Exhibit 99.15
Ferrellgas, Inc. and
Subsidiaries
Consolidated Balance Sheets as of
July 31, 2003 and 2002 and
Independent Auditors' Report
INDEX TO BALANCE SHEETS
Page
------
Independent Auditor's Report...................................................2
Consolidated Balance Sheets - July 31, 2003 and 2002...........................3
Notes to Consolidated Balance Sheets...........................................4
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas, Inc. and Subsidiaries
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas, Inc.
and subsidiaries (the "Company") as of July 31, 2003 and 2002. These balance
sheets are the responsibility of the Company's management. Our responsibility is
to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance
sheets are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheets. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated balance sheets present fairly, in all material
respects, the financial position of Ferrellgas, Inc. and subsidiaries as of July
31, 2003 and 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Notes B(14) and H to the consolidated balance sheets, the
Company changed its method of accounting for asset retirement obligations with
the adoption of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations", in fiscal 2003 and, as discussed in Notes
B(8) and E to the consolidated balance sheets, changed its method of accounting
for goodwill and other intangible assets with the adoption of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" in fiscal
2002.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 29, 2003
FERRELLGAS, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Ferrell Companies, Inc.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 31,
---------------------------
ASSETS 2003 2002
- ---------------------------------------------------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 12,311 $ 20,819
Accounts and notes receivable (net of
allowance for doubtful accounts of $2,672 and
$1,467 in 2003 and 2002, respectively) 56,742 74,274
Inventories 69,077 48,034
Prepaid expenses and other current assets 8,366 10,771
------------ ------------
Total current assets 146,496 153,898
Property, plant and equipment, net 741,792 565,611
Goodwill 363,134 363,134
Intangible assets, net 98,157 98,170
Other assets 8,897 3,476
------------ ------------
Total assets $1,358,476 $1,184,289
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
- ----------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 59,454 $ 54,316
Other current liabilities 89,666 89,005
------------ ------------
Total current liabilities 149,120 143,321
Long-term debt 888,226 703,858
Deferred income taxes 2,401 2,351
Other liabilities 18,747 14,861
Contingencies and commitments (Note L) - -
Minority interest 171,220 180,620
Parent investment in subsidiary 201,466 210,817
Stockholder's equity (deficiency):
Common stock, $1 par value;
10,000 shares authorized; 990 shares issued 1 1
Additional paid-in-capital 13,824 13,622
Note receivable from parent (146,864) (147,484)
Retained earnings 62,303 65,094
Accumulated other comprehensive loss (1,968) (2,772)
------------ ------------
Total stockholder's equity (deficiency) (72,704) (71,539)
------------ ------------
Total liabilities and stockholder's equity (deficiency) $1,358,476 $1,184,289
============ ============
See notes to consolidated balance sheets
3
FERRELLGAS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, unless otherwise designated)
A. Organization and formation
The accompanying consolidated balance sheets and related notes present the
consolidated balance sheets of Ferrellgas, Inc. (the "Company"), its
subsidiaries and its partnership interest in Ferrellgas Partners, L.P and
subsidiaries. The Company is a wholly-owned subsidiary of Ferrell
Companies, Inc. ("Ferrell" or "Parent").
On July 5, 1994, Ferrellgas Partners, L.P. ("Ferrellgas Partners")
completed an initial public offering of common units representing limited
partner interests (the "common units"). Ferrellgas Partners 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").
Ferrellgas Partners and the operating partnership (collectively referred to
as "Ferrellgas") are both Delaware limited partnerships. Both Ferrellgas
Partners and the operating partnership are governed by partnership
agreements that were made effective at the time of formation of the
partnerships. Ferrellgas Partners 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
the Company. The Company owns an effective 2% general partner interest in
Ferrellgas and performs all management functions required for Ferrellgas.
Concurrent with the closing of the offering, the Company contributed all of
its propane business and assets to Ferrellgas Partners in exchange for
17,593,721 common units and Incentive Distribution Rights as well as a 2%
general partner interest in Ferrellgas Partners and the operating
partnership on a combined basis.
In July 1998, the Company transferred its entire limited partnership
ownership of Ferrellgas Partners to Ferrell. In July 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
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 Ferrellgas. As contributions are made by Ferrell to the
ESOT in the future, shares of Ferrell are allocated to the employees' ESOP
accounts.
On December 17, 1999, Ferrellgas Partners' partnership agreement was
amended, in connection with an acquisition, to allow for the issuance of a
newly created senior unit. 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
Ferrellgas Partners 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, Ferrellgas Partners' and the operating partnership's
partnership agreements were amended to allow the Company to have an option
in maintaining its effective 2% general partner interest concurrent with
the issuance of other additional equity. Prior to this amendment, the
Company was required to make capital contributions to maintain its
effective 2% general partner interest concurrent with the issuance of any
additional equity. Also as part of this amendment, the Company's general
partner interest in Ferrellgas Partners' common units became represented by
newly created general partner units.
4
On April 6, 2001, Ferrellgas Partners' 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
of their liquidation value, or $4 per senior unit. The amendment also
granted the holder of the senior units the right to convert any outstanding
senior units into common units beginning on the earlier of December 31,
2005 or upon the occurrence of a "material event" as such term is defined
by Ferrellgas Partners' partnership agreement. The number of common units
issuable upon conversion of a senior unit is equal to the senior unit
liquidation value, currently $40 per unit plus any accrued and unpaid
distributions, divided by the then current market price of a common unit.
