benefit
plans, with the exception of the employee stock ownership plan and the
nonqualified stock option plan of Ferrell.
Also on July 17, 1998, Mr. Danley K. Sheldon, Chief Executive Officer of
the General Partner, entered into an eight year employment agreement, with
automatic one year renewals. He will receive an annual salary of $340,000 and an
annual bonus based on the earnings of the Partnership.
Pursuant to the terms of both employment agreements, in the event of either
a termination without cause or resignation for cause, Mr. Ferrell and Mr.
Sheldon are entitled to a cash amount equal to three times the greater of 125%
of their current base salary or the average compensation paid for the prior
three fiscal years. If a change of control of Ferrell or the General Partner
occurs, Mr. Ferrell and Mr. Sheldon will receive a cash termination benefit
equal to three times the greater of 125% of their current base salary or the
average three year compensation paid.
Mr. Ferrell's agreement contains a non-compete provision for the period of
time equal to the greater of five years or the time in which certain outstanding
debt of Ferrell is paid in full. The non-compete provision provides that he
shall not directly or indirectly own, manage, control, or engage in any business
with any person whose business is substantially similar to the business of the
Company.
Mr. Sheldon's agreement also contains a non-compete provision for a
period of two years following his termination of employment. The non-compete
provision provides that he shall not directly or indirectly own, manage,
control, or engage in any business with any person whose business is
substantially similar to the business of the Company.
Compensation of Directors
The General Partner does not pay any additional remuneration to its
employees for serving as directors. Directors who are not employees of the
General Partner 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, 1998,
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.
23
Ferrellgas Partners, L.P.
Title of Class Name and Address of Beneficial Units (1) Percentage of
Owner Beneficially Class
Owned
- ------------------------ --------------------------------------------------- ----------------
Common Units ESOT 1,210,162 (2) 8.2
Goldman, Sachs & Co. 1,635,717 (3) 11.1
The Goldman Sachs Group 1,635,717 (3) 11.1
Danley K. Sheldon 1,000 *
Patrick J. Chesterman 200 *
James M. Hake 400 *
Kenneth G. Atchley 2,000 *
Elizabeth T. Solberg 200 *
A. Andrew Levison 15,000 *
*
All Directors and Officers as a 18,800 *
Group
Subordinated Units ESOT 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 LaSalle National Bank, the trustee for the Ferrell
Companies, Inc. Employee Stock Ownership Trust ("ESOT") is 125 S. LaSalle
Street, 17th Floor, Chicago, Illinois, 60603
Includes 1,210,162 Common Units and 16,593,721 Subordinated Units owned by
Ferrell which is 100% owned by the ESOT.
(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 1,635,717 Common Units owned by their customers.
Compliance With Section 16(a) of the Securities and Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 requires the
General Partner's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10%
unitholders are required by SEC regulation to furnish the General Partner with
copies of all Section 16(a) forms.
Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during fiscal year 1998 all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were met in a timely manner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a discussion of certain relationships and related
transactions among affiliates of the Partnership.
24
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 $129,808,000 and $128,033,000 for the years
ended July 31, 1998 and 1997, respectively, include compensation and benefits
paid to officers and employees of the General Partner, and general and
administrative costs. In addition, the conveyance of the net assets of the
Company to the Partnership included the assumption of specific liabilities
related to employee benefit and incentive plans for the benefit of the officers
and employees of the General Partner. 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.
Ferrell, the parent of the General Partner, and its other wholly-owned
subsidiaries engage in various investment activities including, but not limited
to, commodity investments and the trading thereof. The Partnership from time to
time acts as an agent on behalf of Ferrell to purchase and market natural gas
liquids and enter into certain trading activities. The Partnership charges all
direct and indirect expenses incurred in performing this agent role to Ferrell.
During the years ended July 31, 1998 and 1997, the Partnership, as Ferrell's
agent, performed the following services: a) purchased 1,089,929 barrels of
propane during 1997 b) marketed and sold 469,820 and 619,929 barrels, in 1998
and 1997, respectively, and c) entered into certain hedging arrangements during
1997. The Partnership charged Ferrell $66,467 and $73,078, in 1998 and 1997,
respectively, for its direct and indirect expenses. Of the 469,820 barrels of
propane sold in fiscal year 1998, all of these barrels were sold to and used by
the Partnership at the applicable market prices (an aggregate of $7,405,200). Of
the 619,929 barrels of propane sold in fiscal year 1997, 534,929 barrels were
sold to and used by the Partnership at the applicable market prices (an
aggregate of $13,128,765). In addition, during fiscal 1998, the Partnership sold
to Ferrell certain physical and derivative crude oil commodity contracts
totaling 4,120,000 aggregate barrels at a price of $2,548,927. The Partnership
believes these transactions were under terms that were no less favorable to the
Partnership than those arranged with other parties.
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.
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.
25
(b) Reports on Form 8-K.
The Partnership filed one Form 8-K during the quarter ended July 31, 1998.
Form 8-K dated July 31, 1998, reporting that on July 17, 1998, the
Ferrell Companies, Inc. Employee Stock Ownership Trust acquired all of
the outstanding capital stock of Ferrell Companies, Inc., a Kansas
corporation, from trusts affiliated with Mr. James E. Ferrell. The
ESOT purchased the stock of Ferrell using funds provided primarily by
a private placement of $160,000,000 of debt and $40,000,000 of seller
financed notes. By acquiring such stock, the ESOT became the
beneficial owner through Ferrell of all of the outstanding capital
stock of Ferrellgas, Inc., a Delaware corporation that is the general
partner of both Ferrellgas Partners, L.P. and the Partnership's
operating subsidiary, Ferrellgas, L.P. The ESOT's indirect control of
the General Partner gives the ESOT control of the Partnership and the
Operating Partnership.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FERRELLGAS PARTNERS, L.P.
By Ferrellgas, Inc. (General Partner)
By /s/ Danley K. Sheldon
Danley K. Sheldon
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/s/ Danley K. Sheldon President, Chief Executive Officer 10/29/98
Danley K. Sheldon and Director (Principal Executive
Officer)
/s/ James E. Ferrell Chairman of the Board 10/29/98
James E. Ferrell
/s/ A. Andrew Levison Director 10/29/98
A. Andrew Levison
/s/ Elizabeth T. Solberg Director 10/29/98
Elizabeth T. Solberg
/s/ Kevin T. Kelly Vice President and Chief 10/29/98
Kevin T. Kelly Financial Officer (Principal
Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FERRELLGAS PARTNERS FINANCE CORP.
