Ferrellgas, Inc and Subsidiaries
Consolidated Balance Sheets as of July 31, 2000 and 1999, and Independent
Auditors' Report
<PAGE>
INDEX TO BALANCE SHEETS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................................................2
Consolidated Balance Sheets - July 31, 2000 and July 31, 1999...........................................3
Notes to Consolidated Balance Sheets....................................................................4
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas, Inc. and Subsidiaries
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas, Inc.
and subsidiaries (the "Company") as of July 31, 2000 and 1999. These balance
sheets are the responsibility of the Company's management. Our responsibility is
to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the balance
sheets are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheets. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheets present fairly, in all material
respects, the financial position of the Company as of July 31, 2000 and 1999, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 16, 2000
2
<PAGE>
FERRELLGAS, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Ferrell Companies, Inc.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
July 31, July 31,
ASSETS 2000 1999
------------- -------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 16,007 $ 35,713
Accounts and notes receivable (net of allowance for doubtful
accounts of $2,388 and $1,296 in 2000 and 1999, respectively) 89,801 58,380
Inventories 71,979 24,645
Prepaid expenses and other current assets 8,275 6,780
------------- -------------
Total Current Assets 186,062 125,518
Property, plant and equipment, net 583,342 477,494
Intangible assets, net 501,836 369,101
Other assets, net 10,425 8,473
------------- -------------
Total Assets $1,281,665 $980,586
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable $ 95,264 $ 60,754
Other current liabilities 77,714 48,443
Short-term borrowings 18,342 20,486
------------- -------------
Total Current Liabilities 191,320 129,683
Long-term debt 718,118 583,840
Deferred income taxes 1,931 2,150
Other liabilities 16,176 12,144
Contingencies and commitments (Note F) - -
Minority interest 179,786 -
Parent investment in subsidiary 228,300 269,069
Stockholder's Equity (Deficiency):
Common stock, $1 par value;
10,000 shares authorized; 990 shares issued 1 1
Additional paid-in-capital 13,361 13,288
Note receivable from parent (146,102) (148,286)
Retained earnings 78,774 119,502
Accumulated other comprehensive income - (805)
------------- -------------
Total Stockholder's Equity (Deficiency) (53,966) (16,300)
------------- -------------
Total Liabilities and Stockholder's Equity (Deficiency) $1,281,665 $980,586
============= =============
See notes to consolidated balance sheets.
3
</TABLE>
<PAGE>
FERRELLGAS, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Ferrell Companies, Inc.)
NOTES TO CONSOLIDATED BALANCE SHEETS
A. Partnership Organization and Formation
The accompanying consolidated balance sheets and related notes present the
consolidated financial position of Ferrellgas, Inc. (the "Company"), its
subsidiaries and its partnership interest in Ferrellgas Partners, L.P and
subsidiaries. The Company is a wholly-owned subsidiary of Ferrell
Companies, Inc. ("Ferrell" or "Parent").
On July 5, 1994, Ferrellgas Partners, L.P. (the "Partnership" or "MLP")
completed an initial public offering of Common Units representing limited
partner interests (the "Common Units"). Ferrellgas Partners, L.P. was
formed April 19, 1994, owning a 99% limited partner interest in Ferrellgas,
L.P. (the "Operating Partnership" or "OLP"). Ferrellgas Partners, L.P. was
formed to acquire and hold a limited partner interest in the Operating
Partnership. The Operating Partnership was formed to own and operate the
propane business and substantially all of the assets of the Company. Both
are Delaware limited partnerships, and are collectively known as the
Partnership.
Concurrent with the closing of the offering, the Company contributed all of
its propane business and assets to the Partnership in exchange for
1,000,000 Common Units, 16,593,721 Subordinated Units and Incentive
Distribution Rights as well as a 2% general partner interest in the
Partnership and the Operating Partnership on a combined basis. Effective
August 1, 1999, the Subordinated Units converted to Common Units, because
certain financial tests, among others, were satisfied by the Partnership
for each of the three consecutive four quarter periods ended on July 31,
1999.
