UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Earliest Event Reported: December 12, 2001
Date of Report: December 12, 2001
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
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(Exact name of registrants as specified in their charters)
Delaware 1-111331 43-1698480
Delaware 333-06693 43-1742520
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(States or other Commission file (I.R.S. Employer Identification
jurisdictions of numbers Nos.)
incorporation or
organization)
One Liberty Plaza, Liberty, Missouri 64068
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(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (816) 792-1600
ITEM 5. OTHER EVENTS
Ferrellgas, Inc., the General Partner of Ferrellgas Partners, L.P., balance
sheets as of July 31, 2001 and 2000, have been audited by an independent
auditor. See exhibit 99.15 for the audited financial statements.
These audited balance sheets and independent auditor's opinion will be
incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement No. 33-55185 of Ferrellgas Partners, L.P. on Form S-4 to Form S-1 and
in Amendment No. 1 to Registration Statement No. 333-71111 of Ferrellgas
Partners, L.P. and Ferrellgas Partners Finance Corp. on Form S-3. See exhibit
23.1 for independent auditor's consent.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
The Exhibits listed in the Index to Exhibits are filed as part of
this Current Report on Form 8-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FERRELLGAS PARTNERS, L.P.
By Ferrellgas, Inc. (General Partner)
Date: December 12, 2001 By /s/ Kevin T. Kelly
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Kevin T. Kelly
Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
FERRELLGAS PARTNERS FINANCE CORP.
Date: December 12, 2001 By /s/ Kevin T. Kelly
--------------------------------------
Kevin T. Kelly
Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
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23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
99.15 Consolidated balance sheets of Ferrellgas, Inc. as of
July 31, 2001 and 2000, together with the report of
Deloitte & Touche LLP with respect thereto.
Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration Statement No. 33-55185 of Ferrellgas Partners, L.P. on Form S-4 to Form S-1 and in Amendment No. 1 to Registration Statement No. 333-71111 of Ferrellgas Partners, L.P. and Ferrellgas Partners Finance Corp. on Form S-3 of our report dated September 21, 2001 relating to the consolidated balance sheets of Ferrellgas, Inc. and Subsidiaries as of July 31, 2001 and 2000, appearing in this Form 8-K. DELOITTE & TOUCHE LLP Kansas City, Missouri December 7, 2001
Exhibit 99.15
Ferrellgas, Inc. and Subsidiaries
Consolidated Balance Sheets as of July 31, 2001 and 2000, and Independent
Auditors' Report
INDEX TO BALANCE SHEETS
Page
Independent Auditors' Report...............................................2
Consolidated Balance Sheets - July 31, 2001 and July 31, 2000..............3
Notes to Consolidated Balance Sheets.......................................4
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas, Inc. and Subsidiaries
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas, Inc.
and subsidiaries (the "Company") as of July 31, 2001 and 2000. These balance
sheets are the responsibility of the Company's management. Our responsibility is
to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits of the balance sheets provide a
reasonable basis for our opinion.
In our opinion, such consolidated balance sheets present fairly, in all material
respects, the financial position of the Company as of July 31, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 21, 2001
FERRELLGAS, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Ferrell Companies, Inc.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 31,
--------------------------------
ASSETS 2001 2000
- ---------------------------------------------- ---------------- --------------
Current Assets:
Cash and cash equivalents $ 27,017 $ 16,007
Accounts and notes receivable (net of
allowance for doubtful accounts of $3,159 and
$2,388 in 2001 and 2000, respectively) 56,815 89,801
Inventories 65,284 71,979
Prepaid expenses and other current assets 10,504 8,275
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Total Current Assets 159,620 186,062
Property, plant and equipment, net 556,005 583,342
Intangible assets, net 469,862 501,836
Other assets, net 16,162 10,425
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Total Assets $1,201,649 $1,281,665
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LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
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Current Liabilities:
Accounts payable $ 58,274 $ 95,264
Other current liabilities 77,324 77,714
Short-term borrowings - 18,342
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Total Current Liabilities 135,598 191,320
Long-term debt 704,782 718,118
Deferred income taxes 1,726 1,931
Other liabilities 15,472 16,176
Contingencies and commitments (Note J) - -
Minority interest 188,254 179,786
Parent investment in subsidiary 220,083 228,300
Stockholder's Equity (Deficiency):
Common stock, $1 par value;
10,000 shares authorized; 990 shares issued 1 1
Additional paid-in-capital 13,476 13,361
Note receivable from parent (147,607) (146,102)
Retained earnings 72,245 78,774
Accumulated other comprehensive loss (2,381) -
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Total Stockholder's Equity (Deficiency) (64,266) (53,966)
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Total Liabilities and
Stockholder's Equity (Deficiency) $1,201,649 $1,281,665
================ ==============
FERRELLGAS, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Ferrell Companies, Inc.)
NOTES TO CONSOLIDATED BALANCE SHEETS
A. Organization and Formation
The accompanying consolidated balance sheets and related notes present the
consolidated financial position of Ferrellgas, Inc. (the "Company"), its
subsidiaries and its partnership interest in Ferrellgas Partners, L.P and
subsidiaries. The Company is a wholly-owned subsidiary of Ferrell
Companies, Inc. ("Ferrell" or "Parent").
