FERRELLGAS PARTNERS, L.P. References and Defined Terms
In this Item 2 of this Quarterly Report on Form 10-Q, unless the context indicates otherwise:
"us," "we," "our," "ours," "consolidated," the "Company" or "Ferrellgas" are
references to
? subsidiaries, including
or "Class
? "
consolidated subsidiaries;
the "operating partnership" refers to
? the context indicates otherwise) with its consolidated subsidiaries, including
? our "general partner" refers to
? "Ferrell Companies" refers to
our general partner;
? "Board of Directors" or "Board" refers to the board of directors of our general
partner;
? "GAAP" refers to accounting principles generally accepted in
"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;
"Class A Units" refers to the Class A Units of
? which was issued for every twenty of
common units in a 1-for-20 reverse unit split effected on
? "Class
? "Preferred Units" refers to the Senior Preferred Units of the operating
partnership;
"Unitholders" or "unitholders" refers to holders of Class A Units, holders of
? Class
requires for each such reference; and
? references to any fiscal year are to the fiscal year ended or ending on
of the applicable year.
Also, the following terms are defined in this Item 2 of this Quarterly Report on Form 10-Q:
? Amended Ferrellgas Partners LPA
? Amended OpCo LPA ? Credit Agreement ? Credit Facility ? Ferrellgas Partners Notes ? OpCo LPA Amendment
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 financial position or our ability to generate sales,
income or cash flow are forward-looking statements.
41
Table of Contents
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;
? 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;
? 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
? economic and political instability, particularly in areas of the world tied to
the energy industry;
? disruptions in the capital and credit markets; and
? access to available capital to meet our operating and debt-service
requirements.
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 2022 and in any more recent filings with theSEC . 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.
Overview
Our management's discussion and analysis of financial condition and results of
operations relates to
Ferrellgas Partners is a holding entity that conducts no operations and has two direct subsidiaries, the operating partnership andFerrellgas Partners Finance Corp. Our activities are primarily conducted through the operating partnership.Ferrellgas Partners and the Preferred Unitholders are the only limited partners of the operating partnership.Ferrellgas, Inc. is the sole general partner ofFerrellgas Partners and the operating partnership and, excluding the economic interests attributable to the ClassB Units and the Preferred Units, owns an approximate 1% general partner economic interest in each, and, therefore, an effective 2% general partner economic interest in the operating partnership. Excluding the economic interests attributable to the Preferred Units,Ferrellgas Partners owns an approximate 99% limited partner interest in the operating partnership. For information regarding the economic and other terms of the ClassB Units and the Preferred Units, see Note G - Equity (Deficit) and Note F - Preferred units to our condensed consolidated financial statements included
elsewhere herein.
42
Table of Contents
Our general partner performs all management functions for us. The parent company
of our general partner, Ferrell Companies , currently beneficially owns
approximately 23.4% of our outstanding Class A units. Ferrell Companies is owned
100% by an employee stock ownership trust.
The operating partnership was formed on
Ferrellgas Partners Finance Corp. andFerrellgas Finance Corp. have nominal assets, do not conduct any operations and have no employees other than officers.Ferrellgas Partners Finance Corp. has served as co-issuer and co-obligor for debt securities ofFerrellgas Partners , whileFerrellgas Finance Corp. , a subsidiary of the operating partnership, 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 ofFerrellgas Partners Finance Corp. andFerrellgas Finance Corp. is not presented in this section.
The Class A Units of
We file annual, quarterly, and current reports and other information with theSecurities and Exchange Commission (the "SEC"). You may read and download ourSEC filings over the Internet from several commercial document retrieval services as well as at theSEC's website at www.sec.gov. OurSEC 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 theSEC . 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 2022 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
Recent developments COVID-19 COVID-19, and variants thereof, which has been declared by theWorld Health Organization as a "Public Health Emergency of International Concern," continues to evolve and impact the economy ofthe United States and other countries around the world. 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.
