(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our management's discussion and analysis of financial condition and results of operations relates to Ferrellgas Partners and the operating partnership.
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. have nominal assets, do not conduct any operations and have no employees other than officers. Ferrellgas Partners Finance Corp. serves as co-issuer and co-obligor for debt securities of Ferrellgas Partners, while Ferrellgas Finance Corp. serves as co-issuer and co-obligor for debt securities of the operating partnership. Accordingly, and due to the reduced disclosure format, a discussion of the results of operations, liquidity and capital resources of Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. is not presented in this section.
The following is a discussion of our historical financial condition and results of operations and should be read in conjunction with our audited historical consolidated financial statements and accompanying Notes thereto included elsewhere in this Annual Report on Form 10-K.
The discussions set forth in this section generally refer to Ferrellgas Partners and its consolidated subsidiaries. However, in these discussions there exists one material difference between Ferrellgas Partners and the operating partnership: Ferrellgas Partners has outstanding $357.0 million aggregate principal amount of 8.625% unsecured senior notes due June 15, 2020 and, accordingly, has interest expense that the operating partnership does not have. Ferrellgas Partners' access to liquidity is dependent on distributions from the operating partnership. See the statements of operations in their respective consolidated financial statements.
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The coronavirus disease 2019 (COVID-19), which has been declared by the World Health Organization as a "Public Health Emergency of International Concern," continues to spread and severely impact the economy of the United States and other countries around the world. COVID-19 poses the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from or limited in conducting business activities for an indefinite period of time. The outbreak of COVID-19 has already resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, manufacturing restrictions, declarations of national emergency and states of emergency, business shutdowns and restrictions on the movement of people throughout the United States and the world. While some of our business operations and support systems are deemed essential in many jurisdictions, we are continuing to assess the impact that COVID-19 may have on our results of operations and financial condition and cannot at this time accurately predict what effects these conditions will have on our operations and sales due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak and the length of the travel restrictions and business closures imposed by governments in different jurisdictions. Additionally, initiatives we have implemented or may implement to slow and/or reduce the impact of COVID-19, such as using staggered start times for drivers, may increase our operating expenses and reduce the efficiency of our operations. Any of the foregoing events or other unforeseen consequences of public health epidemics may have further adverse impacts on U.S. and global economic conditions, including a general slowdown in the U.S. economy, which could decrease demand for our products and have a material adverse effect on our results of operations and financial condition.
Forbearance Agreement with respect to Ferrellgas Partners' 8.625% Unsecured Senior Notes due June 15, 2020
We have engaged Moelis & Company LLC as our financial advisor and the law firm of Squire Patton Boggs LLP to assist in our ongoing process to reduce existing debt and address our debt maturities. On June 7, 2020, Ferrellgas Partners and additional Ferrellgas entities entered into a Forbearance Agreement (the "Forbearance Agreement") with the beneficial owners (or nominees, investment managers, advisors or subadvisors for the beneficial owners, collectively referred to as the "Forbearing Noteholders") of approximately 77% of the aggregate principal amount of Ferrellgas Partners' 8.625% unsecured senior notes due June 15, 2020, pursuant to which the Forbearing Noteholders agreed to forbear from exercising any default-related rights and remedies with respect to the Ferrellgas Partners Notes and to direct the trustee thereunder not to take any remedial action. The forbearance period under the Forbearance Agreement expired on August 15, 2020. Following the expiration of the forbearance period, discussions with representatives of the Forbearing Noteholders have continued.
The indenture governing the outstanding notes of Ferrellgas Partners and the agreements governing the operating partnership's indebtedness contain various covenants that limit our ability to, among other things, make restricted payments and incur additional indebtedness. Our general partner believes that the most restrictive of these covenants are the restricted payments covenants in the indenture governing the outstanding notes of Ferrellgas Partners and the indentures governing the outstanding notes of the operating partnership, which are discussed below.