On July 5, 1994, Ferrellgas Partners, L.P. (the "MLP") completed an initial
public offering of common units representing limited partner interests (the
"common units"). The MLP was formed April 19, 1994, and is a publicly
traded limited partnership, owning a 99% limited partner interest in
Ferrellgas, L.P. (the "Operating Partnership" or "OLP"). The MLP and the
OLP (collectively referred to as the "Partnership") are both Delaware
limited partnerships. The MLP was formed to acquire and hold a limited
partner interest in the Operating Partnership. The OLP was formed to
acquire, own and operate the propane business and assets of the Company.
The Company owns an effective 2% general partner interest in the
Partnership and performs all management functions required for the
Partnership.
Concurrent with the closing of the offering, the Company contributed all of
its propane business and assets to the Partnership in exchange for
17,593,721 common units and Incentive Distribution Rights as well as a 2%
general partner interest in the MLP and the OLP on a combined basis.
In July 1998, the Company transferred its entire limited partnership
ownership of the MLP to Ferrell. Also during July 1998, 100% of the
outstanding common stock of Ferrell was purchased from Mr. James E. Ferrell
and his family by a leveraged employee stock ownership trust (the "ESOT")
established pursuant to the Ferrell Companies, Inc. Employee Stock
Ownership Plan (the "ESOP").
On December 17, 1999, the MLP partnership agreement was amended to allow
for the issuance of a newly created senior unit, in connection with an
acquisition. Generally, these senior units were to be paid quarterly
distributions in additional senior units equal to 10% per annum. Also, the
senior units were structured to allow for a redemption by the MLP at any
time, in whole or in part, upon payment in cash of the liquidating value of
the senior units, currently $40 per unit, plus the amount of any accrued
and unpaid distributions. The holder of the senior units also had the
right, at dates in the future and subject to certain events and conditions,
to convert any outstanding senior units into common units.
On June 5, 2000, the MLP and the OLP partnership agreements were amended to
allow the Company to have an option in maintaining its effective 2% general
partner interest concurrent with the issuance of other additional equity.
Prior to this amendment, the Company was required to make capital
contributions to maintain its effective 2% general partner interest with
the issuance of any additional equity. Also as part of this amendment, the
Company's interest in the MLP's common units was converted from a general
partner interest to general partner units.
On April 6, 2001, the MLP partnership agreement was amended to reflect
modifications made to the senior units, previously issued on December 17,
1999, and the common units owned by Ferrell. The senior units are to be
paid quarterly distributions in cash equivalent to 10% per annum or $4 per
senior unit. The amendment also granted the holder of the senior units the
right, subject to certain events and conditions, to convert any outstanding
senior units into common units at the earlier of December 31, 2005 or upon
the occurrence of a material event as defined by the partnership agreement.
Also as part of the amendment, Ferrell granted the Partnership the ability
to defer future distributions on the common units held by it, up to an
aggregate outstanding amount of $36,000,000, until December 31, 2005.
B. Summary of Significant Accounting Policies
(1) Nature of operations: The Company's operations are limited to those
activities associated with the Partnership. The Partnership is engaged
primarily in the retail distribution of propane and related equipment and
supplies in the United States. The retail market is seasonal because
propane is used primarily for heating in residential and commercial
buildings. The Partnership serves approximately 1,100,000 residential,
industrial/commercial and agricultural customers.
(2) Accounting estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the balance
sheets. Actual results could differ from these estimates. Significant
estimates impacting the consolidated balance sheets include reserves that
have been established for product liability and other claims.
(3) Principles of consolidation: The consolidated balance sheets include
the accounts of the Company, its subsidiaries and the Partnership. The
minority interest includes limited partner interests in the MLP's common
units held by the public and the MLP's senior units (See Notes H and N).
The limited partner interest owned by Ferrell is reflected as "Parent
investment in subsidiary" in the consolidated balance sheets. All material
intercompany transactions and balances have been eliminated.
(4) Cash and cash equivalents: The Company considers cash equivalents to
include all highly liquid debt instruments purchased with an original
maturity of three months or less.
(5) Inventories: Inventories are stated at the lower of cost or market
using average cost and actual cost methods. The Company enters into
commodity derivative contracts involving propane and related products to
hedge, reduce risk and anticipate market movements. The fair value of these
derivative contracts is classified as inventory.
(6) Property, plant and equipment: Property, plant and equipment are stated
at cost less accumulated depreciation. Expenditures for maintenance and
routine repairs are expensed as incurred. Depreciation is calculated using
the straight-line method based on the estimated useful lives of the assets
ranging from two to 30 years. In the first quarter of fiscal 2001, the
Company increased the estimate of the residual values of its existing
customer and storage tanks. This change in accounting estimate resulted
from a review by management of its tank values established through an
independent tank valuation obtained in connection with a financing
completed in December 1999. The Company, using its best estimates based on
reasonable and supportable assumptions and projections, reviews long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of its assets might not be recoverable.
(7) Goodwill and intangible assets: Intangible assets, consisting primarily
of customer lists, trademarks, assembled workforce, goodwill, and
noncompete notes, are stated at cost, net of amortization calculated using
either straight-line or accelerated methods over periods ranging from five
to 40 years. The Company reviews identifiable intangibles for impairment in
a similar manner as with long-lived assets. See "Adoption of new accounting
standards" below for a related discussion of the effect of a new accounting
pronouncement, Statement of Financial Accounting Standards (SFAS) No. 142,
on goodwill and intangible assets.