By /s/ Danley K. Sheldon
Danley K. Sheldon
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/s/ Danley K. Sheldon Chairman of the Board, 10/29/98
Danley K. Sheldon Chief Executive Officer and
Sole Director (Principal
Executive Officer)
/s/ Kevin T. Kelly Chief Financial Officer 10/29/98
Kevin T. Kelly (Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
The exhibits listed on the accompanying Exhibit Index are filed as part
of this report. Exhibits required by Item 601 of Regulation S-K which are not
listed are not applicable.
Exhibit
Number Description
(1) 2.1 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) 3.2 Articles of Incorporation for Ferrellgas Partners
Finance Corp.
(5) 3.3 Bylaws of Ferrellgas Partners Finance Corp.
(6) 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.
(7) 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.
(8) 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.
4.4 Ferrellgas, L.P., Note Purchase Agreement Dated as of
July 1, 1998 Re: $109,000,000 6.99% Senior Notes,
Series A, due August 1, 2005 $37,000,000 7.08% Senior
Notes, Series B, due August 1, 2006 $52,000,000 7.12%
Senior Notes, Series C, due August 1, 2008 $82,000,000
7.24% Senior Notes, Series D, due August 1, 2010
$70,000,000 7.42% Senior Notes, Series E, due August 1,
2013
(9) 10.1 Agreement dated as of April 1, 1994, between BP
Exploration & Oil, Inc. and Ferrellgas,
L.P. dba Ferrell North America
(10)# 10.2 Ferrell Companies, Inc. Supplemental Savings Plan.
(11)# 10.3 Ferrellgas, Inc. Unit Option Plan.
(12) 10.4 Contribution,Conveyance and Assumption Agreement dated
as of November 1, 1994, among
the Partnership, the Operating Partnership and
Ferrellgas, Inc.
(13) 10.5 First Amendment to Contribution, Conveyance and
Assumption Agreement between
Ferrellgas, the Partnership and the Operating
Partnership.
(14) 10.6 Second Amendment to Contribution, Conveyance and
Assumption Agreement between
Ferrellgas, the Partnership and the Operating
Partnership.
E-1
(15) 10.7 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.
(16) 10.8 Amended and Restated Agreement of Limited Partnership
of Ferrellgas, L.P. dated as of
April 23, 1996.
(17) 10.9 Pledge and Security Agreement dated as of April
26, 1996, among Ferrellgas Partners, L.P., Ferrellgas,
Inc., and American Bank National Association, as
collateral agent.
(18) 10.10 First 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.
10.11 Second Amended and Restated Credit Agreement dated as
of July 2, 1998, among Ferrellgas, L.P., Ferrellgas,
Inc., Bank of America National Trust and Savings
Association, as administrative agent, and the other
financial institutions party thereto.
10.12# Ferrell Companies, Inc. 1998 Incentive Compensation
Plan
10.13# Employment agreement between James E. Ferrell and
Ferrellgas, Inc. dated July 31, 1998
10.14# Employment agreement between Danley K. Sheldon and
Ferrellgas, Inc. dated July 31, 1998
21.1 List of subsidiaries.
23.1 Consent of Deloitte & Touche, LLP Certified Public
Accountants.
27.1 Financial Data Schedule - Ferrellgas Partners, L.P.
(filed in electronic format only).
27.2 Financial Data Schedule - Ferrellgas Partners Finance
Corp. (filed in electronic format only)
# Management contracts or compensatory plans.
(1) Incorporated by reference to the same numbered Exhibit to
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 same numbered Exhibit to
Registrant's Quarterly Report on Form 10-Q filed on June 13,
1997.
(5) Incorporated by reference to Exhibit same numbered Exhibit to
Registrant's Quarterly Report on Form 10-Q filed on June 13,
1997.
(6) Incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K filed
August 15, 1994.
(7) Incorporated by reference to Exhibit 4.1 to Registrant's Current
Report on Form 8-K filed on May 6, 1996.
(8) Incorporated by reference to Exhibit 4.2 to Registrant's Current
Report on Form 8-K filed on May 6, 1996.
E-2
(9) Incorporated by reference to the Exhibit 10.4 to Registrant's
Annual Report on Form 10-K filed
on October 20, 1994.
(10) Incorporated by reference to the Exhibit 10.7 to Registrant's
Annual Report on Form 10-K filed on October 17, 1995.
(11) 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
(12) 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
(13) Incorporated by reference to Exhibit 10.8 to Registrant's Annual
Report on Form 10-K filed on
October 20, 1994.
(14) Incorporated by reference to the Exhibit 10.11 to Registrant's
Annual Report onForm 10-K filed on October 17, 1995.
(15) Incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K filed on May 6, 1996.
(16) Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q filed on June 12, 1996.
(17) Incorporated by reference to Exhibit 10.2 to Registrant's
Current Report on Form 8-K filed on May 6, 1996.
(18) Incorporated by reference to the Exhibit 10.11 to Registrant's
Annual Report on Form 10-K filed on October 18, 1996.
E-3
INDEX TO FINANCIAL STATEMENTS
Page
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report..........................................................................F-2
Consolidated Balance Sheets - July 31, 1998 and 1997..................................................F-3
Consolidated Statements of Earnings - Years ended July 31, 1998, 1997 and 1996........................F-4
Consolidated Statements of Partners' Capital - Years ended
July 31, 1998, 1997 and 1996.....................................................................F-5
Consolidated Statements of Cash Flows - Year ended July 31, 1998, 1997 and 1996.......................F-6
Notes to Consolidated Financial Statements............................................................F-7
Ferrellgas Partners Finance Corp.