Generally, a material event includes (1) a change of control; (2) the
treatment of Ferrellgas Partners as an association taxable as a corporation
for federal income tax purposes; (3) Ferrellgas Partners' failure to use
the aggregate cash proceeds from equity issuances, other than issuances of
equity pursuant to an exercise of any common unit options, to redeem a
portion of its senior units other than up to $20 million of cash proceeds
from equity issuances used to reduce Ferrellgas' indebtedness; or (4)
Ferrellgas Partners' failure to pay the senior unit distribution in full
for any fiscal quarter. Also as part of the amendment, Ferrell granted
Ferrellgas Partners the ability, until December 31, 2005, to defer future
distributions on the common units held by it, up to an aggregate
outstanding amount of $36.0 million.
B. Summary of significant accounting policies
(1) Nature of operations: The Company is a holding entity that conducts no
operations and has two subsidiaries, Ferrellgas Partners and Ferrellgas
Acquisition Company, LLC ("Ferrellgas Acquisition Company"). The Company
owns a 100% equity interest in Ferrellgas Acquisition Company. Limited
operations are conducted by or through Ferrellgas Acquisition Company,
whose only purpose is to acquire the tax liabilities of acquirees of
Ferrellgas. The Company owns a 1% general partner interest in Ferrellgas
Partners. The operating partnership is the only operating subsidiary of
Ferrellgas Partners.
Ferrellgas 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. Ferrellgas serves more than one million residential,
industrial/commercial, agricultural and other customers.
(2) Accounting estimates: The preparation of balance sheets in conformity
with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the balance sheets. Actual
results could differ from these estimates. Significant estimates impacting
the consolidated balance sheets include accruals that have been established
for product liability and other claims, useful lives of property, plant and
equipment assets, residual values of tanks, amortization methods of
intangible assets, and valuation methods of derivative commodity contracts.
(3) Principles of consolidation: The accompanying consolidated balance
sheets include the Company's accounts, those of its wholly-owned subsidiary
Ferrellgas Acquisition Company and Ferrellgas Partners, after elimination
of all material intercompany accounts and transactions. The accounts of
Ferrellgas Partners are included based on the determination that the
Company possesses a controlling financial interest through its ability to
exert control over Ferrellgas Partners and is consolidated with the
Company.
5
The minority interest includes limited partner interests in Ferrellgas
Partners' common units held by the public and Ferrellgas Partners' senior
units. See Note M - Minority interest for related discussion of the
activity in minority interest. The limited partner interest owned by
Ferrell is reflected as "Parent investment in subsidiary" in the
consolidated balance sheets.
(4) Cash and cash equivalents and non-cash activities: The Company
considers cash equivalents to include all highly liquid debt instruments
purchased with an original maturity of three months or less.
(5) Inventories: Inventories are stated at the lower of cost or market
using average cost and actual cost methods. The Company enters into
commodity derivative contracts involving propane and related products to
hedge, reduce risk and anticipate market movements. The fair value of these
derivative contracts is classified as inventory.
(6) Accounts receivable securitization: The Company has agreements to
transfer, on an ongoing basis, certain of its trade accounts receivable
through an accounts receivable securitization facility and retains
servicing responsibilities as well as a retained interest related to a
portion of the transferred receivables. The Company accounts for the
securitization of accounts receivable in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." As a
result, the related receivables are removed from the consolidated balance
sheets and a retained interest is recorded for the amount of receivables
sold in excess of cash received. Retained interest is included in "Accounts
and notes receivable" in the consolidated balance sheets.
The Company determines the fair value of its retained interests based on
the present value of future expected cash flows using management's best
estimates of various factors, including credit loss experience and discount
rates commensurate with the risks involved. These assumptions are updated
periodically based on actual results, thus the estimated credit loss and
discount rates utilized are materially consistent with historical
performance. Due to the short-term nature of the Company's trade
receivables, variations in the credit and discount assumptions would not
significantly impact the fair value of the retained interests. See Note D -
Accounts receivable securitization - for further discussion of these
transactions.
(7) 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. The Company capitalizes equipment
replacement and betterment expenditures that are (i) greater than $1
thousand, (ii) upgrade, replace or completely rebuild major mechanical
components and (iii) extend the original book life of the equipment.
Depreciation is calculated using the straight-line method based on the
estimated useful lives of the assets ranging from two to 30 years. The
Company, using its best estimates based on reasonable and supportable
assumptions and projections, reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of its assets might not be recoverable. See Note C - Supplemental
financial statement information - for further discussion of property, plant
and equipment.
(8) Goodwill: Goodwill is not amortized and is tested annually for
impairment. Beginning in the first quarter of fiscal 2002, the Company
adopted 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 Company tested goodwill for impairment at the time the
statement was adopted and continues to do so each January 31 on an annual
basis. The Company did not recognize any impairment losses as a result of
these tests.
6
(9) 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 Company reviews identifiable intangibles
for impairment in a similar manner as with long-lived assets. The Company,
using its best estimates based on reasonable and supportable assumptions
and projections, reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of its assets
might not be recoverable. See Note F - Intangible assets, net - for further
discussion of intangible assets.
(10) Accounting for derivative commodity contracts: The Company enters into
commodity options involving propane and related products to specifically
hedge certain product cost risk. Any changes in the fair value of these
specific cash flow hedge positions are deferred and included in other
comprehensive income and recognized as an adjustment to the overall
purchase price of product in the month the purchase contract is settled.
The Company also enters into other commodity forward and futures
purchase/sale agreements and commodity swaps and options involving propane
and related products, which are not specific hedges to a certain product
cost risk, but are used for risk management purposes. To the extent such
contracts are entered into at fixed prices and thereby subject the Company
to market risk, the contracts are accounted for using the fair value
method. Under this valuation method, derivatives are carried on the
consolidated balance sheets at fair value with changes in that value
recognized in earnings. See Note J - Derivatives - for further discussion
about these transactions.
