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FGP Ferrellgas L P

Filed: 15 Dec 20, 7:13am

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2020

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: 001-11331, 333-06693-02, 000-50182 and 000-50183

Ferrellgas Partners, L.P.

Ferrellgas Partners Finance Corp.

Ferrellgas, L.P.

Ferrellgas Finance Corp.

(Exact name of registrants as specified in their charters)

Delaware

43-1698480

Delaware

43-1742520

Delaware

43-1698481

Delaware

14-1866671

(States or other jurisdictions of incorporation or organization)

(I.R.S. Employer Identification Nos.)

7500 College Boulevard,
Suite 1000, Overland Park, Kansas

66210

(Address of principal executive office)

(Zip Code)

Registrants’ telephone number, including area code: (913) 661-1500

Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “Large Accelerated Filer,” “Accelerated Filer,” “Smaller Reporting Company,” and “Emerging Growth Company” in Rule 12b-2 of the Exchange Act.

Ferrellgas Partners, L.P.:

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

Ferrellgas Partners Finance Corp, Ferrellgas, L.P. and Ferrellgas Finance Corp.:

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Ferrellgas Partners, L.P. and Ferrellgas, L.P.

Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp.

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

Ferrellgas Partners, L.P. and Ferrellgas, L.P. Yes  No 

Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. Yes  No 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

N/A

N/A

N/A

At November 30, 2020, the registrants had common units or shares of common stock outstanding as follows:

Ferrellgas Partners, L.P.

97,152,665

Common Units

Ferrellgas Partners Finance Corp.

1,000

Common Stock

Ferrellgas, L.P.

n/a

n/a

Ferrellgas Finance Corp.

1,000

Common Stock

Documents Incorporated by Reference: None

EACH OF FERRELLGAS PARTNERS FINANCE CORP. AND FERRELLGAS FINANCE CORP. MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND ARE THEREFORE, WITH RESPECT TO EACH SUCH REGISTRANT, FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.


FERRELLGAS PARTNERS, L.P.

FERRELLGAS PARTNERS FINANCE CORP.

FERRELLGAS, L.P.

FERRELLGAS FINANCE CORP.

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (unaudited)

Ferrellgas Partners, L.P. and Subsidiaries

Condensed Consolidated Balance Sheets – October 31, 2020 and July 31, 2020

3

Condensed Consolidated Statements of Operations – Three months ended October 31, 2020 and 2019

4

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three months ended October 31, 2020 and 2019

5

Condensed Consolidated Statement of Partners’ Deficit – Three months ended October 31, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows – Three months ended October 31, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

Ferrellgas Partners Finance Corp.

Condensed Balance Sheets – October 31, 2020 and July 31, 2020

25

Condensed Statements of Operations – Three months ended October 31, 2020 and 2019

26

Condensed Statements of Cash Flows – Three months ended October 31, 2020 and 2019

27

Notes to Condensed Financial Statements

28

Ferrellgas, L.P. and Subsidiaries

Condensed Consolidated Balance Sheets – October 31, 2020 and July 31, 2020

30

Condensed Consolidated Statements of Operations – Three months ended October 31, 2020 and 2019

31

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three months ended October 31, 2020 and 2019

32

Condensed Consolidated Statement of Partners’ Deficit – Three months ended October 31, 2020 and 2019

33

Condensed Consolidated Statements of Cash Flows – Three months ended October 31, 2020 and 2019

34

Notes to Condensed Consolidated Financial Statements

35

Ferrellgas Finance Corp.

Condensed Balance Sheets – October 31, 2020 and July 31, 2020

57

Condensed Statements of Operations – Three months ended October 31, 2020 and 2019

58

Condensed Statements of Cash Flows – Three months ended October 31, 2020 and 2019

59

Notes to Condensed Financial Statements

60

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

62

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

79

ITEM 4.

CONTROLS AND PROCEDURES

80

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

81

ITEM 1A.

RISK FACTORS

81

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

81

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

81

ITEM 4.

MINE SAFETY DISCLOSURES

81

ITEM 5.

OTHER INFORMATION

81

ITEM 6.

EXHIBITS

83

2


PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (unaudited)

FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except unit data)

(unaudited)

    

October 31, 2020

    

July 31, 2020

ASSETS

Current assets:

Cash and cash equivalents (including $96,909 and $95,759 of restricted cash at October 31, 2020 and July 31, 2020, respectively)

$

299,527

$

333,761

Accounts and notes receivable, net (including $120,261 and $103,703 of accounts receivable pledged as collateral at October 31, 2020 and July 31, 2020, respectively)

 

119,488

 

101,438

Inventories

 

78,980

 

72,664

Prepaid expenses and other current assets

 

40,088

 

35,944

Total current assets

 

538,083

 

543,807

 

  

 

  

Property, plant and equipment, net

 

592,132

 

591,042

Goodwill, net

 

246,946

 

247,195

Intangible assets (net of accumulated amortization of $425,426 and $423,290 at October 31, 2020 and July 31, 2020, respectively)

 

101,812

 

104,049

Operating lease right-of-use assets

100,349

107,349

Other assets, net

 

73,522

 

74,748

Total assets

$

1,652,844

$

1,668,190

 

  

 

  

LIABILITIES AND PARTNERS' DEFICIT

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

44,641

$

33,944

Current portion of long-term debt

859,095

859,095

Current operating lease liabilities

28,280

29,345

Other current liabilities

 

186,938

 

167,466

Total current liabilities

1,118,954

1,089,850

 

  

 

  

Long-term debt

 

1,647,106

 

1,646,396

Operating lease liabilities

83,337

89,022

Other liabilities

 

49,543

 

51,190

Contingencies and commitments (Note L)

 

 

 

  

 

  

Partners' deficit:

 

  

 

  

Common unitholders (97,152,665 units outstanding at October 31, 2020 and July 31, 2020)

 

(1,171,359)

 

(1,126,452)

General partner unitholder (989,926 units outstanding at October 31, 2020 and July 31, 2020)

 

(71,741)

 

(71,287)

Accumulated other comprehensive income (loss)

 

5,534

 

(2,303)

Total Ferrellgas Partners, L.P. partners' deficit

 

(1,237,566)

 

(1,200,042)

Noncontrolling interest

 

(8,530)

 

(8,226)

Total partners' deficit

 

(1,246,096)

 

(1,208,268)

Total liabilities and partners' deficit

$

1,652,844

$

1,668,190

See notes to condensed consolidated financial statements.

3


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except unit data)

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

    

 

Revenues:

Propane and other gas liquids sales

$

281,049

$

273,385

Other

 

19,845

 

19,829

Total revenues

 

300,894

 

293,214

 

 

  

Costs and expenses:

 

 

  

Cost of sales - propane and other gas liquids sales

 

137,627

 

134,028

Cost of sales - other

 

3,667

 

3,681

Operating expense - personnel, vehicle, plant and other

 

109,027

 

114,543

Operating expense - equipment lease expense

6,830

8,388

Depreciation and amortization expense

 

21,390

 

19,219

General and administrative expense

 

13,080

 

9,695

Non-cash employee stock ownership plan compensation charge

 

708

 

795

Loss on asset sales and disposals

 

813

 

2,235

 

 

  

Operating income

 

7,752

 

630

Interest expense

 

(54,226)

 

(45,697)

Other income (expense), net

 

108

 

(132)

Loss before income taxes

 

(46,366)

 

(45,199)

Income tax expense

 

87

 

518

Net loss

 

(46,453)

 

(45,717)

Net loss attributable to noncontrolling interest

 

(391)

 

(373)

Net loss attributable to Ferrellgas Partners, L.P.

 

(46,062)

 

(45,344)

Less: General partner's interest in net loss

 

(461)

 

(453)

Common unitholders' interest in net loss

$

(45,601)

$

(44,891)

Basic and diluted net loss per common unit

$

(0.47)

$

(0.46)

See notes to condensed consolidated financial statements.

4


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

 

Net loss

$

(46,453)

$

(45,717)

Other comprehensive income (loss):

Change in value of risk management derivatives

 

5,767

 

(13,627)

Reclassification of losses on derivatives to earnings, net

 

2,150

 

7,479

Other comprehensive income (loss)

 

7,917

 

(6,148)

Comprehensive loss

 

(38,536)

 

(51,865)

Less: Comprehensive loss attributable to noncontrolling interest

 

(311)

 

(435)

Comprehensive loss attributable to Ferrellgas Partners, L.P.

$

(38,225)

$

(51,430)

See notes to condensed consolidated financial statements.

5


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ DEFICIT

(in thousands)

(unaudited)

    

Number of units

    

    

    

Accumulated

    

Total Ferrellgas

    

    

General

General

other

Partner, L.P.

Common

partner

Common

partner

comprehensive

partners’

Non-controlling

Total partners’

    

unitholders

    

unitholder

    

unitholders

    

unitholder

    

income (loss)

    

deficit

    

interest

    

deficit

Balance at July 31, 2020

 

97,152.7

 

989.9

$

(1,126,452)

$

(71,287)

$

(2,303)

$

(1,200,042)

$

(8,226)

$

(1,208,268)

Contributions in connection with non-cash ESOP compensation charges

 

 

 

694

 

7

 

 

701

 

7

 

708

Net loss

 

 

 

(45,601)

 

(461)

 

 

(46,062)

 

(391)

 

(46,453)

Other comprehensive income

 

 

 

 

 

7,837

 

7,837

 

80

 

7,917

Balance at October 31, 2020

 

97,152.7

 

989.9

 

(1,171,359)

 

(71,741)

 

5,534

 

(1,237,566)

 

(8,530)

 

(1,246,096)

    

Number of units

    

    

    

Accumulated

    

Total Ferrellgas

    

    

General

General

other

Partner, L.P.

Common

partner

Common

partner

comprehensive

partners’

Non-controlling

Total partners’

    

unitholders

    

unitholder

    

unitholders

    

unitholder

    

loss

    

deficit

    

interest

    

deficit

Balance at July 31, 2019

 

97,152.7

 

989.9

$

(1,046,245)

$

(70,476)

$

(14,512)

$

(1,131,233)

$

(7,705)

$

(1,138,938)

Contributions in connection with non-cash ESOP and stock and unit-based compensation charges

 

 

 

779

 

8

 

 

787

 

8

 

795

Distributions

 

 

 

 

 

 

 

(1)

 

(1)

Cumulative adjustment for lease accounting standard

 

 

 

(1,347)

 

(14)

 

 

(1,361)

 

(14)

 

(1,375)

Net loss

 

 

 

(44,891)

 

(453)

 

 

(45,344)

 

(373)

 

(45,717)

Other comprehensive loss

 

 

 

 

 

(6,086)

 

(6,086)

 

(62)

 

(6,148)

Balance at October 31, 2019

 

97,152.7

 

989.9

 

(1,091,704)

 

(70,935)

 

(20,598)

 

(1,183,237)

 

(8,147)

 

(1,191,384)

See notes to condensed consolidated financial statements.

6


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

Cash flows from operating activities:

  

  

Net loss

$

(46,453)

$

(45,717)

Reconciliation of net loss to net cash provided by (used in) operating activities:

 

  

 

  

Depreciation and amortization expense

 

21,390

 

19,219

Non-cash employee stock ownership plan compensation charge

 

708

 

795

Loss on asset sales and disposals

 

813

 

2,235

Provision for doubtful accounts

 

678

 

665

Deferred income tax expense (benefit)

 

(1)

 

554

Other

 

2,346

 

3,450

Changes in operating assets and liabilities, net of effects from business acquisitions:

 

 

  

Accounts and notes receivable, net of securitization

 

(18,728)

 

(14,410)

Inventories

 

(6,316)

 

(4,541)

Prepaid expenses and other current assets

 

(334)

 

(8,008)

Accounts payable

 

10,479

 

11,360

Accrued interest expense

 

14,827

 

34,167

Other current liabilities

 

6,154

 

8,214

Other assets and liabilities

 

2,946

 

(872)

Net cash provided by (used in) operating activities

 

(11,491)

 

7,111

 

  

 

  

Cash flows from investing activities:

 

  

 

  

Business acquisitions, net of cash acquired

 

 

(6,400)

Capital expenditures

 

(19,454)

 

(18,126)

Proceeds from sale of assets

 

1,407

 

835

Cash payments to construct assets in connection with future lease transactions

(16,879)

Cash receipts in connection with leased vehicles

5,863

Net cash used in investing activities

 

(18,047)

 

(34,707)

 

  

 

  

Cash flows from financing activities:

 

  

 

  

Payments on long-term debt

 

(696)

 

(512)

Net additions to short-term borrowings

 

 

37,000

Net additions to collateralized short-term borrowings

 

 

11,000

Cash paid for financing costs

 

(2,297)

 

(1,102)

Noncontrolling interest activity

 

 

(1)

Cash payments for principal portion of finance lease liability

 

(1,703)

 

(38)

Net cash provided by (used in) financing activities

 

(4,696)

 

46,347

 

  

 

  

Net change in cash and cash equivalents

 

(34,234)

 

18,751

Cash and cash equivalents - beginning of period

 

333,761

 

11,054

Cash, cash equivalents and restricted cash - end of period

$

299,527

$

29,805

See notes to condensed consolidated financial statements.

