10-K/A 1 form10ka_120902.txt FORM 10-K/A #2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 2 [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 -------------------------------------------------------------------------------- (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 EXPLANATORY NOTE On October 23, 2002, we filed with the Securities and Exchange Commission (SEC) our Annual Report on Form 10-K for our fiscal year ended July 31, 2002. On December 10, 2002, we filed with the SEC Amendment No. 1 to our Annual Report on Form 10-K/A for the sole purpose of including an explanatory sentence to the unqualified Independent Auditors' Report of our independent auditor, Deloitte & Touche LLP. In the explanatory sentence, Deloitte & Touche LLP clarified for the reader that we changed our accounting in fiscal 2002 for goodwill and other intangible assets by virtue of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." This Amendment No. 2 to our Annual Report on Form 10-K/A for our fiscal year ended July 31, 2002, is being filed to restate our consolidated statements of cash flows related to our accounts receivable securitization for July 31, 2002 and 2001. This information was previously shown in the consolidated statements of cash flows on a net basis in the section "Cash Flows from Investing Activities" and is now shown on a gross basis in the section "Cash Flows from Operating Activities" and includes a disaggregation for the proceeds from new accounts receivable securitizations to the amounts previously provided in Note E, as filed in Amendment No. 1 to our Annual Report on Form 10-K/A. The gross amounts related to the accounts receivable securitizations were previously reflected within Note E to the consolidated financial statements. This restatement necessitated amending Note E to our consolidated financial statements by moving the gross information to our consolidated statement of cash flows and the addition of a new Note R to our consolidated financial statements to explain the restatement. It is important to note that this amended filing has no effect on our aggregate "Increase (decrease) in cash and cash equivalents" for the 2002 and 2001 fiscal years, but merely affect the allocation of our cash flows. Our aggregate "Increase (decrease) in cash and cash equivalents" for the 2002 and 2001 fiscal years remain the same as initially disclosed in our Annual Report filed on October 23, 2002. Additionally, other than as stated above, this restatement has no impact on our previously reported consolidated financial statements and accompanying notes for our 2002, 2001 and 2000 fiscal years. The amendments being made pursuant to this Amendment No. 2 are as follows: o Item 6. "Selected Financial Data" has been restated to reflect the amendments made to Item 8; o Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" has been revised to reflect the restatement made to Item 8 as follows: o "Liquidity and Capital Resources - Operating activities" - the first paragraph from our initial 10-K has been modified and a new second paragraph has been added; and o "Liquidity and Capital Resources - Investing activities" - the fifth paragraph from our initial 10-K has been deleted; o Item 8. "Financial Statements and Supplementary Data" has been revised to restate our consolidated statements of cash flows. See "Consolidated Statement of Cash Flows" and Notes E and R of the accompanying consolidated financial statements; and o Item 15. "Exhibits, Financial Statement Schedules, and Reports on Form 8-K" has been revised to include an update to the Independent Auditor's Consent and the certifications required by Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. See Exhibits 23.1, 99.1 and 99.2. Except as described above, no other changes have been made to our Annual Report on Form 10-K or Amendment No. 1 to our Annual Report on Form 10-K/A. For the convenience of the reader and as required under SEC rules, this Amendment No. 2 sets forth the complete text of Items 6, 7, 8 and 15, rather than just the amended portions thereof. To preserve the nature and character of the disclosures set forth in these Items as originally filed, this Amendment No. 2 continues to speak as of October 23, 2002, and we have not updated the disclosures in this Amendment No. 2 to speak as of a later date or to reflect any events which occurred at a later date. For Items not modified herein, reference should be made to our Annual Report on Form 10-K as filed with the SEC on October 23, 2002. The filing of this Amendment No. 2 is not an admission that our initial Annual Report on Form 10-K or our Amendment No. 1 to our Annual Report on Form 10-K/A, when made, knowingly included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading. FERRELLGAS PARTNERS, L.P. FERRELLGAS PARTNERS FINANCE CORP. 2002 FORM 10-K/A Amendment No. 2 ANNUAL REPORT Table of Contents Page ---- PART II ITEM 6. SELECTED FINANCIAL DATA...................................... 1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................16 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..........................................16 PART II --------- 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 loss 1.34 1.43 (0.32) 0.47 0.16 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 =========== =========== ============ =========== ===========
1 Ferrellgas Partners, L.P. ------------------------------------------------------------------------- Year Ended July 31, ------------------------------------------------------------------------- 2002 2001 (as (as restated*) restated*) 2000 1999 1998 ----------- ----------- ------------ ----------- ----------- Supplemental Data: Net cash provided by operating $121,925 $130,859 $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 =========== =========== ============ =========== =========== * See Note R to the consolidated financial statements.
