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FGP > SEC Filings for FGP > Form 10-Q on 6-Dec-2013All Recent SEC Filings

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Form 10-Q for FERRELLGAS PARTNERS L P


6-Dec-2013

Quarterly Report


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 Quarterly Report on Form 10-Q, unless the context indicates otherwise:

"us," "we," "our," "ours," or "consolidated" are references exclusively 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 with its consolidated subsidiaries, including Ferrellgas Finance Corp.;

our "general partner" refers to Ferrellgas, Inc.;

"Ferrell Companies" refers to Ferrell Companies, Inc., the sole shareholder of our general partner;

"unitholders" refers to holders of common units of Ferrellgas Partners;

"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; and

"Notes" refers to the notes to the condensed consolidated financial statements of Ferrellgas Partners or the operating partnership, as applicable.

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 significant 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 listed on the New York Stock Exchange 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 a 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 27% of our outstanding common units. Ferrell Companies is owned 100% by an employee stock ownership trust.


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We file annual, quarterly, and other reports and information with 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. You may also read and copy our SEC filings at the SEC's Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information concerning the Public Reference Room and any applicable copy charges. Because our common units are traded on the New York Stock Exchange under the ticker symbol "FGP," we also provide our SEC filings and particular other information to the New York Stock Exchange. You may obtain copies of these filings and such other information at the offices of the New York Stock Exchange located at 11 Wall Street, New York, New York 10005. In addition, our SEC filings are 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 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 exist two material differences between Ferrellgas Partners and the operating partnership. Those material differences are:

because Ferrellgas Partners has outstanding $182.0 million in aggregate principal amount of 8.625% senior notes due fiscal 2020, the two partnerships incur different amounts of interest expense on their outstanding indebtedness; see the statements of earnings in their respective condensed consolidated financial statements and Note E - Debt in the respective notes to their condensed consolidated financial statements; and

Ferrellgas Partners issued common units during both fiscal 2014 and 2013.

Overview

We believe we are a leading distributor of propane and related equipment and supplies to customers primarily in the United States and conduct our business as a single reportable operating segment. We believe we are the second largest retail marketer of propane in the United States as measured by the volume of our retail sales in fiscal 2013 and the largest 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 distribution and sale of propane and related equipment and supplies with concentrations in the Midwest, Southeast, Southwest and Northwest regions of the United States. Sales from propane distribution are generated principally from transporting propane purchased from third parties to propane distribution locations and then to tanks on customers' premises or to portable propane tanks delivered to nationwide and local retailers. Sales from portable tank exchanges, nationally branded under the name Blue Rhino, are generated through a network of independent and partnership-owned distribution outlets. Our market areas for our residential and agricultural customers are generally rural while our market areas for our industrial/commercial and portable tank exchange customers are generally urban.

In the residential and industrial/commercial markets, propane is primarily used for space heating, water heating, cooking and other propane fueled appliances. In the portable tank exchange market, propane is used primarily for outdoor cooking using gas grills. In the agricultural market, propane is primarily used for crop drying, space heating, irrigation and weed control. In addition, propane is used for a variety of industrial applications, including as an engine fuel which is burned in internal combustion engines that power vehicles and forklifts and as a heating or energy source in manufacturing and drying processes.

The market for propane is seasonal because of increased demand during the months of November through March (the "winter heating season") primarily for the purpose of providing heating in residential and commercial buildings. Consequently, sales and operating profits are concentrated in our second and third fiscal quarters, which are during the winter heating season. However, our propane by portable tank exchange sales volumes provide increased operating profits during our first and fourth fiscal quarters due to its counter-seasonal business activities. These sales also provide us the ability to better utilize our seasonal resources at our propane distribution locations. Other factors affecting our results of operations include competitive conditions,


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volatility in energy commodity prices, demand for propane, timing of acquisitions and general economic conditions in 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. We define "normal" temperatures based on 30 year historical information published by the National Oceanic and Atmospheric Administration ("NOAA"). 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 during the winter heating season. Accordingly, the volume of propane used by our customers for this purpose is 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 warming trend, we could expect nationwide demand for propane to decrease which could lead to a reduction in our sales, income and liquidity availability.

Our gross margin from the retail distribution of propane is primarily based on the cents-per-gallon difference between the sales prices we charge our customers and our costs to purchase and deliver propane to our propane distribution locations. Our residential customers and portable tank exchange customers typically provide us a greater cents-per-gallon margin than our industrial/commercial, agricultural, wholesale and other customers. We track "Propane sales volumes," "Revenues - Propane and other gas liquids sales" and "Gross margin - Propane and other gas liquids sales" by customer; however, we are not able to specifically allocate operating and other costs in a manner that would determine their specific profitability with a high degree of accuracy. The wholesale propane price per gallon is subject to various market conditions, including inflation, and may fluctuate based on changes in demand, supply and other energy commodity prices, primarily crude oil and natural gas, as propane prices tend to correlate with the fluctuations of these underlying commodities.