(11) Income taxes: The Company is treated as a Subchapter S corporation for
Federal income tax purposes and is liable for income tax in states that do
not recognize Subchapter S status. Income taxes were computed as though
each company filed its own income tax return in accordance with the
Company's tax sharing agreement. Deferred income taxes are provided as a
result of temporary differences between financial and tax reporting, as
described in Note K - Income taxes - using the asset/liability method.
(12) Unit and stock-based compensation: The Company accounts for the
Ferrellgas Unit Option Plan and the Ferrell Companies, Inc. Incentive
Compensation Plan ("ICP") using the intrinsic value method under the
provisions of Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees." See Note P - Unit options of Ferrellgas
Partners and stock options of Ferrell - for further discussion and
disclosure of stock-based compensation.
(13) Segment information: The Company has a single reportable operating
segment engaging in the retail distribution of propane and related
equipment and supplies.
(14) Adoption of new accounting standards: The Financial Accounting
Standards Board ("FASB") recently issued 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", SFAS No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities," SFAS No. 148 "Accounting for Stock-Based Compensation
- Transition and Disclosure," SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," SFAS No. 150 "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity," FASB Financial Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others" and FASB Financial Interpretation No. 46
"Consolidation of Variable Interest Entities."
7
SFAS No. 143 requires the recognition of a liability if a company has a
legal or contractual financial obligation in connection with the retirement
of a tangible long-lived asset. The Company implemented SFAS No. 143
beginning in the fiscal year ending July 31, 2003. This cumulative effect
of a change in accounting principle resulted in a one-time charge to
earnings of $0.1 million at the beginning of the year ended July 31, 2003,
together with the recognition of a $3.1 million long-term liability and a
$0.3 million long-term asset. See Note H - Asset retirement obligations -
for further discussion of these obligations. The Company believes the
implementation will not have a material ongoing effect on its financial
position.
SFAS No. 144 modifies the financial accounting and reporting for long-lived
assets to be disposed of by sale and it broadens the presentation of
discontinued operations to include more disposal transactions. The Company
implemented SFAS No. 144 beginning in the fiscal year ending July 31, 2003,
with no material effect on its financial position.
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 the Company.
The Company implemented SFAS No. 145 beginning in the fiscal year ending
July 31, 2003, with no material effect on it financial position.
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 Company adopted
and implemented SFAS No. 146 for any exit or disposal activities initiated
after July 31, 2002. The implementation of this statement did not have a
material effect on the Company's financial position.
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation"
to provide alternative methods of transition for a voluntary change to the
fair-value based method of accounting for stock-based employee
compensation. This statement also amends SFAS No. 123 disclosure
requirements for annual and interim financial statements to provide more
prominent disclosures about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. This statement is effective for the fiscal year ending July 31,
2003. The Company implemented the interim disclosure requirements during
the three months ended April 30, 2003. The Company is currently studying
the voluntary aspects of SFAS No. 148 and the related implications of SFAS
No. 123.
SFAS No. 149 amends SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. This statement is,
in general, effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The
Company has studied SFAS No. 149 and believes it will not have a material
effect on its financial position.
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective for
the fiscal year ending July 31, 2004. The Company is currently studying
SFAS No. 150 and any related effect on its financial position.
8
FASB Financial Interpretation No. 45 expands the existing disclosure
requirements for guarantees and requires that companies recognize a
liability for guarantees issued after December 31, 2002. The Company
implemented this interpretation beginning in the three months ended January
31, 2003. During the year ended July 31, 2003, the implementation resulted
in the recognition of a liability of $0.2 million, and a related asset of
$0.2 million, both of which will be recognized into income over the life of
the guarantees. See Note I - Guarantees - for further discussion about
these guarantees.
FASB Financial Interpretation No. 46 clarifies Accounting Research Bulletin
No. 51, "Consolidated Financial Statements." If certain conditions are met,
this interpretation requires the primary beneficiary to consolidate certain
variable interest entities in which equity investors lack the
characteristics of a controlling financial interest or do not have
sufficient equity investment at risk to permit the variable interest entity
to finance its activities without additional subordinated financial support
from other parties. This interpretation is effective immediately for
variable interest entities created or obtained after January 31, 2003. For
variable interest entities acquired before February 1, 2003, the
interpretation is effective for the first fiscal year or interim period
beginning after June 15, 2003. The Company believes it does not currently
have any variable interest entities that would be subject to this
interpretation.
Emerging Issues Task Force ("EITF") No. 02-3 "Issues Involved in Accounting
for Derivative Contracts Held for Trading Purposes and Contracts Involved
in Energy Trading and Risk Management Activities" eliminates any basis for
recognizing physical inventories included in energy trading activities at
fair value. This new accounting rule applies to all physical inventory
purchased after October 22, 2002. The Company had previously recognized
physical inventories included in risk management trading activities at fair
value.
EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables" addresses how to account for arrangements that may involve
multiple revenue-generating activities, i.e., the delivery or performance
of multiple products, services, and/or rights to use assets. In applying
this guidance, separate contracts with the same party, entered into at or
near the same time, will be presumed to be a bundled transaction, and the
consideration will be measured and allocated to the separate units based on
their relative fair values. This consensus guidance will be applicable to
agreements entered into in quarters beginning after June 15, 2003. The
Company will adopt this new accounting pronouncement beginning August 1,
2003. The Company believes this pronouncement will not have a material
impact on its financial position because it does not enter into a
significant number of arrangements that may involve multiple
revenue-generating activities.
