UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended July 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file numbers 1-11331 and
333-06693
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
(Exact name of registrants as specified in their charters)
Delaware 43-1698480
Delaware 43-1742520
- -------------------------------- -------------------------------------
(State or other jurisdictions of (I.R.S. Employer Identification Nos.)
incorporation or organization)
One Liberty Plaza, Liberty, Missouri 64068
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 792-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Units New York Stock Exchange
- --------------------------------------------------------------------------------
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value as of September 30, 2002, of the registrant's Common
Units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $362,574,000.
At September 30, 2002, Ferrellgas Partners, L.P. had outstanding 36,089,703
Common Units and 2,782,211 Senior Units.
Documents Incorporated by Reference: None
FERRELLGAS PARTNERS, L.P.
FERRELLGAS PARTNERS FINANCE CORP.
2002 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I
ITEM 1. BUSINESS......................................................1
ITEM 2. PROPERTIES....................................................9
ITEM 3. LEGAL PROCEEDINGS............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........10
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND
RELATED UNITHOLDER MATTERS...................................11
ITEM 6. SELECTED FINANCIAL DATA......................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS..........29
ITEM 11. EXECUTIVE COMPENSATION.......................................31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS...............34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............37
ITEM 14. CONTROLS AND PROCEDURES......................................38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..........................................38
PART I
ITEM 1. BUSINESS.
Ferrellgas Partners, L.P. is a Delaware limited partnership. Our common
units are listed on the New York Stock Exchange and our activities are primarily
conducted through our subsidiary Ferrellgas, L.P., a Delaware limited
partnership. We are the sole limited partner of Ferrellgas, L.P. with a 99%
limited partner interest. In this report, unless the context indicates otherwise
the terms "our", "we" and "its" are used sometimes as abbreviated references to
Ferrellgas Partners, L.P. itself or Ferrellgas Partners, L.P. and its
consolidated subsidiaries, including Ferrellgas, L.P.
Ferrellgas, L.P. was formed on April 22, 1994, and accounts for
substantially all of our consolidated assets, sales and operating earnings,
except for interest expense related to $160,000,000 of 9.375% Senior Secured
Notes due 2006. See "Management's Discussion and Analysis of Financial Condition
- - Liquidity and Capital Resources - Financing Activities" for additional details
about our redemption in September 2002 of the Senior Secured Notes with the
proceeds from the issuance of $170,000,000 of 8.75% Senior Notes due 2012.
Our general partner, Ferrellgas, Inc., performs all management functions
for us and our subsidiaries, including both Ferrellgas, L.P. and Ferrellgas
Partners Finance Corp. Ferrellgas, Inc. holds an approximate 1% general partner
interest in both us and in Ferrellgas, L.P. Ferrell Companies, Inc., the parent
company of Ferrellgas, Inc., owns approximately 50% of our outstanding common
units.
General
We are the second largest retail marketer of propane in the United States
based on retail gallons sold during our fiscal year ended July 31, 2002,
representing approximately 11% of the retail propane gallons sold in the United
States. We have 564 retail outlets, serving more than 1 million residential,
industrial/commercial and agricultural and other customers in 45 states. Our
operations primarily include the retail distribution and sale of propane and
related equipment and supplies and extend from coast to coast with
concentrations in the Midwest, Southeast, Southwest and Northwest regions of the
country.
Our retail propane distribution business consists principally of
transporting propane purchased from third parties to retail distribution outlets
and then to tanks on customers' premises, as well as to portable propane
cylinders. In the residential and commercial markets, propane is primarily used
for space heating, water heating and cooking. In the agricultural market,
propane is primarily used for crop drying, space heating, irrigation and weed
control. In addition, propane is used for a variety of industrial applications,
including use as an engine fuel which is burned in internal combustion engines
that power vehicles and forklifts, and use as a heating or energy source in
manufacturing and drying processes.
In our past three fiscal years, we reported annual retail propane sales
volumes of:
Retail propane gallons
sold
Fiscal year ended (in millions)
----------------- ----------------------
July 31, 2002 832
July 31, 2001 957
July 31, 2000 847
1
The decrease in gallons sold from our fiscal year 2001 to 2002 is primarily
due to national average heating season temperatures that were 12% warmer than
normal in fiscal 2002 compared to 6% colder than normal for the same period last
year. For our fiscal year 2001, our retail propane sales volumes included a full
year's contribution from the Thermogas operations we acquired in December 1999.
With this acquisition, we acquired more than 180 retail locations primarily in
the Midwest, complementing our historically strong presence in that region. We
integrated these Thermogas operations with our existing operations resulting in
significant cost savings.
Our History
We are a Delaware limited partnership that was formed in 1994 in connection
with our initial public offering. Our operations began in 1939 as a single
location propane retailer in Atchison, Kansas. Our initial growth largely
resulted from small acquisitions in rural areas of eastern Kansas, northern and
central Missouri, Iowa, western Illinois, southern Minnesota, South Dakota and
Texas. Since 1986, we have acquired more than 100 propane retailers, expanding
our operations from coast to coast, and as of July 31, 2002, we have 564 retail
outlets nationwide. Our three largest acquisitions since 1994 have been:
Estimated Retail
Gallons Acquired
Company Date Acquired (in millions)
------------------------ ----------------- ----------------
Thermogas December 1999 270
Skelgas Propane May 1996 93
Vision Energy Resources November 1994 47
Business Strategy
Our business strategy is to:
o achieve operating efficiencies through the utilization of technology and
process enhancements in our operations;
o capitalize on our national presence and economies of scale;
o expand our operations through disciplined acquisitions and internal growth;
and
o align employee interest with investors through significant employee
ownership.
Using technology to improve operations. During 2001, we completed a review
of our key business processes to identify several areas where we can use new
technology and process enhancements to improve our operational efficiency.
Specifically, we have identified areas where we believe we can reduce operating
expenses and improve customer satisfaction in the near future. These areas of
opportunity include development of new technology to improve our routing and
scheduling of customer deliveries, customer administration and operational
workflow. During our fiscal year 2002, we allocated considerable resources
toward these improvements, including the purchase of computer hardware and
software and development of new software. We have incurred growth and
maintenance capital expenditures of $30,070,000 related to this technology and
process enhancement initiative which was funded primarily from excess cash
generated from operations during our record financial performance in fiscal year
2001 - a year in which we achieved net earnings of $64,068,000. These capital
expenditures represent a substantial majority of the capital expenditures we
expect to incur in connection with this initiative. We began a pilot of some of
these technology and process enhancements in a limited geographic area in fiscal
2003. This pilot program currently affects less than 5% of our retail operations
and is being used to test and further refine the technology and process
enhancements. See "Management's Discussion and Analysis of Financial Condition -
Liquidity and Capital Resources - Investing Activities" for additional details
about the technology and process enhancement initiative.
2
Capitalizing on our national presence and economies of scale. We believe
our national presence of 564 retail outlets and estimated 11% market share of
retail propane gallons sold in the United States gives us advantages over our
smaller competitors. These advantages include economies of scale in areas such
as:
o product procurement;
o transportation;
o fleet purchases;
o customer administration; and
o general administration.
Our national presence also allows us to be one of the few propane retailers
that can competitively serve commercial customers on a nationwide basis. In
addition, we believe that our presence in 45 states provides us opportunities to
make acquisitions of other retail propane companies that overlap with our
existing operations, providing economies of scale and significant cost savings
in these markets. Our most recent significant acquisition was Thermogas in
December 1999. Over 130 of the 180 acquired Thermogas retail locations were
integrated with our existing retail locations.
Employing a disciplined acquisition strategy and achieving internal growth.
We expect to continue the expansion of our customer base through the acquisition
of other retail propane distributors. We intend to concentrate on acquisition
activities in geographical areas adjacent to our existing operations, and on a
selected basis, in areas that broaden our geographic coverage. We also intend to
focus on acquisitions that can be efficiently combined with our existing
operations to provide an attractive return on investment after taking into
account the cost savings we anticipate will result from those combinations. Our
goal is to improve the operations and profitability of the businesses we acquire
by integrating them into our established national organization. We also believe
that, as a result of our industry leadership and efficient operating standards,
we are positioned to successfully compete for growth opportunities within our
existing operating regions and have implemented marketing programs that focus
specific resources towards internal growth.
Aligning employee interests with our investors. In 1998, we established an
employee benefit plan that we believe aligns the interests of employees with
those of our investors. Through the Ferrell Companies, Inc. Employee Stock
Ownership Trust, employees own approximately 50% of our outstanding common
units, allowing them to participate directly in our overall success. This plan
is unique in the retail propane distribution industry and we believe that the
entrepreneurial culture fostered by employee-ownership provides us with a
distinct competitive advantage.
Retail Distribution of Propane and Related Equipment and Supplies
Our retail propane distribution business consists principally of
transporting propane purchased from third parties to retail distribution outlets
and then to tanks on customers' premises, as well as to portable propane
cylinders. Our market areas are generally rural, but also include suburban areas
for industrial applications. We utilize marketing programs targeting both new
and existing customers by emphasizing our efficiency in delivering propane to
customers as well as our employee training and safety programs.
We sell propane primarily to four markets: residential,
industrial/commercial, agricultural and other, with "other" being principally to
other propane retailers. In fiscal 2002, no one customer accounted for 10% or
more of our consolidated revenues. The retail distribution of bulk propane
generally involves large numbers of small volume deliveries averaging
approximately 200 gallons each. Our bulk deliveries of propane are transported
from our retail distribution outlets to our customers by our fleet of 2,247 bulk
delivery trucks, which are generally fitted with 2,000 to 3,000 gallon tanks.
Propane storage tanks located on our customers' premises are then filled from
these bulk delivery trucks. We also deliver propane to our customers in portable
cylinders using primarily our fleet of 505 cylinder delivery trucks.
3
For our 2002 fiscal year, we derived approximately 90% of our gross profit
from the retail distribution and sale of propane and related risk management
activities. Gross profit derived from our retail distribution of propane was
derived primarily from three sources:
o 58% from residential customers;
o 30% from industrial/commercial customers; and
o 12% from agricultural and other customers.
Our gross profit from the retail distribution of propane is primarily based
on margins, the cents-per-gallon difference between our purchase price and the
sales price we charge our customers. Our residential customers typically provide
us a greater margin and tend to be a more stable customer base and less
sensitive to price changes than our industrial/commercial and agricultural and
other customers. Should wholesale propane prices decline in the future, our
margins on the distribution of propane to retail customers should increase in
the short-term because retail prices have tended to change less rapidly than
wholesale prices. Should the wholesale cost of propane increase, for similar
reasons retail margins and profitability would likely be reduced, at least for
the short-term, until retail prices can be increased.
Retail propane bulk customers typically lease their storage tanks from
their distributors. Over 70% of our retail propane bulk customers lease their
tanks from us. Our lease terms and the fire safety regulations in some states
require leased tanks to be filled only by the propane supplier owning the tank.
The cost and inconvenience of switching tanks minimizes a customer's tendency to
switch suppliers of propane on the basis of minor variations in price, which
helps us minimize customer loss.
Our retail operations also include the retail sale of propane appliances
and related parts and fittings, leasing tanks to retail customers, and other
retail propane related services.
Seasonality and Effect of Weather
The market for propane is seasonal because propane is used primarily for
heating in residential and commercial buildings. Consequently, sales and
operating profits are concentrated in our second and third fiscal quarters. In
addition, sales volume traditionally fluctuates from year to year in response to
variations in weather, price and other factors. We believe that our broad
geographic distribution helps us minimize exposure to regional weather and
economic patterns. The weather has been significantly warmer than normal in four
of the last five winter heating seasons. Despite reduced gallon sales during
these warmer than normal periods, and the completion in 1999 of our largest
acquisition since 1994, we have been able to maintain our debt to cash flow
ratio while continuing to pay quarterly distributions to our unitholders. See
additional information about debt to cash flow ratios and the payment of
quarterly distributions in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." In
addition, during times of colder than normal winter weather, we have been able
to take advantage of our large, efficient distribution network to avoid supply
disruptions such as those experienced by some of our competitors, thereby
broadening our long-term customer base.
Risk Management Activities
Our risk management activities primarily attempt to mitigate risks related
to the purchasing, storing and transporting of propane. We generally purchase
propane in the contract and spot markets from major domestic energy companies on
a short-term basis. Our costs to purchase and distribute propane fluctuate with
the movement of market prices. That fluctuation subjects us to potential price
risk, which we attempt to minimize through the use of risk management
activities.
4
Our risk management activities include the use of energy commodity forward
contracts, swaps and options traded on the over-the-counter financial markets
and futures and options traded on the New York Mercantile Exchange. These risk
management activities are conducted primarily to offset the effect of market
price fluctuations on propane inventory and purchase commitments and to mitigate
the price risk on sale commitments to our customers.
Our risk management activities are intended to generate a profit, which we
then apply to reduce our cost of product sold. The results of risk management
activities directly related to the delivery of propane to our retail customers,
which includes our supply procurement, storage and transportation activities,
are presented in our discussion of retail margins and are accounted for at cost.
The results of other risk management activities are presented separately in our
discussion of cost of product sold as risk management trading activities and are
accounted for at fair value. The results from these risk management activities
are included in our discussions of cost of product sold and gross profit in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
Risk management activities - supply procurement, storage and transportation
Through our supply procurement activities, we purchase propane primarily
from major domestic energy companies. Supplies of propane from these sources
have traditionally been readily available, although no assurance can be given
that they will be readily available in the future. As a result of our ability to
buy large volumes of propane and utilize our large distribution system and
underground storage capacity, we believe we are in a position to achieve product
cost savings and avoid shortages during periods of tight supply to an extent not
generally available to other retail propane distributors. We are not dependent
upon any single supplier or group of suppliers, the loss of which would have a
material adverse effect on us. For our fiscal year ended July 31, 2002, no
supplier provided us 10% or more of our total propane purchases.
A portion of our propane inventory is purchased under supply contracts that
typically have a one-year term and a price that fluctuates based on the spot
market prices. In order to limit overall price risk, we will enter into fixed
price over-the-counter energy commodity forward contracts that have terms of
less than one year. We also use options to hedge a portion of our forecasted
purchases for up to one year in the future.
Through our storage activities, we may purchase and store inventories of
propane to avoid delivery interruptions during periods of increased demand and
to take advantage of favorable commodity prices. We own three underground and
four above-ground storage facilities with an aggregate capacity of approximately
248 million gallons. As of July 31, 2002, approximately 174 million gallons of
this capacity is leased to third parties and revenues from these leases are
included in other revenue in our Consolidated Statements of Earnings. The
remaining space is available for our use. We also lease underground and
above-ground storage at third party storage facilities and pipeline terminals.
We incur risks related to the price and availability of propane during
periods of much colder than normal weather, temporary supply shortages
concentrated in certain geographic regions, and commodity price distortions
between geographic regions. In addition to the use of other risk management
activities, we attempt to mitigate these risks through our transportation
activities by utilizing our transport truck and railroad tank car fleet to
distribute propane between supply or storage locations and retail distribution
outlets. The propane we sell to our customers is generally transported from
natural gas processing plants and refineries, pipeline terminals and storage
facilities to distribution outlets or storage facilities by our 265 leased
railroad tank cars and 202 owned or leased highway transport trucks. We may use
common carrier transport trucks during the peak delivery season in the winter
months or to provide service in areas where economic considerations favor common
carrier use.
5
Risk management trading activities
We also purchase and sell derivatives to manage other risks associated with
commodity prices. Our risk management trading activities utilize various types
of energy commodity forward contracts, options, swaps traded on the
over-the-counter financial markets and futures and options traded on the New
York Mercantile Exchange to manage and hedge our exposure to the volatility of
floating commodity prices and to protect our inventory positions. These risk
management trading activities are intended to generate a profit, which we then
apply to reduce our cost of product sold. Although these activities attempt to
mitigate our commodity price risk, they do not qualify for hedge accounting
treatment and are accounted for at fair value in the Consolidated Statement of
Earnings.
For further discussions about our risk management trading activities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations", "Liquidity and Capital Resources -
Disclosures about Risk Management Activities Accounted for at Fair Value" and
"Quantitative and Qualitative Disclosures about Market Risk."
Industry
Natural gas liquids are derived from petroleum products and are sold in
compressed or liquefied form. Propane, the predominant type of natural gas
liquid, is typically extracted from natural gas or separated during crude oil
refining. Although propane is gaseous at normal pressures, it is compressed into
liquid form at relatively low pressures for storage and transportation. Propane
is a clean-burning energy source, recognized for its transportability and ease
of use relative to alternative forms of stand-alone energy sources.
Based upon industry publications, propane accounts for approximately 3% to
4% of household energy consumption in the United States, an average level which
has remained relatively constant for the past two decades. Propane competes
primarily with natural gas, electricity and fuel oil as an energy source
principally on the basis of price, availability and portability. Propane serves
as an alternative to natural gas in rural and suburban areas where natural gas
is unavailable or portability of product is required. Propane is generally more
expensive than natural gas on an equivalent British Thermal Unit (BTU) basis in
locations served by natural gas, although propane is often sold in such areas as
a standby fuel for use during peak demands and during interruption in natural
gas service. The expansion of natural gas into traditional propane markets has
historically been inhibited by the capital costs required to expand distribution
and pipeline systems. Although the extension of natural gas pipelines tends to
displace propane distribution in the neighborhoods affected, we believe that new
opportunities for propane sales arise as more geographically remote
neighborhoods are developed.
Propane is generally less expensive to use than electricity for space
heating, water heating and cooking and competes effectively with electricity in
those parts of the country where propane is cheaper than electricity on an
equivalent BTU basis. Although propane is similar to fuel oil in application,
market demand and price, propane and fuel oil have generally developed their own
distinct geographic markets. Because residential furnaces and appliances that
burn propane will not operate on fuel oil, a conversion from one fuel to the
other requires the installation of new equipment. Residential retail propane
customers will have an incentive to switch to fuel oil only if fuel oil becomes
significantly less expensive than propane. Conversely, we may be unable to
expand our customer base in areas where fuel oil is widely used, particularly
the northeast United States, unless propane becomes significantly less expensive
than fuel oil. However, many industrial customers who use propane as a heating
fuel have the capacity to switch to other fuels, such as fuel oil, on the basis
of availability or minor variations in price.
6
Competition
In addition to competing with marketers of other fuels, we compete with
other companies engaged in the retail propane distribution business. Competition
within the propane distribution industry stems from two types of participants:
the larger, multi-state marketers, including farmers' cooperatives, and the
smaller, local independent marketers, including rural electric cooperatives.
Based upon industry publications, we believe that the ten largest multi-state
retail marketers of propane, including ourselves, account for approximately 49%
of the total retail sales of propane in the United States and that there are
approximately 5,000 local or regional distributors. We believe we are the second
largest retail marketer of propane in the United States based on retail gallons
sold during our fiscal year ended July 31, 2002, representing approximately 11%
of the retail propane gallons sold in the United States.
Most of our retail distribution outlets compete with three or more
marketers or distributors, the principal factors being price and service. We
compete with other retail marketers primarily on the basis of reliability of
service and responsiveness to customer needs, safety and price. Each retail
distribution outlet operates in its own competitive environment because retail
marketers typically reside in close proximity to their customers to lower the
cost of providing service. The typical retail distribution outlet has an
effective marketing radius of approximately 25 miles.
Other Activities
Our other activities include the following:
o wholesale propane marketing;
o wholesale marketing of propane appliances;
o the sale of refined fuels;
o chemical feedstocks marketing;
o natural gas liquids storage; and
o common carrier services.
These activities together with the retail sale of propane appliances and related
parts and fittings, the leasing of tanks to retail customers, and other retail
propane related services comprised approximately 10% of our gross profit in our
fiscal year 2002.
We engage in the wholesale marketing and distribution of propane to other
retail propane distributors. In our past three fiscal years, we made the
following sales to wholesale customers:
(in millions)
Wholesale Wholesale
Fiscal year ended Gallons Sold Revenues
----------------- ------------ ---------
July 31, 2002 92 $ 39.6
July 31, 2001 97 $ 65.1
July 31, 2000 99 $ 43.4
Employees
We have no employees and are managed by our general partner, Ferrellgas,
Inc. pursuant to the partnership agreement. At September 30, 2002, our general
partner had 4,264 full-time employees and 809 temporary and part-time employees.
7
Our general partner employed its full-time employees in the following areas:
Retail Locations 3,633
Transportation and Storage 236
Corporate Offices in Liberty, MO and Houston, TX 395
-----------
Total 4,264
===========
Less than one percent of our general partner's employees are represented by
four local labor unions, which are all affiliated with the International
Brotherhood of Teamsters. Our general partner has not experienced any
significant work stoppages or other labor problems.
Our risk management activities, wholesale propane marketing, chemical
feedstocks marketing, and other related functions are operated primarily out of
our offices located in Houston, Texas by a total full-time corporate staff of 73
people.
Governmental Regulation - Environmental and Safety Matters
We are not subject to any price or allocation regulation of propane and
propane is not a hazardous substance within the meaning of federal and state
environmental laws.
In connection with all acquisitions of retail propane businesses that
involve the purchase of real estate, we conduct a due diligence investigation to
attempt to determine whether any substance other than propane has been sold from
or stored on any such real estate prior to its purchase. At a minimum, due
diligence includes questioning the sellers, obtaining representations and
warranties concerning the sellers' compliance with environmental laws and visual
inspections of the properties.
With respect to the transportation of propane by truck, we are subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These
regulations cover the transportation of hazardous materials and are administered
by the United States Department of Transportation. The National Fire Protection
Association Pamphlet No. 58 established a set of rules and procedures governing
the safe handling of propane. Those rules and procedures have been adopted as
the industry standard in a majority of the states in which we operate.
We believe that we are in material compliance with all governmental
regulations and industry standards applicable to environmental and safety
matters. The Department of Transportation established new regulations addressing
emergency discharge control issues that became effective on July 1, 1999 with
various requirements phased in over the next seven years. We have implemented
the required discharge control systems and are in compliance in all material
respects with current regulatory requirements.
Trademarks and Service Marks
We market our goods and services under various trademarks and tradenames,
which we own or have a right to use. Those trademarks and tradenames include
marks or pending marks before the United States Patent and Trademark Office such
as Ferrellgas, Ferrell North America, Ferrellmeter, American Energy
Incorporated, NRG Distributors and Thermogas. Our general partner has an option
to purchase for a nominal value the tradenames "Ferrellgas" and "Ferrell North
America" and the trademark "Ferrellmeter" that it contributed to us during 1994,
if Ferrellgas, Inc. is removed as our general partner other than for cause. If
Ferrellgas, Inc. ceases to serve as our general partner for any other reason, it
will have the option to purchase the tradenames and trademark from us for fair
market value.
8
Businesses of Other Subsidiaries
Ferrellgas Partners Finance Corp. is a Delaware corporation formed in 1996
and is our wholly-owned subsidiary. Ferrellgas Partners Finance Corp. has
nominal assets and does not conduct any operations, but serves as a co-obligor
for our securities. Accordingly, a discussion of the results of operations,
liquidity and capital resources of Ferrellgas Partners Finance Corp. is not
presented. Institutional investors that might otherwise be limited in their
ability to invest in our securities, because we are a partnership, may be able
to invest in our securities because Ferrellgas Partners Finance Corp. is a
co-obligor. See the Notes to Ferrellgas Partners Finance Corp.'s Financial
Statements for a discussion of the securities with respect to which Ferrellgas
Partners Finance Corp. is serving as a co-obligor.