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 loss attributable toFerrellgas Partners, L.P. , the most directly comparable GAAP measure, see the subheading "Non-GAAP Financial Measures" below. 43
Table of Contents
Propane operations and related equipment sales
Based on our propane sales volumes in fiscal 2022, we believe that we are the second largest retail marketer of propane inthe 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, theDistrict of Columbia andPuerto 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 ofthe 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 theNational 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 inthe 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. Ifthe 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, ifthe 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. 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 2023 and 2024 sales commitments and, as ofOctober 31, 2022 , we have experienced net mark-to-market losses of approximately$10.7 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 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 condensed 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. AtOctober 31, 2022 , we estimate 81% 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. 44 Table of Contents
Summary Discussion of Results of Operations:
Executive Overview
For the three months ended
During the three months endedOctober 31, 2022 , we recognized a net loss attributable toFerrellgas Partners, L.P. of$4.5 million compared to a net loss attributable toFerrellgas Partners, L.P. of$8.6 million during the three months endedOctober 31, 2021 . This$4.1 million change was primarily driven by a$25.1 million increase in "Gross margin," which was partially offset by increases of$12.6 million in "Operating expense-personnel, vehicle, plant and other,"$2.3 million in "General and administrative expense,"$2.3 million in "Depreciation and amortization expense," and a$3.8 million decrease in "Other income, net." Distributable cash flow attributable to equity investors increased to$22.0 million for the three months endedOctober 31, 2022 compared to$15.3 million for the prior year period, primarily due to a$12.4 million increase in Adjusted EBITDA, which was partially offset by a$3.5 million increase in net cash interest expense and a$2.3 million increase in maintenance capital expenditures. For the three months endedOctober 31, 2022 , distributable cash flow excess was$3.6 million compared to a distributable cash shortage of$2.4 million for the three months endedOctober 31, 2021 . This$6.0 million change was primarily due to the$6.7 million change in distributable cash flow attributable to equity investors noted above, partially offset by a$0.6 million increase in distributions accrued or paid to preferred unitholders.
Consolidated Results of Operations
Three months ended October 31,
(amounts in thousands) 2022 2021
Total revenues $ 413,289 $ 394,506
Total cost of sales 217,857 224,148
Operating expense - personnel, vehicle, plant and other 129,740 117,112
Depreciation and amortization expense 22,631 20,295
General and administrative expense 14,833 12,575
Operating expense - equipment lease expense 6,024 5,690
Non-cash employee stock ownership plan compensation charge 723 909
Loss on asset sales and disposals 1,680 1,410
Operating income 19,801 12,367
Interest expense (25,009) (25,395)
Other income, net 469 4,264
Loss before income taxes (4,739) (8,764)
Income tax expense 18 96
Net loss (4,757) (8,860)Net loss attributable to noncontrolling interest (212) (254) Net loss attributable to Ferrellgas Partners, L.P.$ (4,545) $ (8,606) Non-GAAP Financial Measures
In this Quarterly Report we present the following Non-GAAP financial measures: Adjusted EBITDA, Distributable cash flow attributable to equity investors, Distributable cash flow attributable to Class A and B Unitholders, and Distributable cash flow excess (shortage).
45
Table of Contents
Adjusted EBITDA. Adjusted EBITDA forFerrellgas Partners is calculated as net loss attributable toFerrellgas Partners, L.P. , plus the sum of the following: income tax expense, interest expense, depreciation and amortization expense, non-cash employee stock ownership plan compensation charge, loss on asset sales and disposals, other income, net, severance costs, legal fees and settlements related to non-core businesses, 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 make it easier to compare its results with other companies that have different financing and capital structures. Adjusted EBITDA, as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of Adjusted EBITDA that will not occur on a continuing basis may have associated cash payments. This method of calculating Adjusted EBITDA should be viewed in conjunction with measurements that are computed in accordance with GAAP. Distributable Cash Flow Attributable toEquity Investors . Distributable cash flow attributable to equity investors is calculated as Adjusted EBITDA minus net cash interest expense, maintenance capital expenditures and cash paid for income taxes, plus proceeds from certain asset sales. Management considers distributable cash flow attributable to equity investors a meaningful measure ofFerrellgas' ability to declare and pay quarterly distributions to equity investors, including holders of the operating partnership's Preferred Units. Distributable cash flow attributable to equity investors, as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of distributable cash flow attributable to equity investors that will not occur on a continuing basis may have associated cash payments. Distributable cash flow attributable to equity investors should be viewed in conjunction with measurements that are computed in accordance with