(15) Reclassifications: Certain reclassifications have been made to the
prior years' consolidated balance sheets.
9
C. Supplemental balance sheet information
Inventories consist of:
2003 2002
-------------- --------------
Propane gas and related products $49,772 $29,169
Appliances, parts and supplies 19,305 18,865
-------------- --------------
$69,077 $48,034
============== ==============
In addition to inventories on hand, the Company enters into contracts to
buy product for supply purposes, primarily propane for supply procurement
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,
2003, the Company had committed, for supply procurement purposes, to make
net delivery of approximately 0.3 million gallons at a fixed price.
Property, plant and equipment consist of:
Estimated
useful lives 2003 2002
------------------ ---------- ----------
Land and improvements 2-20 $ 39,768 $ 40,781
Buildings and improvements 20 55,010 54,453
Vehicles, including transport trailers 8-20 79,708 77,226
Furniture and fixtures 5 7,630 8,730
Bulk equipment and district facilities 5-30 77,717 73,461
Tanks and customer equipment 5-30 741,436 567,169
Computer equipment and software 2-5 27,311 29,530
Computer software development in progress n/a 44,869 29,904
Other 2,240 2,652
---------- ----------
1,075,689 883,906
Less: accumulated depreciation 333,897 318,295
---------- ----------
$ 741,792 $ 565,611
========== ==========
The Company capitalized $2.2 million and $0.7 million of interest expense
related to the development of computer software for the years ended July
31, 2003 and 2002, respectively. As of July 31, 2002, the Company
recognized payables totaling $7.0 million related to the development of new
computer software that was paid during fiscal 2003.
Other current liabilities consist of:
2003 2002
---------- ----------
Accrued interest $23,563 $22,382
Accrued payroll 22,848 24,068
Accrued insurance 9,535 9,409
Note payable (pursuant to acquisition - see Note R -
Business combinations) 9,847 -
Other 23,873 33,146
---------- ----------
$89,666 $89,005
========== ==========
10
D. Accounts receivable securitization
On September 26, 2000, the Company entered into an accounts receivable
securitization facility with Bank One, NA. As part of this renewable
364-day facility, the Company transfers an interest in a pool of its trade
accounts receivable to Ferrellgas Receivables, LLC, a wholly-owned
unconsolidated, special purpose entity, which sells its interest to a
commercial paper conduit of Banc One, NA. The Company does not provide any
guarantee or similar support to the collectibility of these receivables.
The Company structured the facility using a wholly-owned unconsolidated,
qualifying special purpose entity in order to facilitate the transaction as
required by Banc One, NA and to comply with the Company's various debt
covenants. As a servicer, the Company remits daily to this special purpose
entity funds collected on the pool of trade receivables held by Ferrellgas
Receivables. The Company renewed the facility for an additional 364-day
commitment on September 23, 2003.
The Company transfers certain of its trade accounts receivable to
Ferrellgas Receivables and retains an interest in a portion of these
transferred receivables. As these transferred receivables are subsequently
collected and the funding from the accounts receivable securitization
facility is reduced, the Company's retained interest in these receivables
is reduced. In fiscal 2002, as the transferred receivables were collected
and the funding from the accounts receivable securitization facility was
reduced to zero, the Company's retained interest in the transferred
receivables, was reduced from $7.2 million at July 31, 2001 to zero at July
31, 2002. As of July 31, 2003 and 2002, the balance of the retained
interest was $8.1 million and $0 million, respectively and was classified
as accounts receivable on the consolidated balance sheets. At July 31,
2003, $42.5 million had been transferred compared with $0 million at July
31, 2002. The Company had the ability to transfer, at its option, an
additional $19.1 million of its trade accounts receivable at July 31, 2003.
E. Goodwill
The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets"
beginning in the first quarter of fiscal 2002. 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.
F. Intangible assets, net
Intangible assets, net consist of:
July 31, 2003 July 31, 2002
------------------------------------------- -------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------------- ---------------- ----------- -------------- ---------------- -----------
Customer lists $220,061 $(133,548) $86,513 $208,662 $(124,860) $83,802
Non-compete agreements 64,020 (52,376) 11,644 62,893 (48,525) 14,368
-------------- ---------------- ----------- -------------- ---------------- -----------
Total $284,081 $(185,924) $98,157 $271,555 $(173,385) $98,170
============== ================ =========== ============== ================ ===========
Customer lists have estimated lives of 15 years, while non-compete
agreements have estimated lives ranging from two to 10 years.
11
Aggregate amortization expense:
2003 2002
---- ----
For the year ended July 31, $12,539 $14,022
Estimated amortization expense:
For the year ended July 31,
2004 $11,396
2005 10,876
2006 10,357
2007 9,677
2008 8,748
G. Long-term debt
Long-term debt consists of:
2003 2002
------------- ------------
Senior notes
Fixed rate, 7.16% due 2005-2013 (1) $350,000 $350,000
Fixed rate, 8.75%, due 2012, net of unamortized premium of $1,569 (2) 219,569 -
Fixed rate, 9.375%, due 2006 (2) - 160,000
Fixed rate, 8.8%, due 2006-2009 (3) 184,000 184,000
Credit agreement, variable interest rates, expiring 2006 126,700 -
Notes payable, 7.5% and 7.6% weighted average interest rates,
respectively, due 2004 to 2011 10,108 12,177
------------- ------------
890,377 706,177
Less: current portion, included in other current liabilities on the
consolidated balance sheets 2,151 2,319
------------- ------------
$888,226 $703,858
============= ============
(1) The operating partnership fixed rate senior notes, issued in August
1998, are general unsecured obligations of the operating partnership
and rank on an equal basis in right of payment with all senior
indebtedness of the operating partnership and senior to all
subordinated indebtedness of the operating partnership. 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 operating partnership does not have the
option to prepay the notes prior to maturity without incurring
prepayment penalties.