Ferrellgas Receivables, LLC was organized in September 2000, and is a
wholly-owned, qualifying special purpose entity and a subsidiary of Ferrellgas,
L.P. Ferrellgas, L.P. transfers interests in a pool of accounts receivable to
Ferrellgas Receivables. Ferrellgas Receivables then sells the interests to a
commercial paper conduit of Banc One, NA. Ferrellgas Receivables does not
conduct any other activities. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," Ferrellgas Receivables is
accounted for using the equity method of accounting. The accounts receivable
securitization is more fully described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Investing Activities" and Note E to the Consolidated Financial
Statements provided herein.
ITEM 2. PROPERTIES.
We own or lease the following transportation equipment that is utilized
primarily in the retail distribution of propane.
Owned Leased Total
----- ------ -----
Truck tractors ......................... 65 137 202
Transport trailers ..................... 332 36 368
Cylinder delivery trucks................ 327 178 505
Bulk delivery trucks.................... 1,337 910 2,247
Pickup and service trucks............... 1,135 477 1,612
Railroad tank cars...................... - 265 265
The transport trailers have an average capacity of approximately 9,000
gallons. The bulk delivery trucks are generally fitted with 2,000 to 3,000
gallon tanks. Each railroad tank car has a capacity of approximately 30,000
gallons.
A typical retail distribution outlet is located on one to three acres of
land and includes a small office, a workshop, bulk storage capacity of 18,000 to
60,000 gallons and a small inventory of customer storage tanks and portable
propane cylinders that we provide to our retail customers for propane storage.
At July 31, 2002, we owned approximately 40 million gallons of propane storage
at our retail distribution outlets. We own our land and buildings in the local
markets of approximately half of our operating locations and lease the remaining
facilities on terms customary in the industry.
We either own or lease approximately 1,000,000 propane tanks, most of which
are located on customer property and leased to those customers. We also own
approximately 700,000 portable propane cylinders, most of which we lease to
industrial and commercial customers. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Financing Activities" for a discussion of the operating tank leases
involving a portion of our customer tanks.
9
We own underground storage facilities at Hutchinson, Kansas; Adamana,
Arizona; and Moab, Utah and four above-ground storage facilities primarily
located in the Upper Midwest and North Carolina that together hold 248 million
gallons of product.
(in millions of gallons)
Storage
Location Capacity
-------- --------
Adamana, Arizona 96
Hutchinson, Kansas 142
Moab, Utah and above-ground storage 10
---
Total 248
===
Currently, we lease approximately 174 million gallons of this capacity to third
parties. The remaining space is available for our use.
We own land and two buildings with 50,245 square feet of office space and
lease 6,250 square feet of office space that together comprise our corporate
headquarters in Liberty, Missouri, and lease 27,696 square feet of office space
in Houston, Texas.
We believe that we have satisfactory title to or valid rights to use all of
our material properties. Although some of those properties may be subject to
liabilities and leases, liens for taxes not yet currently due and payable and
immaterial encumbrances, easements and restrictions, we do not believe that any
such burdens will materially interfere with the continued use of such properties
in our business. We believe that we have obtained, or are in the process of
obtaining, all required material approvals. These approvals include
authorizations, orders, licenses, permits, franchises, consents of,
registrations, qualifications and filings with, the various state and local
governmental and regulatory authorities which relate to our ownership of
properties or to our operations.
ITEM 3. LEGAL PROCEEDINGS.
Propane is a flammable, combustible gas. Serious personal injury and
property damage can occur in connection with its transportation, storage or use.
In the ordinary course of business, we are sometimes threatened with or are
named as a defendant in various lawsuits seeking actual and punitive damages for
product liability, personal injury and property damage. We maintain liability
insurance policies with insurers in amounts and with coverages and deductibles
we believe are reasonable and prudent. However, there can be no assurance that
the levels of insurance protection currently in effect will be continuously
available at reasonable prices or adequate to protect us from material expenses
related to product liability, personal injury or property damage in the future.
Currently, we are not a party to any legal proceedings other than various
claims and lawsuits arising in the ordinary course of business. It is not
possible to determine the ultimate disposition of these lawsuits. However, we
believe that there are no known claims or known contingent claims that will have
a material adverse effect on our results of operations, financial condition and
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
10
PART II
---------
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.
Common Units
Our common units representing limited partner interests are listed and
traded on the New York Stock Exchange under the symbol FGP. As of September 30,
2002, we had 799 common unitholders of record. The following table sets forth
the high and low sales prices for the common units on the New York Stock
Exchange and the cash distributions declared per common unit for the periods
indicated.
Common Unit Distributions
Price Range Declared Per Unit
------------------- ---------------------
High Low
2001
-------- ---------- ---------------------
First Quarter $16.94 $13.00 $0.50
Second Quarter 15.99 12.50 0.50
Third Quarter 19.85 14.92 0.50
Fourth Quarter 21.24 18.55 0.50
2002
-------- ---------- ---------------------
First Quarter 19.89 16.95 $0.50
Second Quarter 20.46 17.90 0.50
Third Quarter 19.90 18.32 0.50
Fourth Quarter 20.11 16.58 0.50
We make quarterly cash distributions of our available cash, as defined by
our partnership agreement. Available cash is generally defined as consolidated
cash receipts less consolidated cash disbursements and changes in cash reserves
established by our general partner for future requirements. To the extent
necessary, we will generally reserve cash inflows from the second and third
quarters for distribution in the first and fourth fiscal quarters. Based upon
our current financial condition and results of operations, our general partner
currently believes that during our fiscal year 2003 we will be able to make
quarterly cash distributions per common unit comparable to those quarterly
distributions made during our last two fiscal years, however, no assurances can
be given that such distributions will be made or the amount of such
distributions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" for a discussion of
the financial tests and covenants which place limits on the amount of cash that
we can use to pay distributions.
Recent Sales of Unregistered Securities
During our fiscal year 2002, we made the following issuances of common
units in reliance on one or more exemptions from registration under the
Securities Act:
o On November 29, 2001, we issued 80,000 common units to the Alabama Butane
Company pursuant to the Purchase and Noncompetition Agreement as a portion
of our consideration for our acquisition of assets from Alabama Butane.
These common units were issued to Alabama Butane Company pursuant to
Section 4(2) of the Securities Act.
o On December 12, 2001, we issued 37,487 common units to our affiliate,
Ferrellgas Acquisitions Company, LLC pursuant to the Contribution and
Conveyance Agreement entered by and between Ferrellgas Acquisition Company,
LLC and Ferrellgas Partners, L.P. as consideration for its retention of
certain tax liabilities purchased in connection with the acquisition of
Blue Flame. These common units were issued to Ferrellgas Acquisitions
Company pursuant to Section 4(2) of the Securities Act.
11
Partnership Tax Matters
We are a master limited partnership and thus not subject to federal income
taxes. Instead, our unitholders are required to report for income tax purposes
their allocable share of our income, gains, losses, deductions and credits,
regardless of whether we make distributions. Accordingly, each prospective
unitholder should consult their own tax advisor in analyzing the federal, state,
and local tax consequences applicable to their ownership or disposition of our
common units.
Due to the effect of our issuance of senior units in December 1999, our tax
year has recently changed to a December year-end in accordance with Internal
Revenue Code and Regulations. Accordingly, we will file our partnership tax
returns for both the tax year ended July 31, 2002, and the five-month period
ended December 31, 2002. Thus individual unitholders who owned our units during
this entire 17-month period will report their allocable share of our income,
gains, losses, deductions and credits for this 17-month period on their 2002
income tax forms.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents our selected consolidated historical financial
data.
(in thousands, except per unit data)
Ferrellgas Partners, L.P.
-------------------------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ------------ ----------- -----------
Income Statement Data:
Total revenues $1,034,796 $1,468,670 $959,023 $633,349 $623,775
Interest expense 59,608 61,544 58,298 46,621 49,129
Earnings before extraordinary loss 59,959 64,068 860 14,783 4,943
Basic and diluted earnings (loss) per
common and subordinated unit-
Earnings (loss) before extraordinary 1.34 1.43 (0.32) 0.47 0.16
loss
Cash distributions declared per common
and subordinated unit 2.00 2.00 2.00 2.00 2.00
Balance Sheet Data at end of period:
Working capital $ 9,436 $ 22,062 $ (6,344) $(4,567) $ (443)
Total assets 885,128 896,159 967,907 656,745 621,223
Long-term debt 703,858 704,782 718,118 583,840 507,222
Partners' capital: 21,161 37,987 40,344 (69,651) (11,083)
Operating Data:
Retail propane sales volumes (in 831,592 956,718 846,664 680,477 659,932
gallons)
Capital expenditures
Maintenance $ 9,576 $11,996 $ 8,917 $ 10,505 $ 10,569
Growth 4,826 3,152 11,838 15,238 10,060
Technology initiative 30,070 100 - - -
Acquisition 10,962 1,417 310,260 48,749 13,003
----------- ----------- ----------- ---------- -----------
Total $55,434 $16,665 $331,015 $ 74,492 $33,632
=========== =========== =========== ========== ===========
12
Ferrellgas Partners, L.P.
-------------------------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ------------ ----------- -----------
Supplemental Data:
Net cash provided by operating $152,925 $99,859 $53,352 $ 92,494 $74,337
activities
Operating income 118,915 126,691 57,091 60,497 52,586
Add: Depreciation and amortization 41,937 56,523 61,633 47,257 45,009
ESOP compensation charge 5,218 4,843 3,733 3,295 350
Loss (gain) on disposal of
assets and other 3,957 5,744 (356) 1,842 174
----------- ----------- ------------ ----------- -----------
EBITDA $170,027 $193,801 $122,101 $112,891 $ 98,119
=========== =========== ============ =========== ===========
We define EBITDA as earnings before interest, income taxes, depreciation,
amortization, other charges and non-cash items such as employee stock ownership
plan compensation charge and gain or loss on disposal of assets and other.
EBITDA provides additional information for evaluating our ability to make debt
service obligations, capital expenditures and quarterly distributions and is
presented solely as a supplemental measure. You should not consider EBITDA as an
alternative to operating income, net cash provided by operating activities or
any other measure of financial performance presented in accordance with
generally accepted accounting principles. Our EBITDA may not be comparable to
EBITDA or similarly titled measures of other entities as other entities may not
calculate EBITDA in the same manner as we do.
Depreciation and amortization expense decreased significantly in the year ended
July 31, 2002, due to the elimination of goodwill amortization and in the year
ended July 31, 2001, due to a change in the estimated residual value of our
customer and storage tanks. See additional discussion about these changes in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Results of Operations" and in our
Notes D and F to our Consolidated Financial Statements.
Our capital expenditures fall generally into four categories:
o maintenance capital expenditures, which include capitalized expenditures
for repair and replacement of property, plant and equipment;
o growth capital expenditures, which include expenditures for purchases of
new propane tanks and other equipment to facilitate expansion of our
customer base and operating capacity;
o technology and process enhancement initiative capital expenditures, which
include expenditures for purchase of computer hardware and software and the
development of new software; and
o acquisition capital expenditures, which include expenditures related to the
acquisition of retail propane operations. Acquisition capital expenditures
represent the total cost of acquisitions less working capital acquired. Our
fiscal 2001 capital expenditures do not include a $4,638,000 adjustment
made in the second fiscal quarter of fiscal 2001 to working capital related
to a final valuation adjustment to record the Thermogas acquisition. We
acquired Thermogas in December 1999 for a total acquisition cost, less
working capital acquired, of approximately $307,000,000. The Thermogas
acquisition contributed a significant increase in our total revenues,
interest expense, earnings before extraordinary loss, operating income,
depreciation and amortization, and EBITDA in the years ended July 31, 2001
and 2000. This acquisition also contributed to a significant increase in
total assets, long-term debt and partners' capital as of July 31, 2000 as
compared to July 31, 1999.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion of our historical financial condition and
results of operations and should be read in conjunction with our historical
Consolidated Financial Statements and accompanying Notes thereto included
elsewhere in this Annual Report on Form 10-K.
On January 22, 2002, the Securities and Exchange Commission issued
cautionary advice recommending various disclosures. We have provided the
recommended disclosures as follows:
o liquidity and capital resources, including off-balance sheet arrangements;
see discussion in "Liquidity and Capital Resources - Investing Activities",
o trading activities; see discussion regarding the fair value of our risk
management trading contracts in "Liquidity and Capital Resources -
Disclosures about Risk Management Activities Accounted for at Fair Value",
and
o transactions with related and certain other parties; see discussion
regarding the nature of these transactions in "Disclosures about Effects of
Transactions with Related Parties."
Forward-looking statements
Statements included in this report include forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act and Section 27A
of the Securities Act. These forward-looking statements are identified as any
statement that does not relate strictly to historical or current facts. They 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. In particular, statements, express or implied, concerning future
operating results, or the ability to generate sales, income or cash flow are
forward-looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Our future
results may differ materially from those expressed in these forward-looking
statements. Many of the factors that will determine these results are beyond our
ability to control or predict. These statements include, but are not limited to,
the following:
o whether Ferrellgas, L.P. will have sufficient funds 1) to meet its
obligations and to enable it to distribute to us sufficient funds to permit
us to meet our obligations with respect to our $170,000,000 senior notes
due 2012 and 2) assuming all quarterly financial tests required by various
financing instruments are met, to pay the required distribution on our
senior units and the minimum quarterly distribution of $0.50 per common
unit;
o whether or not we will continue to meet all of the quarterly financial
tests required by the agreements governing our indebtedness; and
o the expectation that future periods may not have the same percentage
decrease in retail volumes, revenues and expenses as was experienced in
fiscal 2002.
You should not put undue reliance on any forward-looking statements. All
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in or implied by
such statements. The risks and uncertainties and their effect on our operations
include, but are not limited to, the following risks, which are more fully
described in the our Securities Act filings:
o the retail propane industry is a mature one;
o the effect of weather conditions on demand for propane;
o increases in propane prices may cause higher levels of conservation by our
customers;
o price, availability and inventory risk of propane supplies, including risk
management activities;
o the timing of collections of the our accounts receivable and increases in
product costs and demand may decrease our working capital availability;
14
o the availability of capacity to transport propane to market areas;
o competition from other energy sources and within the propane industry;
o operating risks incidental to transporting, storing, and distributing
propane, including the litigation risks which may not be covered by
insurance;
o we may not be successful in making acquisitions;
o changes in interest rates, including the refinancing of long-term financing
at favorable interest rates;
o governmental legislation and regulations;
o energy efficiency and technology trends may affect demand for propane;
o the condition of the capital markets in the United States;
o the political and economic stability of the oil producing nations;
o we may sell additional limited partner interests, thus diluting existing
interests of our unitholders;
o the distribution priority to our common units owned by the public
terminates no later than December 31, 2005;
o the holder of our senior units may have the right in the future to convert
the senior units into common units;
o the holder of our senior units may be able to sell the senior units or
convert into common units with special indemnification rights available to
the holder from us;
o a redemption of the senior units may be dilutive to our common unitholders;
o the terms of the senior units limit our use of proceeds from sales of
equity and the rights of our common unitholders;
o the current holder of the senior units has a special voting exemption if
the senior units convert into common units; and
o the expectation that the remaining senior units will be redeemed in the
future with proceeds from an offering of equity at a price satisfactory to
us.
Results of Operations
Fiscal Year Ended July 31, 2002 versus Fiscal Year Ended July 31, 2001
Gas liquid and related product sales. Total gas liquids and related product
sales decreased $240,126,000 due to a decrease in the average propane sales
price per gallon and an additional $188,697,000 primarily due to a significant
decrease in retail propane sales volume.
The average propane sales price per gallon decreased due to the effect of a
significant decrease in the wholesale cost of propane. In addition, retail sales
volumes decreased 13.1% to 831,592,000 gallons in fiscal 2002 as compared to
fiscal 2001, primarily due to the effects of the significantly warmer than
normal weather and to a lesser extent the weak national economy. The heating
season of fiscal 2002 (November through March) was the third warmest in recorded
United States history, according to the National Oceanic and Atmospheric
Administration (NOAA) data, with national average temperatures 12% warmer than
normal compared to 6% colder than normal for the same period last year. During
the peak winter heating season (December through February) average national
temperatures were 14% warmer than normal.
Other revenues. Other revenues decreased 5.8% in fiscal 2002 as compared to
fiscal 2001, primarily due to lower appliance sales and service labor related to
the effect of the weak national economy.
Cost of product sold. Cost of product sold decreased $338,443,000 due to
the significant decline in the wholesale cost of propane during fiscal 2002 and
an additional $87,705,000 primarily due to the effect of the decline in retail
sales volume compared to last year. The propane wholesale market price at one of
the major supply points, Mt. Belvieu, Texas, averaged $0.37 per gallon during
fiscal 2002 compared to an average of $0.58 per gallon for the prior year. Other
major supply points in the United States also experienced significant declines
in propane prices. However, cost of product sold increased $29,468,000 due to
exceptional results from risk management trading activities recognized in fiscal
2001 that were not repeated in fiscal 2002. See additional discussion regarding
risk management trading activities in "Quantitative and Qualitative Disclosures
about Market Risk."
15
Gross profit. Gross profit decreased 6.9% primarily due to the effect of a
significant decrease in retail propane volumes and to a lesser extent, the
decrease in results from risk management trading activities. These factors were
partially offset by an increase in retail margin per gallon.
Operating expense. Operating expense decreased 3.0% primarily due to a
$12,980,000 decrease in operating expenses incurred at our retail distribution
outlets generally resulting from fewer gallons delivered to customers in fiscal
2002 as compared to fiscal 2001.
General and administrative expense. General and administrative expense
increased 6.5% primarily due to increased performance-based incentive
compensation expense.
Depreciation and amortization expense. Depreciation and amortization
expense decreased 25.8% primarily due to the implementation of SFAS No. 142,
which eliminated goodwill amortization. See further discussion of the
implementation of SFAS No. 142 in Note B to the Consolidated Financial
Statements.
Equipment lease expense. Equipment lease expense decreased 20.8% due to the
impact that significantly lower interest rates had on our variable rate
operating leases as compared to fiscal 2001. See further discussion about these
leases in "Liquidity and Capital Resources - Investing Activities" and
"Financing Activities."
Loss (gain) on disposal of assets and other. Loss on disposal of assets and
other decreased $1,787,000 primarily due to a decrease in the activity related
to the transfer of accounts receivables pursuant to the accounts receivable
securitization facility. See further discussion about this facility in
"Liquidity and Capital Resources - Investing Activities" and "Financing
Activities."
Interest expense. Interest expense decreased 3.1% primarily due to reduced
borrowings and the impact that significantly lower interest rates had on our
credit facility borrowings. This decrease was partially offset by the effect of
the termination of an interest rate swap agreement in the fourth quarter of
fiscal 2001.
Forward looking statements. Our gross profit, operating income and net
earnings each declined between 6% and 7% from fiscal 2001 to 2002. In fiscal
2002, we also recognized decreases in gas liquids and related product sales,
cost of product sold, operating expenses, equipment lease expense, and
depreciation and amortization expense. Warm winter weather, a significant
decrease in interest rates and the elimination of goodwill amortization during
fiscal 2002 largely contributed to these decreases. Assuming that the weather
remains the same as in fiscal 2002 or becomes colder and that interest rates
remain relatively stable, we do not anticipate similar decreases in revenue,
gross profit, operating expenses and operating income as was recognized in
fiscal 2002 versus fiscal 2001.
We will implement SFAS No. 143 beginning in the fiscal year ending July 31,
2003, and expect to record a one-time reduction to earnings during the first
quarter of fiscal 2003, as a cumulative change in accounting principle, of
approximately $2,800,000. We believe the implementation will not have a material
ongoing effect on our financial position, results of operations and cash flows.
In addition, as a result of the redemption of our $160,000,000 senior secured
notes in September 2002, we will reflect an approximate $7,100,000 charge to
earnings related to the premium and other costs incurred to redeem the notes
plus the write-off of financing costs related to the original issuance of the
notes in 1996. See further discussion about this debt redemption in "Liquidity
and Capital Resources - Financing Activities."
16
Fiscal Year Ended July 31, 2001 versus Fiscal Year Ended July 31, 2000
Gas liquid and related product sales. Total gas liquids and related product
sales increased $317,962,000 due to an increased average sales price per gallon
and an additional $184,598,000 primarily due to increased retail sales volumes.
The average sales price per gallon increased due to the effect of a significant
increase in the wholesale cost of propane during fiscal 2001, which was
significantly higher as compared to fiscal 2000.
Retail sales volumes increased 13.0% to 956,718,000 gallons in fiscal 2001
as compared to 846,664,000 gallons for the prior year, primarily due to the
acquisition of Thermogas completed in December 1999 and the effect of colder
weather, partially offset by the impact of customer conservation caused by the
higher product cost environment. During the heating season of fiscal 2001,
temperatures as reported by NOAA were 6% colder than normal as compared to
temperatures 16% warmer than normal during the same period in fiscal 2000.
Other revenues. Other revenues increased 8.9% in fiscal 2001 as compared to
fiscal 2000, primarily due to the acquisition of Thermogas completed in December
1999.
Cost of product sold. Cost of product sold increased $262,523,000 due to a
significant increase in the wholesale cost of propane during fiscal 2001 and an
additional $131,522,000 primarily due to the 13.0% increase in retail sales
volumes delivered compared to fiscal 2000. The propane wholesale market price at
one of the major supply points, Mt. Belvieu, Texas, averaged $0.58 per gallon
during fiscal 2001 compared to an average of $0.45 per gallon for the prior
year. Other major supply points in the United States also experienced
significant increases in propane prices. Cost of product sold increased
$5,093,000 due to lower gains from risk management trading activities in fiscal
2001 compared to the prior year's exceptional performance.
Gross profit. Gross profit increased 25.8% primarily due to increased
retail margins, the effect on sales related to the colder than normal weather
and the acquired Thermogas operations, partially offset by lower gains from risk
management trading activities. See additional discussion regarding risk
management trading activities in "Quantitative and Qualitative Disclosures about
Market Risk" and Note J to the Consolidated Financial Statements included
elsewhere in this report.
Operating expense. Operating expense increased 12.7% primarily due to
operating expenses related to the acquired Thermogas operations and to a lesser
extent the increased cost of incentives resulting from our improved financial
performance. This increase was partially offset by favorable expense management
related to the completed integration of the Thermogas acquisition and expense
savings initiatives established late in fiscal year 2000.
General and administrative expense. General and administrative expense
increased 3.7% primarily due to incentives resulting from the improved financial
performance of the company as compared to last year and due to expenses incurred
related to business process reviews. Prior to the acquisition by us, Thermogas
incurred in excess of $20,000,000 in general and administrative expenses per
year. As a result of our acquisition of Thermogas and the complete integration
of the general and administrative services into our operations, we were able to
eliminate approximately 90% of these overhead costs, thus realizing the expected
general and administrative cost reduction from the acquisition.