7


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per unit data, unless otherwise designated)

(unaudited)

A.    Partnership organization and formation

Ferrellgas Partners, L.P. (“Ferrellgas Partners”) was formed on April 19, 1994, and is a publicly traded limited partnership, owning an approximate 99% limited partner interest in Ferrellgas, L.P. (the “operating partnership”). Ferrellgas Partners and the operating partnership, collectively referred to as “Ferrellgas,” are both Delaware limited partnerships and are governed by their respective partnership agreements. Ferrellgas Partners was formed to acquire and hold a limited partner interest in the operating partnership. As of October 31, 2020, Ferrell Companies, Inc., a Kansas corporation (“Ferrell Companies”), beneficially owns 22.8 million of Ferrellgas Partners’ outstanding common units.

Ferrellgas, Inc., a Delaware corporation and a wholly-owned subsidiary of Ferrell Companies, is the sole general partner of Ferrellgas Partners and one of three general partners of the operating partnership. Ferrellgas, Inc. has retained an approximate 1% general partner economic interest in Ferrellgas Partners and also holds an approximate 1% general partner economic interest in the operating partnership, representing an effective 2% general partner economic interest in Ferrellgas on a combined basis. As the sole general partner of Ferrellgas Partners, Ferrellgas, Inc. performs all management functions required by Ferrellgas Partners. Unless contractually provided for, creditors of the operating partnership have no recourse with regards to Ferrellgas Partners.

The term “general partner” (i) with respect to Ferrellgas Partners refers to Ferrellgas, Inc. and (ii) with respect to the operating partnership refers to (a) Ferrellgas, Inc., in the case of any economic general partner interest and (b) Ferrellgas, Inc., Ferrellgas GP II, LLC and Ferrellgas GP III, LLC, collectively, in the case of any voting general partner interest.

Ferrellgas Partners is a holding entity that conducts no operations and has two subsidiaries, Ferrellgas Partners Finance Corp. and the operating partnership. Ferrellgas Partners owns a 100% equity interest in Ferrellgas Partners Finance Corp., whose only business activity is to act as the co-issuer and co-obligor of any debt issued by Ferrellgas Partners. The operating partnership is the only operating subsidiary of Ferrellgas Partners.

Ferrellgas is primarily engaged in the retail distribution of propane and related equipment sales. The propane distribution market is seasonal because propane is used primarily for heating in residential and commercial buildings. Ferrellgas serves residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia, and Puerto Rico.

Due to seasonality, the results of operations for the three months ended October 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year ending July 30, 2021.

The condensed consolidated financial statements of Ferrellgas reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim periods presented. All adjustments to the condensed consolidated financial statements were of a normal recurring nature. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with (i) the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) the consolidated financial statements and accompanying notes included in Ferrellgas’ Annual Report on Form 10-K for fiscal 2020.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. Ferrellgas Partners has $357.0 million in unsecured notes due June 15, 2020, which Ferrellgas Partners failed to repay, that are classified as current in the condensed consolidated financial statements. Additionally, Ferrellgas, L.P. has $500.0 million in unsecured notes due May 1, 2021, that are also classified as current in the condensed consolidated financial statements. The ability of Ferrellgas Partners to restructure, refinance or otherwise satisfy these notes is uncertain considering the level of other outstanding indebtedness. Given these concerns, Ferrellgas Partners believes there is substantial doubt about the entity’s ability to continue as a going concern. Ferrellgas has engaged Moelis & Company LLC as its financial advisor and the law firm of Squire Patton Boggs LLP to assist in its ongoing process to reduce existing debt and address its debt maturities. On December 10, 2020, Ferrellgas Partners, Ferrellgas

8


Partners Finance Corp., the operating partnership and additional Ferrellgas entities entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. There is no assurance that the transactions contemplated by the TSA will be consummated and the outcome of Ferrellgas’ debt reduction strategy continues to remain uncertain. See Note N – Subsequent Events, for a discussion of the TSA and the transactions contemplated thereunder. Additionally, see Note F – Debt below for further discussion of the outstanding debt.

B.    Summary of significant accounting policies

(1) 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 condensed consolidated financial statements include accruals that have been established for contingent liabilities, pending claims and legal actions arising in the normal course of business, useful lives of property, plant and equipment, residual values of tanks, capitalization of customer tank installation costs, amortization methods of intangible assets, valuation methods used to value sales returns and allowances, allowance for expected credit losses, fair value of reporting units, recoverability of long-lived assets, assumptions used to value business combinations, determination of incremental borrowing rate used to measure right-of-use asset and lease liability, fair values of derivative contracts and stock-based compensation calculations.

Update to accounting estimates:

On August 1, 2020 Ferrellgas adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326). As a result, we updated our significant accounting policies for the measurement of expected credit losses below.

Allowance for expected credit losses

Ferrellgas closely monitors accounts receivable balances and estimates the allowance for expected credit losses. The estimate is primarily based on historical collection experience and other factors, including those related to current market conditions and events. The expected credit losses associated with accounts receivable have not historically been material and the adoption impact on Ferrellgas’ allowance for expected credit losses was immaterial as of October 31, 2020.

(2) New accounting standards:

FASB Accounting Standard Update No. 2016-13

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Ferrellgas adopted the amended guidance effective August 1, 2020. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.

9


C. Leases

The following table provides the operating and financing ROU assets and lease liabilities as of October 31, 2020 and July 31, 2020:

Leases

Classification

October 31, 2020

July 31, 2020

Assets

Operating lease assets

Operating lease right-of-use assets

$

100,349

$

107,349

Financing lease assets

Other assets, net

39,753

41,426

Total leased assets

$

140,102

$

148,775

Liabilities

Current

Operating

Current operating lease liabilities

$

28,280

$

29,345

Financing

Other current liabilities

7,186

6,955

Noncurrent

Operating

Operating lease liabilities

83,337

89,022

Financing

Other liabilities

32,033

33,473

Total leased liabilities

$

150,836

$

158,795

The following table provides the lease expenses for the three months ended October 31, 2020 and 2019:

For the three months ended October 31, 

Leases expense

    

Classification

2020

2019

Operating lease expense

Operating expense - personnel, vehicle, plant and other

$

1,783

$

1,741

Operating expense - equipment lease expense

6,442

7,607

Cost of sales - propane and other gas liquids sales

526

389

General and administrative expense

282

266

Total operating lease expense

9,033

10,003

Short-term expense

Operating expense - personnel, vehicle, plant and other

2,033

1,954

General and administrative expense

242

110

Total short-term expense

2,275

2,064

Variable lease expense

Operating expense - personnel, vehicle, plant and other

746

675

Operating expense - equipment lease expense

388

733

Total variable lease expense

1,134

1,408

Finance lease expense:

Amortization of leased assets

Depreciation and amortization expense

2,165

40

Interest on lease liabilities

Interest expense

945

42

Total finance lease expense

3,110

82

Total lease expense (a)

$

15,552

$

13,557

10


(a)As of October 31, 2020 and 2019 Ferrellgas has also recognized $0.1 million and $0.1 million, respectively, of expense related to the accretion of lease exit costs associated with a crude oil storage agreement that is no longer being utilized, primarily due to various Midstream dispositions, and for which Ferrellgas does not anticipate any future economic benefit.

Minimum annual payments under existing operating and finance lease liabilities as of October 31, 2020 are as follows:

Maturities of lease liabilities

Operating leases

Finance leases

Total

2021

$

25,539

$

7,751

$

33,290

2022

27,163

9,709

36,872

2023

35,832

7,742

43,574

2024

18,150

7,173

25,323

2025

12,889

7,183

20,072

Thereafter

21,532

10,655

32,187

Total lease payments

$

141,105

$

50,213

$

191,318

Less: Imputed interest

29,488

10,994

40,482

Present value of lease liabilities

$

111,617

$

39,219

$

150,836

The following table represents the weighted-average remaining lease term and discount rate as of October 31, 2020:

As of October 31, 2020

Lease type

Weighted-average remaining lease term (years)

Weighted-average discount rate

Operating leases

5.3

8.2%

Finance leases

5.9

8.6%

Cash flow information is presented below:

For the three months ended October 31, 

2020

2019

Cash paid for amounts included in the measurement of lease liabilities for operating leases:

Operating cash flows

$

8,395

$

11,049

Cash paid for amounts included in the measurement of lease liabilities for financing leases:

Operating cash flows

$

877

$

42

Financing cash flows

$

1,703

$

38

D.    Supplemental financial statement information

Inventories consist of the following:

    

October 31, 2020

    

July 31, 2020

Propane gas and related products

$

65,513

$

58,733

Appliances, parts and supplies, and other

 

13,467

 

13,931

Inventories

$

78,980

$

72,664

In addition to inventories on hand, Ferrellgas enters into contracts to take delivery of propane for supply procurement purposes with terms that generally do not exceed 36 months. Most of these contracts call for payment based on market prices at the date of delivery. As of October 31, 2020, Ferrellgas had committed, for supply procurement purposes, to take delivery of approximately 1.7 million gallons of propane at fixed prices.

11


Prepaid expenses and other current assets consist of the following:

    

October 31, 2020

    

July 31, 2020

Broker margin deposit assets

$

9,381

$

14,398

Other

 

30,707

 

21,546

Prepaid expenses and other current assets

$

40,088

$

35,944

Other current liabilities consist of the following:

    

October 31, 2020

    

July 31, 2020

Accrued interest

$

68,668

$

53,841

Customer deposits and advances

 

40,898

 

32,257

Accrued payroll

 

13,431

 

18,375

Accrued insurance

 

10,994

 

14,796

Price risk management liabilities

1,506

5,029

Other

 

51,441

 

43,168

Other current liabilities

$

186,938

$

167,466

Shipping and handling expenses are classified in the following condensed consolidated statements of operations line items:

For the three months ended October 31, 

    

2020

    

2019

    

Operating expense - personnel, vehicle, plant and other

$

47,531

$

48,015

Depreciation and amortization expense

 

4,523

 

1,840

Operating expense - equipment lease expense

 

5,883

 

7,642

$

57,937

$

57,497

Cash and cash equivalents consist of the following:

    

October 31, 2020

    

July 31, 2020

Cash and cash equivalents

$

202,618

$

238,002

Restricted cash (1)

 

96,909

 

95,759

Cash, cash equivalents and restricted cash

$

299,527

$

333,761

(1)As of October 31, 2020, the $96.9 million of restricted cash includes $79.4 million of pledged cash collateral for letters of credit outstanding, an $11.5 million cash deposit made with the administrative agent under the terminated Senior Secured Credit Facility, which may be used by the administrative agent to pay contingent obligations arising under the Financing Agreement that governed the Senior Secured Credit Facility, and $6.0 million of additional pledged collateral. As of July 31, 2020, the $95.8 million of restricted cash includes $78.2 million of pledged cash collateral for letters of credit outstanding, an $11.5 million cash deposit made with the administrative agent under the terminated Senior Secured Credit Facility, which may be used by the administrative agent to pay contingent obligations arising under the Financing Agreement that governed the Senior Secured Credit Facility, and $6.1 million of additional pledged collateral. For additional discussion see Note I – Debt.

12


For purposes of the condensed consolidated statements of cash flows, Ferrellgas considers cash equivalents to include all highly liquid debt instruments purchased with an original maturity of three months or less.  Certain cash flow and significant non-cash activities are presented below:

For the three months ended October 31, 

    

2020

    

2019

Cash paid for:

 

  

 

  

Interest

$

36,997

$

8,284

Income taxes

$

35

$

Non-cash investing and financing activities:

  

 

  

Liabilities incurred in connection with acquisitions

$

$

520

Change in accruals for property, plant and equipment additions

$

(65)

$

(43)

Lease liabilities arising from operating right-of-use assets

$

366

$

11,563

Lease liabilities arising from finance right-of-use assets

$

554

$

5,614

E.    Accounts and notes receivable, net and accounts receivable securitization

Accounts and notes receivable, net consist of the following:

    

October 31, 2020

    

July 31, 2020

Accounts receivable pledged as collateral

$

120,261

$

103,703

Accounts receivable not pledged as collateral (including other reserves)

 

823

 

(825)

Note receivable

 

15,148

 

12,648

Other

 

37

 

36

Less: Allowance for expected credit losses

 

(16,781)

 

(14,124)

Accounts and notes receivable, net

$

119,488

$

101,438

At October 31, 2020, $120.3 million of trade accounts receivable were pledged as collateral, but Ferrellgas had no outstanding collateralized notes payable due to a commercial paper conduit. At July 31, 2020, $103.7 million of trade accounts receivable were pledged as collateral, but Ferrellgas had no outstanding collateralized notes payable due to a commercial paper conduit. These accounts receivable pledged as collateral are bankruptcy remote from the operating partnership. The operating partnership does not provide any guarantee or similar support to the collectability of these accounts receivable pledged as collateral.