Ferrellgas Partners, L.P., the master limited partnership
The indenture governing the outstanding notes of Ferrellgas Partners due June 15, 2020 contains a covenant that restricts the ability of Ferrellgas Partners to make certain restricted payments, including distributions on its common units. Ferrellgas Partners continues to comply with the restrictive covenants with respect to the $357.0 million aggregate principal amount of its unsecured senior notes due June 15, 2020 as Ferrellgas Partners continues to negotiate with the Forbearing Noteholders. Under this covenant, subject to the limited exception described below, Ferrellgas Partners may not make a restricted payment unless its consolidated fixed charge coverage ratio (defined in the indenture generally to mean the ratio of trailing four quarters consolidated EBITDA to consolidated interest expense, both as adjusted for certain, specified items) is at least 1.75x, on a pro forma basis giving effect to the restricted payment and, if applicable,
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certain other specified events. As of July 31, 2020, Ferrellgas Partners' consolidated fixed charge coverage ratio was 1.40x.
If the consolidated fixed charge coverage ratio is below 1.75x, Ferrellgas Partners may make restricted payments of up to $50.0 million in total over a sixteen quarter period. As a result of distributions paid to common unitholders in September 2017, December 2017, March 2018, June 2018 and September 2018, while this ratio was less than 1.75x, Ferrellgas Partners has used substantially all of its capacity under the limited exception and therefore is currently restricted by this covenant from making future restricted payments, including distributions to common unitholders. Accordingly, no distributions have been or will be paid to common unitholders for the three months ended July 31, 2020, and the general partner expects that this covenant will continue to prohibit Ferrellgas Partners from making common unit distributions unless and until the outstanding notes of Ferrellgas Partners due 2020 are restructured, refinanced or otherwise satisfied. While there can be no assurance of success, as part of our debt and interest expense reduction strategy, we are presently considering potential solutions to address the recent maturity of the outstanding notes of Ferrellgas Partners due 2020. The potential solutions include, among others, restructuring, refinancing or a transaction to exchange new notes for some or all of these notes. See "Recent Developments - Forbearance Agreement with respect to Ferrellgas Partners' 8.625% Unsecured Senior Notes due June 15, 2020" above.
Ferrellgas, L.P., the operating partnership
Similar to the indenture governing the outstanding notes of Ferrellgas Partners, the indentures governing the outstanding notes of the operating partnership contain covenants that restrict the ability of the operating partnership to make certain restricted payments, including distributions to Ferrellgas Partners. Under these covenants in the indentures governing the operating partnership's notes, subject to the limited exceptions described below, the operating partnership may not make a restricted payment unless its consolidated fixed charge coverage ratio (defined in the indentures generally to mean the ratio of trailing four quarters consolidated EBITDA to consolidated interest expense, both as adjusted for certain, specified items) is at least 1.75x, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. As of July 31, 2020, the operating partnership's consolidated fixed charge coverage ratio was 1.70x.
Under the covenants in the indentures governing the operating partnership's unsecured notes, if the consolidated fixed charge coverage ratio is below 1.75x, the operating partnership may still make restricted payments in limited amounts determined under the indentures governing the operating partnership's unsecured notes. The distributions made by the operating partnership on June 15, 2019 and December 15, 2019 for payment of interest on Ferrellgas Partners' unsecured senior notes due June 2020 were made from capacity under this limited exception to the ratio requirement under the indentures governing the operating partnership's unsecured notes.
The indenture governing the operating partnership's senior secured first lien notes due 2025 contains a similar but, in some respects, different restricted payments covenant. The covenant in the secured notes indenture provides for the same 1.75x consolidated fixed charge coverage ratio test as the unsecured notes indentures and a limited exception when that ratio is below 1.75x. In addition, the secured notes indenture also provides that, subject to a separate limited exception, described below, the operating partnership generally may not make a restricted payment unless the operating partnership's consolidated leverage ratio (defined in the secured notes indenture generally to mean the ratio of consolidated total debt to trailing four quarters consolidated EBITDA, both as adjusted for certain, specified items) is no greater than 5.5x, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. The consolidated leverage ratio test applies regardless of whether the operating partnership's consolidated fixed coverage ratio is at least 1.75x or below 1.75x. As of July 31, 2020, the operating partnership's consolidated leverage ratio was substantially in excess of 5.5x. Additionally, the secured notes indenture provides for restricted payments under its limited exception to the consolidated fixed charge coverage ratio test that is less than the capacity available under the similar exception in the unsecured notes indentures. However, the secured notes indenture contains a separate exception to both the consolidated fixed charge coverage ratio test and the consolidated leverage ratio test that can be utilized to make certain specified restricted payments in a limited amount when the operating partnership does not meet either the consolidated fixed charge coverage ratio test or the consolidated leverage ratio test. This separate exception under the secured notes indenture currently has capacity for such specified restricted payments that is substantially the same as the capacity under the most restrictive of the operating partnership's unsecured notes indentures.