(8) Accounting for derivative commodity contracts: The Company enters into
commodity options involving propane and related products to specifically
hedge certain product cost risk. Any changes in the fair value of these
specific cash flow hedge positions are deferred and included in other
comprehensive income and recognized as an adjustment to the overall
purchase price of product in the month the purchase contract is settled.
The Company also enters into other commodity forward and futures
purchase/sale agreements and commodity swaps and options involving propane
and related products, which are not specific hedges to a certain product
cost risk, but are used for risk management purposes. To the extent such
contracts are entered into at fixed prices and thereby subject the Company
to market risk, the contracts are accounted for using the fair value
method. Under this valuation method, derivatives are carried on the
consolidated balance sheets at fair value with changes in that value
recognized in earnings.
(9) Income taxes: The Company is treated as a Subchapter S corporation for
Federal income tax purposes and is liable for income tax in states that do
not recognize Subchapter S status. Income taxes were computed as though
each company filed its own income tax return in accordance with the
Company's tax sharing agreement. Deferred income taxes are provided as a
result of temporary differences between financial and tax reporting, as
described in Note G, using the asset/liability method.
(10) Unit and stock-based compensation: The Company accounts for its Unit
Option Plan and the Ferrell Companies Incentive Compensation Plan using the
intrinsic value method under the provisions of Accounting Principles Board
(APB) No. 25, "Accounting for Stock Issued to Employees."
(11) Segment information: The Company is a single reportable operating
segment engaging in the retail distribution of propane and related
equipment and supplies and all of its long-lived assets are located in the
U.S.
(12) Adoption of new accounting standards: The Financial Accounting
Standards Board (FASB) recently issued SFAS No. 141 "Business
Combinations", SFAS No. 142 "Goodwill and Other Intangible Assets", SFAS
No. 143 "Accounting for Asset Retirement Obligations" and SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 141 requirements include, among other things, that all business
combinations be accounted for by a single method - the purchase method. It
applies to all business combinations initiated after June 30, 2001. The
Company has historically accounted for business combinations using the
purchase method, therefore, this new standard will not have a substantial
impact on how the Company accounts for future combinations.
SFAS No. 142 modifies the financial accounting and reporting for acquired
goodwill and other intangible assets, including the requirement that
goodwill and some intangible assets no longer be amortized. Also some
intangibles will be reclassified to goodwill. The Company has elected to
adopt SFAS No. 142 beginning in the first quarter of fiscal 2002. Although
there will be no cash flow effect, the Company believes its amortization
expense will decrease by approximately $17,000,000 in fiscal 2002, compared
to the amortization that would have been recorded had the new accounting
standard not been issued. This new standard also requires the Company to
test goodwill for impairment at the time the standard is adopted and also
on an annual basis. The Company believes that the results of the initial
impairment test of goodwill performed at the time the standard is adopted
will not have a material effect on its financial position.
SFAS No. 143 requires the recognition of a liability if a company has a
legal or contractual financial obligation in connection with the retirement
of a tangible long-lived asset. The Company expects to implement SFAS No.
143 beginning in the fiscal year ending July 31, 2003, and is currently
assessing its effect on the Company's financial position.
SFAS No. 144 modifies the financial accounting and reporting for long-lived
assets to be disposed of by sale and it broadens the presentation of
discontinued operations to include more disposal transactions. The Company
expects to implement SFAS No. 144 beginning in the fiscal year ending July
31, 2003, and is currently assessing its effect on the Company's financial
position.
(13) Reclassifications: Certain reclassifications have been made to the
prior year's consolidated balance sheet to conform to the current year's
consolidated balance sheet presentation.
C. Supplemental Balance Sheet Information
Inventories consist of:
(in thousands) 2001 2000
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Liquefied propane gas and related products $45,966 $50,868
Appliances, parts and supplies 19,318 21,111
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$65,284 $71,979
========== ==========
In addition to inventories on hand, the Company enters into contracts to
buy product for supply purposes. Nearly all of these contracts have terms
of less than one year and most call for payment based on market prices at
the date of delivery. All fixed price contracts have terms of less than one
year. As of July 31, 2001, in addition to the inventory on hand, the
Company had committed to take net delivery of approximately 3,754,000
gallons at a fixed price for its future retail propane sales.
Property, plant and equipment consist of:
(in thousands) 2001 2000
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Land and improvements $41,191 $40,761
Buildings and improvements 54,384 54,794
Vehicles 76,611 78,490
Furniture and fixtures 35,138 32,844
Bulk equipment and district facilities 90,930 88,289
Tanks and customer equipment 550,373 560,397
Other 3,281 3,753
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851,908 859,328
Less: accumulated depreciation 295,903 275,986
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$556,005 $583,342
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Intangibles consist of:
(in thousands) 2001 2000
---------- -----------
Customer lists $207,667 $207,478
Goodwill 400,569 398,974
Noncompete agreements 60,222 59,905
Assembled workforce 9,600 9,600
Other 168 391
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678,226 676,348
Less: accumulated amortization 208,364 174,512
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$469,862 $501,836
========== ===========
Other current liabilities consist of:
2001 2000
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Accrued interest $22,816 $21,659
Accrued payroll 20,236 15,073
Accrued insurance 8,056 4,770
Other 26,216 36,212
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$77,324 $77,714
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D. Accounts Receivable Securitization
On September 26, 2000, the OLP entered into an account receivable
securitization facility with Bank One, NA. As part of this 364-day
facility, the OLP transferred an interest in a pool of its trade accounts
receivable to its wholly-owned, special purpose subsidiary, Ferrellgas
Receivables, LLC. Ferrellgas Receivables then sold its interest to a
commercial paper conduit of Banc One, NA. The OLP remits daily to
Ferrellgas Receivables funds collected on the pool of trade receivables
held by Ferrellgas Receivables. The Company intends to renew the facility
effective September 25, 2001 for a one year commitment with Bank One, NA.