As of October 31, 2020, Ferrellgas had received no cash proceeds from trade accounts receivables securitized, with $26.0 million remaining capacity to receive additional proceeds or issue letters of credit. As of July 31, 2020, Ferrellgas had received no cash proceeds from trade accounts receivables securitized, with $11.0 million remaining capacity to receive additional proceeds or issue letters of credit.

The agreement governing the accounts receivable securitization facility (the “Purchase Agreement”) requires the operating partnership to maintain a fixed charge coverage ratio of not less than 1.00x and a senior secured leverage ratio of not greater than 3.00x. The operating partnership was in compliance with these financial ratio requirements as of October 31, 2020. However, if at any time the operating partnership is not in compliance with these financial ratio requirements, Ferrellgas will be unable to access the facility for working capital or other cash requirements and the facility may be terminated. This facility matures in May 2021 and includes an option, at Ferrellgas’ request and consent, for the purchasers in their sole discretion to extend the facility for up to an additional three years.

13


F.    Debt

Long-term debt

Long-term debt consists of the following:

    

October 31, 2020

    

July 31, 2020

Unsecured senior notes

 

  

 

  

Fixed rate, 6.50%, due 2021 (1)

$

500,000

$

500,000

Fixed rate, 6.75%, due 2023 (2)

 

500,000

 

500,000

Fixed rate, 6.75%, due 2022, net of unamortized premium of $770 and $937 at October 31, 2020 and July 31, 2020, respectively (3)

 

475,770

 

475,937

Fixed rate, 8.625%, due 2020 (4)

 

357,000

 

357,000

Secured senior notes

 

  

 

  

Fixed rate, 10.00%, due 2025, net of unamortized premium of $3,424 at October 31, 2020 and $3,573 at July 31, 2020, respectively (5)

703,424

703,573

Notes payable

 

  

 

  

9.7% and 9.4% weighted average interest rate at October 31, 2020 and July 31, 2020, respectively, due 2020 to 2029, net of unamortized discount of $449 and $537 at October 31, 2020 and July 31, 2020, respectively

 

3,956

 

4,564

Total debt, excluding unamortized debt issuance and other costs

 

2,540,150

 

2,541,074

Unamortized debt issuance and other costs

 

(33,949)

 

(35,583)

Less: current portion of long-term debt

 

859,095

 

859,095

Long-term debt

$

1,647,106

$

1,646,396

(1)During November 2010, the operating partnership issued $500.0 million aggregate principal amount of 6.50% senior notes due 2021. These notes are general unsecured senior obligations of the operating partnership and are (i) effectively junior to all existing and future senior secured indebtedness of the operating partnership, to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of the operating partnership’s subsidiaries. The senior notes bear interest from the date of issuance, payable semi-annually in arrears on May 1 and November 1 of each year. The outstanding principal amount is due on May 1, 2021.
(2)During June 2015, the operating partnership issued $500.0 million aggregate principal amount of 6.75% senior notes due 2023. These notes are general unsecured senior obligations of the operating partnership and are (i) effectively junior to all existing and future senior secured indebtedness of the operating partnership, to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of any subsidiary of the operating partnership that is not a guarantor of these notes. The senior notes bear interest from the date of issuance, payable semi-annually in arrears on June 15 and December 15 of each year. The outstanding principal amount is due June 15, 2023. The operating partnership would incur prepayment penalties if it were to repay the notes prior to June 15, 2021.
(3)During fiscal 2014, the operating partnership issued $475.0 million aggregate principal amount of 6.75% senior notes due 2022, $325.0 million of which was issued at par and $150.0 million of which was issued at 104% of par. These notes are general unsecured senior obligations of the operating partnership and are (i) effectively junior to all existing and future senior secured indebtedness of the operating partnership, to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of the operating partnership’s subsidiaries. The senior notes bear interest from the date of issuance, payable semi-annually in arrears on January 15 and July 15 of each year. The outstanding principal amount is due January 15, 2022.
(4)During January 2017, Ferrellgas Partners issued $175.0 million aggregate principal amount of additional 8.625% unsecured senior notes due 2020, issued at 96% of par. Ferrellgas Partners contributed the net proceeds from the offering of approximately $166.1 million to the operating partnership, which used such amounts to

14


repay borrowings under its previous senior secured credit facility. During April 2010, Ferrellgas Partners issued $280.0 million of these notes. During March 2011, Ferrellgas Partners redeemed $98.0 million of these notes. These notes are general unsecured senior obligations of Ferrellgas Partners and are (i) effectively junior to all existing and future senior secured indebtedness of Ferrellgas Partners, to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of the operating partnership and its subsidiaries. The unsecured senior notes bear interest from the date of issuance, payable semi-annually in arrears on June 15 and December 15 of each year. The outstanding principal amount was due on June 15, 2020, but has not been repaid.
(5)During April 2020, the operating partnership issued $700.0 million aggregate principal amount of 10.00% senior secured first lien notes due 2025, $575.0 million of which was issued at par and $125.0 million of which was issued at 103% of par. These notes are senior secured obligations of the operating partnership and the guarantors of such notes, including Ferrellgas Partners, the general partners of the operating partnership and certain subsidiaries of the operating partnership, and are (i) effectively senior to all existing senior unsecured indebtedness of the operating partnership and the guarantors, to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of Ferrellgas Receivables, LLC, a special purpose subsidiary that does not guarantee the notes. The senior notes bear interest from the date of issuance, payable semiannually in arrears on April 15 and October 15 of each year. The operating partnership would incur prepayment penalties if it were to repay the notes prior to April 15, 2024. The outstanding principal amount is due on April 15, 2025.

The scheduled principal payments on long-term debt are as follows:

Scheduled

Payment due by fiscal year

    

principal payments

2021 (a)

$

858,425

2022

 

476,435

2023

 

500,999

2024

 

329

2025

 

700,199

Thereafter

 

19

Total

$

2,536,406

(a)Includes the Ferrellgas Partners Notes, which matured on June 15, 2020, but have not yet been repaid.

Letters of credit outstanding at October 31, 2020 and July 31, 2020 totaled $127.1 million and $126.0 million, respectively, and were used to secure insurance arrangements, product purchases and commodity hedges. At October 31, 2020 and July 31, 2020 Ferrellgas did not have in place a credit facility providing for the issuance of letters of credit and had $79.4 million and $78.2 million, respectively, of restricted cash pledged as cash collateral for letters of credit outstanding. Additionally, at both October 31, 2020 and July 31, 2020, Ferrellgas also issued letters of credit of $50.0 million by utilizing our liquidity available on the accounts receivable securitization facility.

Forbearance Agreement with respect to Ferrellgas Partners’ 8.625% Unsecured Senior Notes due June 15, 2020

On June 7, 2020, Ferrellgas Partners and additional Ferrellgas entities entered into a Forbearance Agreement (the “Forbearance Agreement”) with the beneficial owners (or nominees, investment managers, advisors or subadvisors for the beneficial owners, collectively referred to as the “Forbearing Noteholders”) of approximately 77% of the aggregate principal amount of Ferrellgas Partners’ 8.625% unsecured senior notes due June 15, 2020, pursuant to which the Forbearing Noteholders agreed to forbear from exercising any default-related rights and remedies with respect to the Ferrellgas Partners Notes and to direct the trustee thereunder not to take any remedial action. The forbearance period under the Forbearance Agreement expired on August 15, 2020. Following the expiration of the forbearance period, discussions with representatives of the Forbearing Noteholders have continued.

Financial covenants

The indenture governing the outstanding notes of Ferrellgas Partners and the agreements governing the operating partnership’s indebtedness contain various covenants that limit Ferrellgas Partners’ ability and the ability of specified subsidiaries to, among other things, make restricted payments and incur additional indebtedness. The general partner

15


believes that the most restrictive of these covenants are the restricted payments covenants in the indenture governing the outstanding notes of Ferrellgas Partners and the indentures governing the outstanding notes of the operating partnership, which are discussed below.

Ferrellgas Partners, L.P., the master limited partnership

The indenture governing the outstanding notes of Ferrellgas Partners due June 15, 2020 contains a covenant that restricts the ability of Ferrellgas Partners to make certain restricted payments, including distributions on its common units. Ferrellgas Partners continues to comply with the restrictive covenants with respect to the $357.0 million aggregate principal amount of its unsecured senior notes due June 15, 2020 as it continues to negotiate with the Forbearing Noteholders.

Under this covenant, subject to the limited exception described below, Ferrellgas Partners may not make a restricted payment unless its consolidated fixed charge coverage ratio (defined in the indenture generally to mean the ratio of trailing four quarters consolidated EBITDA to consolidated interest expense, both as adjusted for certain, specified items) is at least 1.75x, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. As of October 31, 2020, Ferrellgas Partners’ consolidated fixed charge coverage ratio was 1.38x.

If the consolidated fixed charge coverage ratio is below 1.75x, Ferrellgas Partners may make restricted payments of up to $50.0 million in total over a sixteen quarter period. As a result of distributions paid to common unitholders in September 2017, December 2017, March 2018, June 2018, and September 2018, while this ratio was less than 1.75x, Ferrellgas Partners has used substantially all of its capacity under the limited exception and therefore is currently restricted by this covenant from making future restricted payments, including distributions to common unitholders. Accordingly, no distributions have been or will be paid to common unitholders for the three months ended October 31, 2020, and the general partner expects that this covenant will continue to prohibit Ferrellgas Partners from making common unit distributions, unless and until the outstanding notes of Ferrellgas Partners due 2020 are restructured, refinanced or otherwise satisfied. While there can be no assurance of success, as part of our debt and interest expense reduction strategy, we are presently considering potential solutions to address the maturity of the outstanding notes of Ferrellgas Partners due June 15, 2020, as well as the upcoming maturity of the operating partnership’s $500.0 million in unsecured notes due May 1, 2021. The potential solutions include, among others, restructuring, refinancing or a transaction to exchange new notes for some or all of these notes.

Ferrellgas, L.P., the operating partnership

Similar to the indenture governing the outstanding notes of Ferrellgas Partners, the indentures governing the outstanding notes of the operating partnership contain covenants that restrict the ability of the operating partnership to make certain restricted payments, including distributions to Ferrellgas Partners. Under these covenants, in the indentures governing the operating partnership’s notes, subject to the limited exceptions described below, the operating partnership may not make a restricted payment unless its consolidated fixed charge coverage ratio (defined in the indentures generally to mean the ratio of trailing four quarters consolidated EBITDA to consolidated interest expense, both as adjusted for certain, specified items) is at least 1.75x on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. As of October 31, 2020, the operating partnership’s consolidated fixed charge coverage ratio was 1.65x.

Under the covenants in the indentures governing the operating partnership’s unsecured notes, if the consolidated fixed charge coverage ratio is below 1.75x, the operating partnership may still make restricted payments in limited amounts determined under the indentures governing the operating partnership’s unsecured notes. The distributions made by the operating partnership on June 15, 2019 and December 15, 2019 for payment of interest on Ferrellgas Partners’ unsecured senior notes due June 2020 were made from capacity under this limited exception to the ratio requirement under the indentures governing the operating partnership’s unsecured notes.

The indenture governing the operating partnership’s senior secured first lien notes due 2025 contains a similar but, in some respects, a different restricted payments covenant. The covenant in the secured notes indenture provides for the same 1.75x consolidated fixed charge coverage ratio test as the unsecured notes indentures and a limited exception when that ratio is below 1.75x. In addition, the secured notes indenture also provides that, subject to a separate limited exception, described below, the operating partnership generally may not make a restricted payment unless the operating partnership’s consolidated leverage ratio (defined in the secured notes indenture generally to mean the ratio of

16


consolidated total debt to trailing four quarters consolidated EBITDA, both as adjusted for certain, specified items) is no greater than 5.5x, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. The consolidated leverage ratio test applies regardless of whether the operating partnership’s consolidated fixed coverage ratio is at least 1.75x or below 1.75x. As of October 31, 2020, the operating partnership’s consolidated leverage ratio was substantially in excess of 5.5x. Additionally, the secured notes indenture provides for restricted payments under its limited exception to the consolidated fixed charge coverage ratio test that is less than the capacity available under the similar exception in the unsecured notes indentures. However, the secured notes indenture contains a separate exception to both the consolidated fixed charge coverage ratio test and the consolidated leverage ratio test that can be utilized to make certain specified restricted payments in a limited amount when the operating partnership does not meet either the consolidated fixed charge coverage ratio test or the consolidated leverage ratio test. This separate exception under the secured notes indenture currently has capacity for such specified restricted payments that is substantially the same as the capacity under the most restrictive of the operating partnership’s unsecured notes indentures.