In July 1998, the Company transferred its entire limited partnership
ownership of the MLP to Ferrell. Also during July 1998, 100% of the
outstanding common stock of Ferrell was purchased from Mr. James E. Ferrell
and his family by a newly established leveraged employee stock ownership
trust (the "ESOT") established pursuant to the Ferrell Companies, Inc.
Employee Stock Ownership Plan (the "ESOP"). The purpose of the ESOP is to
provide employees of the Company an opportunity for ownership in Ferrell
and indirectly in the Partnership. As contributions are made by Ferrell to
the ESOP in the future, shares of Ferrell are allocated to employees' ESOP
accounts. As a result of these transactions, the Parent no longer intends
to repay its intercompany note with the Company. The Note Receivable from
Parent is therefore reported in Stockholder's Equity as of July 31, 2000
and 1999.
As a result of the 100% change in ownership of Ferrell, effective July 17,
1998, the Company established a new basis in the net assets of the Company
based on the purchase price paid by the ESOT for the common stock of its
parent, Ferrell. The new basis in the equity of the Company was established
at $10,000,000, which resulted in an increase in the basis of property,
plant and equipment of $73,692,000 and goodwill of $198,620,000.
Amortization on the goodwill, related to the purchase price allocation, is
calculated using the straight-line method based on an estimated useful life
of forty years.
On June 5, 2000, the MLP's and the OLP'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.
Additionally, the General Partner's interest in the MLP's Common Units was
converted from a General Partner interest to General Partner units.
4
<PAGE>
B. Summary of Significant Accounting Policies
(1) Nature of operations: The Company's operations are limited to those
activities associated with the Partnership. The Partnership is engaged
primarily in the sale, distribution, and marketing of propane and other
natural gas liquids throughout 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 1,100,000
residential, industrial/commercial and agricultural customers.
(2) Accounting estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the balance
sheets. Actual results could differ from these estimates. Significant
estimates impacting the balance sheets include reserves that have been
established for product liability and other claims.
(3) Principles of consolidation: The consolidated balance sheets include the
accounts of the Company, its subsidiaries and the Partnership. The minority
interest includes limited partner interests in the MLP's common units held
by the public and in fiscal year 2000 the MLP's Senior Common Units held by
The Williams Companies, Inc. ("Williams") (See Notes G and L). The 50% and
57% limited partner interest in 2000 and 1999, respectively, owned by
Ferrell is reflected as "Parent investment in subsidiary" in the
accompanying balance sheets. All material inter-company balances have been
eliminated.
(4) Cash and cash equivalents: The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
(5) Inventories: Inventories are stated at the lower of cost or market
using average cost and actual cost methods.
(6) Property, plant and equipment and intangible assets: 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 thirty years. Intangible assets,
consisting primarily of customer lists, trademarks, assembled workforce,
goodwill, and non-compete notes, are stated at cost, net of amortization
calculated using the straight-line method over periods ranging from 5 to 40
years. The Company, using its best estimates based on reasonable and
supportable assumptions and projections, reviews for impairment of
long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstances indicate that the carrying
amount of its assets might not be recoverable, and has concluded no
financial statement adjustment is required.
(7) Accounting for derivative commodity contracts: The Company enters into
commodity forward and futures purchase/sale agreements and commodity options
involving propane and related products which are used for risk management
purposes in connection with its trading activities. To the extent such
contracts are entered into at fixed prices and thereby subject the Company
to market risk, the contracts are accounted for using the fair value method.
Under the fair value method, derivatives are carried on the balance sheet at
fair value with changes in that value recognized in earnings. The Company
also enters into commodity options involving propane and related products to
hedge its product cost risk. Any changes in the fair value of hedge
positions are deferred and recognized as an adjustment to the overall
purchase price of product in the settlement month.
5
<PAGE>
(8) Income taxes: For the tax years ended prior to July 31, 1999, the
Company filed consolidated Federal income tax returns with its parent and
affiliates. Income taxes were computed as though each company filed its own
income tax return in accordance with the Company's tax sharing agreement.
Deferred income taxes are provided as a result of temporary differences
between financial and tax reporting as described in Note E, using the
asset/liability method. See Note E for the accounting treatment for deferred
income taxes subsequent to the Subchapter S Corporation election that was
made by Ferrell for the tax year ended July 31, 1999.