GAAP. Distributable Cash Flow Attributable to Class A and B Unitholders. Distributable cash flow attributable to Class A and B Unitholders is calculated as Distributable cash flow attributable to equity investors minus distributions accrued or paid to Preferred Unitholders and distributable cash flow attributable to general partner and noncontrolling interest. Management considers Distributable cash flow attributable to Class A and B Unitholders a meaningful measure of the partnership's ability to declare and pay quarterly distributions to Class A and B Unitholders. Distributable cash flow attributable to Class A and B Unitholders, as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of distributable cash flow attributable to Class A and B Unitholders that will not occur on a continuing basis may have associated cash payments. Distributable cash flow attributable to Class A and B Unitholders should be viewed in conjunction with measurements that are computed in accordance with GAAP. Distributable Cash Flow Excess (Shortage). Distributable cash flow excess (shortage) is calculated as Distributable cash flow attributable to Class A and B Unitholders minus Distributions paid to Class A and B Unitholders. Distributable cash flow excess, if any, is retained to establish reserves, to reduce debt, to fund capital expenditures and for other partnership purposes, and any shortage is funded from previously established reserves, cash on hand or borrowings under our Credit Facility. Management considers Distributable cash flow excess (shortage) a meaningful measure of the partnership's ability to effectuate those purposes. Distributable cash flow excess (shortage), as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of distributable cash flow excess (shortage) that will not occur on a continuing basis may have associated cash payments. Distributable cash flow excess (shortage) should be viewed in conjunction with measurements that are computed in accordance with GAAP. 46 Table of Contents The following table reconciles Adjusted EBITDA, Distributable cash flow attributable to equity investors, Distributable cash flow attributable to Class A and B Unitholders and Distributable cash flow excess (shortage) to Net loss attributable toFerrellgas Partners, L.P. , the most directly comparable GAAP measure, for the three months endedOctober 31, 2022 and 2021: Three months ended October 31, (amounts in thousands) 2022 2021
Net loss attributable to Ferrellgas Partners, L.P.$ (4,545)
$ (8,606) Income tax expense 18 96 Interest expense 25,009 25,395
Depreciation and amortization expense 22,631
20,295
EBITDA 43,113
37,180
Non-cash employee stock ownership plan compensation charge 723
909
Loss on asset sales and disposals 1,680
1,410
Other income, net (469) (4,264)
Severance costs 10 216Legal fees and settlements related to non-core businesses 4,872
2,131
Net loss attributable to noncontrolling interest (212)
(254)
Adjusted EBITDA 49,717 37,328
Net cash interest expense (a) (22,606) (19,119)Maintenance capital expenditures (b) (5,832)
(3,579)
Cash paid for income taxes (49)
-
Proceeds from certain asset sales 752
641
Distributable cash flow attributable to equity investors 21,982
15,271
Less: Distributions accrued or paid to preferred unitholders 17,966
17,345
Distributable cash flow attributable to general partner and non-controlling interest
(440) (305)
Distributable cash flow attributable to Class A and B unitholders 3,576
(2,379)
Less: Distributions paid to Class A and B unitholders (c) -
-
Distributable cash flow excess (shortage)$ 3,576
(a) Net cash interest expense is the sum of interest expense less non-cash
interest expense and other income, net.
Maintenance capital expenditures include capitalized expenditures for (b) betterment and replacement of property, plant and equipment, and may from
time to time include the purchase of assets that are typically leased.
(c) The Company did not pay any distributions to Class A unitholders during
fiscal 2023 or 2022.
47
Table of Contents
Operating Results for the three months ended
The following table summarizes propane sales volumes and Adjusted EBITDA results
for the periods indicated:
2022 2021 Increase (Decrease)
As of October 31 ,
Retail customers 662,027 686,752 (24,725) (4) %Tank exchange selling locations 61,135 60,945 190 0 % (amounts in thousands) Three months endedOctober 31 , Propane sales volumes (gallons): Retail - Sales to End Users 118,396 115,825 2,571 2 % Wholesale - Sales to Resellers 43,869 44,055
(186) - %
162,265 159,880 2,385 1 %
Revenues -
Propane and other gas liquids sales:
Retail - Sales to End Users $ 265,974 $ 252,510 $ 13,464 5 %
Wholesale - Sales to Resellers 116,014 113,971
2,043 2 %
Other Gas Sales (a) 3,856 6,223 (2,367) (38) %
Other (b) 27,445 21,802 5,643 26 %Propane and related equipment revenues$ 413,289 $ 394,506
Gross Margin - Propane and other gas liquids sales gross margin: (c) Retail - Sales to End Users (a)$ 124,391 $ 100,282 $ 24,109 24 % Wholesale - Sales to Resellers (a) 48,372 51,884 (3,512) (7) % Other (b) 22,669 18,192
4,477 25 %
Propane and related equipment gross profit
Operating, general and administrative expense (d)
6,024 5,690 334 6 %
Operating income $ 19,801 $ 12,367 $ 7,434 60 %
Depreciation and amortization expense 22,631 20,295 2,336 12 % Non-cash employee stock ownership plan compensation charge 723 909 (186) (20) % Loss on asset sales and disposals 1,680 1,410 270 NM Legal fees and settlements related to non-core businesses 4,872 2,131 2,741 129 % Severance costs 10 216 (206) (95) % Adjusted EBITDA$ 49,717 $ 37,328 $ 12,389 33 % NM - Not meaningful
Gross margin for "Other Gas Sales" is allocated to Gross margin "Retail - (a) Sales to End Users" and "Wholesale - Sales to Resellers" based on the volumes
in each respective category.