Depreciation and amortization expense. Depreciation and amortization
expense decreased 8.3% primarily due to the change in the estimated residual
values of customer and storage tanks, partially offset by the depreciation and
amortization expense from the addition of property, plant and equipment and
intangible assets from the Thermogas acquisition. In the first quarter of fiscal
2001, we increased the estimate of the residual values of our existing customer
and storage tanks. This increase in the residual values resulted from a review
by our management of tank values established through an independent tank
valuation obtained in connection with a financing completed in December 1999.
Due to this change in the tank residual values, depreciation expense decreased
by approximately $12,000,000, compared to the depreciation that would have been
recorded using the previously estimated residual values. The change in estimated
residual values will continue to affect future depreciation expense as compared
to the depreciation that would have been recorded using the previously estimated
residual values.
17
Equipment lease expense. Equipment lease expense increased 21.4% due to the
addition of the $160,000,000 operating leases in December 1999, and to a lesser
extent to upgrades to our truck fleet.
Loss (gain) on disposal of assets and other. Loss on disposal of assets and
other increased $6,100,000 primarily due the loss on disposal of fixed assets
and losses related to the transfer of accounts receivables pursuant to the
accounts receivable securitization. See Note E to the Consolidated Financial
Statements included elsewhere in this report for additional information
regarding the accounts receivable securitization.
Interest expense. Interest expense increased 5.6% primarily due to the
result of increased borrowings related to the Thermogas acquisition, partially
offset by the effect of reduced credit facility borrowings during fiscal 2001
and interest rate savings resulting from an interest rate swap arrangement in
effect during most of the fiscal year. In June 2001, the interest rate swap
agreement was terminated by the counterparty. The reduced credit facility
borrowings resulted primarily from the funds generated from the accounts
receivable securitization facility. See discussion of the transactions between
us and Ferrellgas Receivables in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - Financing Activities."
Other charges. On April 6, 2001, we announced a series of transactions that
increased the cash distribution coverage to our public unitholders and modified
the structure of our outstanding senior units. See additional discussion of this
transaction in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Financing Activities."
We incurred $3,277,000 in banking, legal and other fees related to these
transactions.
Liquidity and Capital Resources
Our ability to satisfy our obligations is dependent upon future
performance, which will be subject to prevailing economic, financial, business,
and weather conditions and other factors, many of which are beyond our control.
During fiscal 2002 the United States experienced unusually mild temperatures
that were approximately 12% warmer than normal during the winter heating season
(November through March) and 14% warmer than normal during the peak winter
heating season (December through February). These temperatures rank as the third
warmest winter heating season and fifth warmest peak winter heating season in
the National Oceanic and Atmospheric Administration's 108-year history.
Moreover, the weather has been significantly warmer than normal in four of the
last five winter heating seasons. Despite these challenges, we paid the minimum
quarterly distribution of $0.50 on all common units on September 13, 2002, which
represents the thirty-second consecutive minimum quarterly distribution paid to
our common unitholders dating back to October 1994.
Due to the seasonality of the retail propane distribution business, a
significant portion of our cash flow from operations is generated during the
winter heating season which occurs during our second and third fiscal quarters.
We generate significantly lower cash flows from operations in our first and
fourth fiscal quarters as compared to the second and third quarters because
fixed costs exceed gross profit during the non-peak heating season. Subject to
meeting the financial tests discussed below, our general partner believes that
Ferrellgas, L.P. will have sufficient funds available to meet its obligations,
and to distribute to Ferrellgas Partners sufficient funds to permit Ferrellgas
Partners to meet its obligations with respect to the $170,000,000 senior notes.
In addition, our general partner believes that Ferrellgas, L.P. will have
sufficient funds available to distribute to Ferrellgas Partners sufficient cash
to pay the required quarterly distribution on the senior units and the minimum
quarterly distribution on all common units during fiscal 2003.
18
Our credit facilities, public debt, private debt, accounts receivable
securitization facility and operating tank leases contain several financial
tests and covenants restricting our ability to pay distributions, incur debt and
engage in certain other business transactions. In general, these tests are based
on our debt to cash flow ratio and cash flow to interest expense ratio. Our
general partner believes that the most restrictive of these tests currently are
debt incurrence limitations within the credit facility, operating tank leases
and accounts receivable securitization facility and limitations on the payment
of distributions within Ferrellgas Partners' senior notes. The credit facility,
operating tank leases and accounts receivable securitization facility generally
limit Ferrellgas, L.P.'s ability to incur debt if it exceeds prescribed ratios
of either debt to cash flow or cash flow to interest expense. Ferrellgas
Partners' senior notes restrict payments if a minimum ratio of cash flow to
interest expense is not met, assuming certain exceptions to this ratio limit
have previously been exhausted. This restriction places limitations on our
ability to make restricted payments such as the payment of cash distributions to
unitholders. The cash flow used to determine these financial tests generally is
based upon our most recent cash flow performance giving pro forma effect for
acquisitions and divestitures made during the test period. It should be noted
that none of our credit facilities, public debt, private debt, accounts
receivable securitization facility or operating tank leases contain repayment
provisions related to a decline in our credit rating.
As of July 31, 2002, our general partner believes that we met all the
required quarterly financial tests and covenants. Based upon current estimates
of our cash flow, our general partner believes that we will be able to continue
to meet all of the required quarterly financial tests and covenants. However, if
we were to encounter unexpected downturns in business operations in the future,
such as significantly warmer than normal weather, a volatile energy commodity
cost environment or continued economic downturn, we may not meet the applicable
financial tests in future quarters. This could have a materially adverse effect
on our operating capacity and cash flows and could restrict our ability to incur
debt or to make cash distributions to our unitholders, even if sufficient funds
were available. Depending on the circumstances, we may consider alternatives to
permit the incurrence of debt or the continued payment of the quarterly cash
distribution to our unitholders. No assurances can be given, however, that such
alternatives can or will be implemented with respect to any given quarter.
Our future capital expenditures and working capital needs are expected to
be provided by cash generated from future operations, existing cash balances,
the credit facility or the accounts receivable securitization facility. To fund
expansive capital projects and future acquisitions, we may borrow on our
facilities, we may issue additional debt to the extent permitted under existing
financing arrangements or we may issue additional equity securities, including,
among others, common units.
Toward this purpose, on February 5, 1999, we filed a shelf registration
statement with the Securities and Exchange Commission for the periodic sale of
equity and/or debt securities. The registered securities are available to us for
sale in the future to fund acquisitions, to reduce indebtedness or to provide
funds for general corporate purposes. On June 8, 2001, we issued $89,550,000
worth of equity common units and on September 24, 2002, we issued $170,000,000
worth of debt, both pursuant to this registration statement. We currently have
approximately $40,000,000 remaining available under this registration statement
for the sale of registered securities in the future. See further discussion
about debt issuance in "Liquidity and Capital Resources - Financing Activities."
We also maintain a shelf registration statement with the Securities and
Exchange Commission for 2,010,484 common units. We may issue these common units
in connection with our acquisition of other businesses, properties or securities
in business combination transactions.
Operating Activities. Cash provided by operating activities was
$152,925,000 for fiscal 2002, compared to $99,859,000 for fiscal 2001. This
increase is primarily due to improved working capital principally reflected in:
o the decrease in accounts receivable, net of the change in the related
funding from the accounts receivable securitization facility;
19
o the decrease in inventory, primarily attributable to the decreased cost of
propane and lower inventory volumes; and
o the effect of timing of payments on accounts payable.
Investing Activities. During fiscal 2002, we made cash capital expenditures
of $37,516,000 consisting primarily of the following:
o technology and process enhancement initiative discussed in the following
paragraph,
o upgrading district plant facilities,
o vehicle lease buyouts, and
o additional propane storage tanks and cylinders.
During fiscal 2001, we completed a review of our key business processes to
identify areas where we could use technology to improve our operational
efficiency. Specifically, we identified areas where we believe we can reduce
operating expenses and improve customer satisfaction in the near future. These
areas of opportunity include improvements to our routing and scheduling of
customer deliveries, customer administration and operational workflow. During
fiscal 2002, we allocated considerable resources toward these improvements,
including the purchase of computer hardware and software and development of new
software. The capital expenditures related to the technology and process
enhancement initiative were funded primarily from excess cash generated from
operations during our record financial performance in fiscal year 2001. These
capital expenditures represent a substantial majority of the capital
expenditures we expect to incur in connection with this initiative. We intend to
fund any remaining capital requirements from cash generated from future
operations or funds available from our credit facility or accounts receivable
securitization facility. We incurred the following expenditures related to this
initiative in fiscal 2002 and 2001.
(in thousands)
Capital Expenditures Expensed Items
------------------------ ----------------------
Fiscal Fiscal Fiscal Fiscal
2002 2001 2002 2001
-------- -------- -------- --------
Development of new computer software $25,847 $100 $ - $ -
Purchased computer software and licenses 3,947 - - -
Computer hardware and other equipment 276 - - -
Operating expense - - 2,032 -
General and administrative expenses - - - 1,703
-------- -------- -------- --------
Total incurred 30,070 100 2,032 1,703
Less: amounts payable to vendors 6,956 - - -
-------- -------- -------- --------
Total cash used for technology initiative $23,114 $100 $2,032 $1,703
======== ======== ======== ========
Other than this initiative, our capital requirements for repair and
maintenance of property, plant and equipment are expected to remain relatively
low.
We lease computers, light and medium duty trucks, tractors and trailers. We
believe vehicle leasing is a cost-effective method for meeting our
transportation and technology equipment needs. We purchased $860,000 of vehicles
whose lease terms expired during fiscal 2002.
20
We utilize an accounts receivable securitization facility for the purpose
of providing us with additional short-term working capital funding, especially
during the winter heating months. As part of this 364-day facility, we transfer
an interest in a pool of our trade accounts receivable to Ferrellgas
Receivables, LLC, our wholly-owned, qualifying special purpose entity, which
sells its interest to a commercial paper conduit of Banc One, NA. We do not
provide any guarantee or similar support to the collectability of these
receivables. We structured the facility using a wholly-owned, qualifying special
purpose entity in order to facilitate the transaction as required by Banc One,
N.A. and to comply with our various debt covenants. We remit daily to this
special purpose entity funds collected on its pool of trade receivables. This
unconsolidated entity, together with the accounts receivable securitization
facility, provide us additional working capital liquidity at interest rates
approximately one-half of one percent lower than borrowings from our credit
facility, based on the most recent twelve-month period. The level of funding
available from this facility is currently limited to the lesser of $60,000,000
or qualified trade accounts receivable. At July 31, 2002, there was no
outstanding balance from this facility. During fiscal 2002, the funding
outstanding from this facility was reduced by $31,000,000 to zero. This decrease
in funding resulted from our reduced liquidity needs caused primarily by the
significant decrease in the amount of account receivables outstanding and lower
inventory levels related primarily to the lower wholesale propane cost
environment experienced for most of this fiscal year as compared to last year.
We renewed this facility effective September 24, 2002, for a 364-day commitment
with Banc One, N.A. In accordance with SFAS No. 140, this transaction is
reflected on our Consolidated Financial Statements as a sale of accounts
receivable and an investment in an unconsolidated subsidiary. See Note E to the
Consolidated Financial Statements for further discussion about this facility.
We continue to consider opportunities to expand our operations through
strategic acquisitions of retail propane operations located throughout the
United States. During the fiscal year ended July 31, 2002, we made total
acquisition capital expenditures of approximately $10,962,000 pursuant to the
acquisition of three retail propane companies. This amount was funded by
approximately $6,294,000 of cash payments, the issuance of $2,325,000 in common
units and $2,343,000 in notes and other consideration.
Financing Activities. On September 24, 2002, we issued $170,000,000 of
publicly-held senior notes at a fixed rate of 8.75% due 2012. Interest is
payable semi-annually in arrears on June 15 and December 15, commencing on
December 15, 2002. These new notes are unsecured and not redeemable before June
15, 2007, except under specific circumstances. We used the proceeds from the new
senior note issuance to repurchase and redeem our $160,000,000 9.375% fixed rate
senior secured notes due 2006, including related premiums, fees, accrued and
unpaid interest and tender consent payments.
We paid the required quarterly distribution on the senior units and the
minimum quarterly distribution on all common units, as well as general partner
interests, totaling $84,075,000 and $69,125,000 in fiscal 2002 and fiscal 2001,
respectively. The increase in cash distributions from fiscal 2001 to fiscal 2002
is primarily due to:
o a full year of cash distributions paid in fiscal 2002 on the 4,500,000
common units issued in June 2001; and
o cash distributions paid on the senior units for a full year in fiscal 2002
as compared to in-kind distributions paid for two quarters in fiscal 2001.
On September 13, 2002, we paid our fourth fiscal quarter cash distribution
of $1.00 and $0.50 per senior and common unit, respectively.
On June 8, 2001, we received $84,865,000, net of issuance costs, pursuant
to the issuance of 4,500,000 common units to the public. We used these proceeds
to redeem 2,048,697 senior units, to pay the related accrued senior unit
distribution and to pay related common unit issuance fees.
On April 6, 2001, we announced a series of transactions that increased the
cash distribution coverage to our public common unitholders and modified the
structure of our outstanding senior units. In addition, we announced that an
entity owned by our general partner's Chairman, Chief Executive Officer and
President, James E. Ferrell, purchased all the outstanding senior units from The
Williams Companies for a purchase price of $195,529,000 plus accrued and unpaid
distributions. We pay the senior units a quarterly cash distribution equivalent
to 10 percent per annum of the liquidating value. We can redeem the senior units
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
various 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 our partnership agreement. Such conversion rights
are contingent upon us not previously redeeming such securities. Also, Ferrell
Companies granted us the option, until December 31, 2005, to defer future
distributions on the common units held by it up to an aggregate outstanding
amount of $36,000,000. As of July 31, 2002, we have not elected to defer any
common unit distributions due Ferrell Companies.
21
Our credit facility, which expires June 30, 2003, is an unsecured facility
and consists of the following:
o a $117,000,000 working capital, general corporate and acquisition facility,
including a letter of credit sub-facility, and
o a $40,000,000 revolving working capital facility, which is subject to an
annual reduction in outstanding balances to zero for thirty consecutive
days.
We intend to renew this facility before June 30, 2003, however, there are no
assurances that the new facility will be renewed or on terms at least as
favorable as the existing agreement. All borrowings under the credit facility
bear interest, at the borrower's option, at a rate equal to either London
Interbank Offered Rate plus an applicable margin, based upon our debt to cash
flow ratio, varying from 1.25 percent to 2.25 percent or the bank's base rate
plus an applicable margin varying from 0.25 percent to 1.25 percent. The bank's
base rates at July 31, 2002 and July 31, 2001 were 4.75% and 6.75%,
respectively. See "Investing Activities" for a discussion of additional cash
availability related to the accounts receivable facility agreement.
At July 31, 2002, $40,614,000 of letters of credit were outstanding under
this credit facility. Letters of credit are currently used to cover obligations
primarily relating to requirements for insurance coverage and, and to a lesser
extent, risk management activities. Based on the pricing grid contained in the
credit facility, the current borrowing rate for future borrowings under the
credit facility is either the bank's base rate plus 0.75% or LIBOR plus 1.75%.
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.
At July 31, 2002, we had a total of $176,386,000 of funding available under
two facilities:
o $116,386,000 available for general corporate, acquisition and working
capital purposes under the credit facility, and
o $60,000,000 of funding available from the accounts receivable
securitization facility.
We believe that the liquidity available from these facilities will be sufficient
to meet our future working capital needs. However, if we were to experience an
unexpected significant increase in working capital requirements, this need could
exceed our immediately available resources. Events that could cause increases in
working capital borrowings or letter of credit requirements include, but are not
limited to the following:
o a significant increase in the cost of propane,
o a significant delay in the collections of accounts receivable,
o increased volatility in energy commodity prices related to risk management
activities,
o increased liquidity requirements imposed by insurance providers,
o a significant downgrade in our credit rating, or
o decreased trade credit.
If one or more of these events caused a significant use of available funding, we
would consider alternatives to provide increased working capital funding. No
assurances can be given, however, that such alternatives could be implemented.
22
In December 1999, we entered into a $25,000,000 operating lease involving a
portion of our customer tanks. Also in December 1999, we assumed a $135,000,000
operating lease involving a portion of the Thermogas acquisition related
customer tanks. Both arrangements utilize a structure referred to as a synthetic
operating lease, using a special purpose entity as lessor and Ferrellgas, L.P.
as lessee; thus, the assets and liabilities of the special purpose entities are
not included in our Consolidated Balance Sheet. We made $8,819,000 of rent
payments related to these leases for the most recent twelve-month period. Both
arrangements have terms that expire June 30, 2003, and may be extended for two
additional one-year periods at the option of Ferrellgas, L.P., if such extension
is approved by the lessor. Prior to the end of the lease terms, we intend to
secure additional financing in order to either lease or purchase the related
customer tanks. No assurances can be given that such financing will be obtained
or, if obtained, such financing will be on terms equally favorable to us. See
further discussion about these lease arrangements in "Investing Activities."
The following table summarizes our long-term debt obligations as of July
31, 2002:
(in thousands) Principal Payments due by Pay Period
------------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
------------ ------------- ------------ ---------------- ---------------
Long-term debt, including current
portion of long-term debt $706,177 $2,319 $4,433 $330,352 $369,073
The following table summarizes our long-term debt obligations as of July
31, 2002, and after the September 24, 2002 issuance of the $170,000,000 fixed
rate senior notes and related repurchase and redemption of the $160,000,000
fixed rate senior secured notes:
(in thousands) Principal Payments due by Pay Period
------------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
------------ ------------- ------------ ---------------- ---------------
Long-term debt, including
current portion of long-term debt $716,177 $2,319 $4,433 $170,352 $539,073
In addition, we lease property, computer equipment, light and medium duty
trucks, tractors and trailers. We account for these arrangements as operating
leases. See further discussion about these leases in "Investing Activities." The
following tables summarize our future minimum rental commitments under
non-cancelable operating lease agreements as of July 31, 2002. The summary
presents the future minimum rental payments and, should we elect to do so, the
buyout amounts necessary to purchase the equipment at the end of the lease
terms.
(in thousands) Future Minimum Rental and Buyout Amounts
-------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
------------- ------------ ------------- ------------ -------------
Operating leases rental payments $68,575 $26,986 $23,701 $13,248 $4,640
Operating leases buyouts $178,658 $158,577 $8,843 $9,020 $2,218
Historically, we have been successful in renewing some of our leases
subject to buyouts. However, there is no assurance that we will be successful in
the future. The large buyout amount in fiscal 2003 primarily relates to the
previously discussed operating tank leases. These two leases have terms that
expire June 30, 2003, and may be extended for two additional one-year periods at
the option of Ferrellgas, L.P., if such extension is approved by the lessor. We
intend to secure additional financing in order to either lease or purchase the
related tanks. See Note L to the Consolidated Financial Statements included
elsewhere in this report for additional information regarding these leases.
23
At July 31, 2002, we had no borrowings outstanding on our credit facility.
We had letters of credit outstanding in the amount of $40,614,000 used primarily
to cover obligations relating to requirements for insurance coverage. At July
31, 2002, we did not have any funding from our accounts receivable
securitization facility. As of July 31, 2002, in addition to the inventory on
hand, we had committed to make delivery of approximately 7,061,000 gallons at a
fixed price.
Disclosures about Risk Management Activities Accounted for at Fair Value
The following table summarizes the change in the unrealized fair value of
contracts from risk management trading activities for the fiscal year ended July
31, 2002. This table summarizes the contracts where settlement has not yet
occurred:
Fiscal year ended
(in thousands) July 31, 2002
-----------------
Unrealized (losses) in fair value of contracts outstanding at July 31, 2001 $(12,587)
Other unrealized gains and (losses) recognized (6,148)
Less: realized gains and (losses) recognized (14,166)
-----------------
Unrealized (losses) in fair value of contracts outstanding at July 31, 2002 $ (4,569)
=================
The following table summarizes the maturity of these contracts for the
valuation methodologies we utilize as of July 31, 2002. This table summarizes
the contracts from risk management trading activities where settlement has not
yet occurred:
(in thousands) Fair Value of Contracts at Period-End
---------------------------------------------
Maturity greater
than 1 year and
Maturity less than less than 18 months
Source of Fair Value 1 year
- ------------------------------------------------------------ --------------------- --------------------
Prices actively quoted $ (328) $ -
Prices provided by other external sources (4,225) (16)
Prices based on models and other
valuation methods - -
--------------------- --------------------
Unrealized (losses) in fair value of contracts
outstanding at July 31, 2002 $(4,553) $(16)
===================== ====================
See additional discussion about market, counterparty credit and liquidity risks
related to the our risk management trading activities and other risk management
activities in "Quantitative and Qualitative Disclosures about Market Risk."
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 agreement, 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 costs, which totaled $197,863,000 for the year
ended July 31, 2002, include compensation and benefits paid to officers and
employees of our general partner who perform services on our behalf and general
and administrative costs.
On December 12, 2001, we issued 37,487 common units to Ferrell Propane,
Inc., a subsidiary of our general partner in connection with our acquisition of
Blue Flame Bottle Gas (see Note P to the Consolidated Financial Statements.) The
common unit issuance compensated Ferrell Propane for its retention of $725,000
of certain tax liabilities of Blue Flame.
During fiscal 2002, we paid JEF Capital Management $776,445 to redeem a
total of 19,411 senior units and $11,192,000 in senior unit distributions. In a
noncash transaction, we accrued a senior unit distribution of $2,782,211 that we
paid to JEF Capital Management on September 13, 2002.
24
Ferrell International Limited and FI Trading, Inc. are beneficially owned
by James E. Ferrell and thus are our affiliates. We enter into transactions with
Ferrell International Limited and FI Trading in connection with our risk
management activities and do so at market prices in accordance with our
affiliate trading policy approved by our general partner's Board of Directors.
These transactions include forward, option and swap contracts and are all
reviewed for compliance with the policy. During fiscal 2002, we recognized net
receipts from purchases, sales and commodity derivative transactions of
$10,692,000. These net purchases, sales and commodity derivative transactions
with Ferrell International Limited and FI Trading, Inc. are classified as cost
of product sold. Amounts due from (to) Ferrell International Limited at July 31,
2002 were $396,000 and $(266,000), respectively.
We believe these related party transactions were under terms that were no
less favorable to us than those available with third parties.
See both Item 13 "Certain relationships and related transactions" and Note
K to the Consolidated Financial Statements for additional discussion.
Adoption of New Accounting Standards
The Financial Accounting Standards Board recently issued SFAS No. 141
"Business Combinations", SFAS No. 142 "Goodwill and Other Intangible Assets",
SFAS No. 143 "Accounting for Asset Retirement Obligations", SFAS No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets", SFAS No. 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections", and SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities."