Independent Auditors' Report.........................................................................F-19
Balance Sheets - July 31, 1998 and 1997..............................................................F-20
Statements of Earnings - Year ended July 31, 1998, 1997 and
From the Date of inception to July 31, 1996.....................................................F-21
Statements of Stockholder's Equity - Year ended July 31, 1998, 1997 and
From the Date of Inception to July 31, 1996.....................................................F-22
Statements of Cash Flows - Year ended July 31, 1998, 1997 and
From the Date of Inception to July 31,1996......................................................F-23
Notes to Financial Statements........................................................................F-24
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P. and Subsidiaries
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas
Partners, L.P. and subsidiaries as of July 31, 1998 and 1997, and the related
consolidated statements of earnings, partners' capital and cash flows for the
years ended July 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the results of their operations
and their cash flows for the years ended July 31, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 24, 1998
F-2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
July 31, July 31,
ASSETS 1998 1997
- ---------------------------------------------------------- ---------------- -----------------
Current Assets:
Cash and cash equivalents $ 16,961 $ 14,788
Accounts and notes receivable (net of
allowance for doubtful accounts of $1,381 and
$1,234 in 1998 and 1997, respectively) 50,097 61,835
Inventories 34,727 43,112
Prepaid expenses and other current assets 8,706 8,906
---------------- -----------------
Total Current Assets 110,491 128,641
Property, plant and equipment, net 395,855 405,736
Intangible assets, net 105,655 112,058
Other assets, net 9,222 10,641
---------------- -----------------
Total Assets $621,223 $657,076
================ =================
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------------------------
Current Liabilities:
Accounts payable $ 48,017 $ 39,322
Other current liabilities 41,767 49,422
Short-term borrowings 21,150 21,786
---------------- -----------------
Total Current Liabilities 110,934 110,530
Long-term debt 507,222 487,334
Other liabilities 12,640 12,354
Contingencies and commitments
Minority interest 1,510 2,075
Partners' Capital:
Common unitholders (14,699,678 and 14,612,580 units
outstanding in 1998 and 1997, respectively) 27,985 52,863
Subordinated unitholders (16,593,721 units outstanding
in 1998 and 1997, respectively) 19,908 50,337
General partner (58,976) (58,417)
---------------- -----------------
Total Partners' Capital (11,083) 44,783
---------------- -----------------
Total Liabilities and Partners' Capital $621,223 $657,076
================ =================
See notes to consolidated financial statements
F-3
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per unit data)
For the year ended July 31,
-------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Revenues:
Gas liquids and related product sales $622,423 $759,941 $612,593
Other 44,930 44,357 41,047
----------------- ----------------- -----------------
Total revenues 667,353 804,298 653,640
Cost of product sold (exclusive of
depreciation, shown separately below) 342,600 470,128 356,314
----------------- ----------------- -----------------
Gross profit 324,753 334,170 297,326
Operating expense 199,010 198,298 179,462
Depreciation and amortization expense 45,009 43,789 37,024
Employee stock ownership plan compensation charge 350 - -
General and administrative expense 17,497 15,831 13,221
Vehicle and tank lease expense 10,127 7,433 5,113
----------------- ----------------- -----------------
Operating income 52,760 68,819 62,506
Interest expense (49,129) (45,769) (37,983)
Interest income 1,695 2,002 1,666
Loss on disposal of assets (174) (1,439) (1,586)
----------------- ----------------- -----------------
Earnings before income taxes,
minority interest and extraordinary loss 5,152 23,613 24,603
Minority interest 209 395 291
----------------- ----------------- -----------------
Earnings before extraordinary loss 4,943 23,218 24,312
Extraordinary loss on early extinguishment of debt,
net of minority interest of $10 - - 965
----------------- ----------------- -----------------
Net earnings 4,943 23,218 23,347
General partner's interest in net earnings 49 232 233
----------------- ----------------- -----------------
Limited partners' interest in net earnings $ 4,894 $ 22,986 $ 23,114
================= ================= =================
Earnings per limited partner unit:
Earnings before extraordinary loss $ 0.16 $ 0.74 $ 0.77
Extraordinary loss 0.03
----------------- ----------------- -----------------
Net earnings $ 0.16 $ 0.74 $ 0.74
================= ================= =================
Earnings per limited partner unit-assuming dilution:
Earnings before extraordinary loss $ 0.16 $ 0.73 $ 0.77
Extraordinary loss 0.03
----------------- ----------------- -----------------
Net earnings $ 0.16 $ 0.73 $ 0.74
================= ================= =================
See notes to consolidated financial statements
F-4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands)
Number of units
------------------------------
General Total partners'
Common Subordinated Common Subordinated partner capital
------------ ---------------- ----------- ---------------- ------------ ---------------
August 1, 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
Quarterly distributions - - (29,224) (33,188) (632) (63,044)
Net earnings - - 10,763 12,223 232 23,218
------------ ---------------- ----------- ---------------- ------------ ---------------
July 31, 1997 14,612.6 16,593.7 52,863 50,337 (58,417) 44,783
Common units issued in
connection with acquisitions 87.1 - 2,000 - 20 2,020
Contribution from general
partner in connnection with
ESOP compensation charge - - 23 320 4 347
Quarterly distributions - - (29,356) (33,188) (632) (63,176)
Net earnings - - 2,455 2,439 49 4,943
------------ ---------------- ----------- ---------------- ------------ ---------------
July 31, 1998 14,699.7 16,593.7 $27,985 $19,908 $ (58,976) $ (11,083)
============ ================ =========== ================ ============ ===============
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,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Cash Flows From Operating Activities:
Net earnings $4,943 $23,218 $23,347
Reconciliation of net earnings to net
cash from operating activities:
Depreciation and amortization 45,009 43,789 37,024
Employee stock ownership plan compensation charge 350
Minority interest 209 395 291
Extraordinary loss - - 965
Other 5,236 6,056 4,478
Changes in operating assets and liabilities net of
effects from business acquisitions:
Accounts and notes receivable 9,313 6,685 (3,988)
Inventories 8,052 (906) 7,612
Prepaid expenses and other current assets 200 (3,221) 765
Accounts payable 8,695 (9,078) (10,576)
Accrued interest expense (157) (1,171) 1,270
Other current liabilities (7,799) 9,368 3,649
Other liabilities 286 (48) 259
---------------- ---------------- ----------------
Net cash provided by operating activities 74,337 75,087 65,096
---------------- ---------------- ----------------
Cash Flows From Investing Activities:
Business acquisitions (9,839) (36,114) (8,116)
Capital expenditures (20,629) (16,192) (13,011)
Cash from acquired company - - 9,620
Other 4,539 3,068 (1,587)
---------------- ---------------- ----------------
Net cash used in investing activities (25,929) (49,238) (13,094)
---------------- ---------------- ----------------
Cash Flows From Financing Activities:
Distributions (63,176) (63,044) (62,863)
Additions to long-term debt 21,094 45,463 222,268
Reductions of long-term debt (2,759) (2,640) (234,082)
Net additions (reductions) to short-term borrowings (636) (3,734) 5,520
Minority interest activity (798) (818) 1,002
Other 40 (58) 46
---------------- ---------------- ----------------
Net cash used in financing activities (46,235) (24,831) (68,109)
---------------- ---------------- ----------------
Increase (decrease) in cash and cash equivalents 2,173 1,018 (16,107)
Cash and cash equivalents - beginning of period 14,788 13,770 29,877
---------------- ---------------- ----------------
Cash and cash equivalents - end of period $16,961 $14,788 $13,770
---------------- ---------------- ----------------
Cash paid for interest $46,546 $44,516 $34,994
================ ================ ================
See notes to consolidated financial statements
F-6
FERRELLGAS PARTNERS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Partnership Organization and Formation
Ferrellgas Partners, L.P. (the "MLP") was formed April 19, 1994, and is a
publicly traded limited partnership, owning a 99% limited partner interest
in Ferrellgas, L.P. (the "Operating Partnership" or "OLP"). The MLP and the
OLP are both Delaware limited partnerships, and are collectively referred to
as the Partnership. Ferrellgas Partners, L.P. was formed to acquire and hold
a limited partner interest in the Operating Partnership. The Operating
Partnership was formed to acquire, own and operate the propane business and
assets of Ferrellgas, Inc. (the "Company" or "General Partner"), a
wholly-owned subsidiary of Ferrell Companies, Inc. ("Ferrell"). Ferrell has
a 56% limited partnership interest in Ferrellgas Partners, L.P. The Company
has retained a 1% general partner interest in Ferrellgas Partners, L.P. and
also holds a 1.0101% general partner interest in the Operating Partnership,
representing a 2% general partner interest in the Partnership on a combined
basis. As General Partner of the Partnership, the Company performs all
management functions required for the Partnership.