(b) "Other" primarily includes various customer fee income and to a lesser extent
appliance and material sales.
Gross margin from "Propane and other gas liquids sales" represents (c) "Revenues - Propane and other gas liquids sales" less "Cost of sales -
Propane and other gas liquids sales" and does not include depreciation and
amortization.
"Operating, general and administrative expense" above includes both the (d) "Operating expense - personnel, vehicle, plant and other" and the "General
and administrative expense" captions in the condensed consolidated statement
of operations.
48
Table of Contents
Propane sales volumes during the three months ended October 31, 2022 increased
1%, or 2.4 million gallons, from the prior year period. Our growth strategy
drove the increase, aided by weather that was favorable compared to the prior
year period.
Our wholesale sales price per gallon partially correlates to the change in the
wholesale market price of propane. The wholesale market price at major supply
points in Mt. Belvieu, Texas during the three months ended October 31, 2022
averaged 23% less than the prior year period, while at the Conway, Kansas major
supply point prices averaged 24% less than the prior year period. The wholesale
market price at Mt. Belvieu, Texas averaged $0.98 and $1.28 per gallon during
the three months ended October 31, 2022 and 2021, respectively, while the
wholesale market price at Conway, Kansas averaged $0.98 and $1.29 per gallon
during the three months ended October 31, 2022 and 2021, respectively. This
decrease in the wholesale cost of propane contributed to our decrease in sales
price per gallon.
Revenues
Retail sales increased $13.5 million compared to the prior year period primarily
due to our strategic pricing initiatives and the right-timed delivery of
gallons, in addition to a 2% increase in gallons sold. New monitoring technology
allows us to provide more gallons at each stop, thereby optimizing the use of
our labor force and vehicle fleet and our fuel efficiency.
Wholesale sales increased
Other gas sales decreased
Other revenues increased
Gross margin - Propane and other gas liquids sales
Gross margin increased$20.6 million primarily due to a$13.1 million increase in revenue, as discussed above, and a$7.5 million decrease in related cost of sales as a result of decreases in price per gallon. Margin per gallon for the quarter increased by$0.11 , or 12%, compared to the prior year period.
Gross margin - other
Gross margin increased
Operating income
Operating income increased
"Operating, general and administrative expense" primarily increased due to a$12.6 million increase in "Operating expense - personnel, vehicle, plant and other" and a$2.3 million increase in "General and administrative expense." "Operating expense - personnel, vehicle, plant and other" increased primarily due to higher fleet costs and fuel costs. "General and administrative expense" was flat after excluding legal fees related to non-core businesses.
Adjusted EBITDA
Adjusted EBITDA increased$12.4 million compared to the prior year period primarily due to the$7.4 million increase in operating income, discussed above, and EBITDA adjustments related to an increase of$2.7 million of "Legal fees and settlements related to non-core businesses" and an increase of$2.3 million in "Depreciation and amortization expense." 49
Table of Contents
Liquidity and Capital Resources
General
Our primary sources of liquidity and capital resources are cash flows from operating activities, our Credit Facility and funds received from sales of debt and equity securities. As ofOctober 31, 2022 , our total liquidity was$298.0 million , which was comprised of$44.2 million in unrestricted cash and$253.8 million of availability under our Credit Facility. These sources of liquidity and short-term capital resources are intended to fund our working capital requirements, acquisitions and capital expenditures. As ofOctober 31, 2022 , letters of credit outstanding totaled$81.2 million . Our access to long-term capital resources, to the extent needed to refinance debt or for other purposes, may be affected by our ability to access the capital markets, covenants in our debt agreements and other financial obligations, unforeseen demands on cash, or other events beyond our control. As ofOctober 31, 2022 , we had$11.1 million of restricted cash consisting of a cash deposit made with the administrative agent under our prior senior secured credit facility that was terminated inApril 2020 . Our working capital requirements are subject to, among other things, the price of propane, delays in the collection of receivables, volatility in energy commodity prices, liquidity imposed by insurance providers, downgrades in our credit ratings, decreased trade credit, significant acquisitions, the weather, customer retention and purchasing patterns and other changes in the demand for propane. Relatively colder weather or higher propane prices during the winter heating season are factors that could significantly increase our working capital requirements.