(9) Unit and stock-based compensation: The Company accounts for its
Ferrellgas, Inc. Unit Option Plan and the Ferrell Companies Incentive
Compensation Plan under the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees.
(10) Segment information: The Company has determined that it has a single
reportable operating segment, which engages in the distribution of propane
and related equipment and supplies.
(11) Adoption of new accounting standards: The Financial Accounting
Standards Board recently issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, is required to be adopted by the
Partnership beginning in the first quarter of fiscal 2001. SFAS No. 133
requires that all derivative instruments be recorded in the balance sheet at
fair value. The provisions of SFAS No. 133 will impact the Company's
accounting for certain options hedging product cost risk. Under the
provisions of SFAS No. 133, changes in the fair value of certain positions
qualifying as cash flow hedges will be recorded in accumulated other
comprehensive income. Changes in the fair value of certain other positions
not qualifying as hedges under SFAS No. 133 will be recorded in the
consolidated statements of earnings. As a result of these changes in
classification, the Company will recognize in its first quarter of fiscal
2001, gains totaling $709,000 and $299,000 in accumulated other
comprehensive income and the consolidated statement of earnings,
respectively. In addition, beginning in the first quarter of fiscal 2001,
the Company will record 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.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 entitled "Revenue Recognition". The
bulletin, as amended, is to be adopted, no later than the fourth fiscal
quarter of fiscal years commencing after December 15, 1999, with retroactive
adjustment to the first fiscal quarter of that year. Management will
implement this bulletin in the first quarter of fiscal 2001 and believes
that it will have no material affect on the Company's financial position.
C. Supplemental Balance Sheet Information
<TABLE>
<CAPTION>
Inventories consist of:
(in thousands) 2000 1999
-------------- --------------
<S> <C> <C>
Liquefied propane gas and related products $50,868 $15,480
Appliances, parts and supplies 21,111 9,165
-------------- --------------
$71,979 $24,645
============== ==============
</TABLE>
6
<PAGE>
In addition to inventories on hand, the Company enters into contracts to
buy product for supply purposes. Nearly all of these contracts have terms
of less than one year and most call for payment based on market prices at
the date of delivery. All fixed price contracts have terms of less than
one year. As of July 31, 2000, in addition to the inventory on hand, the
Company had committed to take delivery of approximately 98,300,000
gallons at a fixed price for its future retail propane sales.
<TABLE>
<CAPTION>
Property, plant and equipment consist of:
(in thousands) 2000 1999
------------- --------------
<S> <C> <C>
Land and improvements $40,761 $32,776
Buildings and improvements 54,794 43,577
Vehicles 78,490 50,897
Furniture and fixtures 32,844 28,626
Bulk equipment and district facilities 88,289 71,693
Tanks and customer equipment 560,397 496,378
Other 3,753 4,369
------------- --------------
859,328 728,316
Less: accumulated depreciation 275,986 250,822
------------- --------------
$583,342 $477,494
============= ==============
Intangibles consist of:
(in thousands) 2000 1999
------------- --------------
Customer lists $207,478 $145,200
Goodwill 380,474 313,437
Non-compete agreements 59,905 56,234
Trademark 18,500 -
Assembled workforce 9,600 -
Other 391 167
------------- --------------
676,348 515,038
Less: accumulated amortization 174,512 145,937
------------- --------------
$501,836 $369,101
============= ==============
Other current liabilities consist of:
(in thousands) 2000 1999
-------------- -------------
Accrued interest $21,659 $15,065
Accrued payroll 15,073 11,821
Other 40,982 21,557
-------------- -------------
$77,714 $48,443
============== =============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
D. Long-term Debt
Long-term debt consists of:
(in thousands) 2000 1999
------------- ------------
Senior Notes
<S> <C> <C>
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 -
Credit Agreement
Revolving credit loans, 8.9% and 6.0%, respectively, due 2003 (4) 11,658 58,314
Notes payable, 7.5% and 7.3% weighted average interest rates,
respectively, due 2000 to 2010 15,988 18,154
------------- ------------
721,646 586,468
Less: current portion, included in other current liabilities 3,528 2,628
------------- ------------
$718,118 $583,840
============= ============
</TABLE>
(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
Notes may not be prepaid prior to maturity at the option of the
Partnership.
