(EDGAR Online via COMTEX) -- ITEM 2. 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 Item 2 of the Quarterly Report on Form 10-Q, unless the context indicates otherwise:
"us," "we," "our," "ours," "consolidated," or "Ferrellgas" are references to Ferrellgas Partners, L.P. together with its consolidated subsidiaries, ? including Ferrellgas Partners Finance Corp., Ferrellgas, L.P. and Ferrellgas Finance Corp., except when used in connection with "common units," in which case these terms refer to Ferrellgas Partners, L.P. without its consolidated subsidiaries;
? "Ferrellgas Partners" refers to Ferrellgas Partners, L.P. itself, without its consolidated subsidiaries;
the "operating partnership" refers to Ferrellgas, L.P., together (except where ? the context indicates otherwise) with its consolidated subsidiaries, including Ferrellgas Finance Corp.;
our "general partner" (i) with respect to Ferrellgas Partners refers to Ferrellgas, Inc. and (ii) with respect to the operating partnership refers to ? (a) Ferrellgas, Inc., in the case of any economic general partner interest and
? "Ferrell Companies" refers to Ferrell Companies, Inc., the sole shareholder or sole member, as applicable, of our general partners;
? "unitholders" refers to holders of common units of Ferrellgas Partners;
? "GAAP" refers to accounting principles generally accepted in the United States;
"retail sales" refers to Propane and other gas liquid sales: Retail - Sales to ? End Users or the volume of propane sold primarily to our residential, industrial/commercial and agricultural customers;
"wholesale sales" refers to Propane and other gas liquid sales: Wholesale - ? Sales to Resellers or the volume of propane sold primarily to our portable tank exchange customers and bulk propane sold to wholesale customers;
"other gas sales" refers to Propane and other gas liquid sales: Other Gas Sales ? or the volume of bulk propane sold to other third-party propane distributors or marketers and the volume of refined fuel sold;
? "propane sales volume" refers to the volume of propane sold to our retail sales and wholesale sales customers;
"Ferrellgas Partners Notes" refers to the $357.0 million aggregate principal ? amount of 8.625% unsecured senior notes due June 15, 2020 co-issued by Ferrellgas Partners and Ferrellgas Partners Finance Corp.;
? "Notes" refers to the notes of the condensed consolidated financial statements of Ferrellgas Partners or the operating partnership, as applicable; and
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? "fiscal 2021" means the fiscal year ended July 31, 2021 and "fiscal 2020" means the fiscal year ended July 31, 2020.
Ferrellgas Partners is a holding entity that conducts no operations and has two direct subsidiaries, Ferrellgas Partners Finance Corp. and the operating partnership. Ferrellgas Partners' only assets are its approximate 99% limited partnership interest in the operating partnership and its 100% equity interest in Ferrellgas Partners Finance Corp. The common units of Ferrellgas Partners are traded on the OTC Pink Market and our activities are primarily conducted through the operating partnership.
The operating partnership was formed on April 22, 1994, and accounts for substantially all of our consolidated assets, sales and operating earnings, except for interest expense related to the senior notes co-issued by Ferrellgas Partners and Ferrellgas Partners Finance Corp.
Our general partner performs all management functions for us and our subsidiaries and holds an approximate 1% general partner interest in Ferrellgas Partners and an approximate 1% general partner interest in the operating partnership. The parent company of our general partner, Ferrell Companies, beneficially owns approximately 23.4% of our outstanding common units. Ferrell Companies is owned 100% by an employee stock ownership trust.
We file annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and download our SEC filings over the Internet from several commercial document retrieval services as well as at the SEC's website at www.sec.gov . Our SEC filings are also available on our website at www.ferrellgas.com at no cost as soon as reasonably practicable after our electronic filing or furnishing thereof with the SEC. Please note that any Internet addresses provided in this Quarterly Report on Form 10-Q are for informational purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such Internet addresses is intended or deemed to be incorporated by reference herein.
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 in our Annual Report on Form 10-K for fiscal 2020 and in our unaudited historical condensed consolidated financial statements and accompanying Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
The discussions set forth in the "Results of Operations" and "Liquidity and Capital Resources" sections generally refer to Ferrellgas Partners and its consolidated subsidiaries. However, in these discussions there exists two material differences between Ferrellgas Partners and the operating partnership:
Ferrellgas Partners has outstanding $357.0 million aggregate principal amount of the Ferrellgas Partners Notes, 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 condensed consolidated financial statements.
Ferrellgas Partners, L.P. entered into a term loan credit agreement with Ferrellgas, L.P., pursuant to which Ferrellgas, L.P. extended to Ferrellgas Partners, L.P. an unsecured, non-amortizing term loan in the aggregate ? principal amount of $19.9 million. The term loan bears interest at a rate of 20% per annum, and all interest on the term loan will be added to the outstanding principal amount of the term loan. The term loan will mature on July 1, 2022.