Our material known cash requirements continue to be our long-term debt,
including current portion, and fixed rate interest obligations. These
obligations reflect the operating partnership's issuance of the
Our ability to satisfy our obligations is dependent upon our future performance, which will be subject to prevailing weather, economic, financial and business conditions and other factors, many of which are beyond our control. Due to the seasonality of the retail propane distribution business, a significant portion of our propane operations and related products cash flows from operations is generated during the winter heating season. Our net cash provided by operating activities primarily reflects earnings from our business activities adjusted for depreciation and amortization and changes in our working capital accounts. Historically, we generate significantly lower net cash from operating activities in our first and fourth fiscal quarters as compared to the second and third fiscal quarters due to the seasonality of our propane operations and related equipment sales operations. During periods of high volatility, our risk management activities may expose us to the risk of counterparty margin calls in amounts greater than we have the capacity to fund. Likewise, our counterparties may not be able to fulfill their margin calls from us or may default on the settlement of positions with us. We believe that the liquidity available from cash flows from operating activities, unrestricted cash and the Credit Facility will be sufficient to meet our capital expenditure, working capital and letter of credit requirements
for
the foreseeable future.
50
Table of Contents
Distributable Cash Flow
Distributable cash flow attributable to equity investors is reconciled to net
loss attributable to Ferrellgas Partners, L.P. , the most directly comparable
GAAP measure, in this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations under the subheading "Non-GAAP Financial
Measures" above. A comparison of distributable cash flow attributable to equity
investors to cash distributions accrued or paid to equity investors for the
twelve months ended October 31, 2022 to the twelve months ended July 31, 2022 is
as follows (in thousands):
Distributable Cash reserves Cash distributions
cash flow attributable approved by our accrued or paid to DCF
to equity investors General Partner equity investors ratio (a)Three months ended October 31, 2022 $ 21,982 $ 4,016 $ 17,966 1.2x Fiscal 2022 226,776 161,489 65,287 Less: Three months ended October 31, 2021 15,271 (2,074) 17,345 Twelve months ended October 31, 2022 $ 233,487 $ 167,579 $ 65,908 3.5x Twelve months ended July 31, 2022 226,776
161,489 65,287 3.5x Change $ 6,711 $ 6,090 $ 621 10.8x
(a) DCF ratio is calculated as Distributable cash flow attributable to equity
investors divided by Cash distributions accrued or paid to equity investors.
For the twelve months endedOctober 31, 2022 , distributable cash flow attributable to equity investors increased$6.7 million compared to the twelve months endedJuly 31, 2022 . As ofOctober 31, 2022 , the accrued quarterly distribution to Preferred Unitholders was$18.0 million . We paid$15.3 million of this distribution onNovember 15, 2022 . The remaining$2.7 million represents Additional Amounts payable to certain holders of Preferred Units, pursuant to the side letters outlined in the OpCo LPA Amendment. We did not pay any cash distributions to our Class A Unitholders during fiscal 2023 or fiscal 2022.Ferrellgas Partners made aggregate cash distributions of approximately$100.0 million to its ClassB Unitholders during fiscal 2022. Cash reserves, which we utilize to meet future anticipated expenditures, were$167.6 million and$161.5 million for the twelve months endedOctober 31, 2022 and
July 31, 2022 , respectively. Operating ActivitiesFerrellgas Partners Net cash used in operating activities was$66.8 million and$15.3 million for the three months endedOctober 31, 2022 and 2021, respectively. The$51.5 million increase in cash used in operating activities was primarily due to a$68.7 million increase in requirements for other current liabilities, a$17.2 increase in requirements for prepaid expenses, and a$5.3 million outflow associated with other assets and liabilities. These changes were partially offset by a$33.4 million decrease in working capital requirements and a$6.3 million increase in cash flow from operations. The$68.7 million increase related to other current liabilities was primarily driven by changes in the broker margin deposit liability while the$17.2 million increase related to prepaid expenses was primarily due to changes in the broker margin deposit asset. The$33.4 million decrease in working capital requirements was primarily due to a$38.0 million decrease in inventory requirements and a$24.1 million decrease in requirements for accounts and notes receivable, net. These decreases were partially offset by an increase of$28.7 million in requirements for accounts payable.