As described above, Ferrellgas Partners’ unsecured notes due 2020 matured on June 15, 2020, and the outstanding principal amount of those notes was due to be paid on that date, together with accrued interest to the maturity date. Although the operating partnership has some capacity to make distributions under the operating partnership’s unsecured and secured notes indentures, this capacity will not allow the operating partnership to make distributions to Ferrellgas Partners sufficient to pay the principal of and accrued interest on Ferrellgas Partners’ unsecured senior notes due 2020 that was due at the maturity of those notes. Additionally, the restrictions in these indentures currently limit the ability of the operating partnership to make distributions to Ferrellgas Partners to enable it to pay cash distributions to its unitholders.

Debt and interest expense reduction strategy

Ferrellgas continues to pursue a strategy to reduce its debt and interest expense. Opportunities include the generation of additional cash flows through accretive acquisitions, continued restructuring or refinancing of existing indebtedness, selling additional assets, maintaining the suspension of Ferrellgas’ common unit distributions, issuing equity or executing one or more debt exchanges. Ferrellgas expects to maintain its debt and interest expense reduction strategy until its consolidated leverage ratio reaches a level that it deems appropriate for its business. Ferrellgas engaged Moelis & Company LLC as its financial advisor and the law firm of Squire Patton Boggs LLP to assist in its ongoing process to reduce existing debt and address its debt maturities.

G.    Partners’ deficit

As of October 31, 2020 and July 31, 2020, limited partner units were beneficially owned by the following:

    

October 31, 2020

    

July 31, 2020

Public common unitholders (1)

 

69,612,939

 

69,612,939

Ferrell Companies (2)

 

22,529,361

 

22,529,361

FCI Trading Corp. (3)

 

195,686

 

195,686

Ferrell Propane, Inc. (4)

 

51,204

 

51,204

James E. Ferrell (5)

 

4,763,475

 

4,763,475


(1)These common units are traded on the OTC Pink Market under the symbol “FGPR”.
(2)Ferrell Companies is the owner of the general partner and an approximate 23% direct owner of Ferrellgas Partners’ common units and thus a related party. Ferrell Companies also beneficially owns 195,686 and 51,204 common units of Ferrellgas Partners held by FCI Trading Corp. ("FCI Trading") and Ferrell Propane, Inc. ("Ferrell Propane"), respectively, bringing Ferrell Companies’ total beneficial ownership to 23.4%.
(3)FCI Trading is an affiliate of the general partner and thus a related party.
(4)Ferrell Propane is controlled by the general partner and thus a related party.
(5)James E. Ferrell is the Interim Chief Executive Officer and President of our general partner; and is the Chairman of the Board of Directors of our general partner and a related party. JEF Capital Management owns 4,758,859 of these common units and is owned by the James E. Ferrell Revocable Trust Two and other family trusts, all of which James E. Ferrell and/or his family members are the trustees and beneficiaries. James E. Ferrell holds all voting common stock of JEF Capital Management. The remaining 4,616 common units are held by Ferrell Resources

17


Holdings, Inc., which is wholly-owned by the James E. Ferrell Revocable Trust One, for which James E. Ferrell is the trustee and sole beneficiary.

Partnership distributions

No distributions will be paid to common unitholders for the three months ended October 31, 2020.

Accumulated other comprehensive income (loss) (“AOCI”)

See Note J – Derivative instruments and hedging activities – for details regarding changes in the fair value of risk management financial derivatives recorded within AOCI for the three months ended October 31, 2020 and 2019.

General partner’s commitment to maintain its capital account

Ferrellgas’ partnership agreements allow the general partner to have an option to maintain its effective 2% general partner interest concurrent with the issuance of other additional equity.

During the three months ended October 31, 2020, the general partner made non-cash contributions of $14.0 thousand to Ferrellgas to maintain its effective 2% general partner interest.

During the three months ended October 31, 2019, the general partner made non-cash contributions of $16.0 thousand to Ferrellgas to maintain its effective 2% general partner interest.

H.    Revenue from contracts with customers

Disaggregation of revenue

Ferrellgas disaggregates revenues based upon the type of customer and on the type of revenue. The following table presents retail propane revenues, wholesale propane revenues and other revenues. Retail revenues result from sales to end use customers, wholesale revenues result from sales to or through resellers and all other revenues include sales of appliances and other materials, other fees charged to customers and equipment rental charges.

    

For the three months ended October 31, 

    

2020

    

2019

 

Retail - Sales to End Users

$

174,645

$

180,417

Wholesale - Sales to Resellers

 

102,612

 

82,704

Other Gas Sales

 

3,792

 

10,264

Other

 

19,845

 

19,829

Propane and related equipment revenues

$

300,894

$

293,214

Contract assets and liabilities

Ferrellgas’ performance obligations are generally limited to the delivery of propane for our retail and wholesale contracts. Ferrellgas’ performance obligations with respect to sales of appliances and other materials and other revenues are limited to the delivery of the agreed upon good or service. Ferrellgas does not have material performance obligations that are delivered over time, thus all of our revenue is recognized at the time the goods, including propane, are delivered or installed. Ferrellgas offers “even pay” billing programs that can create customer deposits or advances, depending on whether Ferrellgas has delivered more propane than the customer has paid for or whether the customer has paid for more propane than what has been delivered. Revenue is recognized from these customer deposits or advances to customers at the time product is delivered. The advance or deposit is considered to be a contract asset or liability. Additionally, from time to time, we have customers that pay in advance for goods or services, and such amounts result in contract liabilities.

Ferrellgas incurs incremental commissions directly related to the acquisition or renewal of customer contracts. The commissions are calculated and paid based upon the number of gallons sold to the acquired or renewed customer. The total amount of commissions that we incur is not material, and the commissions are expensed commensurate with the deliveries to which they relate; therefore, Ferrellgas does not capitalize these costs.

18


The following table presents the opening and closing balances of Ferrellgas’ receivables, contract assets, and contract liabilities:

    

October 31, 2020

    

July 31, 2020

Accounts receivable

$

132,570

$

108,483

Contract assets

$

3,699

$

7,079

Contract liabilities

 

 

  

Deferred revenue (1)

$

52,220

$

42,911


(1)Of the beginning balance of deferred revenue, $11.4 million was recognized as revenue during the three months ended October 31, 2020.

Remaining performance obligations

Ferrellgas’ remaining performance obligations are generally limited to situations where its customers have remitted payment but have not yet received deliveries of propane. This most commonly occurs in Ferrellgas’ even pay billing programs and Ferrellgas expects that these balances will be recognized within a year or less as the customer takes delivery of propane.

I.    Fair value measurements

Derivative financial instruments

The following table presents Ferrellgas’ financial assets and financial liabilities that are measured at fair value on a recurring basis for each of the fair value hierarchy levels, including both current and noncurrent portions, as of October 31, 2020 and July 31, 2020:

Asset (Liability)

Quoted Prices in Active

    

    

    

Markets for Identical

Significant Other

Assets and Liabilities

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

October 31, 2020:

 

  

 

  

 

  

 

  

Assets:

 

  

 

  

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

7,161

$

$

7,161

Liabilities:

 

  

 

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

(1,557)

$

$

(1,557)

July 31, 2020:

 

  

 

  

 

  

 

  

Assets:

 

  

 

  

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

3,112

$

$

3,112

Liabilities:

 

  

 

  

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

(5,425)

$

$

(5,425)

Methodology

The fair values of Ferrellgas’ non-exchange traded commodity derivative contracts are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators.

Other financial instruments

The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. At October 31, 2020 and

19


July 31, 2020, the estimated fair value of Ferrellgas’ long-term debt instruments was $2,232.3 million and $2,177.1 million, respectively. Ferrellgas estimates the fair value of long-term debt based on quoted market prices. The fair value of Ferrellgas’ consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.

Ferrellgas has other financial instruments such as trade accounts receivable which could expose it to concentrations of credit risk. The credit risk from trade accounts receivable is limited because of a large customer base which extends across many different U.S. markets.

J.    Derivative instruments and hedging activities

Ferrellgas is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Of these, the propane commodity derivative instruments are designated as cash flow hedges.

Derivative instruments and hedging activity

During the three months ended October 31, 2020 and 2019, Ferrellgas did not recognize any gain or loss in earnings related to hedge ineffectiveness and did not exclude any component of financial derivative contract gains or losses from the assessment of hedge effectiveness related to commodity cash flow hedges.

The following tables provide a summary of the fair value of derivatives within Ferrellgas’ condensed consolidated balance sheets as of October 31, 2020 and July 31, 2020:

Final

October 31, 2020

Maturity

Asset Derivatives

Liability Derivatives

Derivative Instrument

    

Date

Location

    

Fair value

    

Location

    

Fair value

Derivatives designated as hedging instruments

December 2021

  

 

  

 

  

 

  

Commodity derivatives-propane

 

Prepaid expenses and other current assets

$

6,656

Other current liabilities

$

1,506

Commodity derivatives-propane

 

Other assets, net

 

505

 

Other liabilities

 

51

 

Total

$

7,161

 

Total

$

1,557

Final

July 31, 2020

Maturity

Asset Derivatives

Liability Derivatives

Derivative Instrument

    

Date

Location

    

Fair value

    

Location

    

Fair value

Derivatives designated as hedging instruments

 

December 2021

  

 

  

 

  

 

  

Commodity derivatives-propane

 

Prepaid expenses and other current assets

$

2,846

 

Other current liabilities

$

5,029

Commodity derivatives-propane

 

Other assets, net

 

266

 

Other liabilities

 

396

 

Total

$

3,112

 

Total

$

5,425

20


Ferrellgas’ exchange traded commodity derivative contracts require cash margin deposit as collateral for contracts that are in a negative mark-to-market position. These cash margin deposits will be returned if mark-to-market conditions improve or will be applied against cash settlement when the contracts are settled. Liabilities represent cash margin deposits received by Ferrellgas for contracts that are in a positive mark-to-market position. The following tables provide a summary of cash margin balances as of October 31, 2020 and July 31, 2020, respectively:

October 31, 2020

Assets

Liabilities

Description

    

Location

    

Amount

    

Location

    

Amount

Margin Balances

 

Prepaid expense and other current assets

$

9,381

 

Other current liabilities

$

5,768

 

Other assets, net

 

544

 

Other liabilities

 

483

$

9,925

 

  

$

6,251

July 31, 2020

Assets

Liabilities

Description

    

Location

    

Amount

    

Location

    

Amount

Margin Balances

 

Prepaid expense and other current assets

$

14,398

 

Other current liabilities

$

510

 

Other assets, net

 

1,433

 

Other liabilities

 

$

15,831

 

  

$

510

The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income (loss) for the three months ended October 31, 2020 and 2019 due to derivatives designated as cash flow hedging instruments:

For the three months ended October 31, 2020

    

    

    

Amount of Gain (Loss) 

Amount of Gain

Location of Gain (Loss)

Reclassified from

(Loss) Recognized in

Reclassified from 

AOCI into Income

Derivative Instrument

    

AOCI

    

AOCI into Income

    

Effective portion

    

Ineffective portion

Commodity derivatives

$

5,767

 

Cost of product sold- propane and other gas liquids sales

$

(2,150)

$

$

5,767

$

(2,150)

$

For the three months ended October 31, 2019

Amount of Gain (Loss)

Amount of Gain (Loss)

Location of Gain (Loss)

Reclassified from

Recognized in

Reclassified from

AOCI into Income

Derivative Instrument

    

AOCI

    

AOCI into Income

    

Effective portion

    

Ineffective portion

Commodity derivatives

$

(13,627)

 

Cost of product sold- propane and other gas liquids sales

$

(7,479)

$

$

(13,627)

$

(7,479)

$

The changes in derivatives included in AOCI for the three months ended October 31, 2020 and 2019 were as follows:

For the three months ended October 31, 

Gains and losses on derivatives included in AOCI

    

2020

    

2019

Beginning balance

$

(2,313)

$

(14,756)

Change in value of risk management commodity derivatives

 

5,767

 

(13,627)

Reclassification of losses on commodity hedges to cost of sales - propane and other gas liquids sales, net

 

2,150

 

7,479

Ending balance

$

5,604

$

(20,904)

Ferrellgas expects to reclassify net gains of approximately $5.2 million to earnings during the next 12 months. These net gains are expected to be offset by increased margins on propane sales commitments Ferrellgas has with its customers that qualify for the normal purchase normal sale exception.