Cautionary Note Regarding Forward-looking Statements
Statements included in this report include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. These statements often use words such as "anticipate," "believe," "intend," "plan," "projection," "forecast," "strategy," "position," "continue," "estimate," "expect," "may," "will," or the negative of those terms or other variations of them or comparable terminology. These statements often discuss plans, strategies, events or developments that we expect or anticipate will or may occur in the future and are based upon the beliefs and assumptions of our management and on the information currently available to them. In particular, statements, express or implied, concerning our future operating results or our ability to generate sales, income or cash flow are forward-looking statements.
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Forward-looking statements are not guarantees of performance. You should not put undue reliance on any forward-looking statements. All forward-looking statements are subject to risks, uncertainties and assumptions that could cause our actual results to differ materially from those expressed in or implied by these forward-looking statements. Many of the factors that will affect our future results are beyond our ability to control or predict. Some of the risk factors that may affect our business, financial condition or results of operations include:
? the effect of weather conditions on the demand for propane;
? the prices of wholesale propane, motor fuel and crude oil;
? disruptions to the supply of propane;
? competition from other industry participants and other energy sources;
? energy efficiency and technology advances;
? adverse changes in our relationships with our national tank exchange customers;
? significant delays in the collection of accounts or notes receivable;
? customer, counterparty, supplier or vendor defaults;
? changes in demand for, and production of, hydrocarbon products;
? disruptions to railroad operations on the railroads we use;
? increased trucking and rail regulations;
? inherent operating and litigation risks in gathering, transporting, handling and storing propane;
? our inability to complete acquisitions or to successfully integrate acquired operations;
? costs of complying with, or liabilities imposed under, environmental, health and safety laws;
? the impact of pending and future legal proceedings;
? the interruption, disruption, failure or malfunction of our information technology systems including due to cyber-attack;
? the impact of changes in tax law that could adversely affect the tax treatment of Ferrellgas Partners for federal income tax purposes;
? economic and political instability, particularly in areas of the world tied to the energy industry;
? disruptions in the capital and credit markets;
? access to available capital to meet our operating and debt-service requirements;
our ability to consummate the transactions contemplated by the Transaction Support Agreement described under "-Recent Developments-Transaction Support ? Agreement and Chapter 11 Bankruptcy Cases" below or otherwise address the past maturity of the Ferrellgas Partners Notes and upcoming maturities of other debt instruments and successfully execute on our debt and interest expense reduction strategy; and
the impact of the inclusion of an "emphasis of matter" paragraph regarding ? substantial doubt as to our ability to continue as a going concern in the report of our auditor on our consolidated financial statements for fiscal 2020.
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When considering any forward-looking statement, you should also keep in mind the risk factors set forth in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for fiscal 2020 and in "Item 1A Risk Factors" of this Quarterly Report on Form 10-Q. Any of these risks could impair our business, financial condition or results of operations. Any such impairment may affect our ability to make distributions to our unitholders or pay interest on the principal of any of our debt securities. In addition, the trading price of our securities could decline as a result of any such impairment.
Except for our ongoing obligations to disclose material information as required by federal securities laws, we undertake no obligation to update any forward-looking statements or risk factors after the date of this Quarterly Report on Form 10-Q.
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.
Transaction Support Agreement and Chapter 11 Bankruptcy Cases
On December 10, 2020, Ferrellgas Partners, Ferrellgas Partners Finance Corp., the operating partnership, Ferrellgas, Inc., Ferrellgas GP II, LLC, Ferrellgas GP III, LLC and certain of their affiliates (collectively, the "Ferrellgas Parties") entered into a Transaction Support Agreement (the "TSA") with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims (collectively, the "Consenting Noteholders") arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes.
The TSA sets forth (i) a restructuring process to satisfy the obligations of Ferrellgas Partners and Ferrellgas Partners Finance Corp. under the Ferrellgas Partners Notes (the "Ferrellgas Partners Transactions"), which would be effectuated through pre-packaged voluntary cases (the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") to be filed by only Ferrellgas Partners and Ferrellgas Partners Finance Corp. and the confirmation of a pre-packaged joint plan of reorganization for Ferrellgas Partners and Ferrellgas Partners Finance Corp. (the "Plan"), and (ii) a refinancing process of the operating partnership, including but not limited to, replacement of the operating partnership's existing unsecured notes due 2021, 2022 and 2023 (the "operating partnership Transactions" and, together with the Ferrellgas Partners Transactions, the "TSA Transactions"), which would be consummated on the effective date (the "Effective Date") of the Plan implementing the Ferrellgas Partners Transactions and would close simultaneously with the Ferrellgas Partners Transactions effectuated under the Plan.
Generally, the TSA contemplates, among other things, the TSA Transactions and certain changes to the capital structure and governance of the Ferrellgas Parties as described in more detail in the TSA.
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Pursuant to the TSA, and subject to the terms and conditions thereof, the parties thereto agreed to support, act in good faith and take all steps reasonably necessary and desirable to implement and consummate the TSA Transactions until the TSA Transactions are consummated or the TSA is terminated. The Consenting Noteholders agreed, among other things, (i) to forbear from taking actions with respect to any default or event of default by the Ferrellgas Parties under the indenture governing the Ferrellgas Partners Notes which arises solely as a result of the failure to make payments of the principal due on the Ferrellgas Partners Notes, and (ii) to vote in favor of any matter requiring approval to the extent necessary to implement the TSA Transactions and the Plan.