(2) The MLP fixed rate Senior Secured Notes ("MLP Senior Secured Notes"),
issued in April 1996, will be redeemable at the option of the MLP, in whole
or in part, at any time on or after June 15, 2001. The notes are secured by
the MLP's partnership interest in the OLP. The MLP Senior Secured Notes
bear interest from the date of issuance, payable semi-annually in arrears
on June 15 and December 15 of each year. Due to a change of control in the
ownership of the General Partner on July 17, 1998 as a result of the ESOP
transaction described in Note A, the MLP was required, pursuant to the MLP
fixed rate Senior Secured Note Indenture, to offer to purchase the
outstanding MLP fixed rate Senior Secured Notes at a price of 101% of the
principal amount thereof plus accrued and unpaid interest. The offer to
purchase was made on July 27, 1998 and expired August 26, 1998. Upon the
expiration of the offer, the MLP accepted for purchase $65,000 of the notes
which were all of the notes tendered pursuant to the offer. The MLP
assigned its right to purchase the notes to a third party, thus the notes
remain outstanding.
(3) The OLP fixed rate Senior Notes ("$184 million Senior Notes"), issued in
February 2000, are general unsecured obligations of the OLP and rank on an
equal basis in right of payment with all senior indebtedness of the OLP and
senior to all subordinated indebtedness of the OLP. The outstanding
principal amount of the Series A, B and C Notes shall be due on August 1,
2006, 2007 and 2009, respectively. In general, the Notes may not be prepaid
prior to maturity at the option of the Partnership.
8
<PAGE>
(4) At July 31, 2000, 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
percent to 2.25 percent or, b) the bank's base rate plus an applicable
margin varying from 0.25 percent to 1.25 percent. The bank's base rate at
July 31, 2000 and 1999 was 9.5% and 8.0%, respectively. To offset the
variable rate characteristic of the Credit Facility, the OLP entered into a
interest rate collar agreement, expiring January 2001, with a major bank
limiting the floating rate portion of LIBOR-based loan interest rates on a
notional amount of $25,000,000 to between 5.05% and 6.5%.
On December 17, 1999, in connection with the purchase of Thermogas, LLC
("Thermogas acquisition") (see Note L), the OLP assumed a $183,000,000
bridge loan that was originally issued by Thermogas, LLC ("Thermogas") and
had a maturity date of June 30, 2000. On February 28, 2000, the OLP issued
$184,000,000 Senior Notes at an average interest rate of 8.8% in order to
refinance the $183,000,000 bridge loan. The additional $1,000,000 in
borrowings was used to fund debt issuance costs.
On December 17, 1999, in connection with the Thermogas acquisition, the OLP
paid off the balance remaining of $35,000,000 then outstanding on its
$38,000,000 unsecured credit facility used for acquisitions, capital
expenditures, and general corporate purposes. This outstanding credit
facility was then terminated. On April 18, 2000, the OLP entered into an
amended and restated Credit Facility with a group of financial institutions.
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 MLP Senior Secured Notes. The Swap
Agreement, which expires June 15, 2006, requires Bank of America to pay an
amount based on the stated fixed interest rate (annual rate 9.375%) pursuant
to the MLP Senior Secured Notes equaling $7,500,000 every six months due on
each June 15 and December 15. In exchange, the Partnership is 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.
At July 31, 2000 and 1999, $18,342,000 and $20,486,000, respectively, of
short-term borrowings were outstanding under the credit facility and letters
of credit outstanding, used primarily to secure obligations under certain
insurance arrangements, totaled $36,892,000 and $32,178,000, respectively.
The MLP Senior Secured Notes, the $350 million and $184 million Senior Notes
and the Credit Facility Agreement contain various restrictive covenants
applicable to the MLP and OLP and its subsidiaries, the most restrictive
relating to additional indebtedness, sale and disposition of assets, and
transactions with affiliates. In addition, the Partnership is prohibited
from making cash distributions of the Minimum Quarterly Distribution if a
default or event of default exists or would exist upon making such
distribution, or if the Partnership fails to meet certain coverage tests.