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With respect to the operating partnership notes, on or about June 24, 2020, a majority of the holders of the outstanding principal amount of each of the (i) 6.50% unsecured senior notes due 2021 (the "2021 Notes"), (ii) 6.75% unsecured senior notes due 2022 (the "2022 Notes") and (iii) 6.75% unsecured senior notes due 2023 (the "2023 Notes") issued by Ferrellgas, L.P. and Ferrellgas Finance Corp. delivered a notice to Ferrellgas, L.P., pursuant to the terms of the applicable indentures, removing the existing indenture trustee for such series of notes. In accordance with the terms of the applicable indentures, Ferrellgas, L.P. is in the process of appointing a successor trustee for each series.
As described above, Ferrellgas Partners' unsecured notes due 2020 matured on June 15, 2020, and the outstanding principal amount of those notes was due to be paid on that date, together with accrued interest to the maturity date. Although the operating partnership has some capacity to make distributions under the operating partnership's unsecured and secured notes indentures, this capacity will not allow the operating partnership to make distributions to Ferrellgas Partners sufficient to pay the principal of and accrued interest on Ferrellgas Partners' unsecured senior notes due 2020 that was due at the maturity of those notes. Additionally, the restrictions in these indentures currently limit the ability of the operating partnership to make distributions to Ferrellgas Partners to enable it to pay cash distributions to its unitholders.
Debt and interest expense reduction strategy
We continue to pursue a strategy to reduce our debt and interest expense. Opportunities include the generation of additional cash flows through accretive acquisitions, continued restructuring or refinancing of existing indebtedness, selling additional assets, maintaining the suspension of Ferrellgas Partners' common unit distributions, issuing equity or executing one or more debt exchanges. We expect to maintain our debt and interest expense reduction strategy until our consolidated leverage ratio reaches a level that we deem appropriate for our business. See "Risk Factors -Risks Related to our Business and Industry -There is substantial doubt about our ability to continue as a going concern, which will affect our ability to obtain future financing and may require us to curtail our operations."
Termination of Bridger agreement with Jamex Marketing, LLC
In connection with the closing of our acquisition of Bridger in June 2015, Bridger entered into a ten-year transportation and logistics agreement (the "Jamex TLA") with Jamex Marketing, LLC ("Jamex") pursuant to which Jamex would be responsible for certain payments to Bridger and also for sourcing crude oil volumes for Bridger's largest customer at that time. On September 1, 2016, Bridger, Jamex, Ferrellgas Partners, L.P. and certain other affiliated parties entered into a group of agreements that terminated the Jamex TLA, as summarized below.
On September 1, 2016, we entered into a Secured Promissory Note with Jamex (the "Jamex Secured Promissory Note") pursuant to which Jamex agreed to pay us a principal amount of $49.5 million plus interest, which principal amount was due over time pursuant to an amortization schedule and with a final maturity date of December 17, 2021. Jamex's obligations under the Jamex Secured Promissory Note were fully guaranteed by certain subsidiaries and affiliates of Jamex, and were partially guaranteed (up to a maximum of $20 million) by James Ballengee, the individual owner of Jamex, and another entity owned by Mr. Ballengee. The Jamex Secured Promissory Note obligations of Jamex and those other fully guaranteeing entities were secured by certain assets owned by those entities, actively traded marketable securities and cash, which were held in a controlled account and were subject to seizure by us in the event of default. The operating partnership also agreed to provide Jamex with a $5.0 million revolving secured working capital facility evidenced by a revolving promissory note (the "Jamex Revolving Promissory Note").