On July 17, 1998, 100% of the outstanding common stock of Ferrell was
purchased primarily from Mr. James E. Ferrell and his family by a newly
established leveraged employee stock ownership trust established pursuant to
the Ferrell Companies, Inc. Employee Stock Ownership Plan ("ESOP"). The
purpose of the ESOP is to provide employees of the Company an opportunity
for ownership in Ferrell and indirectly in the Partnership. As contributions
are made by Ferrell to the ESOP in the future, shares of Ferrell will be
allocated to employees' ESOP accounts.
B. Summary of Significant Accounting Policies
(1) Nature of operations: The Partnership is engaged primarily in the sale,
distribution, marketing and trading of propane and other natural gas liquids
throughout the United States. The retail market is seasonal because propane
is used primarily for heating in residential and commercial buildings. The
Partnership serves more than 800,000 residential, industrial/commercial and
agricultural customers.
(2) Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual results could
differ from these estimates. Significant estimates impacting the financial
statements include reserves that have been established for product liability
and other claims.
(3) Principles of consolidation: The accompanying consolidated financial
statements present the consolidated financial position, results of
operations and cash flows of the Partnership and its wholly-owned
subsidiary, Ferrellgas Partners Finance Corp. The Company's 1.0101% General
Partner interest in Ferrellgas, L.P. is accounted for as a minority
interest. All material intercompany profits, transactions and balances have
been eliminated.
F-7
(4) Cash and cash equivalents: For purposes of the Consolidated Statements
of Cash Flows, the Partnership considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
(5) Inventories: Inventories are stated at the lower of cost or market
using average cost and actual cost methods.
(6) Property, plant and equipment and intangible assets: Property, plant and
equipment is stated at cost less accumulated depreciation. Expenditures for
maintenance and routine repairs are expensed as incurred. Depreciation is
calculated using the straight-line method based on the estimated useful
lives of the assets ranging from two to thirty years. Intangible assets,
consisting primarily of customer location values and goodwill, are stated at
cost, net of amortization calculated using the straight-line method over
periods ranging from 5 to 40 years. Accumulated amortization of intangible
assets totaled $123,531,000 and $109,211,000 as of July 31, 1998 and 1997,
respectively. The Partnership, using its best estimates based on reasonable
and supportable assumptions and projections, reviews for impairment of
long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstances indicate that the carrying
amount of its assets might not be recoverable and has concluded no financial
statement adjustment is required.
(7) Accounting for derivative commodity contracts: The Partnership enters
into commodity forward and futures purchase/sale agreements and commodity
options involving propane and related products which are used 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 using the fair value method.
Under the fair value method, derivatives are carried on the balance sheet at
fair value with changes in that value recognized in earnings. The
Partnership classifies all earnings from derivative commodity contracts as
other revenue on the statement of earnings.
(8) Revenue Recognition: Sales are generally recognized by the Partnership
when product is delivered or shipped to its customers.
(9) Income taxes: The Partnership is a limited partnership. As a result, the
Partnership's earnings or 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.
(10) Net earnings per limited partner unit: Net earnings (loss) per limited
partner unit is computed by dividing net earnings, after deducting the
General Partner's 1% interest, by the weighted average number of outstanding
Common Units, Subordinated Units and the dilutive effect (if any) of
Subordinated Unit options in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share". The only effect
of the application of SFAS No. 128 on the earnings per share was a decrease
of $0.01 per unit in fiscal year 1997 to net earnings per limited partner
unit. This decrease was due to including the effect of assuming the
conversion of 143,000 Unit Options in the denominator of the dilutive
per-unit computation.
F-8
(11) Unit-based compensation: The Partnership accounts for its Unit Option
Plan under the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and makes the pro forma information
disclosures required under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
(12) Adoption of new accounting standards: The Financial Standards
Accounting Board recently issued the following new accounting standards: SFAS
No. 130 "Reporting Comprehensive Income", SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information", SFAS No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits" and SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS Nos. 130,
131 and 132 are required to be adopted by the Partnership for the fiscal year
ended July 31, 1999. The adoption of SFAS Nos. 130 and 132 are not expected to
have a material effect on the Partnership's financial position or results of
operations. The Partnership is currently assessing the impact of SFAS No. 131 on
disclosure requirements for the next year. SFAS No. 133 is required to be
adopted by the Partnership for the fiscal year ended July 31, 2000. The
Partnership is currently assessing its impact on the Partnership's financial
position and results of operations.
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 constituting Cash from Operations (as
defined in the Partnership Agreement) 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. Upon expiration of the Subordination Period, all remaining
Subordinated Units will convert to Common Units.
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.
F-9
D. Supplemental Balance Sheet Information
Inventories consist of:
(in thousands) 1998 1997
-------------- --------------
Liquefied propane gas and related products $26,316 $35,351
Appliances, parts and supplies 8,411 7,761
-------------- --------------
$34,727 $43,112
============== ==============
In addition to inventories on hand, the Partnership enters into
contracts to buy product for supply purposes. Nearly all such contracts
have terms of less than one year and most call for payment based on
market prices at the date of delivery. All fixed price contracts have
terms of less than one year. As of July 31, 1998, in addition to the
inventory on hand, the Partnership had committed to take delivery of
approximately 20,812,000 gallons at a fixed price for its estimated
future retail propane sales.