The Partnership is in compliance with all requirements, tests, limitations
and covenants related to the Senior Secured Note Indenture and the Senior
Note Indentures. The Senior Notes and the Credit Facility agreement have
similar restrictive covenants to the Senior Note Indenture and credit
facility agreement that were replaced.
The annual principal payments on long-term debt are $3,528,000 in 2001,
$2,126,000 in 2002, $1,943,000 in 2003, $2,086,000 in 2004, $2,234,000 in
2005 and $709,729,000 thereafter.
9
<PAGE>
E. Income Taxes
[OBJECT OMITTED]The significant components of the net deferred tax asset
(liability) included in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
------------- -------------
Deferred tax liabilities:
<S> <C> <C>
Partnership basis difference $(2,043) $(2,260)
------------- -------------
Total deferred tax liabilities (2,043) (2,260)
Deferred tax assets:
Operating loss and credit carryforwards 112 110
------------- -------------
Total deferred tax assets 112 110
------------- -------------
Net deferred tax liability $(1,931) $(2,150)
============= =============
</TABLE>
In connection with the public offering described in Note A, the Company's
tax basis in the assets and liabilities contributed became its tax basis in
the units received. Partnership basis differences are primarily
attributable to differences in the tax and book basis of fixed assets and
amortizable intangibles.
For Federal income tax purposes, the Company has net operating loss
carryforwards of approximately $102,000,000 at July 31, 2000 available to
offset future taxable income. These net operating loss carryforwards expire
at various dates through 2011.
The Company's parent, Ferrell, elected Subchapter S status for federal
income tax purposes, effective August 1, 1998. In conjunction with this
election, Ferrell elected to treat the Company as a qualified Subchapter S
subsidiary. For federal income tax purposes, the Company was deemed
liquidated into the parent on July 31, 1998. As a result of these
elections, Ferrell and its subsidiaries will no longer be liable for
federal income tax; however, they may be liable for tax in states that do
not recognize Subchapter S status. Thus, the deferred tax liability balance
relating to federal income tax was eliminated and recognized as income from
continuing operations during fiscal 1999.
The Company is potentially subject to the built-in gains tax, which could
be incurred on the sale of assets owned as of August 1, 1998, that have a
fair market value in excess of their tax basis as of that date. However,
the Company anticipates that it can avoid incurring any built-in gains tax
liability through utilization of its net operating loss carryovers and tax
planning relating to the retention/ disposition of assets owned as of
August 1, 1998. In the event that the built-in gains tax is not incurred,
the Company may not utilize the net operating loss carryforwards.
10
<PAGE>
F. Contingencies and Commitments
The Company is threatened with or named as a defendant in various lawsuits
that, among other items, claim damages for product liability. It is not
possible to determine the ultimate disposition of these matters; however,
management is of the opinion that there are no known claims or contingent
claims that are likely to have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
On December 6, 1999, the OLP entered into, with Banc of America Leasing &
Capital LLC, a $25,000,000 operating tank 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 L), Thermogas entered into, with Banc of America
Leasing & Capital LLC, a $135,000,000 operating tank 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 tank lease, which has terms and conditions similar to the
December 6, 1999, $25,000,000 operating tank lease discussed above.
Effective June 2, 2000, the OLP entered into an interest rate cap agreement
("Cap Agreement") with Bank of America, related to variable quarterly rent
payments due pursuant to two operating tank lease agreements. The variable
quarterly rent payments are determined based upon a floating LIBOR based
interest rate. The Cap Agreement, which expires June 30, 2003, requires
Bank of America to pay the OLP at the end of each March, June, September
and December the excess, if any, of the applicable 3 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, 2000 was
$159,200,000.
Certain property and equipment is leased under noncancellable operating
leases which require fixed monthly rental payments and which expire at
various dates through 2020. Future minimum lease commitments for such
leases in the next five years are $37,166,000 in 2001, $33,882,000 in 2002,
$28,358,000 in 2003, $7,431,000 in 2004, and $4,868,000 in 2005.