From the inception of this facility in September 2000 through July 31,
2001, the cash flows related to this facility between the OLP and
Ferrellgas Receivables are detailed as follows:
(in thousands) 2001
----------
Proceeds from new securitizations $115,000
Proceeds from collections reinvested in
revolving period securitizations 725,955
Remittance of amounts collected on securitizations (809,955)
----------
Net proceeds from accounts receivable securitization $31,000
==========
Cash invested in unconsolidated subsidiary $ 3,399
==========
The level of funding available from this facility is currently limited to
$60,000,000. In accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," this
transaction is reflected on the Company's consolidated balance sheets as a
sale of accounts receivable and an investment in an unconsolidated
subsidiary. The OLP retained servicing rights and the right to collect
finance charges, however, the assets related to these retained interests at
July 31, 2001, had no material effect on the consolidated balance sheet.
The investment in the unconsolidated subsidiary related to this facility
was $7,225,000 at July 31, 2001 and is classified within "other assets" on
the consolidated balance sheet.
E. Long-Term Debt
Long-term debt consists of:
(in thousands) 2001 2000
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Senior Notes
Fixed rate, 7.16% due 2005-2013 (1) $350,000 $350,000
Fixed rate, 9.375%, due 2006 (2) 160,000 160,000
Fixed rate, 8.8%, due 2006-2009 (3) 184,000 184,000
Credit Agreement
Revolving credit loans 8.9% due 2003 (4) - 11,658
Notes payable, 7.9% and 7.5% weighted average
interest rates, respectively,
due 2001 to 2009 12,566 15,988
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706,566 721,646
Less: current portion, included in other
current liabilities 1,784 3,528
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$704,782 $718,118
========== ==========
(1) The OLP fixed rate Senior Notes ("$350 million Senior Notes"), issued
in August 1998, are general unsecured obligations of the OLP and rank
on an equal basis in right of payment with all senior indebtedness of
the OLP and senior to all subordinated indebtedness of the OLP. The
outstanding principal amount of the Series A, B, C, D and E Notes
shall be due on August 1, 2005, 2006, 2008, 2010, and 2013,
respectively. In general, the OLP does not have the option to prepay
the Notes prior to maturity without incurring prepayment penalties.
(2) The MLP fixed rate Senior Secured Notes ("MLP Senior Secured Notes"),
issued in April 1996, are redeemable at the option of the MLP, in
whole or in part, at any time after June 15, 2001. The notes are
secured by the MLP's partnership interest in the OLP. The MLP Senior
Secured Notes bear interest from the date of issuance, payable
semi-annually in arrears on June 15 and December 15 of each year.
(3) The OLP fixed rate Senior Notes ("$184 million Senior Notes"), issued
in February 2000, are general unsecured obligations of the OLP and
rank on an equal basis in right of payment with all senior
indebtedness of the OLP and senior to all subordinated indebtedness of
the OLP. The outstanding principal amount of the Series A, B and C
Notes shall be due on August 1, 2006, 2007 and 2009, respectively. In
general, the OLP does not have the option to prepay the Notes prior to
maturity without incurring prepayment penalties.
(4) At July 31, 2001, the unsecured $157,000,000 Credit Facility (the
"Credit Facility"), expiring June 2003, consisted of a $117,000,000
unsecured working capital, general corporate and acquisition facility,
including a letter of credit facility, and a $40,000,000 revolving
working capital facility. This $40,000,000 facility is subject to an
annual reduction in outstanding balances to zero for thirty
consecutive days. All borrowings under the Credit Facility bear
interest, at the borrower's option, at a rate equal to either a) LIBOR
plus an applicable margin varying from 1.25 % to 2.25 % or, b) the
bank's base rate plus an applicable margin varying from 0.25 % to 1.25
%. The bank's base rate at July 31, 2001 and 2000 was 6.75% and 9.5%,
respectively.
On December 17, 1999, in connection with the purchase of Thermogas, LLC
("Thermogas acquisition") (see Note N), the OLP assumed a $183,000,000 loan
that was originally issued by Thermogas, LLC ("Thermogas") and had a
maturity date of June 30, 2000. On February 28, 2000, the OLP issued
$184,000,000 Senior Notes at an average interest rate of 8.8% in order to
refinance the $183,000,000 loan. The additional $1,000,000 in borrowings
was used to fund debt issuance costs.