21


During the three months ended October 31, 2020 and 2019, Ferrellgas had no reclassifications to operations resulting from the discontinuance of any cash flow hedges arising from the probability of the original forecasted transactions not occurring within the originally specified period of time defined within the hedging relationship.

As of October 31, 2020, Ferrellgas had financial derivative contracts covering 3.6 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.

Derivative financial instruments credit risk

Ferrellgas is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas’ counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas maintains credit policies with regard to its counterparties that it believes reduce its overall credit risk. These policies include evaluating and monitoring its counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by Ferrellgas in the forms of letters of credit, parental guarantees or cash. Ferrellgas has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties. If these counterparties that make up the concentration failed to perform according to the terms of their contracts at October 31, 2020, the maximum amount of loss due to credit risk that Ferrellgas would incur based upon the gross fair values of the derivative financial instruments is $3.5 million.

From time to time Ferrellgas enters into derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas’ debt rating. There were no open derivative contracts with credit-risk-related contingent features as of October 31, 2020.

K.    Transactions with related parties

Ferrellgas has no employees and is managed and controlled by its general partner. Pursuant to Ferrellgas’ partnership agreements, the general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on behalf of Ferrellgas and all other necessary or appropriate expenses allocable to Ferrellgas or otherwise reasonably incurred by its general partner in connection with operating Ferrellgas’ business. These costs primarily include compensation and benefits paid to employees of the general partner who perform services on Ferrellgas’ behalf and are reported in the condensed consolidated statements of operations as follows:

For the three months ended October 31, 

    

2020

    

2019

 

Operating expense

$

60,980

$

63,471

General and administrative expense

$

6,719

$

6,487

See additional discussions about transactions with the general partner and related parties in Note G – Partners’ deficit.

22


L.    Contingencies and commitments

Litigation

Ferrellgas’ operations are subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane and, prior to the sales of midstream operations in fiscal 2018, crude oil. As a result, at any given time, Ferrellgas can be threatened with or named as a defendant in various lawsuits arising in the ordinary course of business. Other than as discussed below, Ferrellgas is not a party to any legal proceedings other than various claims and lawsuits arising in the ordinary course of business. It is not possible to determine the ultimate disposition of these matters; however, management is of the opinion that there are no known claims or contingent claims that are reasonably expected to have a material adverse effect on the consolidated financial condition, results of operations and cash flows of Ferrellgas.

Ferrellgas has been named as a defendant, along with a competitor, in putative class action lawsuits filed in multiple jurisdictions. The lawsuits, which were consolidated in the Western District of Missouri on October 16, 2014, allege that Ferrellgas and a competitor coordinated in 2008 to reduce the fill level in barbeque cylinders and combined to persuade a common customer to accept that fill reduction, resulting in increased cylinder costs to direct customers and end-user customers in violation of federal and certain state antitrust laws. The lawsuits seek treble damages, attorneys’ fees, injunctive relief and costs on behalf of the putative class. These lawsuits have been coordinated for pretrial purposes by the multidistrict litigation panel. The Federal Court for the Western District of Missouri initially dismissed all claims brought by direct and indirect customers other than state law claims of indirect customers under Wisconsin, Maine and Vermont law. The direct customer plaintiffs filed an appeal, which resulted in a reversal of the district court’s dismissal. We filed a petition for a writ of certiorari which was denied. An appeal by the indirect customer plaintiffs resulted in the court of appeals affirming the dismissal of the federal claims and remanding the case to the district court to decide whether to exercise supplemental jurisdiction over the remaining state law claims. Thereafter, in August 2019, Ferrellgas reached a settlement with the direct customers, pursuant to which it agreed to pay a total of $6.25 million to resolve all claims asserted by the putative direct purchaser class.  With respect to the indirect customers, the district court exercised supplemental jurisdiction over the remaining state law claims, but then granted in part Ferrellgas’ pleadings-based motion and dismissed 11 of the 24 remaining state law claims.  As a result, there are 13 remaining state law claims brought by a putative class of indirect customers.  Ferrellgas believes it has strong defenses and intends to vigorously defend itself against these remaining claims.  Ferrellgas does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuit.

Ferrellgas and Bridger Logistics, LLC (“Bridger”), have been named, along with two former officers, in a lawsuit filed by Eddystone Rail Company ("Eddystone") on February 2, 2017 in the Eastern District of Pennsylvania (the "EDPA Lawsuit"). Eddystone indicated that it has prevailed in or settled an arbitration against Jamex Transfer Services (“JTS”), previously named Bridger Transfer Services, a former subsidiary of Bridger. The arbitration involved a claim against JTS for money due for deficiency payments under a contract for the use of an Eddystone facility used to offload crude from rail onto barges. Eddystone alleges that Ferrellgas transferred assets out of JTS prior to the sale of the membership interest in JTS to Jamex Transfer Holdings, and that those transfers should be avoided so that the assets can be used to satisfy the amount owed by JTS to Eddystone as a result of the arbitration. Eddystone also alleges that JTS was an “alter ego” of Bridger and Ferrellgas and that Bridger and Ferrellgas breached fiduciary duties owed to Eddystone as a creditor of JTS. Ferrellgas believes that Ferrellgas and Bridger have valid defenses to these claims and to Eddystone’s primary claim against JTS for breach of contract. The lawsuit does not specify a specific amount of damages that Eddystone is seeking; however, Ferrellgas believes that the amount of such damages, if ultimately owed to Eddystone, could be material to Ferrellgas. Ferrellgas intends to vigorously defend this claim. On August 24, 2017, Ferrellgas filed a third-party complaint against JTS, Jamex Transfer Holdings, and other related persons and entities (the "Third-Party Defendants"), asserting claims for breach of contract, indemnification of any losses in the EDPA Lawsuit, tortious interference with contract, and contribution. On June 25, 2018, Ferrellgas entered into an agreement with the Third-Party Defendants which, among other things, resulted in a dismissal of the claims against the Third-Party Defendants from the lawsuit. The lawsuit is in the discovery stage; as such, management does not currently believe a loss is probable or reasonably estimable at this time.

23


M.    Net earnings (loss) per unitholders’ interest

Below is a calculation of the basic and diluted net loss per common unitholders’ interest in the condensed consolidated statements of operations for the periods indicated:

For the three months ended October 31, 

    

2020

    

2019

 

Common unitholders’ interest in net loss

$

(45,601)

$

(44,891)

Weighted average common units outstanding (in thousands)

 

97,152.7

 

97,152.7

Basic and diluted net loss per common unit

$

(0.47)

$

(0.46)

A.

N.    Subsequent events

Ferrellgas has evaluated events and transactions occurring after the balance sheet date through the date Ferrellgas’ condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that require recognition or disclosure in its condensed consolidated financial statements, except as follows.

Transaction Support Agreement

On December 10, 2020, Ferrellgas Partners, Ferrellgas Partners Finance Corp., the operating partnership and additional Ferrellgas entities (collectively, the “Company Parties”) entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims (collectively, the “Consenting Noteholders”) arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. As of December 10, 2020, the Consenting Noteholders hold or represent, in the aggregate, approximately 74% of the outstanding amount of the Ferrellgas Partners Notes due June 15, 2020.

The TSA sets forth (i) a restructuring process to satisfy the obligations of Ferrellgas Partners and Ferrellgas Partners Finance Corp. under the Ferrellgas Partners Notes due June 15, 2020 (the “Ferrellgas Partners Transactions”), which will be effectuated through pre-packaged voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code filed by only Ferrellgas Partners and Ferrellgas Partners Finance Corp. and the confirmation of a pre-packaged plan of reorganization for Ferrellgas Partners and Ferrellgas Partners Finance Corp., and (ii) a refinancing process of the operating partnership, including but not limited to, replacement of the operating partnership’s existing unsecured notes due 2021, 2022 and 2023 (the “operating partnership Transactions” and, together with the Ferrellgas Partners Transactions, the “Transactions”), which will be consummated on the effective date (the “Effective Date”) of Ferrellgas Partners’ plan of reorganization that implements the Ferrellgas Partners Transactions (the “Plan”) and will close simultaneously with the Ferrellgas Partners Transactions effectuated under the Plan.

Generally, the TSA and the Transactions contemplate, among other things, the transactions and certain changes to the capital structure and governance of the Company Parties as described in more detail in the TSA.

Pursuant to the TSA, and subject to the terms and conditions thereof, the parties thereto have agreed to support, act in good faith and take all steps reasonably necessary and desirable to implement and consummate the Transactions until the TSA is terminated. The Consenting Noteholders have agreed, among other things, (i) to forbear from taking actions with respect to any default or event of default by the Company Parties under the indenture governing the Ferrellgas Partners Notes which arises solely as a result of the failure to make payments of the principal due on the Ferrellgas Partners Notes, and (ii) to vote in favor of any matter requiring approval to the extent necessary to implement the Transactions and the Plan.

The TSA contains certain milestones relating to the commencement of the solicitation of acceptances of the Plan (the “Solicitation”), the refinancing process and the Chapter 11 Cases, which include the dates by which Ferrellgas Partners is required to commence the Solicitation and, thereafter, commence the Chapter 11 Cases or obtain certain approval orders of the United States Bankruptcy Court for the District of Delaware. In addition, the milestones include the

24


obligation of Ferrellgas Partners and Ferrellgas Partners Finance Corp. to emerge from chapter 11 protection no later than April 4, 2021, unless that deadline is extended pursuant to the terms of the TSA.

The TSA also provides that the TSA may be terminated by the Required Consenting Noteholders (as defined therein) with respect to the Consenting Noteholders or by any Company Party with respect to the Company Parties upon the occurrence of certain events set forth therein. In particular, the Company Parties may terminate the TSA in the event the governing body of any Company Party determines, after consulting with counsel, (i) that continuing to pursue any of the Transactions in the manner contemplated by the TSA would be inconsistent with the exercise of its contractual or fiduciary duties or applicable law or (ii) in the exercise of its contractual or fiduciary duties, to pursue an alternative transaction proposal.

There is no assurance that the restructuring and refinancing processes described in the TSA will be consummated.

FERRELLGAS PARTNERS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)

CONDENSED BALANCE SHEETS

(unaudited)

    

October 31, 2020

    

July 31, 2020

ASSETS

Cash

$

1,000

$

1,000

Prepaid expenses and other current assets

 

 

1,850

Total assets

$

1,000

$

2,850

Contingencies and commitments (Note B)

 

  

 

  

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

 

38,920

 

38,846

Accumulated deficit

 

(38,920)

 

(36,996)

Total stockholder’s equity

$

1,000

$

2,850

See notes to condensed financial statements.

25


FERRELLGAS PARTNERS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

 

General and administrative expense

$

1,924

$

891

Net loss

$

(1,924)

$

(891)

See notes to condensed financial statements.

26


FERRELLGAS PARTNERS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

Cash flows from operating activities:

  

  

Net loss

$

(1,924)

$

(891)

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

1,850

 

838

Cash used in operating activities

 

(74)

 

(53)

Cash flows from financing activities:

 

  

 

  

Capital contribution

 

74

 

53

Cash provided by financing activities

 

74

 

53

Net change in cash

 

 

Cash - beginning of period

 

1,000

 

1,000

Cash - end of period

$

1,000

$

1,000

See notes to condensed financial statements.

27


FERRELLGAS PARTNERS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)

(unaudited)

NOTES TO CONDENSED 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.

The Finance Corp. has nominal assets, does not conduct any operations and has no employees.

Going Concern

The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note B – Contingencies and commitments, the Finance Corp serves as co-issuer and co-obligor for debt securities of the Partnership. The Partnership has $357.0 million aggregate principal amount of unsecured senior notes due June 15, 2020, which the Partnership failed to repay, that are classified as current in its condensed consolidated financial statements. These obligations are only reported on the Partnership’s condensed consolidated balance sheet. The ability of the Partnership to restructure, refinance or otherwise satisfy these notes is uncertain considering the level of other outstanding indebtedness. Additionally, the Finance Corp. does not have sufficient cash reserves or the ability to generate sufficient future cash flows to satisfy its obligations as co-obligor of the debt securities of the Partnership. Given these concerns, we believe there is substantial doubt about the Finance Corp’s ability to continue as a going concern. The Partnership has engaged Moelis & Company LLC as its financial advisor and the law firm of Squire Patton Boggs LLP to assist with the Partnership’s ongoing process to reduce existing debt and address its debt maturities. On December 10, 2020, the Partnership, Finance Corp., the operating partnership and additional Ferrellgas entities entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. There is no assurance that the transactions contemplated by the TSA will be consummated and the outcome of Ferrellgas’ debt reduction strategy continues to remain uncertain. See Note C – Subsequent Events, for a discussion of the TSA and the transactions contemplated thereunder.