The
51
Table of Contents
The operating partnership
Net cash used in operating activities was $66.8 million and $15.2 million for
the three months ended October 31, 2022 and 2021, respectively. The $51.6
million increase in cash used in operating activities was primarily due to a
$68.7 million increase in requirements for other current liabilities, a $17.2
million increase in requirements for prepaid expenses, and a $4.7 million
outflow associated with other assets and liabilities. These changes were
partially offset by a $33.4 million decrease in working capital requirements and
a $5.6 million increase in cash flow from operations.
The $68.7 million increase related to other current liabilities was primarily
driven by changes in the broker margin deposit liability while the $17.2 million
increase related to prepaid expenses was primarily due to changes in the broker
margin deposit asset. The $33.4 million decrease in working capital requirements
was primarily due to a $38.0 million decrease in inventory requirements and a
$24.1 million decrease in requirements for accounts and notes receivable, net.
These decreases were partially offset by an increase of $28.7 million in
requirements for accounts payable.
The
Investing ActivitiesFerrellgas Partners Capital Requirements
Our business requires continual investments to upgrade or enhance existing operations and to ensure compliance with safety and environmental regulations. Capital expenditures for our business consist primarily of:
Maintenance capital expenditures - These capital expenditures include
expenditures for betterment and replacement of property, plant and equipment,
? and may from time to time include the purchase of assets that are typically
leased, rather than to generate incremental distributable cash flow. Examples
of maintenance capital expenditures include a routine replacement of a worn-out
asset or replacement of major vehicle components; and
Growth capital expenditures - These expenditures are undertaken primarily to
? generate incremental distributable cash flow. Examples include expenditures for
purchases of both bulk and portable propane tanks and other equipment to
facilitate expansion of our customer base and operating capacity.
Net cash used in investing activities was$34.8 million and$29.6 million for the three months endedOctober 31, 2022 and 2021, respectively. The$5.2 million increase in net cash used in investing activities was primarily due to increases of$3.5 million in "Business acquisitions, net of cash acquired" and$1.7 million in "Capital expenditures." Due to the mature nature of our operations, we do not anticipate significant fluctuations in maintenance capital expenditures, with the exception of future decisions regarding lease versus buy financing options. However, future fluctuations in growth capital expenditures could occur due to the opportunistic nature of these projects. The operating partnership
The investing activities discussed above also apply to the operating partnership.
Financing ActivitiesFerrellgas Partners Net cash used in financing activities was$1.9 million and$68.3 million for the three months endedOctober 31, 2022 and 2021, respectively. The$66.4 million decrease in cash used in financing activities was primarily due to$50.0 million in distributions to Class B unitholders and$15.0 million in short-term borrowings under our Credit Facility (as discussed further in Note E - Debt). 52 Table of Contents
Letters of credit outstanding atOctober 31, 2022 andJuly 31, 2022 totaled$81.2 million and$87.6 million , respectively, and were used to secure insurance arrangements, product purchases and commodity hedges. As ofOctober 31, 2022 , we had available borrowing capacity under our Credit Facility of$253.8 million .
The operating partnership
The financing activities discussed above also apply to the operating partnership except for cash flows related to distributions paid, as discussed below.
Distributions
Partnership distributions
The Sixth Amended and Restated Agreement of Limited Partnership ofFerrellgas Partners, L.P. (the "Amended Ferrellgas Partners LPA") requiresFerrellgas Partners to make quarterly cash distributions of all of its "available cash." Available cash is defined in the Amended Ferrellgas Partners LPA as, generally, the sum ofFerrellgas' Partners cash receipts less consolidated cash disbursements and net changes in reserves established by our general partner for future requirements. In general, the amount ofFerrellgas Partners' available cash depends primarily on whether and the extent to whichFerrellgas Partners receives cash distributions from the operating partnership, as such distributions generally would beFerrellgas Partners' only significant cash receipts. The Fifth Amended and Restated Agreement of Limited Partnership ofFerrellgas, L.P. (the "Amended OpCo LPA"), as amended by the First Amendment to the Amended OpCo LPA (the "OpCo LPA Amendment"), sets forth the preferences, rights, privileges and other terms of the Preferred Units. Pursuant to the Amended Ferrellgas Partners LPA, while any ClassB Units remain outstanding, any distributions byFerrellgas Partners to its partners must be made such that the ratio of (i) the amount of distributions made to holders of ClassB Units to (ii) the amount