Property, plant and equipment consist of:
(in thousands) 1998 1997
------------- --------------
Land and improvements $30,368 $29,849
Buildings and improvements 40,557 39,907
Vehicles 50,810 54,879
Furniture and fixtures 22,397 23,985
Bulk equipment and district facilities 66,150 59,876
Tanks and customer equipment 404,532 402,608
Other 5,969 3,870
------------- --------------
620,783 614,974
Less: accumulated depreciation 224,928 209,238
------------- --------------
$395,855 $405,736
============== =============
Depreciation expense totaled $30,034,000, $29,960,000, and $25,101,000,
for the years ended July 31, 1998, 1997, and 1996, respectively.
Other current liabilities consist of:
(in thousands) 1998 1997
-------------- -------------
Accrued insurance $4,563 $7,327
Accrued interest 12,914 13,071
Accrued payroll 8,635 8,161
Other 15,655 20,863
-------------- -------------
$41,767 $49,422
============== =============
F-10
E. Long-Term Debt
Long-term debt consists of:
(in thousands) 1998 1997
------------- ------------
Senior Notes
Fixed rate, 10%, due 2001 (1) $200,000 $200,000
Fixed rate, 9.375%, due 2006 (2) 160,000 160,000
Credit Agreement
Term loan, 8.5% and 6.25%, due 2001 (3) 50,000 50,000
Revolving credit loans, 8.5% and 6.25%, due 1999 (3) 85,850 64,614
Notes payable, 6.7% and 6.4% weighted average interest rates,
respectively, due 1998 to 2007 (4) 13,558 14,567
------------- ------------
509,408 489,181
Less: current portion 2,186 1,847
------------- ------------
$507,222 $487,334
============= ============
(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 Senior Notes were
redeemed at the option of the OLP on August 5, 1998 with a 5%
premium payable concurrent with the issuance of $350,000,000 of new
unsecured OLP Senior Notes ("New Senior Notes").
(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 Senior Secured Notes bear interest from the date of issuance,
payable semi-annually in arrears on June 15 and December 15 of each year. Due to
a change of control in the ownership of the General Partner on July 17, 1998 as
a result of the ESOP transaction described in Note A, the MLP was required,
pursuant to the MLP fixed rate Senior Secured Note Indenture, to offer to
purchase the outstanding MLP fixed rate Senior Secured Notes at a price of 101%
of the principal amount thereof plus accrued and unpaid interest. The offer to
purchase was made on July 27, 1998 and expired August 26, 1998. Upon the
expiration of the offer, the MLP accepted for purchase $65,000 of the notes
which were all of the notes tendered pursuant to the offer. The MLP assigned its
right to purchase the notes to a third party.
(3) At July 31, 1998, the unsecured $255,000,000 Credit Facility (the
"Credit Facility") consisted 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 outstanding balances to zero for thirty consecutive days. On August
4, 1998, outstanding borrowings under the OLP Credit Facility were refinanced
with the issuance of New Senior Notes and the refinancing with existing lenders
of the existing OLP Credit Facility with a new $145,000,000 revolving credit
F-11
facility ("New Credit Facility"). All borrowings under the Credit Facility bear
interest at either LIBOR plus an applicable margin varying from 0.425% to 1.375%
or the bank's base rate, depending on the nature of the borrowing. The bank's
base rate at July 31, 1998 and 1997 was 8.5% on both dates. To offset the
variable rate characteristic of the Credit Facility and the New Credit Facility,
the OLP entered into interest rate collar agreements, expiring between October
1998 and December 2001, with two major banks limiting the floating rate portion
of LIBOR-based loan interest rates on a notional amount of $100,000,000 to
between 4.9% and 6.5%.
(4) The notes payable are secured by approximately $3,729,000 and
$4,542,000 of property and equipment at July 31, 1998 and 1997, respectively.
On July 1, 1998, the OLP entered into an agreement for the issuance of $350
million of privately placed fixed rate senior notes ("New Senior Notes")
funded August 4, 1998 in five series with maturities ranging from year 2005
through 2013. The proceeds of the offering were used to redeem the OLP
fixed rate Senior Notes issued in June 1994, and to repay outstanding
indebtedness under the Credit Facility.
The OLP also entered into an agreement on July 2, 1998 with the lenders
under the existing Credit Facility for a New Credit Facility effective
August 4, 1998. The New Credit Facility provides for (i) a $40,000,000
unsecured working capital facility subject to an annual reduction in
borrowings to zero for thirty consecutive days, (ii) a $50,000,000
unsecured working capital and general corporate facility, including a
letter of credit facility, and (iii) a $55,000,000 unsecured general
corporate and acquisition facility. The New Credit Facility matures July 2,
2001.
At July 31, 1998 and 1997, $21,150,000 and $21,786,000, 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 $29,056,000 and $24,102,000,
respectively.
The Senior Secured Notes, the Senior Notes and the Credit Facility
Agreement contain various restrictive covenants applicable to the MLP and
OLP and its subsidiaries, the most restrictive relating to additional
indebtedness, sale and disposition of assets, and transactions with
affiliates. In addition, the Partnership is prohibited from making cash
distributions of the Minimum Quarterly Distribution if a default or event
of default exists or would exist upon making such distribution, or if the
Partnership fails to meet certain coverage tests. The Partnership is in
compliance with all requirements, tests, limitations and covenants related
to the Senior Secured Note Indenture, the Senior Note Indenture and Credit
Facility agreement. The New Senior Notes and the New Credit Facility
agreements have similar restrictive covenants to the Senior Note Indenture
and Credit Facility agreement that were replaced.
Taking into account the effects of the New Senior Notes and New Credit
Facility, the annual principal payments on long-term debt for each of the
next five fiscal years are $2,186,000 in 1999, $2,269,000 in 2000,
$3,145,000 in 2001, $1,037,000 in 2002, and $1,114,000 in 2003.
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.
F-12
F. Partners' Capital
Partners' capital consists of 14,699,678 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.
On August 1, 1999, the Subordination Period will end and the Subordinated
Units will convert to Common Units, provided that certain remaining
financial tests, which are related to making the Minimum Quarterly
Distribution on all Units, are satisfied for each of the three consecutive
four quarter periods ending on July 31, 1999. 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.
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 $129,808,000,
$128,033,000 and $109,637,000 for the years ended July 31, 1998, 1997 and
1996, respectively, include compensation and benefits paid to officers and
employees of the General Partner, and general and administrative costs.