B.    Contingencies and commitments

The Finance Corp. serves as co-issuer and co-obligor for debt securities of the Partnership. The Finance Corp. is liable as co-issuer and co-obligor for the $357.0 million aggregate principal amount of the Partnership’s unsecured senior notes due June 15, 2020, which the Partnership failed to repay, and which obligation is only reported on the Partnership’s condensed consolidated balance sheet.

C. Subsequent events

The Finance Corp. has evaluated events and transactions occurring after the balance sheet date through the date the Finance Corp.’s condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that require recognition or disclosure in its condensed consolidated financial statements, except as follows.

28


Transaction Support Agreement

On December 10, 2020, the Partnership, Finance Corp., the operating partnership and additional Ferrellgas entities (collectively, the “Company Parties”) entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims (collectively, the “Consenting Noteholders”) arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. As of December 10, 2020, the Consenting Noteholders hold or represent, in the aggregate, approximately 74% of the outstanding amount of the Ferrellgas Partners Notes due June 15, 2020.

The TSA sets forth (i) a restructuring process to satisfy the obligations of the Partnership and the Finance Corp. under the Ferrellgas Partners Notes due June 15, 2020 (the “Ferrellgas Partners Transactions”), which will be effectuated through pre-packaged voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code filed by only the Partnership and the Finance Corp. and the confirmation of a pre-packaged plan of reorganization for the Partnership and the Finance Corp., and (ii) a refinancing process of the operating partnership and Ferrellgas Finance Corp., including but not limited to, replacement of the operating partnership’s and Ferrellgas Finance Corp.’s existing unsecured notes due 2021, 2022 and 2023 (the “operating partnership Transactions” and, together with the Ferrellgas Partners Transactions, the “Transactions”), which will be consummated on the effective date (the “Effective Date”) of the Partnership’s and the Finance Corp.’s plan of reorganization that implements the Ferrellgas Partners Transactions (the “Plan”) and will close simultaneously with the Ferrellgas Partners Transactions effectuated under the Plan.

Generally, the TSA and the Transactions contemplate, among other things, the transactions and certain changes to the capital structure and governance of the Company Parties as described in more detail in the TSA.

Pursuant to the TSA, and subject to the terms and conditions thereof, the parties thereto have agreed to support, act in good faith and take all steps reasonably necessary and desirable to implement and consummate the Transactions until the TSA is terminated. The Consenting Noteholders have agreed, among other things, (i) to forbear from taking actions with respect to any default or event of default by the Company Parties under the indenture governing the Ferrellgas Partners Notes which arises solely as a result of the failure to make payments of the principal due on the Ferrellgas Partners Notes, and (ii) to vote in favor of any matter requiring approval to the extent necessary to implement the Transactions and the Plan.

The TSA contains certain milestones relating to the commencement of the solicitation of acceptances of the Plan (the “Solicitation”), the refinancing process and the Chapter 11 Cases, which include the dates by which the Partnership and the Finance Corp. are required to commence the Solicitation and, thereafter, commence the Chapter 11 Cases or obtain certain approval orders of the United States Bankruptcy Court for the District of Delaware. In addition, the milestones include the obligation of the Partnership and the Finance Corp. to emerge from chapter 11 protection no later than April 4, 2021, unless that deadline is extended pursuant to the terms of the TSA.

The TSA also provides that the TSA may be terminated by the Required Consenting Noteholders (as defined therein) with respect to the Consenting Noteholders or by any Company Party with respect to the Company Parties upon the occurrence of certain events set forth therein. In particular, the Company Parties may terminate the TSA in the event the governing body of any Company Party determines, after consulting with counsel, (i) that continuing to pursue any of the Transactions in the manner contemplated by the TSA would be inconsistent with the exercise of its contractual or fiduciary duties or applicable law or (ii) in the exercise of its contractual or fiduciary duties, to pursue an alternative transaction proposal.

There is no assurance that the restructuring and refinancing processes described in the TSA will be consummated.

29


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

    

October 31, 2020

    

July 31, 2020

ASSETS

Current assets:

 

  

 

  

Cash and cash equivalents (including $96,909 and $95,759 of restricted cash at October 31, 2020 and July 31, 2020, respectively)

$

299,522

$

333,755

Accounts and notes receivable, net (including $120,261 and $103,703 of accounts receivable pledged as collateral at October 31, 2020 and July 31, 2020, respectively)

 

119,488

 

101,438

Inventories

 

78,980

 

72,664

Prepaid expenses and other current assets

 

40,044

 

35,897

Total current assets

 

538,034

 

543,754

Property, plant and equipment, net

 

592,132

 

591,042

Goodwill, net

 

246,946

 

247,195

Intangible assets (net of accumulated amortization of $425,426 and $423,290 at October 31, 2020 and July 31, 2020, respectively)

 

101,812

 

104,049

Operating lease right-of-use assets

100,349

107,349

Other assets, net

 

73,522

 

74,748

Total assets

$

1,652,795

$

1,668,137

LIABILITIES AND PARTNERS' DEFICIT

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

44,641

$

33,944

Current portion of long-term debt

502,095

502,095

Current operating lease liabilities

28,280

29,345

Other current liabilities

 

159,910

 

148,136

Total current liabilities

734,926

713,520

Long-term debt

 

1,647,106

 

1,646,396

Operating lease liabilities

83,337

89,022

Other liabilities

 

49,543

 

51,190

Contingencies and commitments (Note L)

 

 

Partners’ deficit:

 

  

 

  

Limited partner

 

(859,121)

 

(821,462)

General partner

 

(8,600)

 

(8,216)

Accumulated other comprehensive income (loss)

 

5,604

 

(2,313)

Total partners’ deficit

 

(862,117)

 

(831,991)

Total liabilities and partners’ deficit

$

1,652,795

$

1,668,137

See notes to condensed consolidated financial statements.

30


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

 

Revenues:

Propane and other gas liquids sales

$

281,049

$

273,385

Other

 

19,845

 

19,829

Total revenues

 

300,894

 

293,214

Costs and expenses:

 

  

 

  

Cost of sales - propane and other gas liquids sales

 

137,627

 

134,028

Cost of sales - other

 

3,667

 

3,681

Operating expense - personnel, vehicle, plant and other

 

109,027

 

114,543

Operating expense - equipment lease expense

 

6,830

 

8,388

Depreciation and amortization expense

 

21,390

 

19,219

General and administrative expense

 

13,076

 

9,696

Non-cash employee stock ownership plan compensation charge

 

708

 

795

Loss on asset sales and disposals

 

813

 

2,235

Operating income

 

7,756

629

Interest expense

 

(46,528)

 

(36,877)

Other income (expense), net

 

108

 

(132)

Loss before income taxes

 

(38,664)

(36,380)

Income tax expense

 

87

 

518

Net loss

$

(38,751)

$

(36,898)

See notes to condensed consolidated financial statements.

31


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

 

Net loss

$

(38,751)

$

(36,898)

Other comprehensive income (loss):

 

  

 

  

Change in value of risk management derivatives

5,767

 

(13,627)

Reclassification of losses on derivatives to earnings, net

 

2,150

 

7,479

Other comprehensive income (loss)

 

7,917

 

(6,148)

Comprehensive loss

$

(30,834)

$

(43,046)

See notes to condensed consolidated financial statements.

32


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ DEFICIT

(in thousands)

(unaudited)

Accumulated

other

Total

Limited

General

comprehensive

partners’

    

partner

    

partner

    

income (loss)

    

deficit

Balance at July 31, 2020

$

(821,462)

$

(8,216)

$

(2,313)

$

(831,991)

Contributions in connection with non-cash ESOP compensation charges

 

701

 

7

 

 

708

Net loss

 

(38,360)

 

(391)

 

 

(38,751)

Other comprehensive income

 

 

 

7,917

 

7,917

Balance at October 31, 2020

$

(859,121)

$

(8,600)

$

5,604

$

(862,117)

Accumulated

other

Total

Limited

General

comprehensive

partners’

    

partner

    

partner

    

loss

    

deficit

Balance at July 31, 2019

$

(758,186)

$

(7,570)

$

(14,647)

$

(780,403)

Contributions in connection with non-cash ESOP compensation charges

 

787

 

8

 

 

795

Cumulative adjustment for lease accounting standard

(1,361)

 

(14)

 

 

(1,375)

Distributions

 

(100)

 

(1)

 

 

(101)

Net loss

 

(36,525)

 

(373)

 

 

(36,898)

Other comprehensive loss

 

 

 

(6,148)

 

(6,148)

Balance at October 31, 2019

$

(795,385)

$

(7,950)

$

(20,795)

$

(824,130)

See notes to condensed consolidated financial statements.

33


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

Cash flows from operating activities:

Net loss

$

(38,751)

$

(36,898)

Reconciliation of net loss to net cash provided by (used in) operating activities:

 

  

 

  

Depreciation and amortization expense

 

21,390

 

19,219

Non-cash employee stock ownership plan compensation charge

 

708

 

795

Loss on asset sales and disposals

 

813

 

2,235

Provision for doubtful accounts

 

678

 

665

Deferred income tax expense (benefit)

 

(1)

 

554

Other

 

2,346

 

2,327

Changes in operating assets and liabilities, net of effects from business acquisitions:

 

  

 

  

Accounts and notes receivable, net of securitization

 

(18,728)

 

(14,410)

Inventories

 

(6,316)

 

(4,541)

Prepaid expenses and other current assets

 

(337)

 

(7,970)

Accounts payable

 

10,479

 

11,360

Accrued interest expense

 

7,129

 

26,469

Other current liabilities

 

6,154

 

8,214

Other assets and liabilities

 

2,946

 

(872)

Net cash provided by (used in) operating activities

 

(11,490)

 

7,147

Cash flows from investing activities:

 

  

 

  

Business acquisitions, net of cash acquired

 

 

(6,400)

Capital expenditures

 

(19,454)

 

(18,126)

Proceeds from sale of assets

 

1,407

 

835

Cash payments to construct assets in connection with future lease transactions

(16,879)

Cash receipts in connection with leased vehicles

5,863

Net cash used in investing activities

 

(18,047)

 

(34,707)

Cash flows from financing activities:

 

  

 

  

Distributions

 

 

(101)

Payments on long-term debt

 

(696)

 

(512)

Net additions to short-term borrowings

 

 

37,000

Net additions to collateralized short-term borrowings

 

 

11,000

Cash payments for principal portion of finance lease liability

(1,703)

(38)

Cash paid for financing costs and other

 

(2,297)

 

(1,102)

Net cash provided by (used in) financing activities

 

(4,696)

 

46,247

Net change in cash and cash equivalents

 

(34,233)

18,687

Cash and cash equivalents - beginning of period

 

333,755

 

11,046

Cash, cash equivalents and restricted cash - end of period

$

299,522

$

29,733

See notes to condensed consolidated financial statements.

34


FERRELLGAS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, unless otherwise designated)

(unaudited)

A.    Partnership organization and formation

Ferrellgas, L.P. is a limited partnership that owns and operates propane distribution and related assets. Ferrellgas Partners, L.P. (“Ferrellgas Partners”), a publicly traded limited partnership, holds an approximate 99% limited partner interest in, and consolidates, Ferrellgas, L.P. Ferrellgas, Inc., a Delaware corporation and a wholly-owned subsidiary of Ferrell Companies, Inc., a Kansas corporation (“Ferrell Companies”), is the sole general partner of Ferrellgas Partners and one of three general partners of Ferrellgas, L.P. Ferrellgas, Inc. has retained an approximate 1% general partner economic interest in Ferrellgas Partners and also holds an approximate 1% general partner economic interest in Ferrellgas, L.P., representing an effective 2% general partner economic interest in Ferrellgas, L.P. on a combined basis.

As the sole general partner of Ferrellgas Partners, Ferrellgas, Inc. performs all management functions required by Ferrellgas Partners. Ferrellgas Partners and Ferrellgas, L.P., collectively referred to as “Ferrellgas,” are governed by their respective partnership agreements. These agreements contain specific provisions for the allocation of net earnings and loss to each of the partners for purposes of maintaining the partner capital accounts.

The term “general partner” (i) with respect to Ferrellgas Partners refers to Ferrellgas, Inc. and (ii) with respect to Ferrellgas, L.P. refers to (a) Ferrellgas, Inc., in the case of any economic general partner interest and (b) Ferrellgas, Inc., Ferrellgas GP II, LLC and Ferrellgas GP III, LLC, collectively, in the case of any voting general partner interest. As the general partners of Ferrellgas, L.P., Ferrellgas, Inc., Ferrellgas GP II, LLC and Ferrellgas GP III, LLC each have an equal vote and all general partner matters of Ferrellgas, L.P. are determined by the vote or consent of a majority of such entities. The general partners perform all management functions required by Ferrellgas, L.P. The general partner interests held by Ferrellgas GP II, LLC and Ferrellgas GP III, LLC are strictly voting and non-economic. Unless contractually provided for, creditors of Ferrellgas, L.P. have no recourse with regards to Ferrellgas Partners.