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. We have
historically accounted for business combinations using the purchase method,
therefore, this new standard will not have a substantial impact on how we
account for future business 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 were
reclassified to goodwill. We adopted SFAS No. 142 beginning in the first quarter
of fiscal 2002. Although there was no cash flow effect, our amortization expense
decreased by $10,600,000 in fiscal 2002, compared to the amortization that would
have been recorded had the new accounting standard not been issued. This new
standard also required us to test goodwill for impairment at the time the
standard was adopted and also on an annual basis. The results of these
impairment tests did not have a material effect on our financial position,
results of operations and cash flows. We did not recognize any impairment losses
as a result of these tests.
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. We will implement SFAS No. 143 beginning in the
fiscal year ending July 31, 2003, and expect to record a one-time reduction to
earnings during the first quarter of fiscal 2003, as a cumulative change in
accounting principle, of approximately $2,800,000. This charge relates to the
estimated expenditures that will be incurred by us in the future primarily to
close our underground storage facilities. We believe the implementation will not
have a material ongoing effect on our financial position, results of operations
and cash flows.
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. We will implement
SFAS No. 144 beginning in the fiscal year ending July 31, 2003, and believe the
implementation will not have a material effect on our financial position,
results of operations and cash flows.
25
SFAS No. 145 eliminates the requirement that material gains and losses
resulting from the early extinguishment of debt be classified as an
extraordinary item in the results of operations. Instead, companies must
evaluate whether the transaction meets both the criteria of being unusual in
nature and infrequent in occurrence. Other aspects of SFAS No. 145 relating to
accounting for intangible assets of motor carriers and accounting for lease
modifications do not currently apply to us. We will implement SFAS No. 145
beginning in the fiscal year ending July 31, 2003, and believe the
implementation will not have a material effect on our financial position,
results of operations and cash flows.
SFAS No. 146 modifies the financial accounting and reporting for costs
associated with exit or disposal activities. This standard requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Additionally, the statement requires the
liability to be recognized and measured initially at fair value. Under previous
rules, a liability for an exit cost was recognized at the date of the entity's
commitment to an exit plan. We adopted and implemented SFAS No. 146 for any exit
or disposal activities that are initiated after July 31, 2002. We believe the
implementation will not have a material effect on our financial position,
results of operations and cash flows.
New Federal Legislation
The Public Company Accounting Reform and Investor Protection Act of 2002
was enacted by the United States Congress on July 30, 2002. This Act covers a
wide variety of issues and its provisions will become effective at different
times generally when implementing regulations become effective, at 30, 60, 180
or 360 days after enactment depending on the specific provision. It is important
to note, however, that a number of the Act's provisions became effective on July
30, 2002.
Highlights of this legislation as it applies to us include:
o certification of the periodic reports by the chief executive officer and
chief financial officer;
o restrictions on insider trading of our partnership units and quicker
reporting of insider trades in our partnership units;
o prohibition of company loans to executives;
o future periodic reports will contain an internal control assessment by
management and the independent public accountants will attest to this
assessment;
o adoption of a code of ethics for senior financial officers;
o the audit committee will establish procedures to handle complaints about
accounting matters, including the confidential submission by employees;
o independent public accountants are prohibited from providing certain
non-audit related activities to audit clients;
o all audit and non-audit services provided to the company by its independent
public accountant will be pre-approved by the audit committee; and
o increased communication between the audit committee and the independent
public accountants.
There are many other aspects of this Act which will not directly apply to our
company and other aspects which will have only a minor effect. We will continue
to review this Act and forthcoming regulations as they are published.
26
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with United States
Generally Accepted Accounting Principles requires us to establish accounting
policies and make estimates and assumptions that affect our reported amounts of
assets and liabilities at the date of the Consolidated Financial Statements. We
evaluate our policies and estimates on an on-going basis. Our Consolidated
Financial Statements may differ based upon different estimates and assumptions.
We discuss our significant accounting policies in Note B to the
Consolidated Financial Statements. We believe the following are our critical
accounting policies:
Depreciation of Property, Plant and Equipment
We calculate depreciation using the straight-line method based on the
estimated useful lives of the assets ranging from two to 30 years. Changes in
the estimated useful lives of our assets could have a material effect on results
of operations.
Amortization of Intangible Assets
We calculate amortization using either straight-line or accelerated methods
over periods ranging from two to 15 years. We use amortization methods and
determine asset values based on our best estimates using reasonable and
supportable assumptions and projections. Changes in the amortization methods or
asset values could have a material effect on results of operations.
Fair Value of Derivative Commodity Contracts
We enter into commodity forward, futures, swaps and options contracts
involving propane and related products, which, in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," are not
accounting hedges, but are used for risk management trading purposes. To the
extent such contracts are entered into at fixed prices and thereby subject us to
market risk, the contracts are accounted for using the fair value method. Under
this valuation method, derivatives are carried in the Consolidated Balance
Sheets at fair value with changes in value recognized in earnings. We classify
all gains and losses from these derivative contracts entered into for risk
management trading purposes as cost of product sold in the Consolidated
Statements of Earnings. We utilize published settlement prices for
exchange-traded contracts, quotes provided by brokers and estimates of market
prices based on daily contract activity to estimate the fair value of these
contracts. Changes in the methods used to determine the fair value of these
contracts could have a material effect on results of operations. For further
discussion of derivative commodity contracts, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations", "Liquidity and Capital Resources - Disclosures about Risk
Management Activities Accounted for at Fair Value" and "Quantitative and
Qualitative Disclosures about Market Risk" and Note J to the Consolidated
Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in our market risk sensitive instruments and
positions is the potential loss arising from adverse changes in commodity
prices. Our risk management trading activities utilize various types of energy
commodity forward contracts, options, swaps traded on the over-the-counter
financial markets and futures and options traded on the New York Mercantile
Exchange to manage and hedge our exposure to the volatility of floating
commodity prices and to protect our inventory positions. We include the results
from our risk management trading activities in our discussion and analysis of
cost of product sold. Our other risk management activities, specifically our
supply procurement activities, also utilize over-the-counter energy commodity
forward contracts to limit overall price risk and options to hedge our exposure
to inventory price movements. We include the results from these other risk
management activities in cost of product sold and in our discussion and analysis
of retail margin per gallon.
27
Market risks associated with energy commodities are monitored daily by
senior management for compliance with our risk management policies. These
policies include specific dollar exposure limits, limits on the term of various
contracts and volume limits for various energy commodities. We also utilize loss
limits and review our positions daily where we remain exposed to market risk, so
as to manage exposures to changing market prices.
Market, Credit and Liquidity Risk. New York Mercantile Exchange traded
futures are guaranteed by the New York Mercantile Exchange and have nominal
credit risk. We are exposed to credit risk associated with forwards, swaps and
option transactions in the event of nonperformance by counterparties. For each
counterparty, we analyze its financial condition prior to entering into an
agreement, establish credit limits and monitor the appropriateness of each
limit. The change in market value of Exchange-traded futures contracts requires
daily cash settlement in margin accounts with brokers. Forwards and most other
over-the-counter instruments are generally settled at the expiration of the
contract term. In order to minimize the liquidity risk of cash, margin or
collateral requirements of counterparties for over-the-counter instruments, we
attempt to balance maturities and positions with individual counterparties.
Historically, our risk management activities have not experienced significant
credit related losses in any year or with any individual counterparty. Our risk
management contracts do not contain material repayment provisions related to a
decline in our credit rating.
Sensitivity Analysis. We have prepared a sensitivity analysis to estimate
the exposure to market risk of our energy commodity positions. Forward
contracts, futures, swaps and options used in our risk management trading
activities were analyzed assuming a hypothetical 10% adverse change in prices
for the delivery month for all energy commodities. The potential loss in future
earnings regarding these positions from a 10% adverse movement in market prices
of the underlying energy commodities is estimated at $1,100,000 and $8,000,000
for risk management trading activities and $80,000 and $1,400,000 for other risk
management activities as of July 31, 2002 and 2001, respectively. The preceding
hypothetical analysis is limited because changes in prices may or may not equal
10%, thus actual results may differ.
Additionally, we seek to mitigate our variable rate interest rate risk
exposure on operating leases by entering into interest rate cap agreements. At
July 31, 2002 and 2001, we had $156,000,000 and $157,600,000 outstanding,
respectively, in variable rate operating leases and an equal amount of interest
rate cap agreements outstanding to hedge the related variable rate exposure.
Thus, assuming a one percent increase in our variable interest rate, the
interest rate risk related to the operating leases and the associated interest
rate cap agreements would be a loss in future earnings of $1,553,000 and
$1,569,000 in fiscal 2002 and 2001, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements and the Independent Auditors' Reports
thereon and the Supplementary Financial Information listed on the accompanying
Index to Financial Statements and Financial Statement Schedules are hereby
incorporated by reference. See Note R to the Consolidated Financial Statements
for Selected Quarterly Financial Data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
PART III
----------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
Our Management
Ferrellgas, Inc. manages and operates our activities and anticipates that
its activities will be limited to that management and operation. We do not
directly employ any of the persons responsible for our management or operations,
rather, these individuals are employed by Ferrellgas, Inc. Unitholders do not
directly or indirectly participate in our management or operations.
Audit Committee
Ferrellgas, Inc. has appointed persons who are neither officers nor
employees of Ferrellgas, Inc. or its affiliates to serve on its audit committee.
The audit committee includes one member who is a financial expert. Michael F.
Morrissey is the retired Managing Partner of Ernst & Young's Kansas City,
Missouri office. At the request of Ferrellgas, Inc., the audit committee has the
authority to review specific matters, which Ferrellgas, Inc. believes may be a
conflict of interest with us. The audit committee determines if the resolution
of that conflict as proposed by Ferrellgas, Inc. is fair and reasonable to us.
In addition, the audit committee has the authority and responsibility for
selecting our independent public accountants, reviewing our annual audit and
resolving accounting policy questions. Any matters approved by the audit
committee are conclusively deemed to be fair and reasonable to us, approved by
all our unitholders and not a breach by Ferrellgas, Inc. of any duties it may
owe us or our unitholders.
Directors and Executive Officers of the General Partner
The following table sets forth certain information with respect to the
directors and executive officers of Ferrellgas, Inc. as of September 30, 2002.
Each of the persons named below is elected to their respective office or offices
annually.
Director
Name Age Since Position
- ---- --- -------- --------
James E. Ferrell 63 1984 Chairman of the Board, Chief Executive
Officer, President and a Director of
Ferrellgas, Inc.
Patrick J. Chesterman 52 n/a Executive Vice President and Chief
Operating Officer
Kevin T. Kelly 37 n/a Senior Vice President and Chief
Financial Officer
Kenneth A. Heinz 38 n/a Vice President of Corporate Development
A. Andrew Levison 46 1994 Director of Ferrellgas, Inc.
Elizabeth T. Solberg 63 1998 Director of Ferrellgas, Inc.
Michael F. Morrissey 60 1999 Director of Ferrellgas, Inc.
29
James E. Ferrell--Mr. Ferrell has been with Ferrell Companies or its
predecessors and its affiliates in various executive capacities since 1965,
including Chairman of the Board of Ferrellgas, Inc. He was named Chief Executive
Officer and President of Ferrellgas, Inc. on October 5, 2000. He previously
served as Ferrellgas, Inc.'s Chief Executive Officer until August 1998 and as
President until October 1996.
Patrick J. Chesterman--Mr. Chesterman was named Executive Vice President
and Chief Operating Officer of Ferrellgas, Inc. in June 2000. He had been
Executive Vice President and Chief Operating Officer, Ferrell North America
since April 1998 after having served as Senior Vice President, Supply since
September 1997. After joining Ferrellgas, Inc. in June, 1994, he had one-year
assignments as Vice President - Retail Operations, Director of Field Support and
Director of Human Resources.
Kevin T. Kelly--Mr. Kelly was named Senior Vice President in October 2000
and Chief Financial Officer in May 1998. After joining Ferrellgas, Inc. in June
1996, he served as Director of Finance and Corporate Controller until May 1998.
Kenneth A. Heinz--Mr. Heinz was named Vice President of Corporate
Development in November 2001. After joining Ferrellgas, Inc. in November, 1996,
he served as Manager of Taxation, Director of Finance and Taxation, and Vice
President of Finance and Corporate Development.
A. Andrew Levison--Mr. Levison was elected a Director of Ferrellgas, Inc.
in September 1994. He is also a member of the Audit Committee. Mr. Levison
retired in 2000 after having been a Managing Director of Donaldson, Lufkin &
Jenrette Securities Corporation since 1989.
Elizabeth T. Solberg--Ms. Solberg was elected a Director of Ferrellgas,
Inc. in July 1998. She is also a member of the Audit Committee. Ms. Solberg is
Regional President and Senior Partner of Fleishman-Hillard, Inc. and has been
with the firm since 1976. She has been a member of the Board of Directors of
Kansas City Life Insurance Company since 1997 and Midwest Express Holdings since
2001.
Michael F. Morrissey--Mr. Morrissey was elected a Director of Ferrellgas,
Inc. in November 1999. He is also Chairman of the Audit Committee. Mr. Morrissey
retired as the Managing Partner of Ernst & Young's Kansas City office in the
fall of 1999. He had been with that firm, or its predecessor, since 1975.
Compensation of the General Partner
Our general partner receives no management fee or similar compensation in
connection with its management of our business and receives no remuneration
other than:
o distributions on its combined 2% general partner interest in us, and
o reimbursement for all direct and indirect costs and expenses incurred on
our behalf, all selling, general and administrative expenses incurred by
our general partner on our behalf and all other expenses necessary or
appropriate to the conduct of our business and allocable to us. The
selling, general and administrative expenses reimbursed include specific
employee benefits and incentive plans for the benefit of the executive
officers and employees of our general partner.
Compliance with Section 16(a) of the Securities and Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 requires
Ferrellgas, Inc.'s officers and directors, and persons who own more than 10% of
a registered class of our equity securities, to file reports of beneficial
ownership and changes in beneficial ownership with the Commission. Officers,
directors and unitholders with greater than 10% ownership are required by the
Commission's regulation to furnish Ferrellgas, Inc. with copies of all Section
16(a) forms.
30
Based solely on its review of the copies of such forms received by
Ferrellgas, Inc., or written representations from certain reporting persons that
no Annual Statement of Beneficial Ownership of Securities on Form 5 were
required for those persons, Ferrellgas, Inc. believes that during fiscal year
2002 all filing requirements applicable to its officers, directors, or
beneficial owners with greater than 10% ownership were met in a timely manner.
ITEM 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the compensation for the past three fiscal
years of Ferrellgas, Inc.'s chief executive officer and the three most highly
compensated executive officers other than the chief executive officer, who were
serving as executive officers at the end of the 2002 fiscal year.
Long-Term Compensation
------------------------------
Annual Compensation Awards Pay-outs
-------------------------------------- ---------------------------------
Other Securities Long-Term All Other
Annual Underlying Incentive Compen-
Name and Salary Bonus (1) Compen- Options Payouts sation
Principal Position Year ($) ($) sation $(2) (#) (3) ($) ($)
- --------------------------------- ------ ------------ ------------ ------------ -------------- ------------- -------------
James E. Ferrell (4) 2002 500,000 500,000 --- --- --- 14,674 (6)
Chairman, Chief Executive 2001 431,075 1,000,000 --- 1,050,000 --- 9,682
Officer and President
Patrick J. Chesterman 2002 322,000 300,000 3,403 --- --- 17,227 (6)
Executive Vice President, 2001 285,900 425,000 2,134 90,000 --- 8,714
And Chief Operating Officer 2000 212,646 202,125 1,780 50,000 --- 13,701
Kevin T. Kelly 2002 221,000 200,000 3,403 --- --- 9,231 (6)
Senior Vice President and 2001 180,000 208,000 2,104 120,000 --- 9,619
Chief Financial Officer 2000 160,319 75,000 1,686 75,000 --- 8,184
Kenneth A. Heinz (5) 2002 171,800 125,000 3,403 --- --- 6,936 (6)
Vice President of
Corporate Development
<FN>
(1) Awards under bonus plans are for the year reported, regardless of the year
paid.
(2) All amounts represent the value of shares contributed to each individual's
Employee Stock Ownership Plan account.
(3) The awards are grants of unit options from the Ferrellgas, Inc. Unit Option
Plan and stock options from the Incentive Compensation Plan, a stock option
plan of Ferrell Companies (see below for unit option and stock option grant
tables).
(4) On October 5, 2000, James E. Ferrell was named the Chief Executive Officer,
President and Director of Ferrellgas, Inc. and affiliates.
(5) Kenneth A. Heinz was named Vice President of Corporate Development in
November 2001.
(6) Includes for Mr. Ferrell contributions of $14,674 to the employee's 401(k)
and profit sharing plans. Includes for Mr. Chesterman contributions of
$16,482 to the profit sharing plans and compensation of $745 resulting from
the payment of life insurance premiums. Includes for Mr. Kelly
contributions of $9,231 to the employee's 401(k) and profit sharing plans.
Includes for Mr. Heinz contributions of $6,619 to the employee's 401(k) and
profit sharing plans and compensation of $317 resulting from the payment of
life insurance premiums.
</FN>
Ferrellgas, Inc. and James M. Hake, the former Senior Vice President,
Administration of Ferrellgas, Inc. and affiliates, negotiated a termination of
his employment effective November 30, 2001. As part of this mutual agreement,
Mr. Hake was paid an amount equal to two times his then current salary plus
$100,000.
31
Unit Options
The Second Amended and Restated Ferrellgas Unit Option Plan grants
employees unit options to purchase our common units. The original Unit Option
Plan was adopted in and became effective August 1994 and was most recently
amended effective April 2001. The purpose of the Unit Option Plan is to
encourage certain employees of Ferrellgas, Inc. to develop a proprietary
interest in our growth and performance, to generate an increased incentive to
contribute to our future success and prosperity, thus enhancing our value for
the benefit of our Unitholders, and to enhance the ability of Ferrellgas, Inc.
to attract and retain key individuals who are essential to our progress, growth
and profitability.
As of July 31, 2002, we had outstanding 1,075,400 unit options, with a
weighted average exercise price of $18.15 per option, to purchase our common
units. The options generally vest over a five-year period, and expire on the
tenth anniversary of the date of the grant. As of July 31, 2002, 594,725 of the
unit options outstanding were exercisable.
There were no grants of unit options during the 2002 fiscal year.
The following table lists information on the CEO and named executive
officers' exercisable/unexercisable unit options as of July 31, 2002.
AGGREGATED UNIT OPTION IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options at Fiscal Options at Fiscal
Year End (#) Year End ($)
------------------- --------------------
Units
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
------------------------------- -------------- --------------- ------------------- --------------------
James E. Ferrell 0 0 60,000/240,000 60,000/240,000
Patrick J. Chesterman 0 0 48,000/72,000 24,300/72,000
Kevin T. Kelly 0 0 29,000/76,000 19,000/76,000
Kenneth A. Heinz 0 0 19,200/60,800 15,200/60,800
Employee Stock Ownership Plan
On July 17, 1998, pursuant to the Ferrell Companies, Inc. Employee Stock
Ownership Plan, an employee stock ownership trust purchased all of the
outstanding common stock of Ferrell Companies. The purpose of the Employee Stock
Ownership Plan is to provide employees of Ferrellgas, Inc. an opportunity for
ownership in Ferrell Companies, and indirectly, us. Ferrell Companies makes
contributions to the Employee Stock Ownership Plan which allows a portion of the
shares of Ferrell Companies owned by the Employee Stock Ownership Plan to be
allocated to employees' accounts over time.
Incentive Compensation Plan
Also on July 17, 1998, the Ferrell Companies, Inc. 1998 Incentive
Compensation Plan was established by Ferrell Companies, Inc. to allow
upper-middle and senior level managers of Ferrellgas, Inc. to participate in the
equity growth of Ferrell Companies. Pursuant to this Incentive Compensation
Plan, eligible participants may be granted stock options to purchase shares of
common stock of Ferrell Companies. The shares underlying the stock options are
common shares of Ferrell Companies.
There were no grants of Incentive Compensation Plan options to named
officers during the 2002 fiscal year.
32
The Ferrell Companies stock options vest ratably in 5% to 10% increments
over 12 years or 100% upon a change of control of Ferrell Companies, 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 Companies debt, but in no event later than 20 years from the date of
issuance.
The following table lists information on the CEO and named executive
officers' exercisable/unexercisable stock options as of July 31, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Value of
Number of Unexercised
Securities Underlying In-The-Money
Unexercised Options Options at Fiscal
At Fiscal Year End (#) Year End ($)
-------------------------- ---------------------
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- -------------------------- --------------- ----------- -------------------------- ---------------------
James E. Ferrell 0 0 0/750,000 0/2,242,500
Patrick J. Chesterman 0 0 0/250,000 0/949,000
Kevin T. Kelly 0 0 0/250,000 0/985,000
Kenneth A. Heinz 0 0 0/220,000 0/823,000
Profit Sharing Plan
The Ferrell Companies, Inc. Profit Sharing and 401(k) Investment Plan is a
qualified defined contribution plan, which includes both profit sharing and
matching contributions. All full-time employees of Ferrell Companies or any of
its direct or indirect wholly-owned subsidiaries with at least one year of
service are eligible to participate in the profit sharing plan. With the
establishment of the employee stock ownership plan in July 1998, we suspended
future profit sharing contributions to the plan beginning with fiscal year 1998.
The plan also has a 401(k) feature allowing all full-time employees to specify a
portion of their pre-tax and/or after-tax compensation to be contributed to the
plan. The plan also provides for matching contributions under a cash or deferred
arrangement based upon participant salaries and employee contributions to the
plan. Unlike the profit sharing contributions, these matching contributions were
not eliminated with the establishment of the ESOP.
Supplemental Savings Plan
The Ferrell Supplemental Savings Plan was established October 1, 1994 in
order to provide certain management or highly compensated employees with
supplemental retirement income which is approximately equal in amount to the
retirement income that would have been provided to members of the select group
of employees under the terms of the 401(k) feature of the profit sharing plan
based on such members' deferral elections thereunder, but which could not be
provided under the 401(k) feature of the profit sharing plan due to the
application of certain IRS rules and regulations.
Employment Agreements
In April 2001, the independent board of directors modified the amount of
compensation paid to Mr. James E. Ferrell as Chairman, Chief Executive Officer
and President of Ferrellgas, Inc. pursuant to Mr. Ferrell's existing employment
agreement dated July 17, 1998. Effective September 1, 2002, Mr. Ferrell's annual
salary was increased to $635,000. He is also entitled to an annual bonus, the
amount to be determined in the sole discretion of the independent board members.
In addition to his compensation, Mr. Ferrell participates in our various
employee benefit plans, with the exception of the employee stock ownership plan.
33
Pursuant to the terms of Mr. Ferrell's employment agreement, in the event
of a termination without cause, resignation for cause or a change of control of
Ferrell Companies or Ferrellgas, Inc., Mr. Ferrell is entitled to a cash amount
equal to three times the greater of 125% of his current base salary or the
average compensation paid for the prior three fiscal years.
Mr. Ferrell's agreement contains a non-compete provision for the period of
time, following his termination of employment, equal to the greater of five
years or the time in which certain outstanding debt of Ferrell Companies is paid
in full. The non-compete provision provides that he shall not directly or
indirectly own, manage, control, or engage in any business with any person whose
business is substantially similar to our business.