of distributions made to holders of Class A Units and the general partner is not less than 6:1. The Amended Ferrellgas Partners LPA permitsFerrellgas Partners , in the general partner's discretion, to make distributions to the ClassB Unitholders in a greater proportion than the minimum 6:1 ratio, including paying 100% of any such distribution to ClassB Unitholders . The ClassB Units will not be convertible into Class A Units until ClassB Unitholders receive distributions in the aggregate amount of$357.0 million , which was the$357.0 million aggregate principal amount ofFerrellgas Partners' unsecured senior notes dueJune 15, 2020 (the "Ferrellgas Partners Notes"), and the rate at which ClassB Units will convert into Class A Units increases annually. Additionally, the price at whichFerrellgas Partners may redeem the ClassB Units during the first five years afterMarch 30, 2021 is based on the ClassB Unitholders' receipt of a specified internal rate of return in respect of their ClassB Units . This specified internal rate of return in respect of the ClassB Units is 15.85%, but that amount increases under certain circumstances, including if the operating partnership paid distributions on the Preferred Units in-kind rather than in cash for a certain number of quarters. Accordingly, distributing cash to the ClassB Unitholders in a greater proportion than the minimum 6:1 ratio could result in the ClassB Units becoming convertible into Class A Units more quickly or at a lower conversion rate or reduce the redemption price for the ClassB Units . For additional discussion of the terms of the ClassB Units , see Note G - Equity (Deficit) in the notes to condensed consolidated financial statements. For these reasons, although the general partner has not made any decisions or adopted any policy with respect to the allocation of future distributions byFerrellgas Partners to its partners, the general partner may determine that it is advisable to pay more than the minimum amount of any distribution, up to 100% of the amount of such distribution, to the ClassB Unitholders . OnOctober 8, 2021 andJuly 8, 2022 ,Ferrellgas Partners made cash distributions aggregating in total to approximately$100.0 million entirely to the ClassB Unitholders , without making any distribution to Class A Unitholders and the general partner. In our Annual Report on Form 10-K for fiscal 2022, see "Risk Factors-Risks Inherent in an Investment in our Class A or ClassB Units or ourDebt Securities and Other Risks Related to OurCapital Structure and Financing Arrangements-If Ferrellgas Partners is permitted to make and makes distributions to its partners, while any ClassB Units remain outstanding, ClassB Unitholders collectively will receive at least approximately 85.7% of the aggregate amount of each such distribution and may receive up to 100% of any such distribution. Accordingly, while any ClassB Units remain outstanding, Class A Unitholders may not receive any distributions and, in any case, will not receive collectively more than approximately 14.1% of any distribution." 53
Table of Contents
Ferrellgas Partners did not pay any distributions to Class A Unitholders, ClassB Unitholders or the general partner during the three months endedOctober 31, 2022 and 2021, except for the distribution to ClassB Unitholders of approximately$49.9 million onOctober 8, 2021 . The ability ofFerrellgas Partners to make cash distributions to its Class A Unitholders and ClassB Unitholders is dependent on the receipt byFerrellgas Partners of cash distributions from the operating partnership. For so long as any Preferred Units remain outstanding, the amount of cash that otherwise would be available for distribution by the operating partnership toFerrellgas Partners and the general partner will be reduced by the amount of cash distributions and other payments made by the operating partnership in respect of the Preferred Units, including payments to redeem Preferred Units. Further, the indentures governing the 2026 Notes and 2029 Notes, the credit agreement (the "Credit Agreement") that provides for a four-year revolving credit facility (the "Credit Facility") in an aggregate principal amount of up to$350.0 million , and the OpCo LPA Amendment which sets forth the preferences, rights, privileges and other terms governing the Preferred Units each contain covenants that limit the ability of the operating partnership to make distributions toFerrellgas Partners and therefore effectively limit the ability ofFerrellgas Partners to make distributions to its Class A Unitholders and ClassB Unitholders . See Note E - Debt and Note F - Preferred units for a discussion of these limitations. In our Annual Report on Form 10-K for fiscal 2022, see "Risk Factors-Risks Inherent in an Investment in our Class A or ClassB Units or ourDebt Securities and Other Risks Related to Our Capital Structure and Financing Arrangements-Restrictive covenants in the Indentures, the Credit Agreement and the agreements governing our other future indebtedness and other financial obligations may reduce our operating flexibility and ability to make cash distributions to holders of Class A Units and ClassB Units . The Indentures, the Credit Agreement and the OpCo LPA Amendment contain important exceptions to the covenants."