Effective April 27, 2000, the MLP entered into an interest rate swap
agreement with Bank of America, related to the semi-annual interest payment
due on these MLP Senior Secured notes. The swap agreement, which was
terminated at the option of the counterparty on June 15, 2001, required the
counterparty to pay the stated fixed interest rate every six months. In
exchange, the MLP was required to make quarterly floating interest rate
payments based on an annual interest rate equal to the three month LIBOR
interest rate plus 1.655% applied to the same notional amount of
$160,000,000. The Company resumed paying the stated fixed interest rate
effective after June 15, 2001.
At July 31, 2001 and 2000, $0 and $18,342,000, respectively, of short-term
borrowings were outstanding under the credit facility. Letters of credit
outstanding, used primarily to secure obligations under certain insurance
arrangements, totaled $46,660,000 and $36,892,000, respectively. Effective
July 16, 2001, the credit facility was amended to increase the letter of
credit sub-facility availability from $60,000,000 to $80,000,000.
The MLP Senior Secured Notes, the $350 million and $184 million Senior
Notes and the Credit Facility agreement contain various restrictive
covenants applicable to the MLP and OLP and its subsidiaries, the most
restrictive relating to additional indebtedness, sale and disposition of
assets and transactions with affiliates. In addition, the Partnership is
prohibited from making cash distributions of the Minimum Quarterly
Distribution if a default or event of default exists or would exist upon
making such distribution, or if the Partnership fails to meet certain
coverage tests. The Partnership is in compliance with all requirements,
tests, limitations and covenants related to these debt agreements.
The scheduled annual principal payments on long-term debt are to be
$1,784,000 in 2002, $2,068,000 in 2003, $2,113,000 in 2004, $2,263,000 in
2005, $271,260,000 in 2006 and $427,078,000 thereafter.
F. Derivatives
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137 and SFAS No. 138, requires all
derivatives (with certain exceptions), whether designated in hedging
relationships or not, to be recorded on the consolidated balance sheet at
fair value. As a result of implementing SFAS No. 133 at the beginning of
fiscal 2001, the Company recognized in its first quarter of fiscal 2001,
gains totaling $709,000 in accumulated other comprehensive income. In
addition, beginning in the first quarter of fiscal 2001, the Company
recorded subsequent changes in the fair value of positions qualifying as
cash flow hedges in accumulated other comprehensive income and changes in
the fair value of other positions in the consolidated statements of
earnings. The Company's overall objective for entering into derivative
contracts for the purchase of product is related to hedging, risk reduction
and to anticipate market movements. Other derivatives are entered into to
reduce interest rate risk associated with long term debt and lease
obligations. Fair value hedges are derivative financial instruments that
hedge the exposure to changes in the fair value of an asset or a liability
or an identified portion thereof attributable to a particular risk. Cash
flow hedges are derivative financial instruments that hedge the exposure to
variability in expected future cash flows attributable to a particular
risk.
The Company uses cash flow hedges to manage exposures to product purchase
price risk and uses both fair value and cash flow hedges to manage exposure
to interest rate risks.
Fluctuations in the wholesale cost of propane expose the Company to
purchase price risk. The Company purchases propane at various prices that
are eventually sold to its customers, exposing the Company to future
product price fluctuations. Also, certain forecasted transactions expose
the Company to purchase price risk. The Company monitors its purchase price
exposures and utilizes product hedges to mitigate the risk of future price
fluctuations. Propane is the only product hedged with the use of product
hedge positions. The Company uses derivative products to hedge a portion of
its forecasted purchases for up to one year in the future. These
derivatives are designated as cash flow hedging instruments. Because these
derivatives are designated as cash flow hedges, the effective portions of
changes in the fair value of the derivative are recorded in other
comprehensive income (OCI) and are recognized in the consolidated
statements of earnings when the forecasted transaction impacts earnings.
The $289,000 risk management fair value adjustment classified as other
comprehensive income at July 31, 2001, will be recognized in the
consolidated statements of earnings during fiscal 2002. Changes in the fair
value of cash flow hedges due to hedge ineffectiveness are recognized in
cost of product sold on the consolidated statements of earnings. The fair
value of the derivatives related to purchase price risk are classified on
the consolidated balance sheets as inventories. The Company also purchases
and sells derivatives that are not classified as hedges to manage other
risks associated with commodity prices. The changes in fair value of these
derivatives are recognized as they occur in cost of product sold on the
consolidated statements of earnings.
The Company also uses forward contracts, not designated as hedging
instruments under SFAS No. 133, to help reduce the price risk related to
sales made to its propane customers. These forward contracts meet the
requirement to qualify as normal purchases and sales as defined in SFAS No.
133, as amended by SFAS No. 137 and SFAS No. 138, and thus are not adjusted
to fair market value.
As of July 31, 2001, the Company holds $706,566,000 in primarily fixed rate
debt and $157,600,000 in variable rate operating leases. Fluctuations in
interest rates subject the Company to interest rate risk. Decreases in
interest rates increase the fair value of the Company's fixed rate debt,
while increases in interest rates subject the Company to the risk of
increased interest expense related to its variable rate debt and operating
leases.