During the first quarter of fiscal 2001, Patrick J. Chesterman and Kevin T.
Kelly each entered into three-year employment agreements. The employment
agreements state that Messrs. Chesterman and Kelly will receive an annual salary
of not less than $285,000 and $180,000, respectively. In addition to receiving
an annual salary, each are entitled to a bonus based on our earnings and
individual performance.
Pursuant to the terms of each employment agreement, in the event of a
termination without cause or resignation for cause, Messrs. Chesterman and Kelly
are entitled to a cash amount equal to two times their current base salary. If a
change of control of Ferrell Companies or Ferrellgas, Inc. occurs, each will
receive a cash termination benefit equal to two and a half times the greater of
125% of his current base salary or the average compensation paid for the prior
three fiscal years.
Messrs. Chesterman and Kelly's agreements contain non-compete provisions
for a period of two years following their termination of employment. The
non-compete provisions provide that they shall not directly or indirectly own,
manage, control, or engage in any business with any person whose business is
substantially similar to our business.
Compensation of Directors
Ferrellgas, Inc. does not pay any additional remuneration to its employees
for serving as directors. Directors who are not employees of Ferrellgas, Inc.
receive an annual retainer of $16,000. They also receive a fee per meeting of
$1,000 if they attend in person and $500 if they participate by telephone, plus
reimbursement for out-of-pocket expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of September 30,
2002, regarding the beneficial ownership of our common units by beneficial
owners that are directors and named executive officers of Ferrellgas, Inc., and
all directors and executive officers of Ferrellgas, Inc. as a group. Ferrellgas,
Inc. knows of no other person beneficially owning more than 5% of the common
units. The senior units currently are not voting securities of the Partnership
and therefore are not presented in the table below.
34
Ferrellgas Partners, L.P.
- -------------------------
Units
Beneficially Percentage of
Title of Class Name and Address of Beneficial Owner Owned Class
- --------------------- -------------------------------------------------- ----------------- -----------------
Common Units Employee Stock Ownership Trust 17,855,087 49.5
James E. Ferrell 75,000 *
Patrick J. Chesterman 48,200 *
Kenneth A. Heinz 19,500 *
Kevin T. Kelly 29,700 *
Elizabeth T. Solberg 8,200 *
A. Andrew Levison 35,300 *
Michael F. Morrissey 775 *
All Directors and Executive Officers as a Group 216,675 *
<FN>
* Less than one percent
</FN>
Beneficial ownership for the purposes of the foregoing table is defined by
Rule 13d-3 under the Securities Exchange Act of 1934. Under that rule, a person
is generally considered to be the beneficial owner of a security if he has or
shares the power to vote or direct the voting thereof or to dispose or direct
the disposition thereof or has the right to acquire either of those powers
within 60 days. See the Aggregated Unit Option Exercises In Last Fiscal Year And
Fiscal Year End Option Values table above for the number of common units that
could be acquired by named executive officers through exercising common unit
options.
The address for LaSalle National Bank, the trustee for the Ferrell
Companies, Inc. Employee Stock Ownership Trust is 125 S. LaSalle Street, 17th
Floor, Chicago, Illinois, 60603. The common units owned by the Employee Stock
Ownership Trust includes 17,803,883 Common Units owned by Ferrell Companies
which is 100% owned by the Employee Stock Ownership Trust and 51,204 common
units owned by Ferrell Propane, Inc., a wholly-owned subsidiary of Ferrellgas,
Inc.
Equity Plan Compensation Information
The table below provides information about our Second Amended and Restated
Ferrellgas Unit Option Plan as of July 31, 2002. The plan is our only equity
compensation plan that grants equity of Ferrellgas Partners, L.P. to its
participants. In addition to the information set forth below, see Note N to the
Consolidated Financial Statements for additional information about the plan.
Number of securities remaining
remaining available for future
Number of securities to be Weighted-average issuance under equity
issued upon exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in the first column)
- ------------------------- -------------------------- -------------------- ------------------------------
Equity compensation plans
approved by security
holders - - -
Equity compensation plans
not approved by security 1,075,400 $18.15 274,600 (1)
holders
-------------------------- -------------------- -------------------------------
Total 1,075,400 $18.15 274,600
============================ ==================== ===============================
<FN>
(1) This number may be increased upon the occurrence of particular events. See
narrative below.
</FN>
35
The Second Amended and Restated Ferrellgas Unit Option Plan was initially
adopted by the Board of Directors of our general partner and became effective in
August 1994 and was subsequently amended effective March 1995 and April 2001.
The plan is intended to meet the requirements of the New York Stock Exchange
equity holder approval policy for option plans not approved by the equity
holders of a company, and thus approval of the plan by our common unitholders
was not required.
The purpose of the plan is to encourage selected employees of Ferrellgas,
Inc. to:
o develop a proprietary interest in our growth and performance;
o generate an increased incentive to contribute to our future success and
prosperity, thus enhancing our value for the benefit of our common
unitholders; and
o enhance our ability to attract and retain key individuals who are essential
to our progress, growth and profitability, by giving these individuals the
opportunity to acquire our common units.
The plan is to be administered either by an option committee of the Board
of Directors of our general partner that is composed of not less than two
directors who are "non-employee directors" within the meaning of Rule 16b-3 of
the Exchange Act or by the Board of Directors itself. The Board of Directors,
which currently has three "non-employee directors," has not yet designated such
an option committee and therefore currently administers the plan. The Board of
Directors has however designated an employee committee to recommend to it at
various times throughout the year the number of unit options to be granted and
to whom such unit options should be granted. The Board of Directors then votes
upon such recommendations.
Subject to the terms of the plan and applicable law, the administrator of
the plan has the sole power, authority and discretion to:
o designate the employees who are to be participants in the plan;
o determine the number of unit options to be granted to an employee;
o determine the terms and conditions of any unit option;
o interpret, construe and administer the plan and any instrument or agreement
relating to a unit option granted under the plan;
o establish, amend, suspend, or waive such rules and regulations and appoint
such agents as it deems appropriate for the proper administration of the
plan;
o make a determination as to the right of any person to receive payment of
(or with respect to) a unit option; and
o make any other determinations and take any other actions that the
administrator deems necessary or desirable for the administration of the
plan.
36
Generally, all of the directors, officers, and other employees of
Ferrellgas, Inc., or an affiliate of Ferrellgas, Inc., are eligible for
participation in the plan. Grants to a member of the Board of Directors or the
option committee are permitted provided that the grantee recuses themselves from
the vote relating to such unit option grant. Grants may be made to the same
employee on more than one occasion and the terms and provisions of grants to the
same employee or to different employees need not be the same. The plan allows
for the granting of only non-qualified unit options and in no event shall the
term of any unit option exceed a period of ten years from the date of its grant.
Unit options, to the extent vested as of the date the holder thereof ceases to
be an employee of Ferrellgas, Inc. or one of its affiliates, will remain the
property of the holder until the unit options are exercised or expire. Unit
options, to the extent not vested as of the date the holder ceases to be an
employee, are automatically canceled. Unit options or rights thereunder are not
assignable, alienable, saleable or transferable by a holder otherwise than by
will or by the laws of descent and distribution. It is intended that the plan
and any unit option granted to a person subject to Section 16 of the Exchange
Act meet all of the requirements of Rule 16b-3 of the Exchange Act.
To comply with the rules of the New York Stock Exchange, no single officer
or director may acquire under the plan more than 314,895 common units. In
addition, all common units available for issuance under this plan, together with
any common units available for issuance under any other employee benefit plan,
of which there are currently none, shall not exceed 1,574,475 common units.
Although the number of unit options currently available for issuance under
the plan is limited to 1,350,000, under particular circumstances that would
result in a significant dilution of the rights of the participants in the plan,
the administrator of the plan may make appropriate adjustments in the maximum
number of common units issuable under the plan to reflect the effect of such
circumstance and may make appropriate adjustments to the number of common units
subject to, and/or the exercise price of, each outstanding unit option.
The administrator has the discretion to cancel all or part of any
outstanding unit options at any time. Upon any such cancellation we will pay to
the holder with respect to each cancelled unit option an amount in cash equal to
the excess, if any, of (i) the fair market value of a common unit, at the
effective date of such cancellation, over (ii) the unit option exercise price.
In addition, the administrator has the right to alter or amend the plan or any
part thereof from time to time; provided, however, that no change in any unit
option already granted may be made which would impair the rights of the holder
thereof without the consent of the holder. The administrator may also in its
discretion terminate the plan at any time with respect to any common units for
which a unit option has not yet been granted. There is currently no fixed
termination date for the plan. If a plan for our complete dissolution is adopted
or our unitholders approve an agreement for our sale or disposition of all or
substantially all of our assets, then upon such adoption or approval all or a
portion, in the sole discretion of the administrator, of a holder's unit options
outstanding as of the date of that adoption or approval shall be immediately and
fully vested and exercisable and may be exercised within one year from the date
of that adoption or approval.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a discussion of certain relationships and related
transactions among our affiliates.
We have no employees and are managed and controlled by Ferrellgas, Inc.
Pursuant to our partnership agreement, Ferrellgas, Inc. is reimbursed for all
direct and indirect expenses incurred or payments made on our behalf, and all
other necessary or appropriate expenses allocable to us or otherwise reasonably
incurred by Ferrellgas, Inc. in connection with operating our business. These
costs, which totaled $197,863,000 for the year ended July 31, 2002, include
compensation and benefits paid to officers and employees of Ferrellgas, Inc. who
perform services on our behalf and related general and administrative costs. In
addition, the conveyance of the net assets of Ferrellgas, Inc. to us upon our
formation included the assumption of specific liabilities related to employee
benefit and incentive plans for the benefit of the officers and employees of
Ferrellgas, Inc. who perform services on our behalf.
The Chairman, Chief Executive Officer and President, James E. Ferrell
beneficially owns all of our outstanding senior units at July 31, 2002. During
fiscal 2002, we paid JEF Capital Management, an entity beneficially owned by Mr.
Ferrell, $776,445 to redeem 19,411 senior units and $11,192,000 in senior unit
distributions. As of July 31, 2002, we had recognized a liability for the senior
unit distribution of $2,782,211 that was paid to JEF Capital Management on
September 13, 2002.
37
Ferrell International Limited and FI Trading, Inc. are beneficially owned
by James E. Ferrell and thus are our affiliates. We entered into certain
forward, option and swap contracts with these affiliates as counterparties.
These contracts are entered into according to an affiliate trading policy as
approved by the Board of Directors. All of these contracts are reviewed for
compliance with the policy. In connection with these risk management
transactions, we recognized net receipts from sales, purchases and commodity
derivative transactions of $10,692,000. The net sales, purchases and commodity
derivative transactions with Ferrell International Limited and FI Trading, Inc.
are classified as cost of product sold. Amounts due from and due to Ferrell
International Limited at July 31, 2002 were $396,000 and $266,000, respectively.
We made payments of $300,000 in connection with leased propane tanks from
Ferrell Propane, Inc., a subsidiary of Ferrellgas, Inc until February 2002, at
which time, Ferrell Propane sold all its tanks to an unrelated entity.
On December 12, 2001, we issued 37,487 common units to Ferrell Propane,
Inc., a subsidiary of our general partner, in connection with the acquisition of
Blue Flame Bottle Gas. The common unit issuance compensated Ferrell Propane for
its retention of $725,000 of certain tax liabilities of Blue Flame.
We believe these related party transactions were under terms that were no
less favorable to us than those available with third parties.
See Note K to the Consolidated Financial Statements for discussion of
transactions involving acquisitions related to Ferrellgas, Inc. and us.
ITEM 14. CONTROLS AND PROCEDURES.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the last
time such controls were evaluated by management, including no corrective actions
with respect to significant deficiencies and material weaknesses in such
controls.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
See "Index to Financial Statements" set forth on page F-1.
2. Financial Statement Schedules.
See "Index to Financial Statement Schedules" set forth on page S-1.
3. Exhibits.
See "Index to Exhibits" set forth on page E-1.
(b) Reports on Form 8-K.
We furnished one Form 8-K during the quarter ended July 31, 2002.
Items
Date of Report Reported Financial Statements Filed
- -------------- -------- --------------------------
May 20, 2002 9 None
38
INDEX TO EXHIBITS
The exhibits listed below are filed as part of this Annual Report on Form
10-K. Exhibits required by Item 601 of Regulation S-K of the Securities Act,
which are not listed, are not applicable.
Exhibit
Number Description
- ------- -----------
3.1 Third Amended and Restated Agreement of Limited Partnership of
Ferrellgas Partners, L.P., dated as of April 6, 2001. Incorporated
by reference to the same numbered Exhibit to our Current Report on
Form 8-K filed April 6, 2001.
3.2 Articles of Incorporation for Ferrellgas Partners Finance Corp.
Incorporated by reference to the same numbered Exhibit to our
Quarterly Report on Form 10-Q filed June 13, 1997.
3.3 Bylaws of Ferrellgas Partners Finance Corp. Incorporated by
reference to the same numbered Exhibit to our Quarterly Report on
Form 10-Q filed June 13, 1997.
4.1 Indenture, dated as of September 24, 2002, with Form of Note
attached, by and among Ferrellgas Partners, L.P., Ferrellgas
Partners Finance Corp., and U.S. Bank National Association, as
trustee, relating to $170,000,000 aggregate principal amount of our
8 3/4% Senior Notes due 2012. Incorporated by reference to Exhibit
4.1 to our Current Report on Form 8-K filed September 24, 2002.
4.2 Ferrellgas, L.P., Note Purchase Agreement, dated as of July 1, 1998,
relating to: $109,000,000 6.99% Senior Notes, Series A, due August
1, 2005, $37,000,000 7.08% Senior Notes, Series B, due August 1,
2006, $52,000,000 7.12% Senior Notes, Series C, due August 1, 2008,
$82,000,000 7.24% Senior Notes, Series D, due August 1, 2010, and
$70,000,000 7.42% Senior Notes, Series E, due August 1, 2013.
Incorporated by reference to Exhibit 4.4 to our Annual Report on
Form 10-K filed October 29, 1998.
4.3 Ferrellgas, L.P., Note Purchase Agreement, dated as of February 28,
2000, relating to: $21,000,000 8.68% Senior Notes, Series A, due
August 1, 2006, $70,000,000 8.78% Senior Notes, Series B, due August
1, 2007, and $93,000,000 8.87% Senior Notes, Series C, due August 1,
2009. Incorporated by reference to Exhibit 4.2 to our Quarterly
Report on Form 10-Q filed March 16, 2000.
4.4 Registration Rights Agreement, dated as of December 17, 1999, by and
between Ferrellgas Partners, L.P. and Williams Natural Gas Liquids,
Inc. Incorporated by reference to Exhibit 4.2 to our Current Report
on Form 8-K filed December 29, 2000.
4.5 First Amendment to the Registration Rights Agreement, dated as of
March 14, 2000, by and between Ferrellgas Partners, L.P. and
Williams Natural Gas Liquids, Inc. Incorporated by reference to
Exhibit 4.1 to our Quarterly Report on Form 10-Q filed March 16,
2000.
E-1
Exhibit
Number Description
- ------- -----------
4.6 Second Amendment to the Registration Rights Agreement, dated as of
April 6, 2001, by and between Ferrellgas Partners, L.P. and The
Williams Companies, Inc. Incorporated by reference to Exhibit 10.3
to our Current Report on Form 8-K filed April 6, 2001.
4.7 Representations Agreement, dated as of December 17, 1999, by and
among Ferrellgas Partners, L.P., Ferrellgas, Inc., Ferrellgas, L.P.
and Williams Natural Gas Liquids, Inc. Incorporated by reference to
Exhibit 2.3 to our Current Report on Form 8-K filed December 29,
1999.
4.8 First Amendment to Representations Agreement, dated as of April 6,
2001, by and among Ferrellgas Partners, L.P., Ferrellgas, Inc.,
Ferrellgas, L.P. and The Williams Companies, Inc. Incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K filed
April 6, 2001.
10.1 Second Amended and Restated Agreement of Limited Partnership of
Ferrellgas, L.P., dated as of October 14, 1998. Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed
March 17, 1999.
10.2 First Amendment to the Second Amended and Restated Agreement of
Limited Partnership of Ferrellgas, L.P. Incorporated by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-Q filed June 14,
2000.
10.3 Third Amended and Restated Credit Agreement, dated as of April 18,
2000, by and among Ferrellgas, L.P., Ferrellgas, Inc., Bank of
America National Trust and Savings Association, as agent, and the
other financial institutions party thereto. Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed
June 14, 2000.
10.4 First Amendment to the Third Amended and Restated Credit Agreement,
dated as of January 17, 2001, by and among Ferrellgas, L.P.,
Ferrellgas, Inc., Bank of America National Trust and Savings
Association, as agent, and the other financial institutions party
thereto. Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q filed March 14, 2001.
10.5 Second Amendment to the Third Amended and Restated Credit Agreement,
dated as of July 16, 2001, by and among Ferrellgas, L.P.,
Ferrellgas, Inc., Bank of America National Trust and Savings
Association, as agent, and the other financial institutions party
thereto. Incorporated by reference to Exhibit 10.28 to our Annual
Report on Form 10-K filed October 25, 2001.
10.6 Receivable Interest Sale Agreement, dated as of September 26, 2000,
by and between Ferrellgas, L.P., as originator, and Ferrellgas
Receivables, L.L.C., as buyer. Incorporated by reference to Exhibit
10.17 to our Annual Report on Form 10-K filed October 26, 2000.
E-2
Exhibit
Number Description
- ------- -----------
10.7 First Amendment to the Receivable Interest Sale Agreement dated as
of January 17, 2001, by and between Ferrellgas, L.P., as originator,
and Ferrellgas Receivables, L.L.C., as buyer. Incorporated by
reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q filed
March 14, 2001.
10.8 Receivables Purchase Agreement, dated as of September 26, 2000, by
and among Ferrellgas Receivables, L.L.C., as seller, Ferrellgas,
L.P., as servicer, Jupiter Securitization Corporation, the financial
institutions from time to time party hereto, and Bank One, NA, main
office Chicago, as agent. Incorporated by reference to Exhibit 10.18
to our Annual Report on Form 10-K filed October 26, 2000.
10.9 First Amendment to the Receivables Purchase Agreement, dated as of
January 17, 2001, by and among Ferrellgas Receivables, L.L.C., as
seller, Ferrellgas, L.P., as servicer, Jupiter Securitization
Corporation, the financial institutions from time to time party
hereto, and Bank One, N.A., main office Chicago, as agent.
Incorporated by reference to Exhibit 10.4 to our Quarterly Report on
Form 10-Q filed March 14, 2001.
10.10 Second Amendment to the Receivables Purchase Agreement dated as of
September 25, 2001, by and among Ferrellgas Receivables, L.L.C., as
seller, Ferrellgas, L.P., as servicer, Jupiter Securitization
Corporation, the financial institutions from time to time party
hereto, and Bank One, N.A., main office Chicago, as agent.
Incorporated by reference to Exhibit 10.29 to our Annual Report on
Form 10-K filed October 25, 2001.
* 10.11 Third Amendment to the Receivables Purchase Agreement, dated as of
September 24, 2002, by and among Ferrellgas Receivables, L.L.C., as
seller, Ferrellgas, L.P., as servicer, Jupiter Secruritization
Corporation, the financial institutions from time to time party
hereto, and Bank One, NA, main office Chicago, as agent.
10.12 Pledge and Security Agreement, dated as of April 26, 1996, by and
among Ferrellgas Partners, L.P., Ferrellgas, Inc., and American Bank
National Association, as collateral agent. Incorporated by reference
to Exhibit 10.2 to our Current Report on Form 8-K filed May 6, 1996.
10.13 Lease Intended as Security, dated as of December 1, 1999, by and
between Ferrellgas, L.P., as lessee, and First Security Bank,
National Association, solely as certificate trustee, as lessor.
Incorporated by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q filed December 13, 1999.
10.14 Lease Intended as Security, dated as of December 15, 1999, by and
between Thermogas L.L.C. as lessee and First Security Bank, National
Association, solely as certificate trustee, as lessor. Incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
December 29, 2000.
10.15 Participation Agreement, dated as of December 1, 1999, by and among
Ferrellgas, L.P., as lessee, Ferrellgas, Inc., as general partner,
First Security Bank, National Association, solely as certificate
trustee, First Security Trust Company of Nevada, solely as agent,
and purchasers and lenders named therein. Incorporated by reference
to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed December
13, 1999.
E-3
Exhibit
Number Description
- ------- -----------
10.16 Participation Agreement, dated as of December 15, 1999, by and among
Thermogas L.L.C., as lessee, The Williams Companies, Inc., First
Security Bank, National Association, solely as certificate trustee,
First Security Trust Company of Nevada, solely as agent, and the
purchasers and lenders named therein. Incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed December 29,
1999.
10.17 Assumption Agreement, dated as of December 17, 1999, executed by
Ferrellgas, L.P. and Ferrellgas, Inc., for the benefit of the First
Security Trust Company of Nevada as agent, First Security Bank,
National Association solely as Certificate trustee and the
purchasers and lenders named therein. Incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K filed December 29,
2000.
10.18 Omnibus Amendment Agreement, dated as of February 4, 2000, in
respect of the Ferrellgas, L.P. Trust No. 1999-A: Participation
Agreement, Loan Agreement and Trust Agreement each dated as of
December 1, 1999. Incorporated by reference to Exhibit 10.11 to our
Annual Report of Form 10-K filed October 25, 2001.
10.19 Omnibus Amendment Agreement, dated as of February 4, 2000, in
respect of the Thermogas Trust No. 1999-A: Participation Agreement,
Loan Agreement and Trust Agreement each dated as of December 15,
1999. Incorporated by reference to Exhibit 10.12 to our Annual
Report of Form 10-K filed October 25, 2001.
10.20 Omnibus Amendment Agreement No. 2, dated as of April 18, 2000, in
respect of the Ferrellgas, L.P. Trust No. 1999-A: Participation
Agreement, Lease Intended as Security and Loan Agreement each dated
as of December 1, 1999. Incorporated by reference to Exhibit 10.3
to our Quarterly Report on Form 10-Q filed June 14, 2000.
10.21 Omnibus Amendment Agreement No. 2, dated as of April 18, 2000, in
respect of the Thermogas Trust No. 1999-A: Participation Agreement,
Lease Intended as Security and Loan Agreement each dated as of
December 15, 1999. Incorporated by reference to Exhibit 10.4 to our
Quarterly Report on Form 10-Q filed June 14, 2000.
10.22 Omnibus Amendment Agreement No. 3, dated as of December 28, 2000, in
respect of the Ferrellgas, L.P. Trust No. 1999-A: Participation
Agreement dated as of December 1, 1999. Incorporated by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-Q filed March 14,
2001.
10.23 Omnibus Amendment Agreement No. 3, dated as of December 28, 2000, in
respect of the Thermogas Trust No. 1999-A: Participation Agreement
dated as of December 15, 1999. Incorporated by reference to Exhibit
10.3 to our Quarterly Report on Form 10-Q filed March 14, 2001.