In addition to the future minimum lease commitments, the Company plans to
purchase vehicles at the end of their lease term totaling $1,364,000 in
2001, $203,000 in 2002 and $143,000 in 2003. The Partnership intends to
renew other vehicle and tank leases that would have had buyouts of $452,000
in 2001, $7,057,000 in 2002, $162,569,000 in 2003, $4,981,000 in 2004 and
$4,086,000 in 2005.
G. Minority Interest
The minority interest on the consolidated balance sheets includes limited
partner interests in the MLP's common units held by the public and in
fiscal year 2000 the MLP's Senior Common Units held by Williams. At July
31, 2000 and 1999, minority interest related to the common units owned by
the public is zero as cash distributions were in excess of its basis. All
distributions in excess of basis were recorded in minority interest on the
consolidated statements of earnings in 2000 and 1999. Minority interest
related to the Senior Common Units is $179,786,000 at July 31, 2000, which
represents the sum of the book value of the units issued to Williams, the
accretion of the related discount and the paid in kind distributions.
The paid in kind distribution to Williams and the accretion of the original
discount, which represents the fees paid by the Partnership related to the
issuance of the Senior Common Units, is allocated to the Company based on
its ownership percentage of the MLP. In fiscal year 2000, this resulted in
11
<PAGE>
an allocation to the Company's additional paid in capital of $111,000 for
the accrued paid in kind distribution and $28,000 for the accretion of the
discount.
H. Employee Benefits
On July 17, 1998, Ferrell formed an Employee Stock Ownership Plan ("ESOP").
Ferrell makes contributions to the ESOT which causes a release of 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 Ferrell, equivalent
to the fair value of such shares allocated.
The Company and its parent have a defined contribution profit-sharing plan,
which covers substantially all employees with more than one year of
service. Contributions are made to the plan at the discretion of Ferrell's
Board of Directors. With the establishment of the ESOP in July 1998, the
Board of Directors suspended future contributions to the profit sharing
plan beginning with fiscal year 1998. The profit sharing 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.
I. Unit Options of the Partnership and Stock Options of Ferrell Companies,Inc.
The Ferrellgas, Inc. Unit Option Plan (the "Unit Option Plan") currently
authorizes the issuance of options (the "Unit Options") covering up to
850,000 of the MLP's units to certain officers and employees of the General
Partner. Effective August 1, 1999, with the conversion of the Subordinated
Units, the units covered by the options are Common Units. The Unit Options
are exercisable at exercise prices ranging from $16.80 to $21.67 per unit,
which was an estimate of the fair market value of the Subordinated Units at
the time of the grant. The options vest immediately or over a one to five
year period, and expire on the tenth anniversary of the date of the grant.
<TABLE>
<CAPTION>
Number Weighted Average Weighted
Of Exercise Price Average Fair
Units Value
------------- ------------------- ---------------
<S> <C> <C> <C>
Outstanding, July 31, 1999 781,025 $18.23
Granted - - -
Forfeited (60,500) 19.38
-------------
Outstanding, July 31, 2000 720,525 18.13
-------------
Options exercisable, July 31, 2000 546,875 17.57
-------------
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at July 31, 2000
-------------------------------------------------
<S> <C> <C>
Range of option prices at end of year $16.80-$21.67
Weighted average remaining contractual life 5.3 Years
</TABLE>
The Ferrell Companies, Inc. nonqualified stock option plan (the "NQP") was
established by Ferrell Companies, Inc. ("Ferrell") to allow upper middle
and senior level managers of the General Partner to participate in the
equity growth of Ferrell and, indirectly in the equity growth of the
Partnership. The shares underlying the stock options are common shares of
Ferrell, therefore, there is no potential dilution of the Partnership. The
Ferrell NQP stock options vest ratably in 5% to 10% increments over 12
years or 100% upon a change of control, death, disability or retirement 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.