(2) On September 24, 2002, the Company redeemed the Ferrellgas Partners
fixed rate senior secured notes issued in April 1996, with the
proceeds from $170.0 million of Ferrellgas Partners fixed rate senior
notes. On December 18, 2002, the Company issued $48.0 million of
Ferrellgas Partners fixed rate senior notes with a debt premium of
$1.7 million that will be amortized to interest expense through 2012.
The Ferrellgas Partners senior notes bear interest from the date of
issuance, payable semi-annually in arrears on June 15 and December 15
of each year.
12
(3) The operating partnership fixed rate senior notes, issued in February
2000, are general unsecured obligations of the operating partnership
and rank on an equal basis in right of payment with all senior
indebtedness of the operating partnership and senior to all
subordinated indebtedness of the operating partnership. 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 operating
partnership does not have the option to prepay the notes prior to
maturity without incurring prepayment penalties.
On December 10, 2002, the Company refinanced its $157.0 million bank credit
facility with a $307.5 million amended bank credit facility, using $155.6
million of the funds available thereunder to purchase propane tanks and
related assets that it previously leased, plus making a $1.2 million
payment of related accrued lease expense. The remaining portion of the
amended bank credit facility is available for working capital, acquisition,
capital expenditure and general partnership purposes and will terminate on
April 28, 2006, unless extended or renewed. The credit facility has a
letter of credit sub-facility with availability of $80.0 million. As of
July 31, 2003, the Company had borrowings of $126.7 million, at a weighted
average interest rate of 3.2%, under this amended bank credit facility.
All borrowings under the amended bank credit facility bear interest, at the
Company's option, at a rate equal to either:
o the base rate, which is defined as the higher of the federal funds
rate plus 0.50% or Bank of America's prime rate (as of July 31, 2003,
the federal funds rate and Bank of America's prime rate were 1.04% and
4.00%, respectively); or
o the Eurodollar Rate plus a margin varying from 1.75% to 2.75% (as of
July 31, 2003, the one-month Eurodollar Rate was 1.04%).
In addition, an annual commitment fee is payable on the daily unused
portion of the credit facility at a per annum rate varying from 0.375% to
0.625% (as of July 31, 2003, the commitment fee per annum rate was 0.375%).
Letters of credit outstanding, used primarily to secure obligations under
certain insurance arrangements, totaled $44.7 million and $40.6 million at
July 31, 2003 and 2002, respectively. At July 31, 2003, the Company had
$136.1 million of funding available.
The senior notes and the credit facility agreement contain various
restrictive covenants applicable to the Company, the most restrictive
relating to additional indebtedness. In addition, Ferrellgas Partners 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 Ferrellgas Partners or the operating
partnership fail to meet certain coverage tests. Ferrellgas Partners and
the operating partnership are in compliance with all requirements, tests,
limitations and covenants related to these debt agreements.
The scheduled annual principal payments on long-term debt are as follows:
Scheduled annual
For the year ended July 31, principal payments
--------------------------- ----------------------
2004 $ 2,151
2005 2,146
2006 111,161
2007 38,455
2008 74,105
Thereafter 660,790
----------------------
Total $888,808
13
H. Asset retirement obligations
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets, including the requirement that
a liability be recognized if there is a legal or financial obligation
associated with the retirement of the assets. The Company adopted SFAS No.
143 beginning in the year ending July 31, 2003. This cumulative effect of a
change in accounting principle resulted in a one-time charge to earnings of
$0.1 million, at the beginning of the year ended July 31, 2003, together
with the recognition of a $3.1 million long-term liability and a $0.3
million long-term asset. The Company believes the implementation will not
have a material ongoing effect on its financial position. These obligations
relate primarily to the estimated future expenditures required to retire
the Company's underground storage facilities. The remaining period until
these facilities will require closure and remediation expenditures is
approximately 50 years. The following table presents a reconciliation of
the beginning and ending carrying amounts of the asset retirement
obligation:
For the year ended
July 31, 2003
------------------
Asset retirement obligation as of August 1, 2002 $3,073
Add: Accretion 199
------------------
Asset retirement obligation as of July 31, 2003 $3,272
==================
The related asset carried for the purpose of settling the asset retirement
obligation is $0.3 million as of July 31, 2003, and is not a legally
restricted asset. Other liabilities, assuming retroactive application of
the change in accounting principle as of August 1, 2001 and July 31, 2002,
would have increased $2.9 million and $3.1 million, respectively.
I. Guarantees
FASB Financial Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," expands the existing disclosure requirements for
guarantees and requires recognition of a liability for the fair value of
guarantees issued after December 31, 2002. As of July 31, 2003, the only
material guarantees that the Company had outstanding were associated with
residual value guarantees of operating leases. These operating leases are
related to transportation equipment with remaining lease periods scheduled
to expire over the next seven fiscal years. Upon completion of the lease
period, the Company guarantees that the fair value of the equipment will
equal or exceed the guaranteed amount, or the Company will pay the lessor
the difference. The fair value of these residual value guarantees entered
into after December 31, 2002 was $0.2 million as of July 31, 2003. Although
the fair values at the end of the lease terms have historically exceeded
these guaranteed amounts, the maximum potential amount of aggregate future
payments the Company could be required to make under these leasing
arrangements, assuming the equipment is worthless at the end of the lease
term, is $14.5 million.