The Company enters into fair value and cash flow hedges to help reduce its
overall interest rate risk. Interest rate swaps were used to hedge the
exposure to changes in the fair value of fixed rate debt due to changes in
interest rates. The fair value of interest rate derivatives that are
considered fair value or cash flow hedges are classified either as other
current or long-term assets or as other current or long-term liabilities on
the consolidated balance sheets. Changes in the fair value of the fixed
rate debt and any related fair value hedges are recognized as they occur in
interest expense on the consolidated statements of earnings. There were no
such fair value hedges outstanding at July 31, 2001. Interest rate caps are
used to hedge the risk associated with rising interest rates and their
affect on forecasted transactions related to variable rate debt and lease
obligations. These interest rate caps are designated as cash flow hedges
and are outstanding at July 31, 2001. Thus, the effective portions of
changes in the fair value of the hedges are recorded in OCI at interim
periods and are recognized as interest expense in the consolidated
statements of earnings when the forecasted transaction impacts earnings.
Cash flow hedges are assumed to hedge the risk of changes in cash flows of
the hedged risk.
G. Income Taxes
The significant components of the net deferred tax asset (liability)
included in the consolidated balance sheets are as follows:
(in thousands) 2001 2000
---------- ----------
Deferred tax liabilities:
Partnership basis difference $(1,827) $(2,043)
Deferred tax assets:
Operating loss and credit carryforwards 101 112
---------- ----------
Net deferred tax liability $(1,726) $(1,931)
========== ==========
Partnership basis differences are primarily attributable to differences in
the tax and book basis of fixed assets and amortizable intangibles
resulting from the Company's contribution of assets and liabilities
concurrent with the MLP's public offering in 1994.
For Federal income tax purposes, the Company has net operating loss
carryforwards of approximately $98,000,000 at July 31, 2001 available to
offset future taxable income. These net operating loss carryforwards expire
at various dates through 2011.
The Company is potentially subject to the built-in gains tax, which could
be incurred on the sale of assets owned as of August 1, 1998, the date of
the Subchapter S election, that have a fair market value in excess of their
tax basis as of that date. However, the Company anticipates that it can
avoid incurring any built-in gains tax liability through utilization of its
net operating loss carryovers and tax planning relating to the
retention/disposition of assets owned as of August 1, 1998. In the event
that the built-in gains tax is not incurred, the Company may not utilize
the net operating loss carryforwards.
H. Minority Interest
The minority interest on the consolidated balance sheets includes limited
partner interests in both the MLP's common units held by the public and the
MLP's senior units held by JEF Capital Management, Inc., an entity owned by
James E. Ferrell, Chairman, Chief Executive Officer and President of the
general partner. At July 31, 2001, minority interest related to the common
units owned by the public was $76,189,000. At July 31, 2000, minority
interest related to the common units owned by the public was zero as cash
distributions were in excess of its basis. Minority interest related to the
senior units was $112,065,000 and $179,786,000 at July 31, 2001 and 2000,
respectively. The amount at July 31, 2001 represents the liquidation value
of the senior units. The amount at July 31, 2000, represents the
liquidation value of $186,108,000 less a net discount of $6,322,000 related
to senior unit issuance fees. See Note J for additional information about
the senior units.
I. Transactions with Related Parties
The Company has two notes receivable from Ferrell on an unsecured basis due
on demand. Because Ferrell no longer intends to repay the notes, the
Company did not accrue interest income in fiscal years 2001 and 2000. The
balances outstanding on these notes at July 31, 2001 and 2000, were
$147,607,000, and $146,102,000, respectively, and are reported as Note
Receivable from Parent in Stockholder's Equity on the consolidated balance
sheets. This net increase in the balances in fiscal year 2001 is primarily
due to the cash loaned by the Company to Ferrell.
During fiscal 2000, The Williams Companies, Inc. ("Williams") became a
related party to the Company due to the Partnership's issuance of 4,375,000
senior units to a subsidiary of Williams as part of the Thermogas
acquisition (See Note N). In April 2001, Williams sold all its senior units
to JEF Capital Management, Inc., and thereafter, ceased to be a related
party of the Company.
During fiscal 2000, Williams provided propane supply and general and
administrative services to the Company to assist in the integration of the
acquisition. The amount due to Williams at July 31, 2000, was $5,045,000.
The amount due from Williams at July 31, 2000, was $13,000.
On April 6, 2001, Williams approved amendments to the MLP partnership
agreement related to certain terms of the senior units. Williams then sold
all of the senior units for a purchase price of $195,529,000 plus accrued
and unpaid distributions to JEF Capital Management. The senior units
currently have all the same terms and preference rights in distributions
and liquidation as when the units were owned by Williams.
During the fourth quarter of fiscal 2001, the MLP paid to JEF Capital
Management $83,464,000 to redeem a total of 2,086,612 senior units and
$2,951,000 in senior unit distributions. In a noncash transaction, the MLP
accrued a senior unit distribution of $2,801,622 payable to JEF Capital
Management on September 14, 2001.
Ferrell International Limited and FI Trading are entities owned by James E.
Ferrell and thus affiliates of the Company. In connection with its normal
purchasing and risk management activities, the Company entered into, with
Ferrell International Limited and FI Trading as a counterparty, certain
forward, option and swap contracts. Amounts due from Ferrell International
Limited at July 31, 2001 and 2000 were $0 and $1,826,000, respectively.
Amounts due to Ferrell International Limited at July 31, 2001 and 2000 were
$0 and $1,484,000, respectively.