Ferrellgas, L.P. owns a 100% equity interest in Ferrellgas Finance Corp., whose only business activity is to act as the co-issuer and co-obligor of debt issued by Ferrellgas, L.P.

Ferrellgas, L.P. is primarily engaged in the retail distribution of propane and related equipment sales. The propane distribution market is seasonal because propane is used primarily for heating in residential and commercial buildings. Ferrellgas, L.P. serves residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia, and Puerto Rico.

Due to seasonality, the results of operations for the three months ended October 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year ending July 30, 2021.

The condensed consolidated financial statements of Ferrellgas, L.P. and subsidiaries reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim periods presented. All adjustments to the condensed consolidated financial statements were of a normal recurring nature. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with (i) the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) the consolidated financial statements and accompanying notes included in Ferrellgas, L.P.’s Annual Report on Form 10-K for fiscal 2020.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. Ferrellgas, L.P. has $500.0 million in unsecured notes due May 1, 2021, that are classified as current in its condensed consolidated financial statements. Additionally, Ferrellgas Partners has $357.0 million in unsecured notes due June 15, 2020, which Ferrellgas Partners failed to repay, that are classified as current in its condensed consolidated financial statements. Ferrellgas Partners’ ability to restructure, refinance or otherwise satisfy these notes is directly impacted by the cash flows of Ferrellgas, L.P. The ability of Ferrellgas Partners to restructure or refinance these notes is uncertain considering the level of other outstanding indebtedness. Given these concerns, Ferrellgas Partners believes

35


there is substantial doubt about Ferrellgas, L.P.’s ability to continue as a going concern. Ferrellgas has engaged Moelis & Company LLC as its financial advisor and the law firm of Squire Patton Boggs LLP to assist in its ongoing process to reduce existing debt and address its debt maturities. On December 10, 2020, Ferrellgas Partners, Ferrellgas Partners Finance Corp., Ferrellgas, L.P. and additional Ferrellgas entities entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. There is no assurance that the transactions contemplated by the TSA will be consummated and the outcome of Ferrellgas’ debt reduction strategy continues to remain uncertain. See Note N – Subsequent Events, for a discussion of the TSA and the transactions contemplated thereunder. Additionally, see Note F – Debt below for further discussion of the outstanding debt.

B.    Summary of significant accounting policies

(1) 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 condensed consolidated financial statements include accruals that have been established for contingent liabilities, pending claims and legal actions arising in the normal course of business, useful lives of property, plant and equipment, residual values of tanks, capitalization of customer tank installation costs, amortization methods of intangible assets, valuation methods used to value sales returns and allowances, allowance for expected credit losses, fair value of reporting units, recoverability of long-lived assets, assumptions used to value business combinations, determination of incremental borrowing rate used to measure right-of-use asset and lease liability, fair values of derivative contracts and stock-based compensation calculations.

Update to accounting estimates:

On August 1, 2020 Ferrellgas, L.P. adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326). As a result, we updated our significant accounting policies for the measurement of expected credit losses below.

Allowance for expected credit losses

Ferrellgas, L.P. closely monitors accounts receivable balances and estimates the allowance for expected credit losses. The estimate is primarily based on historical collection experience and other factors, including those related to current market conditions and events. The expected credit losses associated with accounts receivable have not historically been material and the adoption impact on Ferrellgas, L.P.’s allowance for expected credit losses was immaterial as of October 31, 2020.

(2) New accounting standards:

FASB Accounting Standard Update No. 2016-13

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Ferrellgas, L.P. adopted the amended guidance effective August 1, 2020. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.

.

36


C. Leases

The following table provides the operating and financing ROU assets and lease liabilities as of October 31, 2020 and July 31, 2020:

Leases

Classification

October 31, 2020

July 31, 2020

Assets

Operating lease assets

Operating lease right-of-use assets

$

100,349

$

107,349

Financing lease assets

Other assets, net

39,753

41,426

Total leased assets

$

140,102

$

148,775

Liabilities

Current

Operating

Current operating lease liabilities

$

28,280

$

29,345

Financing

Other current liabilities

7,186

6,955

Noncurrent

Operating

Operating lease liabilities

83,337

89,022

Financing

Other liabilities

32,033

33,473

Total leased liabilities

$

150,836

$

158,795

The following table provides the lease expenses for the three months ended October 31, 2020 and 2019:

For the three months ended October 31, 

Leases expense

    

Classification

2020

2019

Operating lease expense

Operating expense - personnel, vehicle, plant and other

$

1,783

$

1,741

Operating expense - equipment lease expense

6,442

7,607

Cost of sales - propane and other gas liquids sales

526

389

General and administrative expense

282

266

Total operating lease expense

9,033

10,003

Short-term expense

Operating expense - personnel, vehicle, plant and other

2,033

1,954

General and administrative expense

242

110

Total short-term expense

2,275

2,064

Variable lease expense

Operating expense - personnel, vehicle, plant and other

746

675

Operating expense - equipment lease expense

388

733

Total variable lease expense

1,134

1,408

Finance lease expense:

Amortization of leased assets

Depreciation and amortization expense

2,165

40

Interest on lease liabilities

Interest expense

945

42

Total finance lease expense

3,110

82

Total lease expense (a)

$

15,552

$

13,557

37


(a)As of October 31, 2020 and 2019 Ferrellgas, L.P. has also recognized $0.1 million and $0.1 million, respectively, of expense related to the accretion of lease exit costs associated with a crude oil storage agreement that is no longer being utilized, primarily due to various Midstream dispositions, and for which Ferrellgas does not anticipate any future economic benefit.

Minimum annual payments under existing operating and finance lease liabilities as of October 31, 2020 are as follows:

Maturities of lease liabilities

Operating leases

Finance leases

Total

2021

$

25,539

$

7,751

$

33,290

2022

27,163

9,709

36,872

2023

35,832

7,742

43,574

2024

18,150

7,173

25,323

2025

12,889

7,183

20,072

Thereafter

21,532

10,655

32,187

Total lease payments

$

141,105

$

50,213

$

191,318

Less: Imputed interest

29,488

10,994

40,482

Present value of lease liabilities

$

111,617

$

39,219

$

150,836

The following table represents the weighted-average remaining lease term and discount rate as of October 31, 2020:

As of October 31, 2020

Lease type

Weighted-average remaining lease term (years)

Weighted-average discount rate

Operating leases

5.3

8.2%

Finance leases

5.9

8.6%

Cash flow information is presented below:

For the three months ended October 31, 

2020

    

2019

Cash paid for amounts included in the measurement of lease liabilities for operating leases:

Operating cash flows

$

8,395

$

11,049

Cash paid for amounts included in the measurement of lease liabilities for financing leases:

Operating cash flows

$

877

$

42

Financing cash flows

$

1,703

$

38

D.    Supplemental financial statement information

Inventories consist of the following:

    

October 31, 2020

    

July 31, 2020

Propane gas and related products

$

65,513

$

58,733

Appliances, parts and supplies, and other

 

13,467

 

13,931

Inventories

$

78,980

$

72,664

In addition to inventories on hand, Ferrellgas, L.P. enters into contracts to take delivery of propane for supply procurement purposes with terms that generally do not exceed 36 months. Most of these contracts call for payment based on market prices at the date of delivery. As of October 31, 2020, Ferrellgas, L.P. had committed, for supply procurement purposes, to take delivery of approximately 1.7 million gallons of propane at fixed prices.

38


Prepaid expenses and other current assets consist of the following:

    

October 31, 2020

    

July 31, 2020

Broker margin deposit assets

$

9,381

$

14,398

Other

 

30,663

 

21,499

Prepaid expenses and other current assets

$

40,044

$

35,897

Other current liabilities consist of the following:

    

October 31, 2020

    

July 31, 2020

Accrued interest

$

41,640

$

34,511

Customer deposits and advances

 

40,898

 

32,257

Accrued payroll

 

13,431

 

18,375

Accrued insurance

 

10,994

 

14,796

Price risk management liabilities

1,506

5,029

Other

 

51,441

 

43,168

Other current liabilities

$

159,910

$

148,136

Shipping and handling expenses are classified in the following condensed consolidated statements of operations line items:

For the three months ended October 31, 

    

2020

    

2019

Operating expense - personnel, vehicle, plant and other

$

47,531

$

48,015

Depreciation and amortization expense

 

4,523

 

1,840

Operating expense - equipment lease expense

 

5,883

 

7,642

$

57,937

$

57,497

Cash and cash equivalents consist of the following:

    

October 31, 2020

    

July 31, 2020

Cash and cash equivalents

$

202,613

$

237,996

Restricted cash (1)

 

96,909

 

95,759

Cash, cash equivalents and restricted cash

$

299,522

$

333,755

(1)As of October 31, 2020, the $96.9 million of restricted cash includes $79.4 million of pledged cash collateral for letters of credit outstanding, an $11.5 million cash deposit made with the administrative agent under the terminated Senior Secured Credit Facility, which may be used by the administrative agent to pay contingent obligations arising under the Financing Agreement that governed the Senior Secured Credit Facility, and $6.0 million of additional pledged collateral. As of July 31, 2020, the $95.8 million of restricted cash includes $78.2 million of pledged cash collateral for letters of credit outstanding, an $11.5 million cash deposit made with the administrative agent under the terminated Senior Secured Credit Facility, which may be used by the administrative agent to pay contingent obligations arising under the Financing Agreement that governed the Senior Secured Credit Facility, and $6.1 million of additional pledged collateral. For additional discussion see Note I – Debt.

For purposes of the condensed consolidated statements of cash flows, Ferrellgas, L.P. considers cash equivalents to include all highly liquid debt instruments purchased with an original maturity of three months or less. Certain cash flow and significant non-cash activities are presented below:

For the three months ended October 31, 

    

2020

    

2019

Cash paid for:

Interest

$

36,997

$

8,284

Income taxes

$

35

$

Non-cash investing and financing activities:

 

  

 

  

39


Liabilities incurred in connection with acquisitions

$

$

520

Change in accruals for property, plant and equipment additions

$

(65)

$

(43)

Lease liabilities arising from operating right-of-use assets

$

366

$

11,563

Lease liabilities arising from finance right-of-use assets

$

554

$

5,614

E.    Accounts and notes receivable, net and accounts receivable securitization

Accounts and notes receivable, net consist of the following:

    

October 31, 2020

    

July 31, 2020

Accounts receivable pledged as collateral

$

120,261

$

103,703

Accounts receivable not pledged as collateral (including other reserves)

 

823

 

(825)

Note receivable

 

15,148

 

12,648

Other

 

37

 

36

Less: Allowance for expected credit losses

 

(16,781)

 

(14,124)

Accounts and notes receivable, net

$

119,488

$

101,438

At October 31, 2020, $120.3 million of trade accounts receivable were pledged as collateral, but Ferrellgas, L.P. had no outstanding collateralized notes payable due to a commercial paper conduit. At July 31, 2020, $103.7 million of trade accounts receivable were pledged as collateral, but Ferrellgas, L.P. had no outstanding collateralized notes payable due to a commercial paper conduit. These accounts receivable pledged as collateral are bankruptcy remote from Ferrellgas, L.P. Ferrellgas, L.P. does not provide any guarantee or similar support to the collectability of these accounts receivable pledged as collateral.

As of October 31, 2020, Ferrellgas, L.P. had received no cash proceeds from trade accounts receivables securitized, with $26.0 million remaining capacity to receive additional proceeds or issue letters of credit. As of July 31, 2020, Ferrellgas, L.P. had received no cash proceeds from trade accounts receivables securitized, with $11.0 million remaining capacity to receive additional proceeds or issue letters of credit.

The agreement governing the accounts receivable securitization facility (the “Purchase Agreement”) requires the operating partnership to maintain a fixed charge coverage ratio of not less than 1.00x and a senior secured leverage ratio of not greater than 3.00x. The operating partnership was in compliance with these financial ratio requirements as of October 31, 2020. However, if at any time the operating partnership is not in compliance with these financial ratio requirements, Ferrellgas, L.P. will be unable to access the facility for working capital or other cash requirements and the facility may be terminated. This facility matures in May 2021 and includes an option, at Ferrellgas, L.P.’s request and consent, for the purchasers in their sole discretion to extend the facility for up to an additional three years.