Prior to the ESOP transaction completed on July 17, 1998, Ferrell, the
parent of the General Partner and its other wholly-owned subsidiaries,
engaged in various investment activities including, but not limited to,
commodity investments and the trading thereof. The Partnership from time to
time acted as an agent on behalf of Ferrell to purchase and market natural
gas liquids and enter into certain trading activities. The Partnership
charged all direct and indirect expenses incurred in performing this agent
role to Ferrell. During the years ended July 31, 1998 and 1997, the
Partnership, as Ferrell's agent, performed the following services: a)
purchased 1,089,929 barrels of propane during 1997 b) marketed and sold
469,820 and 619,929 barrels, in 1998 and 1997, respectively, and c) entered
into certain hedging arrangements during 1997. The Partnership charged
Ferrell $66,467 and $73,078, in 1998 and 1997, respectively, for its direct
and indirect expenses. Of the 469,820 barrels of propane sold in fiscal
year 1998, all of these barrels were sold to and used by the Partnership at
the applicable market prices (an aggregate of $7,405,200). Of the 619,929
F-13
barrels of propane sold in fiscal year 1997, 534,929 barrels were sold to
and used by the Partnership at the applicable market prices (an aggregate
of $13,128,765). In addition, during fiscal 1998, the Partnership sold to
Ferrell certain physical and derivative crude oil commodity contracts
totaling 4,120,000 aggregate barrels at a price of $2,548,927. Management
believes these transactions were under terms that were no less favorable to
the Partnership than those arranged with other parties. Subsequent to the
close of the ESOP transaction, Ferrell divested of its wholly owned
subsidiaries that were engaged in these commodity and trading activities.
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.
H. Contingencies and Commitments
The Partnership is threatened with or named as a defendant in various
lawsuits which, among other items, claim damages for product liability. It
is not possible to determine the ultimate disposition of these matters;
however, management is of the opinion that there are no known claims or
contingent claims that are likely to have a material adverse effect on the
results of operations 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 2017. Rental expense under these leases totaled
$17,095,000, $13,169,000, and $12,054,000, for the years ended July 31,
1998, 1997 and 1996, respectively. Future minimum lease commitments for
such leases are $14,949,000 in 1999, $13,128,000 in 2000, $10,940,000 in
2001, $7,749,000 in 2002, $3,014,000 in 2003 and $533,000 thereafter.
I. Employee Benefits
The Partnership has no employees and is managed and controlled by the
General Partner. The Partnership assumes all liabilities, which include
specific liabilities related to the following employee benefit plans for
the benefit of the officers and employees of the General Partner.
On July 17, 1998, Ferrell formed an Employee Stock Ownership Plan ("ESOP").
Ferrell is expected to make future contributions to the Ferrell Companies,
Inc. Employee Stock Ownership Trust ("ESOT") which will cause a portion of
the shares of Ferrell owned by the ESOT to be allocated to employees'
accounts over time. The allocation of Ferrell shares to employee accounts
will cause a non-cash compensation charge to be incurred by Ferrell,
equivalent to the fair value of such shares allocated. The Partnership is
not obligated to fund or make contributions to the ESOT. Nevertheless, due
to the benefit received by the Company's employees from participating in
the ESOP, the non-cash compensation charge is also recorded by the
Partnership. The non-cash compensation charge recorded by the Partnership
for fiscal year 1998 was $350,000.
The General Partner and its parent Ferrell have a defined contribution
profit-sharing plan which covers substantially all employees with more than
one year of service. Contributions were made to the plan at the discretion
of Ferrell's Board of Directors. With the establishment of the ESOP in July
1998, the Company decided to suspend future contributions to the profit
sharing plan beginning with fiscal year 1998. The profit sharing plan,
F-14
which qualifies under section 401(k) of the Internal Revenue Code, also
provides for matching contributions under a cash or deferred arrangement
based upon participant salaries and employee contributions to the plan.
These matching contributions are not affected by the establishment of the
ESOP. Contributions for the years ended July 31, 1997 and 1996,
respectively, were $3,000,000 and $1,160,000 under the profit sharing
provision and for the years ended July 31, 1998, 1997 and 1996,
respectively, were $1,693,000, $1,542,000 and $1,388,000 under the 401(k)
provision.
J. Unit Options
The Ferrellgas, Inc. Unit Option Plan (the "Unit Option Plan") currently
authorizes the issuance of options (the "Unit Options") covering up to
850,000 of the MLP's Subordinated Units to certain officers and employees
of the General Partner. The Unit Options are exercisable beginning after
July 31, 1999, assuming the Subordination Period has elapsed at 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 the grant. The
options vest immediately or over a one to five year period, and expire on
the tenth anniversary of the date of the grant. Upon conversion of the
Subordinated Units held by the General Partner and its affiliates,
outstanding Subordinated Unit Options granted will convert to the MLP's
Common Unit Options.
The Partnership accounts for stock-based compensation using the intrinsic
value method prescribed in APB No. 25 and related Interpretations.
Accordingly, no compensation cost has been recognized for the Unit Option
Plan. Had compensation cost for the Unit Option Plan been determined based
upon the fair value at the grant date for awards under these plans,
consistent with the methodology prescribed under SFAS No. 123, the
Partnership's net income and earnings per share would have been reduced by
approximately $40,000, $29,000, and $7,000, or less than $0.01 per unit for
the 1998, 1997 and 1996 fiscal years, respectively. The fair value of the
options granted during the 1998, 1997 and 1996 fiscal years was determined
using a binomial option valuation model with the following assumptions: a)
distribution amount of $0.50 per unit per quarter for 1998, 1997 and 1996,
b) average Common Unit price volatility of 16.2%, 16.9% and 16.9% was used
as an estimate of Subordinated Unit volatility for 1998, 1997 and 1996,
respectively, c) the risk-free interest rate used was 5.7%, 5.9% and 5.9%,
for 1998, 1997 and 1996, respectively and d) the expected life of the
option is 5 years for 1998, 1997 and 1996.
Number Weighted Average Weighted
of Exercise Price Average Fair
Units Value
------------ -------------------- ---------------
------------ -------------------- ---------------
Outstanding, July 31, 1995 701,500 $16.98
Granted 99,750 19.96 $0.34
Forfeited (132,825) 17.21
------------- -------------------- ---------------
Outstanding, July 31, 1996 668,425 17.38
Granted 216,500 20.23 0.52
Forfeited (157,325) 18.02
------------ -------------------- ---------------
Outstanding, July 31, 1997 727,600 18.09
Granted 118,500 19.47 0.47
Forfeited (64,100) 19.16
------------ -------------------- ---------------
Outstanding, July 31, 1998 782,000
------------ -------------------- ---------------
Options exercisable, July 31, 1998 0
------------ -------------------- ---------------
Options Outstanding at July 31, 1998
-------------------------------------------------
Range of option prices at end of year $16.80-$21.67
Weighted average remaining contractual life 7.8 years
F-15
K. Disclosures About Off Balance Sheet Risk and Fair Value of Financial
Instruments
The carrying amount of current financial instruments approximates fair
value because of the short maturity of the instruments. The estimated fair
value of the Partnership's long-term debt was $524,612,000 and $507,134,000
as of July 31, 1998 and 1997, respectively. The fair value is estimated
based on quoted market prices.