E-4
Exhibit
Number Description
- ------- -----------
10.24 Purchase Agreement, dated as of November 7, 1999, by and among
Ferrellgas Partners, L.P., Ferrellgas, L.P and Williams Natural Gas
Liquids, Inc. Incorporated by reference to Exhibit 2.1 to our
Current Report on Form 8-K filed November 12, 1999.
10.25 First Amendment to Purchase Agreement, dated as of December 17,
1999, by and among Ferrellgas Partners, L.P., Ferrellgas, L.P., and
Williams Natural Gas Liquids, Inc. Incorporated by reference to
Exhibit 2.2 to our Current Report on Form 8-K filed December 29,
1999.
10.26 Second Amendment to Purchase Agreement, dated as of March 14, 2000,
by and among Ferrellgas Partners, L.P., Ferrellgas L.P., and
Williams Natural Gas Liquids, Inc. Incorporated by reference to
Exhibit 2.1 to our Quarterly Report on Form 10-Q filed March 16,
2000.
10.27 Third Amendment to Purchase Agreement dated as of April 6, 2001, by
and among Ferrellgas Partners, L.P., Ferrellgas L.P. and The
Williams Companies, Inc. Incorporated by reference to Exhibit 10.1
to our Current Report on Form 8-K filed April 6, 2001.
# 10.28 Ferrell Companies, Inc. Supplemental Savings Plan. Incorporated by
reference to Exhibit 10.7 to our Annual Report on Form 10-K filed
October 17, 1995.
# 10.29 Second Amended and Restated Ferrellgas Unit Option Plan.
Incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed June 5, 2001.
# 10.30 Ferrell Companies, Inc. 1998 Incentive Compensation Plan -
Incorporated by reference to Exhibit 10.12 to our Annual Report on
Form 10-K filed October 29, 1998.
# 10.31 Employment agreement between James E. Ferrell and Ferrellgas, Inc.,
dated July 31, 1998. Incorporated by reference to Exhibit 10.13 to
our Annual Report on Form 10-K filed October 29, 1998.
# 10.32 Employment agreement between Patrick Chesterman and Ferrellgas, Inc.
dated July 31, 2000. Incorporated by reference to Exhibit 10.19 to
our Annual Report on Form 10-K filed October 26, 2000.
# 10.33 Employment agreement between Kevin Kelly and Ferrellgas, Inc. dated
July 31, 2000. Incorporated by reference to Exhibit 10.22 to our
Annual Report on Form 10-K filed October 26, 2000.
* 21.1 List of subsidiaries.
* 23.1 Consent of Deloitte & Touche, LLP, independent auditors.
- --------------------------------------------------------------------------------
* Filed herewith
# Management contracts or compensatory plans.
E-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has 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)
By /s/ James. E. Ferrell
---------------------------------------------
James E. Ferrell
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
/s/ James. E. Ferrell Chairman, President and 10/16/02
- --------------------------- Chief Executive Officer
James E. Ferrell (Principal Executive Officer)
/s/ A. Andrew Levison Director 10/16/02
- ---------------------------
A. Andrew Levison
/s/ Elizabeth T. Solberg Director 10/16/02
- ---------------------------
Elizabeth T. Solberg
/s/ Michael F. Morrissey Director 10/16/02
- ---------------------------
Michael F. Morrissey
/s/ Kevin T. Kelly Senior Vice President and Chief 10/16/02
- --------------------------- Financial Officer (Principal
Kevin T. Kelly Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FERRELLGAS PARTNERS FINANCE CORP.
By /s/ James. E. Ferrell
------------------------------------
James E. Ferrell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
/s/ James. E. Ferrell Chief Executive Officer and, 10/16/02
- --------------------------- Sole Director (Principal
James E. Ferrell Executive Officer)
/s/ Kevin T. Kelly Chief Financial Officer 10/16/02
- --------------------------- (Principal Financial and
Kevin T. Kelly Accounting Officer)
Certifications
I, James E. Ferrell, certify that:
1. I have reviewed this annual report on Form 10-K of Ferrellgas Partners, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 16, 2002
/s/ James. E. Ferrell
- -------------------------
James E. Ferrell
Chairman, President and Chief Executive Officer
I, Kevin T. Kelly, certify that:
1. I have reviewed this annual report on Form 10-K of Ferrellgas Partners, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 16, 2002
/s/ Kevin T. Kelly
- --------------------------
Kevin T. Kelly
Senior Vice President and Chief Financial Officer
INDEX TO FINANCIAL STATEMENTS
Page
----
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report.......................................F-2
Consolidated Balance Sheets - July 31, 2002 and 2001...............F-3
Consolidated Statements of Earnings - Years ended
July 31, 2002, 2001 and 2000...................................F-4
Consolidated Statements of Partners' Capital -
Years ended July 31, 2002, 2001 and 2000...................... F-5
Consolidated Statements of Cash Flows -
Years ended July 31, 2002, 2001 and 2000.......................F-6
Notes to Consolidated Financial Statements.........................F-7
Ferrellgas Partners Finance Corp.
Independent Auditors' Report.......................................F-29
Balance Sheets - July 31, 2002 and 2001............................F-30
Statements of Earnings - Years ended
July 31, 2002, 2001 and 2000...................................F-31
Statements of Stockholder's Equity -
Years ended July 31, 2002, 2001 and 2000.......................F-32
Statements of Cash Flows - Years ended
July 31, 2002, 2001 and 2000...................................F-33
Notes to Financial Statements......................................F-34
F-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P. and Subsidiaries
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas
Partners, L.P. and subsidiaries (the "Partnership") as of July 31, 2002 and
2001, and the related consolidated statements of earnings, partners' capital and
cash flows for each of the three years in the period ended July 31, 2002. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ferrellgas Partners, L.P. and
subsidiaries as of July 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 12, 2002
F-2
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
July 31,
-----------------------
ASSETS 2002 2001
- --------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents $ 19,781 $ 25,386
Accounts and notes receivable (net of
allowance for doubtful accounts of $1,467 and
$3,159 in 2002 and 2001, respectively) 74,274 56,772
Inventories 48,034 65,284
Prepaid expenses and other current assets 10,724 10,504
---------- ----------
Total Current Assets 152,813 157,946
Property, plant and equipment, net 506,531 491,194
Goodwill 124,190 114,171
Intangible assets, net 98,170 116,747
Other assets 3,424 16,101
---------- ----------
Total Assets $885,128 $896,159
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------------------------
Current Liabilities:
Accounts payable $54,316 $58,274
Other current liabilities 89,061 77,610
---------- ----------
Total Current Liabilities 143,377 135,884
Long-term debt 703,858 704,782
Other liabilities 14,861 15,472
Contingencies and commitments (Note L) - -
Minority interest 1,871 2,034
Partners' Capital:
Senior unitholder (2,782,211 and 2,801,622
units outstanding at 2002 and 2001, respectively -
liquidation preference $111,288 and $112,065,
respectively) 111,288 112,065
Common unitholders (36,081,203 and 35,908,366 units
outstanding in 2002 and 2001, respectively) (28,320) (12,959)
General partner (392,556 and 391,010 units
outstanding at 2002 and 2001, respectively) (59,035) (58,738)
Accumulated other comprehensive loss (2,772) (2,381)
---------- ----------
Total Partners' Capital 21,161 37,987
---------- ----------
Total Liabilities and Partners' Capital $885,128 $896,159
========== ==========
See notes to consolidated financial statements.
F-3
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per unit data)
For the year ended July 31,
------------------------------------
2002 2001 2000
----------- ----------- -----------
Revenues:
Gas liquids and related product sales $ 953,117 $1,381,940 $ 879,380
Other 81,679 86,730 79,643
----------- ----------- -----------
Total revenues 1,034,796 1,468,670 959,023
Cost of product sold (exclusive of
depreciation, shown separately below) 533,437 930,117 530,979
----------- ----------- -----------
Gross profit 501,359 538,553 428,044
Operating expense 279,624 288,258 255,838
Depreciation and amortization expense 41,937 56,523 61,633
General and administrative expense 27,157 25,508 24,587
Equipment lease expense 24,551 30,986 25,518
Employee stock ownership plan compensation charge 5,218 4,843 3,733
Loss (gain) on disposal of assets and other 3,957 5,744 (356)
----------- ----------- -----------
Operating income 118,915 126,691 57,091
Interest expense (59,608) (61,544) (58,298)
Interest income 1,423 3,027 2,229
Other charges - (3,277) -
----------- ----------- -----------
Earnings before minority interest 60,730 64,897 1,022
Minority interest 771 829 162
----------- ----------- -----------
Net earnings 59,959 64,068 860
Distribution to senior unitholder 11,172 18,013 11,108
Net earnings (loss) available to general partner 488 461 (102)
----------- ----------- -----------
Net earnings (loss) available to common unitholders $ 48,299 $ 45,594 ($10,146)
=========== =========== ===========
Basic and diluted earnings (loss)
per common unit $ 1.34 $ 1.43 $ (0.32)
=========== =========== ===========
See notes to consolidated financial statements.
F-4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands)
Accum-
Number of units ulated
-------------------------------------------- other
Sub- General Sub- General compre- Total
Senior Common ordinate partner Senior Common ordinate partner hensive partners'
unitholder unitholders unitholder unitholder unitholder unitholder unitholder unitholder income capital
---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------
August 1, 1999 - 14,710.8 16,593.7 - $ - $ 1,215 $(10,516) $(59,553) $(797) $(69,651)
Conversion of subordinated
units into common units - 16,593.7 (16,593.7) - - (10,516) 10,516 - - -
Units issued in connection
with acquisitions:
Common units - 2.6 - - - 45 - - - 45
Senior units 4,375.0 - - - 175,000 - - 1,768 - 176,768
Fees paid to
issue senior
units - - - - (8,925) - - - - (8,925)
General partner interest
conversion to general
partner units - - - 360.4 - - - - - -
Accretion of discount
on senior units - - - - 2,603 (2,575) - (28) - -
Contribution in
connection with ESOP
compensation charge - - - - - 3,661 - 36 - 3,697
Quarterly cash
distributions - - - - - (62,615) - (632) - (63,247)
Senior unit paid in
kind distributions 277.7 - - 2.8 11,108 (10,997) - (111) - -
Comprehensive income:
Net earnings - - - - - 851 - 9 - 860
Pension liability
adjustment - - - - - - - - 797 797
-------
Comprehensive income 1,657
---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------
July 31, 2000 4,652.7 31,307.1 - 363.2 179,786 (80,931) - (58,511) - 40,344
Accretion of discount
on senior units - - - - 6,321 (6,258) - (63) - -
Contribution in
connection with ESOP
compensation charge - - - - - 4,745 - 48 - 4,793
Common unit cash
distributions - - - - - (62,645) - (632) - (63,277)
Senior unit paid in kind
distributions 235.5 - - 2.4 9,422 (9,328) - (94) - -
Senior unit cash and
accrued distributions - - - - - (8,535) - (144) - (8,679)
Common unit options
exercised - 101.3 - 1 - 1,701 - 17 - 1,718
Common unit offering, net - 4,500.0 - 45.5 - 84,865 - - - 84,865
Redemption of senior
units (2,086.6) - - (21.1) (83,464) - - - - (83,464)
Comprehensive income:
Net earnings - - - - - 63,427 - 641 - 64,068
Other comprehensive
income:
Cumulative effect
of accounting
change - - - - - - - - 709
Risk management
fair value
adjustment - - - - - - - - (289)
Reclassification
adjustments - - - - - - - - (709)
Pension liability
adjustment - - - - - - - - (2,092) (2,381)
-------
Comprehensive income 61,687
---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------
July 31, 2001 2,801.6 35,908.4 - 391.0 112,065 (12,959) - (58,738) (2,381) 37,987
Contribution in
connection with
ESOP compensation
charge - - - - - 5,114 - 51 - 5,165
Common unit cash
distributions - - - - - (72,044) - (727) - (72,771)
Senior unit cash
and accrued
distributions - - - - - (11,030) - (253) - (11,283)
Redemption of
senior units (19.4) - - (0.2) (777) - - - - (777)
Common unit options
exercised - 55.4 - 0.6 - 930 - 9 - 939
Common units issued
in connection
with acquisitions - 117.5 - 1.2 - 2,310 - 23 - 2,333
Comprehensive income:
Net earnings - - - - - 59,359 - 600 - 59,959
Other comprehensive
income:
Risk management
fair value
adjustment - - - - - - - - 136
Pension liability
adjustment - - - - - - - - (527) (391)
-------
Comprehensive income 59,568
---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------
July 31, 2002 2,782.2 36,081.3 - 392.6 $111,288 $ (28,320) $ - $(59,035) $(2,772) $21,161
========== =========== ========== ========== ========== ========== ========== ========== ======== =========
See notes to consolidated financial statements.
F-5
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended July 31,
---------------------------------
2002 2001 2000
---------- ---------- ----------
Cash Flows From Operating Activities:
Net earnings $59,959 $64,068 $ 860
Reconciliation of net earnings to net cash provided
by operating activities
Depreciation and amortization 41,937 56,523 61,633
Employee stock ownership plan compensation charge 5,218 4,843 3,733
Minority interest 771 829 162
Other 4,295 7,555 2,759
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Accounts and notes receivable, net of securitization 19,614 (9,121) (12,609)
Inventories 17,318 11,333 (25,423)
Prepaid expenses and other current assets 1,661 (2,071) (731)
Accounts payable (1,386) (39,792) 10,418
Accrued interest expense (434) 1,157 6,594
Other current liabilities 1,915 2,233 7,140
Other liabilities 2,057 2,302 (1,184)
---------- ---------- ----------
Net cash provided by operating activities 152,925 99,859 53,352
---------- ---------- ----------
Cash Flows From Investing Activities:
Business acquisitions, net of cash acquired (6,294) (4,668) 47,656
Cash paid for acquisition transaction fees - - (15,893)
Capital expenditures - technology initiative (23,114) (100) -
Capital expenditures - other (14,402) (15,148) (20,755)
Net proceeds (payments) - accounts receivable securitization (31,000) 31,000 -
Proceeds from sale leaseback transaction - - 25,000
Other 4,240 1,652 5,743
---------- ---------- ----------
Net cash provided by (used in) investing activities (70,570) 12,736 41,751
---------- ---------- ----------
Cash Flows From Financing Activities:
Distributions (84,075) (69,125) (63,247)
Issuance of common units, net of issuance costs - 84,865 -
Redemption of senior units (777) (83,464) -
Proceeds from issuance of debt - 9,843 226,490
Principal payments on debt (3,069) (26,205) (276,111)
Net reductions to short-term borrowings - (18,342) (2,144)
Cash paid for debt and lease financing costs - (56) (3,163)
Minority interest activity (994) (848) 1,008
Proceeds from exercise of common unit options 939 1,718 -
Cash contribution from general partner 16 - 1,768
Other - (433) -
---------- ---------- ----------
Net cash used in financing activities (87,960) (102,047) (115,399)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (5,605) 10,548 (20,296)
Cash and cash equivalents - beginning of year 25,386 14,838 35,134
---------- ---------- ----------
Cash and cash equivalents - end of year $19,781 $25,386 $14,838
========== ========== ==========
Cash paid for interest $57,732 $57,893 $49,176
========== ========== ==========
See notes to consolidated financial statements.
F-6
FERRELLGAS PARTNERS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Partnership Organization and Formation
Ferrellgas Partners, L.P. (the "Master Limited Partnership" or "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. Both the MLP and the OLP are governed by
partnership agreements that were made effective at the time of formation of the
partnerships. Ferrellgas Partners, L.P. was formed to acquire and hold a limited
partner interest in the Operating Partnership. The Operating Partnership was
formed to acquire, own and operate the propane business and assets of
Ferrellgas, Inc. (the "Company" or "General Partner"), a wholly-owned subsidiary
of Ferrell Companies, Inc. ("Ferrell"). Ferrell owns 17,855,087 of the
outstanding MLP common units. The Company has retained a 1% general partner
interest in Ferrellgas Partners, L.P. and also holds a 1.0101% general partner
interest in the Operating Partnership, representing an effective 2% general
partner interest in the Partnership on a combined basis. As General Partner of
the Partnership, the Company performs all management functions required for the
Partnership.
On July 17, 1998, 100% of the outstanding common stock of Ferrell was purchased
primarily from Mr. James E. Ferrell and his family by a newly established
leveraged employee stock ownership trust ("ESOT") established pursuant to the
Ferrell Companies, Inc. Employee Stock Ownership Plan ("ESOP"). The purpose of
the ESOP is to provide employees of the Company an opportunity for ownership in
Ferrell and indirectly in the MLP. As contributions are made by Ferrell to the
ESOP in the future, shares of Ferrell are allocated to the Company employees'
ESOP accounts.
On December 17, 1999, the MLP's 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's Partnership Agreement was amended to allow the
General Partner to have an option in maintaining its 1% general partner interest
concurrent with the issuance of other additional equity. Prior to this
amendment, the General Partner was required to make capital contributions to
maintain its 1% general partner interest concurrent with the issuance of any
additional MLP equity. Also as part of this amendment, the General Partner'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's 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, until December 31, 2005,
to defer future distributions on the common units held by it, up to an aggregate
outstanding amount of $36,000,000.
F-7
B. Summary of Significant Accounting Policies
(1) Nature of operations: 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 more than 1,000,000 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
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these
estimates. Significant estimates impacting the consolidated financial
statements include reserves that have been established for product
liability and other claims.
(3) Principles of consolidation: The accompanying consolidated financial
statements present the consolidated financial position, results of
operations and cash flows of the Partnership and its wholly-owned
subsidiary, Ferrellgas Partners Finance Corp. The Company's 1.0101% General
Partner interest in Ferrellgas, L.P. is accounted for as a minority
interest. The wholly-owned subsidiary of the OLP, Ferrellgas Receivables,
LLC, is accounted for using the equity method of accounting. All material
intercompany profits, transactions and balances have been eliminated.
(4) Cash and cash equivalents: For purposes of the Consolidated Statements
of Cash Flows, the Partnership 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 Partnership 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
Partnership 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 Partnership, 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: Goodwill is not amortized and is tested annually for
impairment. Beginning in the first quarter of fiscal 2002, the Partnership
adopted Statement of Financial Accounting Standards (SFAS) No. 142 which
modified 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. The Partnership tested goodwill
for impairment at the time the statement was adopted and during the third
quarter of fiscal 2002, and will continue to do so on an annual basis. The
results of these impairment tests did not have a material effect on the
Partnership's financial position, results of operations and cash flows. The
Partnership did not recognize any impairment losses as a result of these
tests.
F-8
(8) Intangible assets: Intangible assets, consisting primarily of customer
lists and noncompete notes, are stated at cost, net of amortization
calculated using either straight-line or accelerated methods over periods
ranging from two to 15 years. The Partnership reviews identifiable
intangibles for impairment in a similar manner as with long-lived assets.
The Partnership, 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.
(9) Accounting for derivative commodity contracts: The Partnership 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 Partnership 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
Partnership 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. The Partnership classifies all gains and losses
from these derivative commodity contracts entered into for product risk
management purposes as cost of product sold on the Consolidated Statements
of Earnings.
(10) Revenue recognition: Sales of propane are recognized by the
Partnership at the time product is delivered to its customers. Revenue from
the sale of propane appliances and equipment is recognized at the time of
delivery or installation. Revenues from repairs and maintenance are
recognized upon completion of the service.
(11) Income taxes: The MLP is a limited partnership. As a result, the MLP's
earnings or losses for Federal income tax purposes are included in the tax
returns of the individual partners, the MLP unitholders. Accordingly, no
recognition has been given to income taxes in the accompanying Consolidated
Financial Statements of the Partnership. Net earnings for financial
statement purposes may differ significantly from taxable income reportable
to MLP unitholders as a result of differences between the tax basis and
financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the Partnership Agreement.
(12) Net earnings per common unit: Net earnings (loss) per common unit is
computed by dividing net earnings, after deducting the General Partner's 1%
interest and accrued and paid senior unit distributions, by the weighted
average number of outstanding common units and the dilutive effect, if any,
of outstanding unit options. There was a less than $0.01 effect on the
dilutive earnings per unit calculation when making the assumption that all
outstanding unit options were exercised into common units.
(13) Unit and stock-based compensation: The Partnership 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,"
and makes the fair value method pro forma disclosures required under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
(14) Segment information: The Partnership is a single reportable operating
segment engaging in the retail distribution of propane and related
equipment and supplies.
F-9
(15) 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", SFAS No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets", SFAS No.
145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections", and SFAS No. 146 "Accounting
for Costs Associated with Exit or Disposal Activities."
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
Partnership has historically accounted for business combinations using the
purchase method; therefore, this new statement will not have a substantial
impact on how the Partnership accounts for future combinations.
SFAS No. 142 modified 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. The Partnership
adopted SFAS No. 142 beginning in the first quarter of fiscal 2002. This
adoption resulted in a reclassification to goodwill of both assembled
workforce and other intangible assets. Although there was no cash flow
effect, the Partnership's amortization expense decreased by $10,600,000 in
fiscal 2002, compared to the amortization that would have been recorded had
the new accounting statement not been issued. This new standard also
required us to test goodwill for impairment at the time the standard was
adopted and also on an annual basis. The results of these impairment tests
did not have a material effect on the Partnership's financial position,
results of operations and cash flows. The Partnership did not recognize any
impairment losses as a result of these tests.
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 Partnership will implement SFAS No. 143
beginning in the fiscal year ending July 31, 2003, and expects to record a
one-time reduction to earnings during the first quarter of fiscal 2003, as
a cumulative change in accounting principle, of approximately $2,800,000.
The Partnership believes the implementation will not have a material
ongoing effect on its financial position, results of operations and cash
flows.
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
Partnership will implement SFAS No. 144 beginning in the fiscal year ending
July 31, 2003, and believes the implementation will not have a material
effect on its financial position, results of operations and cash flows.
SFAS No. 145 eliminates the requirement that material gains and losses
resulting from the early extinguishment of debt be classified as an
extraordinary item in the results of operations. Instead, companies must
evaluate whether the transaction meets both the criteria of being unusual
in nature and infrequent in occurrence. Other aspects of SFAS No. 145
relating to accounting for intangibles assets of motor carriers and
accounting for certain lease modifications do not currently apply to the
Partnership. The Partnership will implement SFAS No. 145 beginning in the
fiscal year ending July 31, 2003, and believes the implementation will not
have a material effect on its financial position, results of operations and
cash flows.
SFAS No. 146 modifies the financial accounting and reporting for costs
associated with exit or disposal activities. This statement requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Additionally, the statement
requires the liability to be recognized and measured initially at fair
value. Under previous rules, liabilities for exit costs were recognized at
the date of the entity's commitment to an exit plan. The Partnership will
adopt and implement SFAS No. 146 for any exit or disposal activities that
are initiated after July 31, 2002. The Partnership believes the
implementation will not have a material effect on its financial position,
results of operations and cash flows.
F-10
(16) Reclassifications: Certain reclassifications have been made to the
prior years' Consolidated Financial Statements to conform to the current
year's Consolidated Financial Statements' presentation.