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. 2 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. As discussed in Note R to the consolidated financial statements, the partnership has restated its consolidated statements of cash flows for the fiscal years 2002 and 2001. The Management Discussion and Analysis for Operating Activities and for Investing Activities give effect to this restatement. 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; 3 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." 4 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." 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. 5 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. 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. 6 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. 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. 7 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 $121,925,000 for fiscal 2002, compared to $130,859,000 for fiscal 2001. This decrease is primarily due to reduced net earnings and the decreased utilization of the accounts receivable facility. Accounts receivable securitization 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. 8 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. Capital Expenditures Expensed Items -------------------------- ------------------------ (in thousands) 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. 9 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. 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 10 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. 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." 11 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. 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: (in thousands) Fiscal year ended 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) =====================
12 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 less Maturity greater than than 1 year and Source of Fair Value 1 year less than 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) ===================== ====================
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. 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. 13 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. 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. 14 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. 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. 15 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 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 S to the Consolidated Financial Statements for Selected Quarterly Financial Data. 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 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized. FERRELLGAS PARTNERS, L.P. By Ferrellgas, Inc. (General Partner) Date: June 6, 2003 By /s/ Kevin T. Kelly ------------------------------------ Kevin T. Kelly Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: June 6, 2003 FERRELLGAS PARTNERS FINANCE CORP. By /s/ Kevin T. Kelly ------------------------------------ Kevin T. Kelly Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Certifications I, James E. Ferrell, certify that: 1. I have reviewed this annual report on Form 10-K/A 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: June 6, 2003 /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/A 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: June 6, 2003 /s/ Kevin T. Kelly -------------------------- Kevin T. Kelly Senior Vice President and Chief Financial Officer Certifications I, James E. Ferrell, certify that: 1. I have reviewed this annual report on Form 10-K/A of Ferrellgas Partners Finance Corp.; 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: June 6, 2003 /s/ James. E. Ferrell ------------------------- James E. Ferrell President and Chief Executive Officer I, Kevin T. Kelly, certify that: 1. I have reviewed this annual report on Form 10-K/A of Ferrellgas Partners Finance Corp.; 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: June 6, 2003 /s/ Kevin T. Kelly -------------------------- Kevin T. Kelly Senior Vice President and Chief Financial Officer INDEX TO EXHIBITS The exhibits listed below are filed as part of this Annual Report on Amendment No. 2 to Form 10-K/A. 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. Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K filed October 23, 2002. 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. * 99.1 Certification of Ferrellgas Partners, L.P. Pursuant to U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 99.2 Certification of Ferrellgas Partners Finance Corp. Pursuant to U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -------------------------------------------------------------------------------- * Filed herewith # Management contracts or compensatory plans. E-5 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, (as restated) 2001 (as restated) 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. As discussed in Notes B(15) and F to the consolidated financial statements, the Partnership changed its method of accounting for goodwill and other intangible assets with the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", in fiscal 2002. As discussed in Note R, the accompanying 2002 and 2001 consolidated statements of cash flows have been restated. DELOITTE & TOUCHE LLP Kansas City, Missouri September 12, 2002 (May 29, 2003 as to Notes E and R) 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 (as (as restated*) restated*) ---------- ---------- ---------- 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) Accounts receivable securitization: Proceeds from new accounts receivable securitizations 30,000 115,000 - Proceeds from collections reinvested in revolving period accounts receivable securitizations 360,677 725,955 - Remittances of amounts collected as server of accounts receivable securitizations (421,677) (809,955) - ---------- ---------- ---------- Net cash provided by operating activities 121,925 130,859 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) Proceeds from sale leaseback transaction - - 25,000 Other 4,240 1,652 5,743 ---------- ---------- ---------- Net cash provided by (used in) investing activities (39,570) (18,264) 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 Note R to these consolidated financial statements.
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. 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 subsidiary (see Note E) - - (7,225) 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 (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.
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. Restatement of Consolidated Statements of Cash Flows Subsequent to the issuance of the Partnership's consolidated financial statements for the year ended July 31, 2002, management of the Partnership determined that the Partnership's cash flows from the accounts receivable securitizations should be reflected gross in its consolidated statements of cash flows and be included within operating activities rather than a net presentation within investing activities. The Partnership had previously disclosed the gross activity within the notes to the consolidated financial statements. As a result, the Partnership's consolidated statement of cash flows for the years ended July 31, 2002 and 2001 have been restated to present the gross cash flow activities from the accounts receivable securitizations and within the correct cash flow activity. A summary of the significant effects of the restatement is as follows: For the year ended July 31, ------------------------------------ (in thousands) 2002 2001 -------------- -------------- Cash Flows From Operating Activities Net cash provided by operating activities, as previously reported $152,925 $99,859 Adjustment of cash flows related to accounts receivable securitizations Proceeds from new accounts receivable securitizations 30,000 115,000 Proceeds from collections reinvested in revolving period accounts receivable securitizations 360,677 725,955 Remittances of amounts collected as servicer of accounts receivable securitizations (421,677) (809,955) -------------- -------------- Net cash provided by operating activities, as restated $121,925 $130,859 ============== ============== Cash Flows From Investing Activities Net cash provided by (used in) investing activities, as previously reported $(70,570) $12,736 Adjustment of cash flows related to accounts receivable securitizations 31,000 (31,000) -------------- -------------- Net cash (used in) investing activities, as restated $(39,570) $(18,264) ============== ==============
S. 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, which included two explanatory paragraphs relating to a change in accounting principle and to the restatement described in Note R, dated September 12, 2002 (May 29, 2003 as to Notes E and R). Our audit also included the financial statement schedules listed in Item 15. 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
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