J. Contingencies and Commitments
The Company is threatened with or named as a defendant in various lawsuits
that, among other items, claim damages for product liability. It is not
possible to determine the ultimate disposition of these matters; however,
management is of the opinion that there are no known claims or contingent
claims that are likely to have a material adverse effect on the financial
condition, results of operations or cash flows of the Company. Currently,
the Company is not a party to any legal proceedings other than various
claims and lawsuits arising in the ordinary course of business.
On December 6, 1999, the OLP entered into, with Banc of America Leasing &
Capital LLC, a $25,000,000 operating lease involving the sale-leaseback of
a portion of the OLP's customer tanks. This operating lease has a term that
expires June 30, 2003 and may be extended for two additional one-year
periods at the option of the OLP, if such extension is approved by the
lessor.
On December 17, 1999, immediately prior to the closing of the Thermogas
acquisition (See Note N), Thermogas entered into, with Banc of America
Leasing & Capital LLC, a $135,000,000 operating lease involving a portion
of its customer tanks. In connection with the Thermogas acquisition, the
OLP assumed all obligations under the $135,000,000 operating lease, which
has terms and conditions similar to the December 6, 1999, $25,000,000
operating lease discussed above.
Effective June 2, 2000, the OLP entered into an interest rate cap agreement
("Cap Agreement") with Bank of America, related to variable quarterly rent
payments due pursuant to two operating tank lease agreements. The variable
quarterly rent payments are determined based upon a floating LIBOR based
interest rate. The Cap Agreement, which expires June 30, 2003, requires
Bank of America to pay the OLP at the end of each March, June, September
and December the excess, if any, of the applicable three month floating
LIBOR interest rate over 9.3%, the cap, applied to the total obligation due
each quarter under the two operating tank lease agreements. The total
obligation under these two operating tank lease agreements as of July 31,
2001 and 2000 was $157,600,000 and $159,200,000, respectively.
The MLP's senior units are redeemable by the MLP at any time, in whole or
in part, upon payment in cash of the liquidating value of the senior units,
currently $40 per unit, plus the amount of any accrued and unpaid
distributions. The holder of the senior units has the right, subject to
certain events and conditions, to convert any outstanding senior units into
MLP common units at the earlier of December 31, 2005 or upon the occurrence
of a material event as defined by the MLP partnership agreement. Such
conversion rights are contingent upon the Company not previously redeeming
such securities.
Certain property and equipment is leased under noncancelable operating
leases which require fixed monthly rental payments and which expire at
various dates through 2020. Future minimum lease commitments for such
leases in the next five years, including the aforementioned operating tank
leases, are $34,287,000 in 2002, $28,594,000 in 2003, $11,617,000 in 2004,
$8,279,000 in 2005 and $5,855,000 in 2006.
In addition to the future minimum lease commitments, the Company plans to
purchase vehicles and computers at the end of their lease terms totaling
$781,000 in 2002, $1,203,000 in 2003, $1,488,000 in 2004, $1,342,000 in
2005 and $1,009,000 in 2006. The Company intends to renew other vehicle,
tank and computer leases that would have had buyouts of $5,137,000 in 2002,
$161,109,000 in 2003, $3,789,000 in 2004, $2,744,000 in 2005, and $815,000
in 2006.
K. Employee Benefits
Ferrell makes contributions to the ESOT which causes a portion of the
shares of Ferrell owned by the ESOT to be allocated to employees' accounts
over time. The allocation of Ferrell shares to employee accounts causes a
noncash compensation charge to be incurred by the Partnership, equivalent
to the fair value of such shares allocated. The Company is not obligated to
fund or make contributions to the ESOT.
The Company and its parent, Ferrell, have a defined contribution
profit-sharing plan which includes both profit sharing and matching
contributions. The plan covers substantially all employees with more than
one year of service. With the establishment of the ESOP in July 1998, the
Company suspended future profit sharing contributions to the plan beginning
with fiscal year 1998. The plan, which qualifies under section 401(k) of
the Internal Revenue Code, also provides for matching contributions under a
cash or deferred arrangement based upon participant salaries and employee
contributions to the plan.
The Company has a defined benefit plan that provides participants who were
covered under a previously terminated plan with a guaranteed retirement
benefit at least equal to the benefit they would have received under the
terminated plan. Until July 31, 1999, benefits under the terminated plan
were determined by years of credited service and salary levels. As of July
31, 1999, years of credited service and salary levels were frozen. The
Company's funding policy for this plan is to contribute amounts deductible
for Federal income tax purposes and invest the plan assets primarily in
corporate stocks and bonds, U.S. Treasury bonds and short-term cash
investments. As of July 31, 2001, other comprehensive income was reduced by
$2,092,000 due to the recording of $2,092,000 as an increase to other
liabilities, because the accumulated benefit obligation of this plan
exceeded the fair value of plan assets.
L. Ferrellgas, Inc. Unit Option Plan and Stock Options of Ferrell Companies,
Inc.
Prior to April 19, 2001, the Ferrellgas, Inc. Unit Option Plan (the "unit
option plan") authorized the issuance of options (the "unit options")
covering up to 850,000 of the MLP's units to certain officers and employees
of the Company. Effective April 19, 2001, the unit option plan was amended
to authorize the issuance of options covering an additional 500,000 common
units. The unit options are exercisable at exercise prices ranging from
$16.80 to $21.67 per unit, which was an estimate of the fair market value
of the units at the time of the grant. In general, the options vest over a
five year period, and expire on the tenth anniversary of the date of the
grant.