C. Quarterly Distributions of Available Cash
The Partnership makes quarterly cash distributions of all of its "available
cash", generally defined as consolidated cash receipts less consolidated
cash disbursements and net changes in reserves established by the General
Partner for future requirements. Reserves are retained in order to provide
for the proper conduct of the Partnership business, or to provide funds for
distributions with respect to any one or more of the next four fiscal
quarters. Distributions are made within 45 days after the end of each
fiscal quarter ending January, April, July and October to holders of record
on the applicable record date.
Distributions by the MLP in an amount equal to 100% of its available cash,
as defined in its Partnership Agreement, will be made to the senior and
common unitholders and the general partner. Additionally, the payment of
incentive distributions to the holders of incentive distribution rights
will be made to the extent that certain target levels of cash distributions
are achieved. The senior units have certain distribution and preference
rights over the common units. The publicly held common units have certain
distribution preference rights over the common units held by Ferrell
Companies.
On April 6, 2001, the Partnership modified the structure of its outstanding
senior units and increased the cash distribution coverage to its publicly
held common unitholders. Among other changes, the senior units were
modified to allow the holder to be paid a quarterly distribution in cash
instead of in additional senior unit distributions. See Note A for
additional information about the modifications to the senior units. In
addition, Ferrell Companies, Inc., the beneficial owner of 17,855,087
common units, 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. The ability to defer distributions to Ferrell
provides the MLP's public common unitholders distribution support until
December 31, 2005. This new distribution support is available if the
Partnership's available cash for any fiscal quarter is insufficient to pay
all of the common unitholders their quarterly distribution. The MLP will
first pay a distribution to the senior units and then will pay a
distribution out of the remaining available cash to the publicly-held
common units. Any remaining available cash will then be used to pay a
distribution on the common units held by Ferrell. Any quarterly
distribution paid per unit to the publicly-held common units that is not
able to be paid on the Ferrell-owned common units will be deferred, within
certain limits, and paid to Ferrell in future quarters when available cash
is sufficient. If insufficient available cash should exist for a particular
quarter or any previous deferred distributions to Ferrell remain
outstanding, the distribution declared per common unit may not be more than
the highest quarterly distribution paid on the common units for any of the
immediately preceding four fiscal quarters. If the cumulative amount of
deferred quarterly distributions to Ferrell were to reach $36,000,000, the
common units held by Ferrell will then be paid in the same priority as the
publicly-held common units. After payment of all required distributions for
any subsequent period, the MLP will use any remaining available cash to
reduce any amount previously deferred on the common units held by Ferrell.
Reductions in amounts previously deferred will then again be available for
future deferrals to Ferrell through December 31, 2005. In connection with
these transactions, during fiscal 2001 the MLP incurred $3,277,000 in
banking, legal and other professional fees that are classified as other
charges in the Consolidated Statements of Earnings.
F-11
D. Supplemental Balance Sheet Information
Inventories consist of:
(in thousands) 2002 2001
-------- --------
Propane gas and related products $29,169 $45,966
Appliances, parts and supplies 18,865 19,318
-------- --------
$48,034 $65,284
======== ========
In addition to inventories on hand, the Partnership 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, 2002, in addition to the inventory on
hand, the Partnership had committed to make net delivery of approximately
7,061,000 gallons at a fixed price.
Property, plant and equipment consist of:
Estimated
(in thousands) useful lives 2002 2001
------------ --------- ---------
Land and improvements 2-20 $ 40,781 $ 41,191
Buildings and improvements 20 54,453 54,384
Vehicles, including transport trailers 8-20 77,226 76,611
Furniture and fixtures 5 8,730 9,523
Bulk equipment and district facilities 5-30 93,816 90,930
Tanks and customer equipment 5-30 473,324 472,593
Computer equipment and software 2-5 29,530 25,515
Computer software development in progress n/a 29,904 100
Other 2,652 3,281
--------- ---------
810,416 774,128
Less: accumulated depreciation 303,885 282,934
--------- ---------
$506,531 $491,194
========= =========
In a non-cash transaction, the Partnership has recognized payables as of
July 31, 2002, totaling $6,956,000 related to the development of new
computer software. The Partnership capitalized $697,000 of interest expense
related to the development of computer software for the year ended July 31,
2002. Depreciation expense totaled $27,915,000, $28,332,000, and
$37,941,000 for the fiscal years ended July 31, 2002, 2001, and 2000,
respectively. In the first quarter of fiscal 2001, the Partnership
increased the estimate of the residual values of its existing customer and
storage tanks. Due to this change in the tank residual values, depreciation
expense decreased by approximately $12,000,000 in both fiscal 2002 and 2001
or $0.33 and $0.38 per common unit, respectively, as compared to the
depreciation that would have been recorded using the previously estimated
residual values.
F-12
Other current liabilities consist of:
(in thousands) 2002 2001
-------- --------
Accrued interest $22,382 $22,816
Accrued payroll 24,068 20,236
Accrued insurance 9,409 8,056
Other 33,202 26,502
-------- --------
$89,061 $77,610
======== ========
E. Accounts Receivable Securitization
On September 26, 2000, the OLP entered into an account receivable
securitization facility with Bank One, NA. As part of this renewable
364-day facility, the OLP transfers an interest in a pool of its trade
accounts receivable to Ferrellgas Receivables, LLC, a wholly-owned, special
purpose entity, which sells its interest to a commercial paper conduit of
Banc One, NA. The OLP does not provide any guarantee or similar support to
the collectability of these receivables. The OLP structured the facility
using a wholly-owned, qualifying special purpose entity in order to
facilitate the transaction as required by Banc One, N.A. and to comply with
the Partnership's various debt covenants. The OLP remits daily to this
special purpose entity funds collected on the pool of trade receivables
held by Ferrellgas Receivables. The Partnership renewed the facility
effective September 25, 2001, for a 364-day commitment with Bank One, NA
and intends to renew the facility for an additional 364-day commitment on
September 24, 2002. From the inception of this facility in September 2000
through July 31, 2002, the Partnership's cash flows related to this
facility between the OLP and Ferrellgas Receivables are detailed as
follows:
(in thousands) 2002 2001
---------- ----------
Proceeds from new securitizations $ - $ 115,000
Proceeds from collections reinvested in revolving period
securitizations 390,677 725,955
Remittance of amounts collected on securitizations (421,677) (809,955)
---------- ----------
Net proceeds (payments) - accounts receivable securitization $ (31,000) $ 31,000
========== ==========
Cash invested in unconsolidated subsidiary $ 1,017 $ 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 Partnership's Consolidated Financial
Statements 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, 2002 and 2001, had no material effect on the
Consolidated Balance Sheet. The following table provides amounts recorded
on the Partnership's statement of earnings and balance sheet.
(in thousands) 2002 2001
-------- --------
Statement of earnings information
Loss on sale of receivables $ 3,862 $ 7,816
Equity in earnings of unconsolidated subsidiary (1,843) 2,205
Service income (1,285) (1,326)
-------- --------
Amount included in "Loss (gain) on disposal of assets and other" $ 734 $ 8,695
======== ========
Balance sheet information
Investment in unconsolidated subsidiary, included in "other assets" $ - $ 7,225
======== ========
F-13
These amounts reported in the Consolidated Statements of Earnings
approximate the financing cost of issuing commercial paper backed by these
accounts receivable plus an allowance for doubtful accounts associated with
the outstanding receivables transferred to Ferrellgas Receivables.
F. Goodwill
SFAS No. 142 modified 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. The Partnership
adopted SFAS No. 142 beginning in the first quarter of fiscal 2002. This
adoption resulted in a reclassification to goodwill of both assembled
workforce and other intangible assets classified as other assets with
remaining book value of $10,019,000. The changes in the carrying amount of
goodwill for the year ended July 31, 2002, are as follows:
(in thousands) Intangible Other
Goodwill Assets Assets
--------- ---------- --------
Balance as of July 31, 2001, net of accumulated
amortization $114,171 $116,747 $16,101
Reclassified to goodwill 10,019 (8,221) (1,798)
Additions during the period - 3,866 -
Amortization expense - (14,022) -
Reduction of investment in unconsolidated (7,225)
subsidiary (see Note E) - -
Other changes - (200) (3,654)
--------- ---------- --------
Balance as of July 31, 2002 $124,190 $ 98,170 $ 3,424
========= ========== ========
The remaining intangible assets are subject to amortization. The following
table discloses our net earnings for the fiscal years ended July 31, 2001
and 2000, adding back the amortization expense related to goodwill and some
intangible assets that are no longer amortized.
For the year ended July 31,
-------------------------------
(in thousands) 2002 2001 2000
-------- -------- --------
Reported net earnings $59,959 $64,068 $ 860
Add back: Goodwill amortization - 11,308 6,474
-------- -------- --------
Adjusted net earnings $59,959 $75,376 $7,334
======== ======== ========
Basic and diluted earnings per common unit:
For the year ended July 31,
------------------------------
2002 2001 2000
-------- -------- --------
Reported net earnings (loss) available to common unitholders $1.34 $1.43 $(0.32)
Goodwill amortization - 0.32 0.23
-------- -------- --------
Adjusted net earnings (loss) available to common unitholders $1.34 $1.75 $(0.09)
======== ======== ========
F-14
G. Intangible Assets, net
Intangible assets, net consist of:
July 31, 2002 July 31, 2001
------------------------------------------- --------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(in thousands) Amount Amortization Net Amount Amortization Net
--------- ------------- --------- --------- ------------- ---------
Customer lists $208,662 $(124,860) $83,802 $207,667 $(114,679) $92,988
Non-compete agreements 62,893 (48,525) 14,368 60,222 (44,684) 15,538
Assembled workforce - - - 9,600 (1,379) 8,221
--------- ------------- --------- --------- ------------- ---------
Total $271,555 $(173,385) $98,170 $277,489 $(160,742) $116,747
========= ============= ========= ========= ============= =========
Customer lists have estimated lives of 15 years, while non-compete
agreements have estimated lives ranging from two to 10 years.
(in thousands)
Aggregate Amortization Expense:
2002 2001 2000
-------- -------- --------
For the year ended July 31, $14,022 $16,883 $17,218
(in thousands)
Estimated Amortization Expense:
For the year ended July 31, 2003 $11,656
For the year ended July 31, 2004 10,682
For the year ended July 31, 2005 10,150
For the year ended July 31, 2006 9,631
For the year ended July 31, 2007 8,991
H. Long-Term Debt
Long-term debt consists of:
(in thousands) 2002 2001
-------- --------
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
Notes payable, 7.6% and 7.9% weighted
average interest rates, respectively,
due 2002 to 2011 12,177 12,566
-------- --------
706,177 706,566
Less: current portion, included in other
current liabilities 2,319 1,784
-------- --------
$703,858 $704,782
======== ========
F-15
<FN>
(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 Partnership has a commitment to redeem on September 24, 2002, the
MLP fixed rate Senior Secured Notes ("MLP Senior Secured Notes"),
issued in April 1996, with the proceeds expected from $170,000,000 of
MLP fixed rate Senior Notes. The Partnership anticipates that it will
recognize an approximate $7,100,000 charge to earnings related to the
premium and other costs incurred to redeem the notes plus the
write-off of financing costs related to the original issuance of the
MLP Senior Secured Notes. The MLP Senior Secured 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 are 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.
</FN>
At July 31, 2002, 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, 2002 and 2001 was 4.75%
and 6.75%, respectively. In addition, a commitment fee is payable on the
daily unused portion of the credit facility (generally a per annum rate of
0.0375% at July 31, 2002).
The Partnership had no short-term borrowings outstanding under the credit
facility at July 31, 2002 and 2001. Letters of credit outstanding, used
primarily to secure obligations under certain insurance arrangements,
totaled $40,614,000 and $46,660,000, respectively. At July 31, 2002, the
Partnership had $116,386,000 of funding available. The Partnership incurred
commitment fees of $445,000 and $460,000 in fiscal 2002 and 2001,
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.
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 the 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 Partnership resumed paying the stated fixed interest rate
effective after June 15, 2001.
F-16
On December 17, 1999, in connection with the purchase of Thermogas, LLC
("Thermogas acquisition") (see Note P), 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 of 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.
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. 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
$2,319,000 in 2003, $2,134,000 in 2004, $2,299,000 in 2005, $271,313,000 in
2006, $59,039,000 in 2007 and $369,073,000 thereafter.
I. Partners' Capital
On July 31, 2002, the Partnership's capital consisted of 2,782,211 senior
units, 36,081,203 common units, and 392,556 general partner units which
equal a 1% General Partner interest. The Partnership Agreement contains
specific provisions for the allocation of net earnings and loss to each of
the partners for purposes of maintaining the partner capital accounts.
In connection with the Thermogas acquisition on December 17, 1999 (See Note
P) , the Partnership issued 4,375,000 senior units to a subsidiary of The
Williams Companies, Inc. ("Williams"). Ferrellgas, Inc. contributed
$1,768,000 to Ferrellgas Partners, L.P. and $1,803,000 to Ferrellgas, L.P.
in order to maintain its 1% and 1.0101% general partner interest in each
respective entity. On April 6, 2001, an entity owned by James E. Ferrell,
the Chairman, Chief Executive Officer and President of the General Partner,
purchased all senior units held by Williams, who prior to the transaction
agreed to certain modifications to the senior units. See Note A for more
information on the modifications to the senior units.
The Partnership maintains shelf registration statements for common units
representing limited partner interests in the Partnership. One of the shelf
registration statements allows for common units to be issued from time to
time by the Partnership in connection with the Partnership's acquisition of
other businesses, properties or securities in business combination
transactions. The Partnership also maintains another shelf registration
statement for the issuance of common units, deferred participation units,
warrants and debt securities. The Partnership Agreement allows the General
Partner to issue an unlimited number of additional Partnership general and
limited interests and other equity securities of the Partnership for such
consideration and on such terms and conditions as shall be established by
the General Partner without the approval of any unitholders. On June 8,
2001, the Partnership received $84,865,000 net of issuance costs pursuant
to the issuance of 4,500,000 common units to the public. The Partnership
then used these proceeds to redeem 2,048,697 senior units and related
accrued but unpaid distributions. These common units issued to the public
on June 8, 2001, were entitled to the same distribution to be paid to the
already outstanding publicly held common units for the quarter ended July
31, 2001. The Partnership also made redemptions of 37,915 senior units in
July 2001 and 19,411 in February 2002. The Partnership issued 55,350 and
101,250 common units during the fiscal year ended July 31, 2002 and 2001,
respectively, pursuant to the unit option plan (see Note N). The
Partnership issued 117,487 common units as part of the purchase price of
acquisitions during the fiscal year ended July 31, 2002.
F-17
During 1994, the Partnership issued subordinated units, all of which were
held by Ferrell for which there was no established public trading market.
Effective August 1, 1999, the subordinated units were converted to common
units because certain financial tests, which were primarily related to
making the minimum quarterly distribution on all units, were satisfied for
each of the three consecutive four quarter periods ended July 31, 1999.
J. 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 Partnership recognized in its first quarter of fiscal
2001, gains totaling $709,000 and $299,000 in accumulated other
comprehensive income and the Consolidated Statements of Earnings,
respectively. In addition, beginning in the first quarter of fiscal 2001,
the Partnership 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 Partnership'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 Partnership 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 Partnership to
purchase price risk. The Partnership purchases propane at various prices
that are eventually sold to its customers, exposing the Partnership to
future product price fluctuations. Also, certain forecasted transactions
expose the Partnership to purchase price risk. The Partnership 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 Partnership uses derivative contracts
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 derivatives are recorded in
other comprehensive income (OCI) and are recognized in the Consolidated
Statements of Earnings when the forecasted transaction impacts earnings.
The $136,000 risk management fair value adjustment classified as other
comprehensive income in the Consolidated Statements of Partners' Capital at
July 31, 2002, will be recognized in the Consolidated Statements of
Earnings during fiscal 2003. Changes in the fair value of cash flow hedges
due to hedge ineffectiveness, if any, 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.
Through its risk management trading activities, the Partnership also
purchases and sells derivatives that are not designated as accounting
hedges to manage other risks associated with commodity prices. Emerging
Issues Task Force issue 98-10 "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities" applies to these activities. The
types of contracts utilized in these activities include energy commodity
forward contracts, options and swaps traded on the over-the-counter
financial markets, and futures and options traded on the New York
Mercantile Exchange. The Partnership utilizes published settlement prices
F-18
for exchange traded contracts, quotes provided by brokers and estimates of
market prices based on daily contract activity to estimate the fair value
of these contracts. The changes in fair value of these risk management
trading activities are recognized as they occur in cost of product sold in
the Consolidated Statements of Earnings. During fiscal years ended July 31,
2002, 2001 and 2000, the Partnership recognized risk management trading
gains (losses) related to derivatives not designated as accounting hedges
of $(6,148,000), $23,320,000, and $28,413,000, respectively.
Estimates related to our risk management trading activities are sensitive
to uncertainty and volatility inherent in the energy commodities markets
and actual results could differ from these estimates. Assuming a
hypothetical 10% adverse change in prices for the delivery month of all
energy commodities, the potential loss in future earnings of such a change
is estimated at $1,100,000 for risk management trading activities as of
July 31, 2002. The preceding hypothetical analysis is limited because
changes in prices may or may not equal 10%.
The following table summarizes the change in the unrealized fair value of
contracts from risk management trading activities for the fiscal years
ended July 31, 2002 and 2001. This table summarizes the contracts where
settlement has not yet occurred.
Fiscal year ended
(in thousands) July 31,
--------------------------
2002 2001
---------- ----------
Unrealized (losses) in fair value of contracts outstanding
at beginning of year $(12,587) $ (359)
Unrealized gains and (losses) recognized at inception - -
Unrealized gains and (losses) recognized as a result of changes in
valuation techniques or assumptions - -
Other unrealized gains and (losses) recognized (6,148) 23,320
Less: realized gains and (losses) recognized (14,166) 35,548
---------- ----------
Unrealized (losses) in fair value of contracts outstanding at end of year $ (4,569) $ (12,587)
========== ==========
The following table summarizes the maturity of these contracts for the
valuation methodologies we utilize as of July 31, 2002 and 2001. This table
summarizes the contracts where settlement has not yet occurred.
(in thousands) Fair Value of Contracts
at Period-End
---------------------------------
Maturity
greater than 1
Maturity year
less than and less than
Source of Fair Value 1 year 18 months
------------------------------------------------------------- ---------- --------------
Prices actively quoted $ (328) $ -
Prices provided by other external sources (4,225) (16)
Prices based on models and other valuation methods - -
---------- --------------
Unrealized (losses) in fair value of contracts outstanding
at July 31, 2002 $(4,553) $ (16)
========== ==============
Prices actively quoted $(2,535) $ -
Prices provided by other external sources (4,061) (5,991)
Prices based on models and other valuation methods - -
---------- --------------
Unrealized (losses) in fair value of contracts outstanding
at July 31, 2001 $(6,596) $(5,991)
========== ==============
F-19
The following table summarizes the gross transaction volumes in barrels
(one barrel equals 42 gallons) for risk management trading contracts that
were physically settled for the years ended July 31, 2002, 2001 and 2000:
(in thousands)
Fiscal year ended July 31, 2002 11,162
Fiscal year ended July 31, 2001 18,539
Fiscal year ended July 31, 2000 42,284
The Partnership also uses forward contracts, not designated as accounting
hedges 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, 2002, the Partnership holds $706,177,000 in primarily fixed
rate debt and $156,000,000 in variable rate operating leases. Fluctuations
in interest rates subject the Partnership to interest rate risk. Decreases
in interest rates increase the fair value of the Partnership's fixed rate
debt, while increases in interest rates subject the Partnership to the risk
of increased interest expense related to its variable rate debt and
operating leases.
The Partnership 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 in the Consolidated Statements of Earnings. There were no
such fair value hedges outstanding at July 31, 2002. Interest rate caps are
used to hedge the risk associated with rising interest rates and their
effect 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, 2002. 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.
K. Transactions with Related Parties
The Partnership has no employees and is managed and controlled by the
General Partner. Pursuant to the Partnership Agreement, the General Partner
is entitled to reimbursement for all direct and indirect expenses incurred
or payments it makes on behalf of the Partnership, and all other necessary
or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business. These costs, which totaled $197,863,000,
$194,519,000, and $179,033,000 for the years ended July 31, 2002, 2001, and
2000, respectively, include compensation and benefits paid to officers and
employees of the General Partner and general and administrative costs.
On December 12, 2001, the Partnership issued 37,487 common units to Ferrell
Propane, Inc., a subsidiary of the General Partner in connection with the
acquisition of Blue Flame Bottle Gas (see Note P). The common unit issuance
compensated Ferrell Propane for its retention of $725,000 of certain tax
liabilities of Blue Flame.
F-20
During fiscal 2000, Williams became a related party to the Partnership due
to the Partnership's issuance of 4,375,000 senior units to a subsidiary of
Williams as part of the Thermogas acquisition (See Notes I and P). In a
noncash transaction, during fiscal 2001 and 2000, the Partnership paid
quarterly senior unit distributions to Williams of $11,108,000 and
$9,422,000, respectively, using additional senior units. In April 2001,
Williams sold all its senior units to JEF Capital Management, Inc., an
entity owned by James E. Ferrell, Chairman, Chief Executive Officer and
President of the General Partner, and thereafter, ceased to be a related
party of the Partnership. During fiscal 2001 and 2000, the Partnership
recognized wholesale sales to Williams of $493,000 and $2,091,000,
respectively. In connection with its normal purchasing and risk management
activities, the Partnership entered into, with Williams as a counterparty,
certain purchase, forward, futures, option and swap contracts. During
fiscal 2001 and 2000 the Partnership recognized a net increase (decrease)
to cost of sales of $(4,456,000) and $3,645,000, respectively, related to
these activities.
During fiscal 2000, Williams provided propane supply and general and
administrative services to the Partnership to assist in the integration of
the acquisition. The Partnership paid $67,547,000, $4,062,000 and $176,000
to Williams in fiscal 2000 and classified these costs to cost of product
sold, general and administrative expenses and operating expenses,
respectively.
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 fiscal 2001, the Partnership paid to JEF Capital Management
$83,464,000 to redeem a total of 2,086,612 senior units and $5,750,000 in
senior unit distributions. During fiscal 2002, the Partnership paid JEF
Capital Management $776,445 to redeem a total of 19,411 senior units and
$11,192,000 in senior unit distributions. In a noncash transaction, the
Partnership accrued a senior unit distribution of $2,782,211 that will be
paid to JEF Capital Management on September 13, 2002.
Ferrell International Limited, FI Trading, Inc. and Ferrell Resources, LLC
are beneficially owned by James E. Ferrell and thus are affiliates of the
Partnership. The Partnership enters into transactions with Ferrell
International Limited and FI Trading in connection with its risk management
activities and does so at market prices in accordance with an affiliate
trading policy approved by the General Partner's Board of Directors. These
transactions include forward, option and swap contracts and are all
reviewed for compliance with the policy. During fiscal 2002, 2001 and 2000,
the Partnership recognized net receipts (disbursements) from purchases,
sales and commodity derivative transactions of $10,692,000, $(28,140,000),
and $(8,508,000), respectively. These net purchases, sales and commodity
derivative transactions with Ferrell International Limited and FI Trading,
Inc. are classified as cost of product sold. Amounts due from Ferrell
International Limited at July 31, 2002 and 2001 were $396,000 and $0,
respectively. Amounts due to Ferrell International Limited at July 31, 2002
and 2001 were $266,000 and $0, respectively.