On June 25, 2018, Ferrellgas and Mr. Ballengee entered into an Omnibus Agreement (the "Omnibus Agreement") that, among other things, terminated and cancelled the Jamex Secured Promissory Note, the joint guarantee, and the Jamex Revolving Promissory Note. In connection with the termination and cancellation of such agreements, (1) Mr. Ballengee and Jamex paid Ferrellgas $16.3 million towards the remaining balance due under the Jamex Secured Promissory Note and Mr. Ballengee executed a new unsecured promissory note in favor of the operating partnership with an original principal amount of $18.3 million (the "Revised Jamex Promissory Note"), (2) Bacchus, a company controlled by Mr. Ballengee, executed a guaranty agreement to guarantee Mr. Ballengee's obligations under the Revised Jamex Promissory Note, (3) Ferrellgas agreed to dismiss without prejudice certain indemnification claims against Jamex and any affiliates of Jamex related to the Eddystone litigation and to toll the statute of limitations with
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respect thereto, and to dismiss with prejudice the tortious interference claim asserted by Ferrellgas against Mr. Ballengee related to the Eddystone litigation, and (4) Mr. Ballengee agreed to dismiss with prejudice, or cause to be dismissed, all counterclaims by him or his affiliates, as the case may be, with respect to such actions.
On July 1, 2020, Mr. Ballengee defaulted on the Revised Jamex Promissory Note by failing to make the first payment in the amount of $2.5 million. As a result, as of July 31, 2020, Ferrellgas recorded a bad debt reserve against $17.3 million of the Revised Jamex Promissory Note and is pursuing collections from Mr. Ballengee.
As discussed above, no distributions will be paid to common unitholders for the three months ended July 31, 2020, and the general partner expects that Ferrellgas Partners will continue to be prohibited from making common unit distributions unless and until the outstanding notes of Ferrellgas Partners due 2020 are restructured, refinanced or otherwise satisfied. See Item 1A. "Risk Factors - Risks Inherent in an Investment in our Debt Securities or our Common Units and Other Risks Related to Our Capital Structure and Financing Arrangements" and see above under the subheading "Financial covenants" for discussion related to our distributions.
How We Evaluate Our Operations
We evaluate our overall business performance based primarily on a metric we refer to as "Adjusted EBITDA", which is not defined by GAAP and should not be considered an alternative to earnings measures defined by GAAP. We do not utilize depreciation, depletion and amortization expense in our key measures because we focus our performance management on cash flow generation and our revenue generating assets have long useful lives. For the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net earnings (loss) attributable to Ferrellgas Partners, L.P., the most directly comparable GAAP measure, see the subheading "Non-GAAP Financial Measures" below.
Propane operations and related equipment sales
Based on our propane sales volumes in fiscal 2020, we believe that we are the second largest retail marketer of propane in the United States and a leading national provider of propane by portable tank exchange. We serve residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia and Puerto Rico. Our operations primarily include the retail distribution and sale of propane and related equipment and supplies with concentrations in the Midwest, Southeast, Southwest and Northwest regions of the United States.
We use information on temperatures to understand how our results of operations are affected by temperatures that are warmer or colder than normal. Normal temperatures computed by us are the average of the last 10 years of information published by the National Oceanic and Atmospheric Administration. Based on this information we calculate a ratio of actual heating degree days to normal heating degree days. Heating degree days are a general indicator of weather impacting propane usage.
Weather conditions have a significant impact on demand for propane for heating purposes primarily during the months of November through March (the "winter heating season"). Accordingly, the volume of propane used by our customers for this purpose is directly affected by the severity of the winter weather in the regions we serve and can vary substantially from year to year. In any given region, sustained warmer-than-normal temperatures will tend to result in reduced propane usage, while sustained colder-than-normal temperatures will tend to result in greater usage. Although there is a strong correlation between weather and customer usage, general economic conditions in the United States and the wholesale price of propane can have a significant impact on this correlation. Additionally, there is a natural time lag between the onset of cold weather and increased sales to customers. If the United States were to experience a cooling trend, we could expect nationwide demand for propane to increase which could lead to greater sales, income and liquidity availability. Conversely, if the United States were to experience a continued warming trend, we could expect nationwide demand for propane for heating purposes to decrease which could lead to a reduction in our sales, income and liquidity availability as well as impact our ability to maintain compliance with our debt covenants.
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We employ risk management activities that attempt to mitigate price risks related to the purchase, storage, transport and sale of propane generally in the contract and spot markets from major domestic energy companies. We attempt to mitigate these price risks through the use of financial derivative instruments and forward propane purchase and sales contracts. We enter into propane sales commitments with a portion of our customers that provide for a contracted price agreement for a specified period of time. These commitments can expose us to product price risk if not immediately hedged with an offsetting propane purchase commitment.