The TSA contains certain milestones relating to the commencement of the solicitation of acceptances of the Plan (the "Solicitation") from holders of the Ferrellgas Partners Notes and holders of Ferrellgas Partners' common units, the refinancing process and the Chapter 11 Cases, which include the dates by which Ferrellgas Partners was required to commence the Solicitation and, thereafter, commence the Chapter 11 Cases or obtain certain approval orders of the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). In addition, the milestones include the obligation of Ferrellgas Partners and Ferrellgas Partners Finance Corp. to emerge from chapter 11 protection no later than April 4, 2021, unless that deadline is extended pursuant to the terms of the TSA.
The TSA also provides that the TSA may be terminated by the Required Consenting Noteholders (as defined therein) with respect to the Consenting Noteholders or by any Ferrellgas Party with respect to the Ferrellgas Parties upon the occurrence of certain events set forth therein. In particular, the Ferrellgas Parties may terminate the TSA in the event the governing body of any Ferrellgas Party determines, after consulting with counsel, (i) that continuing to pursue any of the TSA Transactions in the manner contemplated by the TSA would be inconsistent with the exercise of its contractual or fiduciary duties or applicable law or (ii) in the exercise of its contractual or fiduciary duties, to pursue an alternative transaction proposal.
Ferrellgas Partners and Ferrellgas Partners Finance Corp. commenced the Solicitation on December 21, 2020 and by January 22, 2021 received sufficient votes from the requisite holders of the Ferrellgas Partners Notes and the requisite holders of Ferrellgas Partners' common units to obtain approval of the Plan from the Bankruptcy Court. Subject to any changes, the Solicitation process is complete.
On January 11, 2021, Ferrellgas Partners and Ferrellgas Partners Finance Corp. commenced the Chapter 11 Cases by filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption and case numbers, In re:
On March 1, 2021, the Company entered into a commitment letter with an investment firm pursuant to which the investment firm (on behalf of certain affiliated funds, investment vehicles and managed accounts) committed to purchase an aggregate amount of $700 million of the New Senior Preferred Units (as defined in the TSA).
On March 5, 2021, the Bankruptcy Court entered an order confirming the Plan. The effectiveness of the Plan is conditioned on certain requirements such as the operating partnership completing its refinancing. There is no assurance that the Plan will become effective or that the TSA Transactions will be consummated, and the outcome of Ferrellgas' debt reduction strategy continues to remain uncertain.
The indenture governing the Ferrellgas Partners Notes 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 discussed below.
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Ferrellgas Partners, L.P., the master limited partnership
Following the failure to repay the Ferrellgas Partners Notes when due at maturity, Ferrellgas Partners has continued to comply with the restrictive covenants set forth in the indenture governing those notes as it continues its efforts to address the Ferrellgas Partners Notes, reduce existing indebtedness and address its other debt maturities.
The indenture governing the $357.0 million aggregate principal amount of Ferrellgas Partners Notes due 2020 contains a covenant that restricts the ability of Ferrellgas Partners to make certain restricted payments, including distributions on its common units. 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, certain other specified events. As of January 31, 2021, Ferrellgas Partners' consolidated fixed charge coverage ratio was 1.44x.
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. Further, regardless of whether Ferrellgas Partners had any capacity to make restricted payments under the limited exception, the indenture governing the Ferrellgas Partners Notes generally prohibits Ferrellgas Partners from making restricted payments if a default or event of default under the indenture has occurred and is continuing, and the failure to repay the principal amount of and accrued interest on these notes at maturity constitutes an event of default. Accordingly, no distributions have been or will be paid to common unitholders for the three months ended January 31, 2021, and the general partner expects that this covenant will continue to prohibit Ferrellgas Partners from making common unit distributions, unless and until the Ferrellgas Partners Notes are restructured, refinanced or otherwise satisfied, pursuant to the transactions contemplated by the TSA and the Plan or otherwise. See "-Debt and interest expense reduction strategy" below.
Ferrellgas, L.P., the operating partnership
Similar to the indenture governing the Ferrellgas Partners Notes, 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, 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 January 31, 2021, the operating partnership's consolidated fixed charge coverage ratio was 1.67x.
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. Under the most restrictive of the indentures governing the operating partnership's unsecured notes, as of February 1, 2021, the remaining capacity under this limited exception was reduced significantly, because, as of that date, the operating partnership was no longer permitted to include the amount of the capital contribution made by Ferrellgas Partners to the operating partnership in January 2017 (from the proceeds of Ferrellgas Partners' issuance of additional Ferrellgas Partners Notes in January 2017, as described above) in the calculation of the amount of restricted payments it is able to make under the exception.
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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 January 31, 2021, 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 . . .
Mar 08, 2021
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