Interest Rate Collar Agreements. The Partnership has entered into various
interest rate collar agreements involving the exchange of fixed and
floating interest payment obligations without the exchange of the
underlying principal amounts. At July 31, 1998 and 1997, the total notional
principal amount of these agreements was $100,000,000 and $125,000,000,
respectively, and the fair value of these agreements was immaterial to the
financial position or results of operations of the Partnership. The
counterparties to these agreements are large financial institutions. The
interest rate collar agreements subject the Partnership to financial risk
that will vary during the life of these agreements in relation to market
interest rates. The mark to market adjustment applicable to the portion of
the notional amount in excess of variable rate indebtedness at July 31,
1998 was not material to the financial position or the results of
operations of the Partnership.
Option Commodity Contracts. The Partnership is a party to certain option
contracts, involving various liquefied petroleum products, for overall risk
management purposes in connection with its supply and trading activities.
Contracts are executed with private counterparties and to a lesser extent
on national mercantile exchanges. Open contract positions are summarized
below.
Forward, Futures and Swaps Commodity Contracts. The Partnership is a party
to certain forward, futures and swaps contracts for trading purposes. Net
gains from trading activities were $7,464,000, $5,476,000, $7,323,000, for
the years ended July 31, 1998, 1997, and 1996, respectively. Such contracts
permit settlement by delivery of the commodity. Open contract positions are
summarized below (assets are defined as purchases or long positions and
liabilities are sales or short positions).
As of July 31
(In thousands, except price per gallon data)
Derivative Commodity Instruments Held for Derivative Commodity
Purposes Other than Trading Instruments Held for
(Options) Trading Purposes
(Forward, Futures and Swaps)
------------------------------------------- ---------------------------------------------------
1998 1997 1998 1997
-------------------- ------------------- ----------------------- -----------------------
Asset Liab. Asset Liab. Asset Liab. Asset Liab.
--------- ---------- -------- ---------- ----------- ----------- ----------- -----------
Volume
(gallons) 3,927 (13,444) 14,406 (13,189) 568,949 (628,573) 165,739 (187,744)
Price ((cent)/gal) 31 49-18 38-35 50-35 35-23 35-24 40-32 43-33
Maturity 8/98- 8/98- 8/97- 9/97- 8/98- 8/98- 8/97- 8/97-
Dates 12/98 2/99 3/98 2/98 12/99 12/99 3/98 7/98
Contract
Amounts ($) 8,295 (19,757) 10,193 (13,164) 181,541 (201,497) 64,859 (75,578)
Fair Value ($) 7,901 (19,538) 10,244 (13,071) 186,696 (203,162) 62,925 (73,217)
Unrealized
gain (loss) ($) (394) 219 51 93 5,155 (1,665) (1,934) 2,361
F-16
Risks related to these contracts arise from the possible inability of the
counterparties to meet the terms of their contracts and changes in
underlying product prices. The Partnership attempts to minimize market risk
through the enforcement of its trading policies, which include total
inventory limits and loss limits, and attempts to minimize credit risk
through application of its credit policies.
L. Business Combinations
During the year ended July 31, 1998, the Partnership made acquisitions of
businesses valued at $12,670,000. This amount was funded by $9,839,000 cash
payments, $2,000,000 in common units and noncash transactions totaling
$831,000 in other 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 pro forma effect of these
transactions was not material to the results of operations.
During the year ended July 31, 1997, the Company made acquisitions of
businesses valued at $40,200,000 (including working capital acquired of
$1,420,000). This amount was funded by $36,114,000 cash payments and
noncash transactions totaling $4,086,000 in 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 pro forma effect of these transactions was not material
to the results of operations.
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. The cash purchase price, after working capital
adjustments, was $89,404,000.
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
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. The total assets contributed to the
Operating Partnership (at the General Partner's cost basis) have been
allocated as follows: (i) working capital of $17,168,000, (ii) property,
plant and equipment of $60,947,000 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.
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 transaction
F-17
occurred at the beginning of the period 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
Ended
July 31, 1996
-----------------
Total revenues $732,372
Income before extraordinary loss 21,734
Net earnings 20,769
Net earnings per limited partner unit $ 0.66
F-18
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas Partners Finance Corp.
Liberty, Missouri
We have audited the accompanying balance sheets of Ferrellgas Partners Finance
Corp. (a wholly-owned subsidiary of Ferrellgas Partners, L.P.), as of July 31,
1998, and 1997, and the related statement of earnings, stockholder's equity and
cash flows for the years ended July 31, 1998, 1997 and 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, 1998 and 1997, and the results of its operations and its cash flows for the
years ended July 31, 1998, 1997 and 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 24, 1998
F-19
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
BALANCE SHEETS
July 31, July 31,
ASSETS 1998 1997
----------------------------------------------------------------- ----------------- -----------------
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 548 327
Accumulated deficit (548) (327)
----------------- -----------------
Total Stockholder's Equity 1,000 1,000
----------------- -----------------
Total Liabilities and Stockholder's Equity $1,000 $1,000
================= =================
See notes to financial statements
F-20
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF EARNINGS
For the For the From
year ended year ended inception to
July 31, 1998 July 31, 1997 July 31, 1996
----------------- ----------------- --------------------
Revenues $ - $ - $ -
General and administrative expense 221 285 42
----------------- ----------------- --------------------
Net loss $(221) $(285) $(42)
================= ================= ====================
See notes to financial statements
F-21
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF STOCKHOLDER'S EQUITY
Total
Common stock Additional Accumulated stockholder's
-----------------------------
Shares Dollars paid in capital deficit equity
------------- ------------ ------------------------------------- ------------------
April 8, 1996 0 $ 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
Capital contribution - - 285 - 285
Net loss - - - (285) (285)
------------- ------------ ----------------- ----------------- ------------------
July 31, 1997 1,000 1,000 327 (327) 1,000
Capital contribution - - 221 - 221
Net loss - - - (221) (221)
------------- ------------ ----------------- ----------------- ------------------
July 31, 1998 1,000 $1,000 $548 $(548) $1,000
============= ============ ================= ================= ==================
See notes to financial statements
F-22
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF CASH FLOWS
For the For the From
year ended year ended inception to
July 31, 1998 July 31, 1997 July 31, 1996
----------------- ----------------- -----------------
Cash Flows From Operating Activities:
Net loss $(221) $(285) $(42)
----------------- ----------------- -----------------
Cash used by operating activities (221) (285) (42)
----------------- ----------------- -----------------
Cash Flows From Financing Activities:
Capital contribution 221 285 1,042
Net advance from affiliate 0 0 0
----------------- ----------------- -----------------
Cash provided by financing activities 221 285 1,042
----------------- ----------------- -----------------
Increase (decrease) in cash 0 0 1,000
Cash - beginning of period 1,000 1,000 0
----------------- ----------------- -----------------
Cash - end of period $1,000 $1,000 $1,000
================= ================= =================
See notes to financial statements
F-23
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
NOTES TO FINANCIAL STATEMENTS
A. Formation
Ferrellgas Partners, Finance Corp. (the "Finance Corp."), a Delaware
corporation, was formed on March 28, 1996 and is a wholly-owned subsidiary of
Ferrellgas Partners, L.P. (the "Partnership").