Our open financial derivative propane purchase commitments are designated as hedges primarily for fiscal 2020 and 2021 sales commitments and, as of July 31, 2020, we have experienced net mark-to-market losses of approximately $2.3 million. Because these financial derivative purchase commitments qualify for hedge accounting treatment, the resulting asset, liability and related mark-to-market gains or losses are recorded on the consolidated balance sheets as "Prepaid expenses and other current assets," "Other assets, net," "Other current liabilities," "Other liabilities" and "Accumulated other comprehensive loss," respectively, until settled. Upon settlement, realized gains or losses on these contracts will be reclassified to "Cost of sales-propane and other gas liquid sales" in the consolidated statements of operations as the underlying inventory is sold. These financial derivative purchase commitment net losses are expected to be offset by increased margins on propane sales commitments that qualify for the normal purchase normal sale exception. At July 31, 2020, we estimate 84% of currently open financial derivative purchase commitments, the related propane sales commitments and the resulting gross margin will be realized into earnings during the next twelve months.
Summary Discussion of Results of Operations:
For the years ended July 31, 2020 and 2019
Weather in the more highly concentrated geographic areas we serve for fiscal 2020 was approximately 4% warmer than normal, and 8% warmer than fiscal 2019. We estimate retail gallons decreased approximately 19 million gallons due to warmer weather. Additionally, gross margin, operating income and Adjusted EBITDA were also negatively impacted by warmer weather.
During fiscal 2020, we generated a net loss attributable to Ferrellgas Partners, L.P. of $82.5 million, compared to a net loss attributable to Ferrellgas Partners, L.P. of $64.2 million during fiscal 2019. This increase in net losses reflects a $37.4 million loss on extinguishment of debt, a $15.3 million increase in interest expense and a $9.9 million increase in "Operating, general and administrative expense". These items were partially offset by a $36.4 million increase in "Gross margin - Propane and other gas liquid sales" and a $4.9 million increase in "Gross margin - other". "Operating, general and administrative expense" increased due to a $24.2 million increase in "Operating expense - personnel, vehicle, plant and other", partially offset by a $14.2 million decrease in "General and administrative expense". These results primarily reflect the effects of a one-time $17.5 million loss related to a provision for doubtful accounts related to non-core businesses, and legal fees and settlements related to non-core businesses of $7.3 million and $18.4 million during fiscal 2020 and fiscal 2019, respectively.
"Interest expense" for Ferrellgas Partners increased $15.3 million primarily due to increased borrowings related to the issuance in April 2020 of our new $700.0 million senior secured notes, which replaced our terminated Senior Secured Credit Facility, paid down the amounts borrowed on our accounts receivable facility and provided more than $250.0 million of additional liquidity and capital resources. The higher interest rate on the new senior secured notes contributed $3.1 million of the increase in interest expense.
Distributable cash flow attributable to equity investors increased to $63.7 million in fiscal 2020 compared to $22.6 million in fiscal 2019, primarily due to a $35.5 million increase in our Adjusted EBITDA, a $23.5 million decrease in our maintenance capital expenditures, as discussed below in "Operating results for the years ended July 31, 2020 and 2019", partially offset by a $17.5 million increase in cash interest expense. This decrease in maintenance capital expenditures primarily related to the purchase of new propane delivery trucks in fiscal 2019.
Distributable cash flow excess increased to $62.4 million in fiscal 2020 as compared to $12.4 million in fiscal 2019, primarily due to a $35.5 million increase in our Adjusted EBITDA, a $23.5 million decrease in our maintenance
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capital expenditures and a $9.7 million decrease in distributions to common unitholders, partially offset by a $17.5 million increase in cash interest expense, each as discussed above.
Consolidated Results of Operations Year ended July 31, (amounts in thousands) 2020 2019 Total revenues $ 1,497,826 $ 1,684,392 Total cost of sales 686,056 913,922 Operating expense 493,055 468,868 Depreciation and amortization expense 80,481 78,846 General and administrative expense 45,752 59,994 . . .
Oct 15, 2020
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