12
<PAGE>
J. Transactions with Related Parties
The Company has two notes receivable from Ferrell on an unsecured basis due
on demand. Because Ferrell no longer intends to repay the notes, the
Company did not accrue interest income in fiscal years 2000 and 1999. The
balances outstanding on these notes at July 31, 2000 and July 31, 1999,
were $146,102,000, and $148,286,000, respectively. This net decrease in the
balances in fiscal year 2000 is primarily due to the cash received by the
Company from Ferrell so that the Company could make cash contributions to
the MLP and the OLP. These cash contributions were made by the Company in
connection with the MLP's issuance of Senior Common Units and allowed the
Company to maintain its 1% and 1.0101% General Partner interest in the MLP
and OLP, respectively (See Note L). As discussed in Note A, the Note
Receivable from Parent is reported in Stockholder's Equity (Deficiency) as
of July 31, 2000 and 1999.
During fiscal 2000, Williams became a related party to the Company due to
the Partnership's issuance of Senior Common Units to Williams (See Note L).
Amounts due to Williams at July 31, 2000 were $5,045,000. Amounts due from
Williams at July 31, 2000 were $13,000.
Ferrell International Limited and Ferrell Resources, LLC, two affiliates of
the Company, are owned by the General Partner's chairman of the board,
chief executive officer and president James E. Ferrell. Amounts due from
Ferrell International Limited at July 31, 2000 and 1999 were $1,826,000 and
$2,531,000, respectively. Amounts due to Ferrell International Limited at
July 31, 2000 and 1999 were $1,484,000 and $3,377,000, respectively.
K. Disclosures About Off Balance Sheet Risk, Fair Value of Financial
Instruments and Derivatives
The carrying amount of current financial instruments approximates fair
value because of the short maturity of the instruments. The estimated fair
value of the Company's long-term debt was $698,082,000 and $568,459,000 as
of July 31, 2000 and 1999, respectively. The fair value is estimated based
on quoted market prices.
Interest Rate Collar, Cap and Swap Agreements. The Company 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. At July 31, 2000
and 1999, total notional principal amount of the interest rate collar
agreement was $25,000,000. At July 31, 2000, total notional principal
amounts of the cap and swap agreements were $159,200,000 and $160,000,000,
respectively. The counterparties to these agreements are large financial
institutions. The interest rate collar and swap agreements subject the
Company to financial risk that will vary during the life of these
agreements in relation to market interest rates. The fair values for these
off-balance sheet financial instruments at July 31, 2000 are as follows:
Interest rate collar - $43,000; interest rate cap - $(258,000); and
interest rate swap - $(561,000).
Option Commodity Contracts. The Company is a party to certain option
contracts, involving various liquefied petroleum products, for risk
management purposes in connection with its risk management activities.
Certain option contracts held by the Company meet the criteria for
classification as hedges of forecasted transactions that will occur in less
than one year. Net gains deferred for option contracts accounted for as
hedges were $1,008,000 at July 31, 2000. Contracts are executed with
private counterparties and to a lesser extent on national mercantile
exchanges. Open contract positions are summarized below.
13
<PAGE>
Forward, Futures and Swaps Commodity Contracts. In connection with its risk
management activities, the Company is a party to certain forward, futures
and swaps contracts for trading purposes. Such contracts do not meet the
criteria for classification as hedge transactions. Such contracts permit
settlement by delivery of the commodity. Open contract positions are
summarized below (assets are defined as purchases or long positions and
liabilities are sales or short positions).
<TABLE>
<CAPTION>
As of July 31
(In thousands, except price per gallon data)
Dirivative Commodity
Derivative Commodity Instruments Held for Instruments Held for
Purposes Other than Trading Trading Purposes
(Options) (Forward, Futures and Swaps)
------------------------------------------- ---------------------------------------------------
2000 1999 2000 1999
-------------------- ------------------- ----------------------- -----------------------
Asset Liab. Asset Liab. Asset Liab. Asset Liab.