Number Weighted Average Weighted
Of Exercise Price Average Fair
Units Value
------------- ---------------- --------------
Outstanding, August 1, 1999 782,025 $18.23
Granted - - -
Forfeited (60,500) 19.38
-------------
Outstanding, July 31, 2000 721,525 18.13
Granted 651,000 17.90 $2.56
Exercised (101,250) 16.80
Forfeited (42,075) 19.27
--------------
Outstanding, July 31, 2001 1,229,200 18.08
--------------
Options exercisable,
July 31, 2001 503,543 18.06
--------------
Options Outstanding at July 31, 2001
--------------------------------------------------
Range of option prices at
end of year $16.80-$21.67
Weighted average remaining
contractual life 7.2 Years
The Ferrell Companies, Inc. nonqualified stock option plan (the "NQP") was
established by Ferrell to allow upper middle and senior level managers of
the Company to participate in the equity growth of Ferrell and, indirectly
in the equity growth of the Partnership. The shares underlying the stock
options are common shares of Ferrell, therefore, there is no potential
dilution of the Partnership. The Ferrell NQP stock options vest ratably in
5% to 10% increments over 12 years or 100% upon a change of control of
Ferrell, or the death, disability or retirement at the age of 65 of the
participant. Vested options are exercisable in increments based on the
timing of the payoff of Ferrell debt, but in no event later than 20 years
from the date of issuance.
M. Disclosures About Fair Value of Financial Instruments
The carrying amount of short-term financial instruments approximates fair
value because of the short maturity of the instruments. The estimated fair
value of the Company's long-term financial instruments was $681,060,000 and
$698,082,000 as of July 31, 2001 and 2000, respectively. The fair value is
estimated based on quoted market prices.
Interest Rate Collar, Cap and Swap Agreements. The Company from time to
time has entered into various interest rate collar, cap and swap agreements
involving, among others, the exchange of fixed and floating interest
payment obligations without the exchange of the underlying principal
amounts. During fiscal 2001, an interest rate collar agreement expired and
a swap agreement was terminated by a counterparty. As of July 31, 2001, an
interest rate cap agreement with a counterparty who is a large financial
institution remained in place. The fair value of this interest rate cap
agreement at July 31, 2001 is de minimis. The fair values for the interest
rate collar, cap and swap agreements at July 31, 2000 were $43,000,
$(258,000), and $(561,000), respectively.
N. Business Combinations
On December 17, 1999, the Company purchased Thermogas from a subsidiary of
Williams. At closing the Company entered into the following noncash
transactions: a) issued $175,000,000 in senior units to the seller, b)
assumed a $183,000,000 loan, (see Note E) and c) assumed a $135,000,000
operating lease (see Note J). After the conclusion of these
acquisition-related transactions, including the merger of the OLP and
Thermogas, the Company acquired $61,842,000 of cash, which remained on the
Thermogas balance sheet at the acquisition date. The Company paid
$17,146,000 in additional costs and fees related to the acquisition. As
part of the Thermogas acquisition, the OLP agreed to reimburse Williams for
the value of working capital received by the Company in excess of
$9,147,500. On June 6, 2000, the OLP and Williams agreed upon the amount of
working capital that was acquired by the Company on December 17, 1999. The
OLP reimbursed Williams $5,652,500 as final settlement of this working
capital reimbursement obligation. In fiscal 2000, the Company had accrued
$7,033,000 in involuntary employee termination benefits and exit costs,
which it expected to incur within twelve months from the acquisition date
as it implemented the integration of the Thermogas operations. This accrual
included $5,870,000 of termination benefits and $1,163,000 of costs to exit
Thermogas activities. The Company paid $2,788,000 and $1,306,000 for
termination benefits and $491,000 and $890,000 for exit costs in fiscal
years 2001 and 2000, respectively. The remaining liability for termination
benefits and exit costs was reduced in fiscal 2001 by $1,558,000 as an
adjustment to goodwill.
The total assets contributed to the OLP (at the Company's cost basis) have
been allocated as follows: (a) working capital of $16,870,000, (b)
property, plant and equipment of $140,284,000, (c) $60,200,000 to customer
list with an estimated useful life of 15 years, (d) $9,600,000 to assembled
workforce with an estimated useful life of 15 years, (e) $3,071,000 to
noncompete agreements with an estimated useful life ranging from one to
seven years, and (f) $86,475,000 to goodwill at an estimated useful life of
15 years. The transaction has been accounted for as a purchase.
During the year ended July 31, 2001, the Company made acquisitions of three
businesses with an aggregate value of $418,000. These purchases were funded
by $200,000 of cash payments and, in a noncash transaction, the issuance of
$218,000 of notes payable to the seller.
During the year ended July 31, 2000, the Company made acquisitions of two
other businesses with an aggregate value of $7,183,000, in addition to the
Thermogas acquisition. These purchases were funded by $6,338,000 of cash
payments and the following noncash transactions: the issuance of $601,000
of notes payable to the seller, $46,000 of common units and $198,000 of
other costs and consideration.
All transactions have been accounted for using the purchase method of
accounting.