J. Derivatives
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149,
requires all derivatives (with certain exceptions), whether designated in
hedging relationships or not, to be recorded on the consolidated balance
sheets at fair value. As a result of implementing SFAS No. 133 at the
beginning of fiscal 2001, the Company recognized in its first quarter of
fiscal 2001, gains totaling $0.7 million in accumulated other comprehensive
income. In addition, beginning in the first quarter of fiscal 2001, the
Company recorded subsequent changes in the fair value of positions
qualifying as cash flow hedges in accumulated other comprehensive income
and changes in the fair value of other positions in the consolidated
statements of earnings. The Company's overall objective for entering into
derivative contracts for the purchase of product is related to hedging,
risk reduction and to anticipate market movements. Other derivatives are
entered into to reduce interest rate risk associated with long term debt
and lease obligations. Fair value hedges are derivative financial
instruments that hedge the exposure to changes in the fair value of an
asset or a liability or an identified portion thereof attributable to a
particular risk. Cash flow hedges are derivative financial instruments that
hedge the exposure to variability in expected future cash flows
attributable to a particular risk. The Company uses cash flow hedges to
manage exposures to product purchase price risk and uses both fair value
and cash flow hedges to manage exposure to interest rate risks.
14
Fluctuations in the wholesale cost of propane expose the Company to
purchase price risk. The Company purchases propane at various prices that
are eventually sold to its customers, exposing the Company to future
product price fluctuations. Also, certain forecasted transactions expose
the Company to purchase price risk. The Company monitors its purchase price
exposures and utilizes product hedges to mitigate the risk of future price
fluctuations. Propane is the only product hedged with the use of product
hedge positions. The Company uses derivative 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 Company did not have any product hedge positions outstanding as of July
31, 2003, therefore there was no fair value adjustment classified as OCI at
July 31, 2003. The risk management fair value adjustments of $(0.2) million
and $(0.3) million included in OCI at July 31, 2002 and 2001, were
reclassified into earnings during fiscal 2003 and 2002, respectively.
Changes in the fair value of cash flow hedges due to hedge ineffectiveness,
if any, are recognized in cost of product sold. 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 Company also purchases
and sells derivatives that are not designated as accounting hedges to
manage other risks associated with commodity prices. 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 Company
utilizes 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. 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.
Estimates related to the Company's 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 $0.9 million for risk management trading activities as of
July 31, 2003. 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, 2003 and 2002.
15
For the year ended July 31,
-----------------------------
2003 2002
---------- ----------
Unrealized losses in fair value of contracts outstanding
at beginning of year $(4,569) $(12,587)
Unrealized gains and (losses) recognized at inception of
a contract - -
Unrealized gains and (losses) recognized as a result of
changes in valuation techniques or assumptions - -
Other unrealized gains and (losses) recognized 5,921 (6,148)
Less: realized gains and (losses) recognized 3,070 (14,166)
---------- ----------
Unrealized losses in fair value of contracts outstanding
at end of year $(1,718) $ (4,569)
========== ==========
The following table summarizes the maturity of these contracts for the
valuation methodologies the Company utilized as of July 31, 2003 and 2002.
This table summarizes the contracts where settlement had not yet occurred.
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 $ 9 $ -
Prices provided by other external sources (1,727) -
Prices based on models and other valuation methods - -
-------------- -----------------
Unrealized losses in fair value of contracts
outstanding at July 31, 2003 $(1,718) $ -
============== =================
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)
============== =================
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, 2003 and 2002:
(in thousands)
For the year ended July 31, 2003 13,805
For the year ended July 31, 2002 11,162
16
The Company 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, SFAS No. 138 and SFAS No. 149, and thus are not
adjusted to fair market value.
As of July 31, 2003, the Company holds $763.7 million in fixed rate debt
and $126.7 million in variable rate debt. Fluctuations in interest rates
subject the Company to interest rate risk. Decreases in interest rates
increase the fair value of the Company's fixed rate debt, while increases
in interest rates subject the Company to the risk of increased interest
expense related to its variable rate debt.
The Company enters into fair value and cash flow hedges to help reduce its
overall interest rate risk. Interest rate swaps were used to hedge the
exposure to changes in the fair value of fixed rate debt due to changes in
interest rates. The fair value of interest rate derivatives that are
considered fair value or cash flow hedges are classified either as other
current or long-term assets or as other current or long-term liabilities on
the consolidated balance sheets. Changes in the fair value of the fixed
rate debt and any related fair value hedges are recognized as they occur in
interest expense in the consolidated statements of earnings. There were no
such fair value hedges outstanding at July 31, 2003 and 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 were designated as cash flow
hedges and were outstanding until June 2003. Thus, the effective portions
of changes in the fair value of the hedges were recorded in OCI at interim
periods and were recognized as interest expense in the consolidated
statements of earnings when the forecasted transaction impacted earnings.
Cash flow hedges are assumed to hedge the risk of changes in cash flows of
the hedged risk.
K. Income taxes
The significant components of the net deferred tax asset (liability)
included in the consolidated balance sheets are as follows:
2003 2002
-------- --------
Deferred tax liabilities:
Partnership basis difference $(1,771) $(1,727)
Tax liability assumed in acquisition (725) (725)
-------- --------
Total deferred tax liabilities (2,496) (2,452)
Deferred tax assets:
Operating loss and credit carryforwards 95 101
-------- --------
Total deferred tax assets 95 101
-------- --------
Net deferred tax liability $(2,401) $(2,351)
======== ========
Partnership basis differences are primarily attributable to differences in
the tax and book basis of fixed assets and amortizable intangibles
resulting from the Company's contribution of assets and liabilities
concurrent with Ferrellgas Partners' public offering in 1994.