------------------- ------- ---------- ---------------------- ----------------------
Volume
Volume
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(gallons) 107,069 (50,526) 3,245 (22,648) 6,056,726 (5,903,184) 2,814,698 (2,720,295)
Price ((cent)/gal) 37-62 37-75 23-39 27-55 42-84 45-95 19-49 19-49
Maturity 8/00- 8/00- 8/99-3/00 8/99-3/00 8/00- 8/00-12/01 8/99-12/01 8/99-
Dates 12/01 12/01 12/01 12/01
Contract
Amounts ($) 111,688 (63,193) 10,775 (13,973) 4,528,216 (4,476,361) 1,232,209 (1,215,341)
Fair Value ($) 113,728 (64,168) 10,941 (15,850) 4,526,076 (4,474,314) 1,337,924 (1,318,526)
Unrealized gain
(loss) ($) 2,040 (975) 166 (1,877) (2,140) 2,047 105,715 (103,185)
</TABLE>
Risks related to these contracts arise from the possible inability of the
counterparties to meet the terms of their contracts and changes in
underlying product prices. The Company attempts to minimize market risk
through the enforcement of its trading policies, which include total
inventory limits and loss limits, and attempts to minimize credit risk
through application of its credit policies.
L. Business Combinations
On December 17, 1999, the Partnership purchased Thermogas LLC from Williams
Natural Gas Liquids, Inc., a subsidiary of The Williams Companies, Inc. At
closing the Partnership entered into the following non-cash transactions: a)
issued $175,000,000 in Senior Common Units to the seller, b) assumed a
$183,000,000 bridge loan, (see Note D) and c) assumed a $135,000,000
operating tank lease (see Note F). 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 has
paid $15,893,000 in additional costs and fees related to the acquisition
between December 17, 1999 and July 31, 2000. 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.
14
<PAGE>
The total assets contributed to the OLP (at the Partnership's cost basis)
have been preliminarily allocated as follows: (a) working capital of
$14,800,000, (b) property, plant and equipment of $145,711,000, (c)
$60,200,000 to customer list with an estimated useful life of 15 years, (d)
$18,500,000 to trademarks with an estimated useful life of 15 years (e)
$9,600,000 to assembled workforce with an estimated useful life of 15
years, (f) $3,071,000 to non-compete agreements with an estimated useful
lives ranging from one to seven years, and (g) $65,589,000 to goodwill at
an estimated useful life of 15 years. The estimated fair values and useful
lives of assets acquired are based on a preliminary valuation and are
subject to final valuation adjustments. The Partnership has accrued
$7,033,000 in involuntary employee termination benefits and exit costs,
which it expects to incur within twelve months from the acquisition date as
it implements 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. As of July 31, 2000, the Partnership has paid
$1,306,000 for termination benefits and $890,000 for exit costs. The
Partnership intends to continue its analysis of the net assets of Thermogas
to determine the final allocation of the total purchase price to the
various assets acquired. The transaction has been 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.
During the year ended July 31, 2000, the Partnership made acquisitions of
two other businesses valued at $7,183,000. This amount was funded by
$6,338,000 cash payments, $601,000 of non-compete notes, $46,000 in Common
Units of the MLP and $198,000 in other costs and consideration.
During the year ended July 31, 1999, the Partnership made acquisitions of
11 businesses valued at $50,049,000. This amount was funded by $43,838,000
cash payments, $199,000 in Common Units of the MLP and non-cash
transactions totaling $6,012,000 which includes the issuance of non-compete
notes and other costs and consideration.
All transactions have been 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.
M. Subsequent Event (unaudited)
On September 26, 2000, Ferrellgas, L.P. received $20,000,000 in cash in
exchange for the sale and contribution of a $25,000,000 interest in a pool
of its trade accounts receivable to its newly created, wholly-owned,
special purpose subsidiary, Ferrellgas Receivables, LLC. Ferrellgas
Receivables, LLC then sold the interest to a commercial paper conduit of
Banc One, NA in accordance with the terms of a 364 day agreement. The level
of funding available from this agreement is limited to $60,000,000. In
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," ("SFAS No. 125") this
transaction will initially be reflected on the financial statements as a
sale of accounts receivable and contribution of capital in the first
quarter of fiscal 2001. Additionally, in accordance with SFAS No. 125,
Ferrellgas Receivables, LLC will be accounted for by the Partnership using
the equity method of accounting, thus it results will not be consolidated
into the results of the Partnership. The proceeds of these sales are less
than the face amount of accounts receivable sold by an amount that
approximates the purchaser's financing cost of issuing its own commercial
paper backed by these accounts receivable.
15