During fiscal 2002, 2001 and 2000, Ferrell International Limited, FI
Trading, Inc. and Ferrell Resources, LLC paid the Partnership a total of
$40,000, $40,000, and $313,000, respectively, for accounting and
administration services.
The Partnership also leased propane tanks from Ferrell Propane, Inc., a
subsidiary of the General Partner from October 1998 until February 2002, at
which time, Ferrell Propane sold all its tanks to an unrelated entity. The
Partnership recognized $300,000, $515,000, and $515,000 of lease expense
during fiscal years 2002, 2001, and 2000.
F-21
L. Contingencies and Commitments
The Partnership 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 will have a material adverse effect on the financial
condition, results of operations or cash flows of the Partnership.
Currently, the Partnership 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 P), 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. Prior to the end of
these lease terms, the Partnership intends to secure additional financing
in order to purchase the related customer tanks. No assurances can be given
that such financing will be obtained or, if obtained, such financing will
be on terms equally favorable to the Partnership.
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,
2002 and 2001 was $156,000,000 and $157,600,000, respectively.
The 2,782,211 senior units outstanding as of July 31, 2002 have a
liquidating value of $40 per unit or $111,288,000. The senior units are
redeemable by the Partnership 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 common units at
the earlier of December 31, 2005 or upon the occurrence of a material event
as defined by the Partnership Agreement. Such conversion rights are
contingent upon the Partnership 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. Rental expense under these leases totaled
$36,959,000, $42,420,000, and $35,292,000 for the years ended July 31,
2002, 2001, and 2000, respectively. Future minimum lease commitments for
such leases in the next five years, including the aforementioned operating
tank leases, are $26,986,000 in 2003, $13,478,000 in 2004, $10,223,000 in
2005, $8,228,000 in 2006 and $5,020,000 in 2007.
In addition to the future minimum lease commitments, the Partnership plans
to purchase vehicles and computers at the end of their lease terms totaling
$158,577,000 in 2003, $4,738,000 in 2004, $4,105,000 in 2005, $2,076,000 in
2006 and $6,944,000 in 2007. The Partnership intends to renew other
vehicle, tank and computer leases that would have had buyouts of $5,039,000
in 2003 and $311,000 in 2004.
F-22
M. Employee Benefits
The Partnership has no employees and is managed and controlled by the
General Partner. The Partnership assumes all liabilities, which include
specific liabilities related to the following employee benefit plans for
the benefit of the officers and employees of the General Partner.
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
non-cash compensation charge to be incurred by the Partnership, equivalent
to the fair value of such shares allocated. This non-cash compensation
charge is reported separately in the Partnership's Consolidated Statements
of Earnings and thus excluded from operating and general and administrative
expenses. The non-cash compensation charge has increased from fiscal 2000
to fiscal 2001 primarily due to the effect of employees added to the
company from the Thermogas acquisition (see Note P). This charge increased
from fiscal 2001 to fiscal 2002 primarily due to the increase in the fair
value of the Ferrell shares allocated to employees. The Partnership is not
obligated to fund or make contributions to the ESOT.
The General Partner 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. Unlike the profit sharing contributions, these
matching contributions were not eliminated with the establishment of the
ESOP. Contributions for the years ended July 31, 2002, 2001, and 2000, were
$2,773,000, $3,235,000, and $2,869,000, respectively, under the 401(k)
provisions.
The General Partner 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 General Partner'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, 2002 and 2001, other
comprehensive income was reduced and other liabilities were increased
$527,000 and $2,092,000, respectively because the accumulated benefit
obligation of this plan exceeded the fair value of plan assets.
N. Unit Options of the Partnership and Stock Options of Ferrell Companies,
Inc.
Prior to April 19, 2001, the Second Amended and Restated Ferrellgas Unit
Option Plan (the "unit option plan") authorized the issuance of options
(the "unit options") covering up to 850,000 of the MLP's common units to
employees of the General Partner or its affiliates. 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 option plan is
intended to meet the requirements of the New York Stock Exchange equity
holder approval policy for option plans not approved by the equity holders
of a company, and thus approval of the plan from the unitholders of the MLP
was not required. The Board of Directors of the General Partner administers
the unit option plan, authorizes grants of unit options thereunder and sets
F-23
the unit option price and vesting terms of unit options in accordance with
the terms of the unit option plan. No single officer or director of the
General Partner may acquire more than 314,895 common units under the unit
option plan. The unit options outstanding as of July 31, 2002, 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 currently outstanding under the unit
option plan vest over a five-year period, and expire on the tenth
anniversary of the date of the grant.
Number Weighted Weighted
Of Average Average
Units Exercise Price Fair 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
Granted - - -
Exercised (55,350) 16.80
Forfeited (98,450) 18.04
-----------
Outstanding, July 31, 2002 1,075,400 18.15
-----------
Options exercisable, July 31, 2002 594,725 18.25
-----------
Options Outstanding at July 31, 2002
------------------------------------
Range of option prices at end of year $16.80-$21.67
Weighted average remaining contractual life 6.2 Years
The Ferrell Companies Incentive Compensation Plan (the "ICP") was
established by Ferrell to allow upper middle and senior level managers of
the General Partner to participate in the equity growth of Ferrell. The
shares underlying the stock options are common shares of Ferrell,
therefore, there is no potential dilution of the Partnership. The Ferrell
ICP 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.
The Partnership accounts for stock-based compensation using the intrinsic
value method prescribed in APB No. 25 and related Interpretations.
Accordingly, no compensation cost has been recognized for the unit option
plan, or for the ICP. Had compensation cost for these plans been determined
based upon the fair value at the grant date for awards under these plans,
consistent with the methodology prescribed under SFAS No. 123, the
Partnership's net income (loss) and earnings (loss) per unit would have
been adjusted as noted in the table below:
F-24
(in thousands, except per unit amounts) 2002 2001 2000
-------- -------- --------
Net earnings (loss) available to common unitholders
as reported $48,299 $45,594 $(10,146)
Pro forma adjustment (10) (498) (79)
-------- -------- ---------
Net earnings (loss) available to common unitholders
as adjusted $48,289 $45,096 $(10,225)
======== ======== =========
Pro forma basic and diluted net earnings
(loss) per common unit $1.34 $ 1.41 $ (0.32)
======== ======== =========
The fair value of the unit options granted during fiscal 2001 was
determined using a binomial option valuation model with the following
assumptions: a) distribution amount of $0.50 per unit per quarter, b)
average common unit price volatility of 23.2%, c) the risk-free interest
rate used was 4.4%, and d) the expected life of the option used was five
years. The fair value of the Ferrell Companies, Inc. ICP stock options
granted during the 2002, 2001 and 2000 fiscal years were determined using a
binomial option valuation model with the following assumptions: a) no
dividends, b) average stock price volatility of 19.2%, 13.2% and 10.1% used
in 2002, 2001 and 2000, respectively, c) the risk-free interest rate used
was 4.3%, 5.2% and 6.4% in 2002, 2001 and 2000, respectively and d)
expected life of the options between five and 12 years.
O. 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 Partnership's long-term financial instruments was $710,228,000
and $681,060,000 as of July 31, 2002 and 2001, respectively. The fair value
is estimated based on quoted market prices.
Interest Rate Collar, Cap and Swap Agreements. The Partnership 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, 2002, 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, 2002 and 2001 was de minimis.
P. Business Combinations
During the year ended July 31, 2002, the Partnership acquired three retail
propane businesses with an aggregate value at $10,790,000.
o Blue Flame Bottle Gas, based in southern Arizona
o Alabama Butane Co., based in central and south Alabama
o Alma Farmers Union Co-op, based in western Wisconsin
F-25
These purchases were funded by $6,294,000 of cash payments and, in noncash
transactions, the issuance of 117,487 common units valued at an aggregate
of $2,325,000, and $2,171,000 of notes payable to the seller. The aggregate
value was allocated as follows: $7,064,000 for fixed assets such as
customer tanks, buildings and land, $2,671,000 for non-compete agreements,
$1,195,000 for customer lists, $32,000 for other assets and $(172,000) for
net working capital. Net working capital was comprised of $556,000 of
current assets and $728,000 of current liabilities. The weighted average
amortization period for non-compete agreements and customer lists are five
and 15 years, respectively.
During the year ended July 31, 2001, the Partnership made acquisitions of
three businesses with an aggregate value at $418,000. The purchases were
funded by $200,000 of cash payments and, in a non-cash transaction, the
issuance of $218,000 of notes payable to the seller. Non-compete agreements
and customer lists were assigned values of $228,000 and $4,000,
respectively.
On December 17, 1999, the Partnership purchased Thermogas from a subsidiary
of Williams. At closing the Partnership 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 H) and c) assumed a $135,000,000
operating lease (see Note L). After the conclusion of these
acquisition-related transactions, including the merger of the OLP and
Thermogas, the Partnership acquired $61,842,000 of cash, which remained on
the Thermogas balance sheet at the acquisition date. The Partnership 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 Partnership 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 Partnership on December 17, 1999.
The OLP reimbursed Williams $5,652,500 as final settlement of this working
capital reimbursement obligation. In fiscal 2000, the Partnership 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 Partnership 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.
Prior to the issuance of SFAS No. 141, "Business Combinations," the total
assets contributed to the OLP (at the Partnership's cost basis) were
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 non-compete
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 was accounted for as a purchase and, accordingly, the
results of operations of Thermogas have been included in the Consolidated
Financial Statements from the date of acquisition. Pursuant to the
implementation of SFAS No. 141, assembled workforce was considered an
acquired intangible asset that did not meet the criteria for recognition
apart from goodwill. Effective August 1, 2000, the $8,221,000 carrying
value of assembled workforce was reclassified to goodwill.
F-26
The following pro forma financial information assumes that the Thermogas
acquisition occurred as of August 1, 1999 (unaudited):
For the year
ended
July 31,
(in thousands, except per unit amounts) 2000
------------
Total revenues $1,055,031
Net loss (18,609)
Common unitholders' interest in net loss (18,423)
Basic and diluted loss per common unit $ (0.59)
During the fiscal year ended July 31, 2000, the Partnership 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. Customer lists and
non-compete agreements were assigned values of $2,056,000 and $601,000,
respectively.
All transactions were accounted for using the purchase method of accounting
and, accordingly, the results of operations of all acquisitions have been
included in the Consolidated Financial Statements from their dates of
acquisition. The pro forma effect of these transactions, except those
related to the Thermogas acquisition, was not material to the results of
operations.
Q. Earnings Per Common Unit
In fiscal 2002, 71,253 unit options were considered dilutive, however,
these additional units caused less than a $0.01 change between the basic
and dilutive earnings per unit. In fiscal 2001 and 2000, the unit options
were antidilutive. Below is a calculation of the basic and diluted earnings
per unit on the Consolidated Statements of Earnings. For diluted earnings
per unit purposes, the senior units were excluded as they are considered
contingently issuable common units for which all necessary conditions for
their issuance have not been satisfied as of the end of the reporting
period. In order to compute the basic and diluted earnings per common unit,
the distributions on senior units are subtracted from net earnings to
compute net earnings available to common unitholders.
(in thousands, except per unit data)
For the year ended July 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Net earnings (loss) available
to common unitholders $48,299 $45,594 $(10,146)
--------- --------- ---------
Weighted average common
units outstanding 36,022.3 31,987.3 31,306.7
Basic and diluted earnings
(loss) per common unit $ 1.34 $ 1.43 $ (0.32)
========= ========= =========
F-27
R. Quarterly Data (unaudited)
The following summarized unaudited quarterly data includes all adjustments
(consisting only of normal recurring adjustments) which we consider
necessary for a fair presentation. Due to the seasonality of the retail
distribution of propane, first and fourth quarter revenues, gross profit
and net earnings are consistently less than the second and third quarter
results. Other factors affecting the results of operations include
competitive conditions, demand for product, timing of acquisitions,
variations in the weather and fluctuations in propane prices. The sum of
net earnings (loss) per common unit by quarter may not equal the net
earnings (loss) per common unit for the year due to variations in the
weighted average units outstanding used in computing such amounts.
(in thousands, except per unit data)
Fiscal year ended July 31, 2002
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenues $245,243 $355,738 $287,161 $146,654
Gross profit 95,296 179,147 152,521 74,395
Net earnings (loss) (13,502) 68,188 36,635 (31,362)
Net earnings (loss) per:
common unit - basic (0.45) 1.80 0.93 (0.94)
Net earnings (loss) per:
common unit - diluted (0.45) 1.80 0.93 (0.93)
Fiscal year ended July 31, 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenues $288,461 $641,817 $384,393 $153,999
Gross profit 92,141 234,150 152,801 59,461
Net earnings (loss) (17,565) 94,948 30,402 (43,717)
Net earnings (loss) per
common unit - basic and
diluted (0.70) 2.85 0.81 (1.38)
F-28
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas Partners Finance Corp.
Liberty, Missouri
We have audited the accompanying balance sheets of Ferrellgas Partners Finance
Corp. (a wholly-owned subsidiary of Ferrellgas Partners, L.P.), as of July 31,
2002, and 2001, and the related statements of earnings, stockholder's equity and
cash flows for each of the three years in the period ended July 31, 2002. These
financial statements are the responsibility of the Ferrellgas Partners Finance
Corp.'s management. Our responsibility is to express an opinion on these
financial statements 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Ferrellgas Partners Finance Corp. as of July
31, 2002 and 2001, and the results of its operations and its cash flows for each
of the three years in the period ended July 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 12, 2002
F-29
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
BALANCE SHEETS
July 31,
--------------------
ASSETS 2002 2001
---------------------------------------------------------------- --------- ---------
Cash $1,000 $1,000
--------- ---------
Total Assets $1,000 $1,000
========= =========
STOCKHOLDER'S EQUITY
----------------------------------------------------------------
Common stock, $1.00 par value; 2,000 shares
authorized; 1,000 shares issued and outstanding $1,000 $1,000
Additional paid in capital 2,061 1,662
Accumulated deficit (2,061) (1,662)
--------- ---------
Total Stockholder's Equity $1,000 $1,000
========= =========
See notes to financial statements.
F-30
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF EARNINGS
For the year ended July 31,
-----------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues $ - $ - $ -
General and administrative expense 399 425 463
---------- ---------- ----------
Net loss $ (399) $ (425) $ (463)
========== ========== ==========
See notes to financial statements.
F-31
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF STOCKHOLDER'S EQUITY
Common stock Additional Accum- Total
---------------------- paid in ulated stockholder's
Shares Dollars capital deficit equity
----------- ---------- ----------- ------------ -----------------
August 1, 1999 1,000 $1,000 $774 $ (774) $1,000
Capital contribution - - 463 - 463
Net loss - - - (463) (463)
----------- ---------- ----------- ------------ -----------------
July 31, 2000 1,000 1,000 1,237 (1,237) 1,000
Capital contribution - - 425 - 425
Net loss - - - (425) (425)
----------- ---------- ----------- ------------ -----------------
July 31, 2001 1,000 1,000 1,662 (1,662) 1,000
Capital contribution - - 399 - 399
Net loss - - - (399) (399)
----------- ---------- ----------- ------------ -----------------
July 31, 2002 1,000 $1,000 $2,061 $(2,061) $1,000
=========== ========== =========== ============ =================
See notes to financial statements.
F-32
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
STATEMENTS OF CASH FLOWS
For the year ended July 31,
-----------------------------------
2002 2001 2000
----------- ---------- ----------
Cash Flows From Operating Activities:
Net loss $ (399) $ (425) $ (463)
----------- ---------- ----------
Cash used by operating activities (399) (425) (463)
----------- ---------- ----------
Cash Flows From Financing Activities:
Capital contribution 399 425 463
----------- ---------- ----------
Cash provided by financing activities 399 425 463
----------- ---------- ----------
Change in cash - - -
Cash - beginning of year 1,000 1,000 1,000
----------- ---------- ----------
Cash - end of year $1,000 $1,000 $1,000
=========== ========== ==========
See notes to financial statements.
F-33
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
NOTES TO FINANCIAL STATEMENTS
A. Formation
Ferrellgas Partners Finance Corp. (the "Finance Corp."), a Delaware
corporation, was formed on March 28, 1996 and is a wholly-owned
subsidiary of Ferrellgas Partners, L.P. (the "Partnership").
The Partnership contributed $1,000 to the Finance Corp. on April 8,
1996 in exchange for 1,000 shares of common stock.
B. Commitment
On April 26, 1996, the Partnership issued $160,000,000 of 9 3/8%
Senior Secured Notes due 2006 (the "Senior Notes"). The Senior Notes
became redeemable at the option of the Partnership, in whole or in
part, at any time on or after June 15, 2001. On September 24, 2002,
the Partnership has a commitment to redeem the Senior Notes, with the
proceeds from $170,000,000 of newly issued fixed rate senior notes.
Effective April 27, 2000, the Partnership entered into an interest
rate swap agreement ("Swap Agreement") with Bank of America, related
to the semi-annual interest payment due on the Senior Notes. The Swap
Agreement, which was terminated by Bank of America on June 15, 2001,
required Bank of America to pay the stated fixed interest rate (annual
rate 9 3/8%) pursuant to the Senior Notes equaling $7,500,000 every
six months due on each June 15 and December 15. In exchange, the
Partnership was required to make quarterly floating interest rate
payments on the 15th of March, June, September and December based on
an annual interest rate equal to the 3 month LIBOR interest rate plus
1.655% applied to the same notional amount of $160,000,000. The
Partnership resumed paying the stated fixed interest rate effective
June 16, 2001.
The Finance Corp. serves as a co-obligor for the Senior Notes.
C. Income Taxes
Income taxes have been computed as though the Company files its own
income tax return. Deferred income taxes are provided as a result of
temporary differences between financial and tax reporting using the
asset/liability method. Deferred income taxes are recognized for the
tax consequences of temporary differences between the financial
statement carrying amounts and tax basis of existing assets and
liabilities.
Due to the inability of the Company to utilize the deferred tax
benefit of $821 associated with the current year net operating loss
carryforward of $2,110, which expire at various dates through July 31,
2022, a valuation allowance has been provided on the full amount of
the deferred tax asset. Accordingly, there is no net deferred tax
benefit for the years ended July 31, 2002, 2001 or 2000, and there is
no net deferred tax asset as of July 31, 2002 and 2001.
F-34
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Ferrellgas Partners, L.P. and Subsidiaries
Independent Auditors' Report on Schedules..................................S-2
Schedule I Parent Company Only Balance Sheets as of
July 31, 2002 and 2001 and Statements of Earnings
and Cash Flows for the years ended July 31, 2002,
2001 and 2000............................................S-3
Schedule II Valuation and Qualifying Accounts for the
years ended July 31, 2002, 2001 and 2000.................S-6
S-1
INDEPENDENT AUDITORS' REPORT
To the Partners of
Ferrellgas Partners, L.P. and Subsidiaries
Liberty, Missouri
We have audited the consolidated financial statements of Ferrellgas Partners,
L.P. and subsidiaries (the "Partnership") as of July 31, 2002 and 2001, and for
each of the three years in the period ended July 31, 2002, and have issued our
report thereon dated September 12, 2002. Our audit also included the financial
statement schedules listed in Item 15(a)2. These financial statement schedules
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 12, 2002
S-2
Schedule I
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
BALANCE SHEETS
(in thousands)
July 31,
-------------------
ASSETS 2002 2001
- --------------------------------------------------- --------- ---------
Cash and cash equivalents $ 393 $ 215
Prepaid expenses and other current assets 2,079 147
Investment in Ferrellgas, L.P. 180,401 196,737
Other assets, net 423 3,019
--------- ---------
Total Assets $183,296 $200,118
========= =========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------------------------
Other current liabilities $ 2,135 $ 2,131
Long term debt 160,000 160,000
Partners' Capital
Senior unitholder 111,288 112,065
Common unitholders (28,320) (12,959)
General partner (59,035) (58,738)
Accumulated other comprehensive income (2,772) (2,381)
--------- ---------
Total Partners' Capital 21,161 37,987
--------- ---------
Total Liabilities and Partners' Capital $183,296 $200,118
========= =========
S-3
Schedule I
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
STATEMENT OF EARNINGS
(in thousands)
For the year ended July 31,
--------------------------------
2002 2001 2000
--------- --------- ---------
Equity in earnings of Ferrellgas, L.P. $ 75,588 $ 81,203 $ 15,907
Operating expense 2 - -
Interest expense 15,583 13,858 15,047
Other charges 44 3,277 -
--------- --------- ---------
Net earnings $ 59,959 $ 64,068 $ 860
========= ========= =========
S-4
Schedule I
FERRELLGAS PARTNERS, L.P.
PARENT ONLY
STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended July 31,
-------------------------------
2002 2001 2000
---------- --------- ---------
Cash Flows From Operating Activities:
Net earnings $59,959 $64,068 $ 860
Reconciliation of net earnings to
net cash used in operating activities:
Amortization of capitalized financing costs 515 523 515
Other 192 48 -
Equity in earnings of Ferrellgas, L.P. (75,588) (81,203) (15,907)
Increase (decrease) in other current liabilities (73) 289 -
Increase (decrease) in accrued interest expense 77 148 (183)
---------- --------- ---------
Net cash used in operating activities (14,918) (16,127) (14,715)
---------- --------- ---------
Cash Flows From Investing Activities:
Distributions received from Ferrellgas, L.P. 99,051 83,133 77,962
---------- --------- ---------
Net cash provided by investing activities 99,051 83,133 77,962
---------- --------- ---------
Cash Flows From Financing Activities:
Distributions to partners (84,075) (69,125) (63,247)
Issuance of common units, net of issuance costs - 84,865 -
Redemption of senior units (777) (83,464) -
Proceeds from exercise of common unit options 939 1,718 -
Other 16 (774) -
Net advance from (to) affiliate (58) (12) -
---------- --------- ---------
Net cash used by financing activities (83,955) (66,792) (63,247)
---------- --------- ---------
Increase in cash and cash equivalents 178 214 -
Cash and cash equivalents - beginning of year 215 1 1
---------- --------- ---------
Cash and cash equivalents - end of year $ 393 $ 215 $ 1
========== ========= =========
S-5
Schedule II
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to Deductions Balance
beginning cost/ Other (amounts at end
Description of period expenses Additions charged-off) of period
- ---------------------------------- ----------- ----------- --------- ------------ ---------
Year ended July 31, 2002
- ------------------------
Allowance for doubtful accounts $3,159 $1,604 $0 $(3,296) $1,467
Year ended July 31, 2001
- ------------------------
Allowance for doubtful accounts 2,388 3,029 0 (2,258) 3,159
Year ended July 31, 2000
- ------------------------
Allowance for doubtful accounts 1,296 2,349 0 (1,257) 2,388
S-6