We employ risk management activities that attempt to mitigate price risks related to the purchase, storage, transport and sale of propane. 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 economically hedged with an offsetting propane purchase commitment. Moreover, customers may not fulfill their purchase agreement due to the effects of warmer than normal weather, customer conservation or economic conditions.

Our open financial derivative purchase commitments are designated as hedges primarily for fiscal 2014 through 2016 sales commitments and, as of October 31, 2013, have experienced net mark to market gains of approximately $12.3 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 condensed consolidated balance sheets as "Prepaid expenses and other current assets," "Other assets, net," "Other current liabilities," "Other liabilities" and "Accumulated other comprehensive income
(loss)," respectively, until settled. Upon settlement, realized gains or losses on these contracts will be reclassified to "Cost of product sold-propane and other gas liquid sales" in the condensed consolidated statements of earnings as the underlying inventory is sold. These financial derivative purchase commitment net gains are expected to be offset by decreased margins on propane sales commitments that qualify for the normal purchase normal sale exception. At October 31, 2013, we estimate 61% 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.

We enter into interest rate derivative contracts, including swaps, to manage our exposure to interest rate risk associated with our fixed rate senior notes and our floating rate borrowings from both the secured credit facility and the accounts receivable securitization facility. Fluctuations in interest rates subject us to interest rate risk. Decreases in interest rates increase the fair value of our fixed rate debt, while increases in interest rates subject us to the risk of increased interest expense related to our variable rate borrowings.

Our business strategy is to:

expand our operations through disciplined acquisitions and internal growth;

capitalize on our national presence and economies of scale;

maximize operating efficiencies through utilization of our technology platform; and

align employee interests with our investors through significant employee ownership.


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"Net loss attributable to Ferrellgas Partners, L.P." in the three months ended October 31, 2013 was $24.8 million compared to $17.7 million in the prior year period. This increase in net loss was primarily due to a $6.6 million increase in operating expenses, a $3.3 million increase in general and administrative expenses partially offset by a $1.8 million increase in "Gross margin - propane and other gas liquids" and a $1.0 million increase in "Gross margin - other".

We completed our last annual goodwill impairment test on January 31, 2013. We are not aware of any indicators of impairment.

Forward-looking Statements

This report includes 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.

Forward-looking statements are not guarantees of performance. Undue reliance should not be put 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 our forward-looking statements include the following:

whether the operating partnership will have sufficient funds to meet its obligations, including its obligations under its debt securities, and to enable it to distribute to Ferrellgas Partners sufficient funds to permit Ferrellgas Partners to meet its obligations with respect to its existing debt;

whether Ferrellgas Partners and the operating partnership will continue to meet all of the quarterly financial tests required by the agreements governing their indebtedness; and

our expectations that in fiscal 2014 propane gallons will remain consistent compared to fiscal 2013 primarily due to our anticipation of normal winter weather, as defined by NOAA; our expectations that "Total revenues" and "Cost of product sold-propane and other gas liquids sales" will increase in fiscal 2014 based upon the effect of the current increase in the wholesale price of propane; and our expectations that "Net earnings" will decrease in fiscal 2014 primarily due to the effect of losses from the restructuring of debt which occurred in November 2013.

When considering any forward-looking statement, keep in mind the risk factors set forth in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for fiscal 2013. 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 to pay interest on the principal of our debt securities. In addition, the trading price, if any, 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.

In addition, the classification of Ferrellgas Partners and the operating partnership as partnerships for federal income tax purposes means that we do not generally pay federal income taxes. We do, however, pay taxes on the income of our subsidiaries that are corporations. We rely on a legal opinion from our counsel, and not a ruling from the Internal Revenue Service ("IRS"), as to our proper classification for federal income tax purposes. See the section entitled "Item 1A. Risk Factors - Tax Risks" in our Annual Report on Form 10-K for fiscal 2013. The IRS could treat us as a corporation for tax purposes or changes in federal or state laws could subject us to entity-level taxation, which would substantially reduce the cash available for distributions to our unitholders or to pay interest on the principal of our debt securities.


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Results of Operations

Three months ended October 31, 2013 compared to October 31, 2012
                                                                           Favorable
(amounts in thousands)                                                   (Unfavorable)
Three months ended October 31,                2013          2012           Variance
Propane sales volumes (gallons):
Retail - Sales to End Users                  125,252       124,883         369       -  %
Wholesale - Sales to Resellers                65,779        54,555      11,224      21  %
                                             191,031       179,438      11,593       6  %

Revenues -
Propane and other gas liquids sales:
Retail - Sales to End Users                $ 224,254     $ 206,791    $ 17,463       8  %
Wholesale - Sales to Resellers               125,147       102,745      22,402      22  %
Other Gas Sales (a)                           32,822        25,745       7,077      27  %
                                           $ 382,223     $ 335,281    $ 46,942      14  %