The Partnership contributed $1,000 to the Finance Corp. on April 8, 1996
in exchange for 1,000 shares of common stock.
B. Commitment
On April 26, 1996, the Partnership issued $160,000,000 of 9 3/8% Senior
Secured Notes due 2006 (the "Senior Notes"). The Senior Notes will be
redeemable at the option of the Partnership, in whole or in part, at any
time on or after June 15, 2001. Interest is payable semi-annually in
arrears on June 15 and December 15 of each year. The Finance Corp.
serves as a co-obligor for the Senior Notes.
C. Income Taxes
Income taxes have been computed as though the Company files its own
income tax return. Deferred income taxes are provided as a result of
temporary differences between financial and tax reporting using the
asset/liability method. Deferred income taxes are recognized for the tax
consequences of temporary differences between the financial statement
carrying amounts and tax basis of existing assets and liabilities.
Due to the inability of the Company to utilize the deferred tax benefit
of $232 associated with the current year net operating loss carryforward
of $597, which expire at various dates through July 31, 2013, a
valuation allowance has been provided on the full amount of the deferred
tax asset. Accordingly, there is no net deferred tax benefit for the
year ended July 31, 1998 or the period ended July 31, 1997 and there is
no net deferred tax asset as of July 31, 1998 or July 31, 1997.
F-24
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report on Schedules....................................S-2
Schedule I Parent Company Only Balance Sheets as
of July 31, 1998 and 1997, and Statements
of Earnings and Cash Flows for the Years
ended July 31, 1998, 1997, and 1996........................S-3
Schedule II Valuation and Qualifying Accounts for the
Years ended July 31, 1998, 1997 and 1996...................S-6
S-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P. and Subsidiaries
Liberty, Missouri
We have audited the consolidated financial statements of Ferrellgas Partners,
L.P. (formerly Ferrellgas, Inc.), and subsidiaries as of July 31, 1998, and
1997, and for the years ended July 31, 1998, 1997, and 1996, and have issued our
report thereon dated September 24, 1998. 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 24, 1998
S-2
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
BALANCE SHEETS
(in thousands)
ASSETS July 31, 1998 July 31, 1997
- ---------------------------------------------------- ----------------- -----------------
Cash and cash equivalents $ 1 $ 1
Investment in Ferrellgas, L.P. 148,013 203,360
Other assets, net
2,778 3,298
----------------- -----------------
Total Assets $ 150,792 $ 206,659
================= =================
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------------------
Other current liabilities $ 1,875 $ 1,876
Long term debt 160,000 160,000
Partners' Capital
Common unitholders 27,985 52,863
Subordinated unitholders 19,908 50,337
General partner (58,976) (58,417)
----------------- -----------------
Total Partners' Capital (11,083) 44,783
----------------- -----------------
Total Liabilities and Partners' Capital $ 150,792 $ 206,659
================= =================
S-3
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
STATEMENTS OF EARNINGS
(in thousands)
For the Year Ended
---------------------------------------------------------
July 31, 1998 July 31, 1997 July 31, 1996
---------------- ----------------- ----------------
Equity in earnings of Ferrellgas, L.P. $ 20,462 $ 38,673 $ 27,508
Operating expense 5 27 -
Interest expense 15,514 15,428 4,161
---------------- ----------------- ----------------
Net earnings $ 4,943 $ 23,218 $ 23,347
================ ================= ================
S-4
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended
-----------------------------------------------------------
July 31, 1998 July 31, 1997 July 31, 1996
----------------- ----------------- ------------------
Cash Flows From Operating Activities:
Net earnings $ 4,943 $ 23,218 $ 23,347
Reconciliation of net earnings to
net cash from operating activities:
Amortization of capitalized financing costs 513 511 161
Equity in (earnings) loss of Ferrellgas, L.P. (20,671) (39,068) (27,508)
Other current assets 3 879 (4,854)
Distributions received from Ferrellgas, L.P. 78,176 80,085 62,863
Increase in other current liabilities (1) (2,980) 4,855
----------------- ----------------- ------------------
Net cash provided by operating activities 62,963 62,645 58,864
----------------- ----------------- ------------------
Cash Flows From Financing Activities:
Distributions to partners (63,176) (63,044) (62,863)
Additions to long-term debt - - 160,000
Contribution to subsidiary - - (156,000)
Net advance from affiliate 213 399 -
----------------- ----------------- ------------------
Net cash provided (used) by financing activities (62,963) (62,645) (58,863)
----------------- ----------------- ------------------
Increase in cash and cash equivalents - - 1
Cash and cash equivalents - beginning of period 1 1 -
----------------- ----------------- ------------------
Cash and cash equivalents - end of period $ 1 $ 1 $ 1
================= ================= ==================
S-5
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARY
VALUATION AND QUALIFYING ACOUNTS
(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, 1998
Allowance for doubtful accounts $1,234 $3,003 $0 $2,856 $1,381
Accumulated amortization:
Intangible assets 109,211 14,320 0 0 123,531
Other assets 6,753 2,301 0 0 9,054
Year ended July 31, 1997
Allowance for doubtful accounts 1,169 2,604 0 2,539 1,234
Accumulated amortization:
Intangible assets 95,801 13,410 0 0 109,211
Other assets 4,647 2,106 0 0 6,753
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
(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
Operating Partnership.The amounts reflected as "Other Additions" represent
valuation and qualifying accounts assumedby the Operating Partnership in
connection with the contribution by the General Partner.
S-6