Preferred unit distributions
Pursuant to the OpCo LPA Amendment, the operating partnership is required to pay to the holders of each Preferred Unit a cumulative, quarterly distribution (the "Quarterly Distribution") at the Distribution Rate (as defined below) on the unit purchase price of such Preferred Unit, which is$1,000 per unit. "Distribution Rate" means, for the first five years afterMarch 30, 2021 , a rate per annum equal to 8.956%, with certain increases in the Distribution Rate on each of the 5th, 6th and 7th anniversaries ofMarch 30, 2021 , subject to a maximum rate of 11.125% and certain other adjustments and exceptions. The Quarterly Distribution may be paid in cash or, at the election of the operating partnership, "in kind" through the issuance of additional Preferred Units ("PIK Units") at the quarterly Distribution Rate plus an applicable premium that escalates each year from 75 bps to 300 bps so long as the Preferred Units remain outstanding. In the event the operating partnership fails to make any Quarterly Distribution in cash, such Quarterly Distribution will automatically be paid in PIK Units.
The Distribution Rate on the Preferred Units will increase upon violation of certain protective provisions for the benefit of Preferred Unit holders notwithstanding the cap mentioned above.
As ofOctober 31, 2022 , the Quarterly Distribution accrued was$18.0 million . OnNovember 15, 2022 ,$15.3 million of the Quarterly Distribution was paid in cash to holders of Preferred Units. The remaining Quarterly Distribution accrual of$2.7 million represents Additional Amounts payable to certain holders of Preferred Units pursuant to the side letters outlined in the OpCo LPA Amendment. As ofOctober 31, 2021 , the Quarterly Distribution accrued was$16.8 million . OnNovember 15, 2021 ,$15.1 million of the Quarterly Distribution was paid in cash to holders of the Preferred Units. The remaining Quarterly Distribution accrued of$1.7 million represented Additional Amounts payable to certain holders of Preferred Units pursuant to the side letters. 54
Table of Contents
Preferred unit tax distributions
For any quarter in which the operating partnership makes a Quarterly Distribution in PIK Units in lieu of cash, it shall make a subsequent cash tax distribution for such quarter in an amount equal to the (i) the lesser of (x) 25% and (y) the highest combined federal, state and local tax rate applicable for corporations organized inNew York , multiplied by (ii) the excess (if any) of (A) one-fourth (1/4th) of the estimated taxable income to be allocated to the holders of Preferred Units for the year in which the Quarterly Tax Payment Date (which refers to certain specified dates that next follow a Quarterly Distribution date on which PIK Units were issued) occurs, over (B) any cash paid on the Quarterly Distribution date immediately preceding the Quarterly Tax Payment Date on which a quarterly tax amount would otherwise be paid (such amount, the "Tax Distribution"). Tax Distributions are treated as advances against, and reduce, future cash distributions for any reason, including payments in redemption of Preferred Units or PIK Units, or payments to the holders in their capacity as such pursuant to any side letter or other agreement.
Cash distributions paid
Ferrellgas Partners did not pay any cash distributions to its Class A Unitholders during the three months endedOctober 31, 2022 and 2021. OnOctober 8, 2021 ,Ferrellgas Partners paid a cash distribution to holders of the ClassB Units in the amount of$38.46 per ClassB Unit or approximately$49.9 million in the aggregate. As permitted by the Amended Ferrellgas Partners LPA as described above,Ferrellgas Partners made this distribution solely to ClassB Unitholders without any contemporaneous distribution to Class A Unitholders and the general partner. OnSeptember 14, 2021 , the operating partnership paid a cash distribution toFerrellgas Partners in the amount of approximately$49.9 million , whichFerrellgas Partners used to pay theOctober 8, 2021 distribution to its ClassB Unitholders described above. The operating partnership also paid cash distributions for the three months endedOctober 31, 2022 and 2021 in respect of its Preferred Units as discussed above under "-Preferred unit distributions."
The operating partnership
The financing activities discussed above also apply to the operating partnership
except for distributions by
Disclosures about Effects of Transactions with Related Parties
We have no employees and are managed and controlled by our general partner. Pursuant to our partnership agreements, our general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on our behalf, and all other necessary or appropriate expenses allocable to us or otherwise reasonably incurred by our general partner in connection with operating our business. These reimbursable costs, which totaled$76.9 million for the three months endedOctober 31, 2022 , include operating expenses such as compensation and benefits paid to employees of our general partnerwho perform services on our behalf as well as related general and administrative expenses.
During the three months ended
Material Cash Requirements
As ofOctober 31, 2022 , there have been no material changes to our material cash requirements from those described under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Material Cash Requirements" in our Annual Report on Form 10-K for fiscal 2022. For additional information regarding our debt obligations, see Note E - Debt to our condensed consolidated financial statements. The operating partnership
The contractual obligations discussed above also apply to the operating partnership.
55
Table of Contents
© Edgar Online, source