Gross margin -
Propane and other gas liquids sales: (b)
Retail - Sales to End Users (a)            $  81,400     $  83,779    $ (2,379 )    (3 )%
Wholesale - Sales to Resellers (a)            42,069        37,845       4,224      11  %
                                           $ 123,469     $ 121,624    $  1,845       2  %

Gross margin - Other                       $  19,461     $  18,431    $  1,030       6  %
Operating income (loss)                       (2,929 )       4,284      (7,213 )    NM
Adjusted EBITDA (c)                           26,442        31,612      (5,170 )   (16 )%
Interest expense                              22,093        22,435         342       2  %
Interest expense - operating partnership      18,049        18,394         345       2  %
Loss on extinguishment of debt                   301             -        (301 )    NM

NM - Not Meaningful
a) Gross margin from other gas sales is allocated to Gross margin Retail - Sales to End Users and Wholesale - Sales to Resellers based on the volumes of fixed-price sales commitments in each respective category.

b) Gross margin from propane and other gas liquids sales represents "Revenues - propane and other gas liquids sales" less "Cost of product sold - propane and other gas liquids sales" and does not include depreciation and amortization.

c) Adjusted EBITDA is calculated as net loss attributable to Ferrellgas Partners, L.P. plus income tax benefit, interest expense, depreciation and amortization expense, loss on extinguishment of debt, non-cash employee stock ownership plan compensation charge, non-cash stock and unit-based compensation charge, loss on disposal of assets, other income, net, nonrecurring litigation accrual and related legal fees, and net loss attributable to noncontrolling interest. Management believes the presentation of this measure is relevant and useful because it allows investors to view the partnership's performance in a manner similar to the method management uses, adjusted for items management believes makes it easier to compare its results with other companies that have different financing and capital structures. This method of calculating Adjusted EBITDA may not be consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance with GAAP.


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The following table summarizes EBITDA and Adjusted EBITDA for the three months ended October 31, 2013 and 2012, respectively:

(amounts in thousands)
Three months ended October 31,                                  2013          2012
Net loss attributable to Ferrellgas Partners, L.P.           $ (24,843 )   $ (17,658 )
Income tax benefit                                                 (50 )        (264 )
Interest expense                                                22,093        22,435
Depreciation and amortization expense                           20,215        20,875
EBITDA                                                          17,415        25,388
Loss on extinguishment of debt                                     301             -
Non-cash employee stock ownership plan compensation charge       3,043         2,402
Non-cash stock and unit-based compensation charge                4,431         3,092
Loss on disposal of assets                                         357           271
Other income, net                                                 (216 )         (91 )
Nonrecurring litigation accrual and related legal fees           1,325           688
Net loss attributable to noncontrolling interest                  (214 )        (138 )
Adjusted EBITDA                                              $  26,442     $  31,612

Propane sales volumes during the three months ended October 31, 2013 increased 11.6 million gallons from that of the prior year period due to 11.2 million of increased gallon sales to wholesale customers. We believe wholesale customer sales volume increased due to a combination of an abnormally wet harvest season and our emphasis on expanding this portion of our business.

Our sales price per gallon correlates to the wholesale market price of propane. The wholesale market price at one of the major supply points, Mt. Belvieu, Texas, during three months ended October 31, 2013 averaged 20% more than the prior year period. The wholesale market price averaged $1.10 and $0.92 per gallon during the three months ended October 31, 2013 and 2012, respectively.

We believe the effect of this significant increase in the average wholesale market price of propane resulted in a decrease in our gross margin per gallon. During this period of higher prices, we earned relatively lower gross margin per gallon as our selling price per gallon did not increase at the same rate as the corresponding increase in wholesale propane prices.

Revenues - Propane and other gas liquids sales

Retail sales increased $17.5 million compared to the prior year period. This increase resulted primarily from a $16.9 million increase in sales price per gallon.

Wholesale sales increased $22.4 million compared to the prior year period. This increase resulted primarily from $12.2 million of increased sales price per gallon and $10.2 million of increased sales volumes, both as discussed above.

Other gas sales increased $7.1 million compared to the prior year period primarily due to $6.0 million of increased sales price per gallon and $1.1 million of increased sales volumes.

Gross margin - Propane and other gas liquids sales

Retail sales gross margin decreased $2.4 million compared to the prior year period. This decrease resulted primarily from a $3.7 million decrease in gross margin per gallon as discussed above, offset partially by a $0.7 million increase in agricultural related propane sales volumes.

Wholesale sales gross margin increased $4.2 million compared to the prior year period resulting primarily from an increase in the gross margin cent per gallon earned resulting from favorable risk management activities associated with a portion of these sales.


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Gross margin - other

Gross margin - other increased $1.0 million primarily due to a $0.8 million increase in material and appliance sales and $0.7 million of grilling tool and accessory sales gained through acquisitions offset partially by a $0.5 million decrease in fees collected from customers.

Operating income

. . .

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