For Federal income tax purposes, the Company has net operating loss
carryforwards of approximately $77.0 million at July 31, 2003 available to
offset future taxable income. These net operating loss carryforwards expire
at various dates through 2011.
17
The Company is potentially subject to the built-in gains tax, which could
be incurred on the sale of assets owned as of August 1, 1998, the date of
the Subchapter S election, that had a fair market value in excess of their
tax basis as of that date. However, the Company anticipates that it can
avoid incurring any built-in gains tax liability through utilization of its
net operating loss carryovers and tax planning relating to the
retention/disposition of assets owned as of August 1, 1998. In the event
that the built-in gains tax is not incurred, the Company may not utilize
the net operating loss carryforwards.
L. Contingencies and commitments
The Company is threatened with or named as a defendant in various lawsuits
that, among other items, claim damages for product liability. It is not
possible to determine the ultimate disposition of these matters; however,
management is of the opinion that there are no known claims or contingent
claims that will have a material adverse effect on the financial condition
of the Company. Currently, the Company is not a party to any legal
proceedings other than various claims and lawsuits arising in the ordinary
course of business.
Ferrellgas Partners makes quarterly cash distributions of all of its
"available cash." Available cash is defined in the partnership agreement of
Ferrellgas Partners as, generally, the sum of its consolidated cash
receipts less consolidated cash disbursements and net changes in reserves
established by the Company for future requirements. Reserves are retained
in order to provide for the proper conduct of Ferrellgas Partners'
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 Ferrellgas Partners 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 Company. 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.
Ferrellgas Partners' 2.0 million senior units outstanding as of July 31,
2003 have a liquidating value of $40 per unit or $79.8 million. The senior
units are redeemable by Ferrellgas Partners 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 Ferrellgas Partners' partnership agreement.
Such conversion rights are contingent upon Ferrellgas Partners 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 2021.
The following table summarizes the Company's future minimum rental payments
and amounts currently anticipated to exercise purchase buyout options as of
July 31, 2003:
18
Future minimum rental and buyout amounts by fiscal year
------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
---------- ---------- ---------- ---------- ---------- --------------
Operating lease rental
payments $20,161 $14,840 $12,226 $8,253 $4,862 $4,748
Operating lease buyouts 6,061 5,316 2,077 6,319 2,343 3,279
M. Minority Interest
The minority interest on the consolidated balance sheets includes limited
partner interests in both Ferrellgas Partners' common units held by the
public and Ferrellgas Partners' senior units held by JEF Capital
Management, Inc ("JEF Capital Management"), an entity owned by James E.
Ferrell, Chairman, Chief Executive Officer and President of the Company. At
July 31, 2003 and 2002, minority interest related to the common units owned
by the public was $91.5 million and $69.3 million, respectively. Minority
interest related to the senior units was $79.7 million and $111.3 million
at July 31, 2003 and 2002, respectively. The amounts at July 31, 2003 and
2002 represent the liquidation value of the senior units. See Note N -
Transactions with related parties - for additional information about the
senior units.
N. Transactions with related parties
The Company has two notes receivable from Ferrell on an unsecured basis due
on demand. Because Ferrell does not intend to repay the notes, the Company
does not accrue interest income. The balances outstanding on these notes at
July 31, 2003 and 2002, are $146.9 million, and $147.5 million,
respectively, and are reported as Note receivable from parent in
Stockholder's equity (deficiency) on the consolidated balance sheets.
On December 12, 2001, Ferrellgas Partners issued 37 thousand common units
to Ferrell Propane, Inc., a subsidiary of Ferrell Acquisition Company in
connection with the acquisition of Blue Flame Bottle Gas (see Note R -
Business combinations). The common unit issuance compensated Ferrell
Propane for its retention of $0.7 million of certain tax liabilities of
Blue Flame.
During fiscal 2000, The Williams Companies, Inc. ("Williams") became a
related party to the Company due to Ferrellgas Partners' issuance of 4.4
million senior units to a subsidiary of Williams as part of an acquisition
during the year ended July 31, 2000. In a noncash transaction, during
fiscal 2001, Ferrellgas Partners paid quarterly senior unit distributions
to Williams of $11.1 million, using additional senior units. In April 2001,
Williams sold all its senior units to JEF Capital Management, and
thereafter, ceased to be a related party of the Company.
On April 6, 2001, Williams approved amendments to Ferrellgas Partners'
partnership agreement related to certain terms of the senior units.
Williams then sold all of the senior units for a purchase price of $195.5
million 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 2003, Ferrellgas Partners paid to JEF Capital Management
$31.5 million to redeem a total of 0.8 million senior units and $11.6
million in senior unit distributions and accrued a senior unit distribution
of $2.0 million that was paid on September 12, 2003. During fiscal 2002,
Ferrellgas Partners paid JEF Capital Management $0.8 million to redeem a
total of 19 thousand senior units and $11.1 million in senior unit
distributions and accrued a senior unit distribution of $2.8 million that
was paid on September 13, 2002.
19
During fiscal 2003 and 2002, Ferrellgas Partners paid common unit
distributions of $35.6 million in each year to Ferrell.
Ferrell International Limited and FI Trading, Inc. are beneficially owned
by James E. Ferrell and thus are affiliates of the Company. The Company
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
Company's Board of Directors. These transactions include forward, option
and swap contracts and are all reviewed for compliance with the policy.
There were no amounts due to or from Ferrell International Limited at July
31, 2003. Amounts due to and from Ferrell International Limited at July 31,
2002 were $0.3 million and $0.4 million, respectively.
O. Employee benefits
Ferrell makes contributions to the ESOT, which causes a portion of the
shares of Ferrell owned by the ESOT to be allocated to employees' accounts
over time. The allocation of Ferrell's shares to employee accounts causes a
non-cash compensation charge to be incurred by the Company, equivalent to
the fair value of such shares allocated. The Company is not obligated to
fund or make contributions to the ESOT.
The Company and its parent, Ferrell, have a defined contribution
profit-sharing plan, which includes both profit sharing and matching
contributions. The plan covers substantially all employees with more than
one year of service. With the establishment of the ESOP in July 1998, the
Company suspended future contributions to the profit sharing 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.
The Company has a defined benefit plan that provides participants who were
covered under a previously terminated plan with a guaranteed retirement
benefit at least equal to the benefit they would have received under the
terminated plan. Until July 31, 1999, benefits under the terminated plan
were determined by years of credited service and salary levels. As of July
31, 1999, years of credited service and salary levels were frozen. The
Company's funding policy for this plan is to contribute amounts deductible
for Federal income tax purposes and invest the plan assets primarily in
corporate stocks and bonds, U.S. Treasury bonds and short-term cash
investments. During fiscal years 2003 and 2002, other comprehensive income
and other liabilities were adjusted by $(0.7) million and $0.5 million,
respectively, because the accumulated benefit obligation of this plan
exceeded the fair value of plan assets.
20
P. Unit options of Ferrellgas Partners and stock options of Ferrell
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 Ferrellgas Partners' common
units to employees of the Company 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
Ferrellgas Partners was not required. The Board of Directors of the Company
administers the unit option plan, authorizes grants of unit options
thereunder and sets 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 Company may acquire more than 314,895 of Ferrellgas
Partners' common units under the unit option plan. The unit options
outstanding as of July 31, 2003, 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
of Weighted average
units exercise price
---------------- --------------------
Outstanding, August 1, 2001 1,229,200 $18.08
Exercised (55,350) 16.80
Forfeited (98,450) 18.04
----------------
Outstanding, July 31, 2002 1,075,400 18.15
Exercised (368,900) 18.05
Forfeited (2,400) 18.80
----------------
Outstanding, July 31, 2003 704,100 18.20
----------------
Options exercisable, July 31, 2003 364,300 18.43
----------------
Options exercisable, July 31, 2002 594,725 18.25
Options outstanding at July 31, 2003
------------------------------------
Range of option prices at end of year $16.80-$21.67
Weighted average remaining contractual life 6.1 Years
The ICP was established by Ferrell to allow upper middle and senior level
managers of the Company 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 Company. The 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's debt, but in no event later
than 20 years from the date of issuance.
Q. Disclosures about fair value of financial instruments
The carrying amount of short-term financial instruments approximates fair
value because of the short maturity of the instruments. The estimated fair
value of the Company's long-term debt was $921.0 million and $710.2 million
as of July 31, 2003 and 2002, respectively. The fair value is estimated
based on quoted market prices.
Interest rate collar, cap and swap agreements. The Company from time to
time has entered into various interest rate collar, cap and swap agreements
involving, among others, the exchange of fixed and floating interest
payment obligations without the exchange of the underlying principal
amounts. During the year ended July 31, 2003, an interest rate cap
agreement with a large financial institution expired. The fair value of
this agreement was de minimus at July 31, 2002.
21
R. Business combinations
During the year ended July 31, 2003, the Company acquired the following
retail propane businesses with an aggregate value at $49.2 million:
o ProAm, Inc., based primarily in Georgia and Texas, acquired December
2002;
o a branch of Cenex Propane Partners Co., based in Iowa, acquired
November 2002;
o Northstar Propane, based in Nevada, acquired November 2002;
o Pettit Oil Company, Inc., based in Washington, acquired May 2003; and
o Wheeler's Bottled Gas, Inc., based in Ohio, acquired July 2003.
These purchases were funded by $39.1 million in cash payments, the issuance
of 9 thousand of Ferrellgas Partners' common units valued at an aggregate
of $0.2 million, and $9.9 million in the issuance of a short-term
non-interest bearing note payable at an imputed interest rate of 4.25% to
the seller and other costs and consideration.
The aggregate value of these five retail propane businesses was
preliminarily allocated as follows: $28.5 million for assets such as
customer tanks, buildings and land, $1.1 million for non-compete
agreements, $11.7 million for customer lists, and $7.9 million for net
working capital. Net working capital was comprised of $8.7 million of
current assets and $0.8 million of current liabilities. The estimated fair
values and useful lives of assets acquired are based on a preliminary
valuation and are subject to final valuation adjustments. The Company
intends to continue its analysis of the net assets of these acquired
businesses to determine the final allocation of the total purchase price to
the various assets acquired. The weighted average amortization period for
non-compete agreements and customer lists are five and 15 years,
respectively.
During the year ended July 31, 2002, the Company acquired the following
retail propane businesses with an aggregate value at $10.8 million:
o Blue Flame Bottle Gas, based in Arizona, acquired December 2001;
o Alabama Butane Co., based in Alabama, acquired November 2001; and
o Alma Farmers Union Co-op, based in Wisconsin, acquired September 2001.
The purchases were funded by $6.3 million of cash payments and the issuance
of 0.1 million of Ferrellgas Partners' common units valued at an aggregate
of $2.3 million, and $2.2 million of notes payable to the seller. The
aggregate value was allocated as follows: $7.1 million for assets such as
customer tanks, buildings and land, $2.7 million for non-compete
agreements, $1.2 million for customer lists, $32 thousand for other assets
and $(0.2) million for net working capital. Net working capital was
comprised of $0.6 million of current assets and $0.7 million of current
liabilities. The weighted average amortization period for non-compete
agreements and customer lists are five and 15 years, respectively.
22