40


F.    Debt

Long-term debt

Long-term debt consists of the following:

    

October 31, 2020

    

July 31, 2020

Unsecured senior notes

 

  

 

  

Fixed rate, 6.50%, due 2021 (1)

$

500,000

$

500,000

Fixed rate, 6.75%, due 2023 (2)

 

500,000

 

500,000

Fixed rate, 6.75%, due 2022, net of unamortized premium of $770 and $937 at October 31, 2020 and July 31, 2020, respectively (3)

 

475,770

 

475,937

Secured senior notes

 

  

 

  

Fixed rate, 10.00%, due 2025, net of unamortized premium of $3,424 and $3,573 at October 31, 2020 and July 31, 2020, respectively (4)

 

703,424

 

703,573

Notes payable

 

  

 

  

9.7% and 9.4% weighted average interest rate at October 31, 2020 and July 31, 2020, respectively, due 2020 to 2029, net of unamortized discount of $449 and $537 at October 31, 2020 and July 31, 2020, respectively

 

3,956

 

4,564

Total debt, excluding unamortized debt issuance and other costs

 

2,183,150

 

2,184,074

Unamortized debt issuance and other costs

 

(33,949)

 

(35,583)

Less: current portion of long-term debt

 

502,095

 

502,095

Long-term debt

$

1,647,106

$

1,646,396

(1)During November 2010, Ferrellgas, L.P. issued $500.0 million aggregate principal amount of 6.50% senior notes due 2021.These notes are general unsecured senior obligations of Ferrellgas, L.P. and are (i) effectively junior to all existing and future senior secured indebtedness of Ferrellgas, L.P., to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of the Ferrellgas, L.P.’s subsidiaries. The senior notes bear interest from the date of issuance, payable semi-annually in arrears on May 1 and November 1 of each year. The outstanding principal amount is due on May 1, 2021.
(2)During June 2015, Ferrellgas, L.P. issued $500.0 million aggregate principal amount of 6.75% senior notes due 2023. These notes are general unsecured senior obligations of Ferrellgas, L.P. and certain subsidiaries and are (i) effectively junior to all existing and future senior secured indebtedness of Ferrellgas, L.P. and such subsidiaries, to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of any subsidiary of Ferrellgas, L.P. that is not a guarantor of these notes. The senior notes bear interest from the date of issuance, payable semi-annually in arrears on June 15 and December 15 of each year. The outstanding principal amount is due on June 15, 2023. Ferrellgas, L.P. would incur prepayment penalties if it were to repay the notes prior to June 15, 2021.
(3)During fiscal 2014, Ferrellgas, L.P. issued $475.0 million aggregate principal amount of 6.75% senior notes due 2022, $325.0 million of which was issued at par and $150.0 million of which was issued at 104% of par. These notes are general unsecured senior obligations of Ferrellgas, L.P. and are (i) effectively junior to all existing and future senior secured indebtedness of Ferrellgas, L.P., to the extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of Ferrellgas, L.P.’s subsidiaries. The senior notes bear interest from the date of issuance, payable semi-annually in arrears on January 15 and July 15 of each year. The outstanding principal amount is due on January 15, 2022.
(4)During April 2020, Ferrellgas, L.P. issued $700.0 million aggregate principal amount of 10.00% senior secured first lien notes due 2025, $575.0 million of which was issued at par and $125.0 million of which was issued at 103% of par. These notes are senior secured obligations of Ferrellgas, L.P. and the guarantors of such notes, including Ferrellgas Partners, the general partners of Ferrellgas, L.P. and certain subsidiaries, and are (i) effectively senior to all existing senior unsecured indebtedness of Ferrellgas, L.P. and the guarantors, to the

41


extent of the value of the assets securing such debt, and (ii) structurally subordinated to all existing and future indebtedness and obligations of Ferrellgas Receivables, LLC, a special purpose subsidiary that does not guarantee the notes. The senior notes bear interest from the date of issuance, payable semiannually in arrears on April 15 and October 15 of each year. The operating partnership would incur prepayment penalties if it were to repay the notes prior to April 15, 2024. The outstanding principal amount is due on April 15, 2025.

The scheduled principal payments on long-term debt are as follows:

Payment due by fiscal year

    

Scheduled
principal payments

2021

$

501,425

2022

 

476,435

2023

 

500,999

2024

 

329

2025

 

700,199

Thereafter

 

19

Total

$

2,179,406

Letters of credit outstanding at October 31, 2020 and July 31, 2020 totaled $127.1 million and $126.0 million, respectively, and were used to secure insurance arrangements, product purchases and commodity hedges. At October 31, 2020 and July 31, 2020, Ferrellgas, L.P. did not have in place a credit facility providing for the issuance of letters of credit and had $79.4 million and $78.2 million, respectively, of restricted cash pledged as cash collateral for letters of credit outstanding. Additionally, at both October 31, 2020 and July 31, 2020, Ferrellgas, L.P. also issued letters of credit of $50.0 million by utilizing our liquidity available on the accounts receivable securitization facility.

Forbearance Agreement with respect to Ferrellgas Partners’ 8.625% Unsecured Senior Notes due June 15, 2020

On June 7, 2020, Ferrellgas Partners and additional Ferrellgas entities entered into a Forbearance Agreement (the “Forbearance Agreement”) with the beneficial owners (or nominees, investment managers, advisors or subadvisors for the beneficial owners, collectively referred to as the “Forbearing Noteholders”) of approximately 77% of the aggregate principal amount of Ferrellgas Partners’ 8.625% unsecured senior notes due June 15, 2020, pursuant to which the Forbearing Noteholders agreed to forbear from exercising any default-related rights and remedies with respect to the Ferrellgas Partners Notes and to direct the trustee thereunder not to take any remedial action. The forbearance period under the Forbearance Agreement expired on August 15, 2020. Following the expiration of the forbearance period, discussions with representatives of the Forbearing Noteholders have continued.

Financial covenants

The indenture governing the outstanding notes of Ferrellgas Partners and the agreements governing the outstanding notes of Ferrellgas, L.P. contain various covenants that limit Ferrellgas Partners’ ability and the ability of specified subsidiaries to, among other things, make restricted payments and incur additional indebtedness. The general partner believes that the most restrictive of these covenants are the restricted payments covenants discussed below.

Similar to the indenture governing the outstanding notes of Ferrellgas Partners, the indentures governing the outstanding notes of the operating partnership contain covenants that restrict the ability of the operating partnership to make certain restricted payments, including distributions to Ferrellgas Partners.  Under these covenants, subject to the limited exception described below, the operating partnership may not make a restricted payment unless its consolidated fixed charge coverage ratio (defined in the indentures generally to mean the ratio of trailing four quarters consolidated EBITDA to consolidated interest expense, both as adjusted for certain, specified items) is at least 1.75x , on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. As of October 31, 2020, the operating partnership’s consolidated fixed charge coverage ratio was 1.65x.

Under the covenants in the indentures governing Ferrellgas, L.P.’s unsecured notes, if the consolidated fixed charge coverage ratio is below 1.75x, Ferrellgas, L.P. may still make restricted payments in limited amounts determined under the indentures governing Ferrellgas, L.P.’s unsecured notes. The distributions made by Ferrellgas, L.P. on June 15, 2019 and December 15, 2019 for payment of interest on Ferrellgas Partners’ unsecured senior notes due June 2020 were made

42


from capacity under this limited exception to the ratio requirement under the indentures governing Ferrellgas, L.P.’s unsecured notes.

The indenture governing Ferrellgas, L.P.’s senior secured first lien notes due 2025 contains a similar but, in some respects, a different restricted payments covenant. The covenant in the secured notes indenture provides for the same 1.75x consolidated fixed charge coverage ratio test as the unsecured notes indentures and a limited exception when that ratio is below 1.75x. In addition, the secured notes indenture also provides that, subject to a separate limited exception, described below, Ferrellgas, L.P. generally may not make a restricted payment unless Ferrellgas, L.P.’s consolidated leverage ratio (defined in the secured notes indenture generally to mean the ratio of consolidated total debt to trailing four quarters consolidated EBITDA, both as adjusted for certain, specified items) is no greater than 5.5x, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. The consolidated leverage ratio test applies regardless of whether Ferrellgas, L.P.’s consolidated fixed coverage ratio is at least 1.75x or below 1.75x. As of October 31, 2020, Ferrellgas, L.P.’s consolidated leverage ratio was substantially in excess of 5.5x. Additionally, the secured notes indenture provides for restricted payments under its limited exception to the consolidated fixed charge coverage ratio test that is less than the capacity available under the similar exception in the unsecured notes indentures. However, the secured notes indenture contains a separate exception to both the consolidated fixed charge coverage ratio test and the consolidated leverage ratio test that can be utilized to make certain specified restricted payments in a limited amount when Ferrellgas, L.P. does not meet either the consolidated fixed charge coverage ratio test or the consolidated leverage ratio test. This separate exception under the secured notes indenture currently has capacity for such specified restricted payments that is substantially the same as the capacity under the most restrictive of Ferrellgas, L.P.’s unsecured notes indentures.

As described above, Ferrellgas Partners’ unsecured notes due 2020 matured on June 15, 2020, and the outstanding principal amount of those notes was due to be paid on that date, together with accrued interest to the maturity date. Although Ferrellgas, L.P. has some capacity to make distributions under Ferrellgas, L.P.’s unsecured and secured notes indentures, this capacity will not allow Ferrellgas, L.P. to make distributions to Ferrellgas Partners sufficient to pay the principal of and accrued interest on Ferrellgas Partners’ unsecured senior notes due 2020 due at the maturity of those notes. Additionally, the restrictions in these indentures currently limit the ability of Ferrellgas, L.P. to make distributions to Ferrellgas Partners to enable it to pay cash distributions to its unitholders. Ferrellgas Partners continues to comply with the restrictive covenants with respect to the $357.0 million aggregate principal amount of Ferrellgas Partners Notes due June 15, 2020 as Ferrellgas Partners continues to negotiate with the Forbearing Noteholders.

Debt and interest expense reduction strategy

Ferrellgas, L.P. continues to pursue a strategy to reduce its debt and interest expense. Opportunities include the generation of additional cash flows through accretive acquisitions, continued restructuring or refinancing of existing indebtedness, selling additional assets, maintaining the suspension of Ferrellgas Partners’ common unit distributions, issuing equity or executing one or more debt exchanges. Ferrellgas, L.P. expects to maintain its debt and interest expense reduction strategy until the consolidated leverage ratio reaches a level that it deems appropriate for its business. Ferrellgas, L.P. engaged Moelis & Company LLC as its financial advisor and the law firm of Squire Patton Boggs LLP to assist in its ongoing process to reduce existing debt and address its debt maturities.

G.    Partners’ deficit

Partnership distributions

Ferrellgas, L.P. has recognized the following distributions:

For the three months ended October 31, 

    

2020

    

2019

Ferrellgas Partners

$

$

100

General partner

 

 

1

See additional discussions about transactions with related parties in Note K – Transactions with related parties.

43


Accumulated other comprehensive income (loss) (“AOCI”)

See Note J – Derivative instruments and hedging activities for details regarding changes in the fair value of risk management financial derivatives recorded within AOCI for the three months ended October 31, 2020 and 2019.

General partner’s commitment to maintain its capital account

Ferrellgas, L.P.’s partnership agreement allows the general partner to have an option to maintain its 1.0101% general partner interest concurrent with the issuance of other additional equity.

During the three months ended October 31, 2020, the general partner made non-cash contributions of $7.0 thousand to Ferrellgas, L.P. to maintain its 1.0101% general partner interest.

During the three months ended October 31, 2019, the general partner made non-cash contributions of $8.0 thousand to Ferrellgas, L.P. to maintain its 1.0101% general partner interest.

H.    Revenue from contracts with customers

Disaggregation of revenue

Ferrellgas, L.P. disaggregates revenues based upon the type of customer and on the type of revenue. The following table presents retail propane revenues, wholesale propane revenues and other revenues. Retail revenues result from sales to end use customers, wholesale revenues result from sales to or through resellers and all other revenues include sales of appliances and other materials, other fees charged to customers and equipment rental charges.

    

For the three months ended October 31, 

    

2020

    

2019

 

Retail - Sales to End Users

$

174,645

$

180,417

Wholesale - Sales to Resellers

 

102,612

 

82,704

Other Gas Sales

 

3,792

 

10,264

Other

 

19,845

 

19,829

Propane and related equipment revenues

$

300,894

$

293,214

Contract assets and liabilities

Ferrellgas, L.P.’s performance obligations are generally limited to the delivery of propane for our retail and wholesale contracts. Ferrellgas, L.P.’s performance obligations with respect to sales of appliances and other materials and other revenues are limited to the delivery of the agreed upon good or service. Ferrellgas, L.P. does not have material performance obligations that are delivered over time, thus all of our revenue is recognized at the time the goods, including propane, are delivered or installed. Ferrellgas, L.P. offers “even pay” billing programs that can create customer deposits or advances, depending on whether Ferrellgas, L.P. has delivered more propane than the customer has paid for or whether the customer has paid for more propane than what has been delivered. Revenue is recognized from these customer deposits or advances to customers at the time product is delivered. The advance or deposit is considered to be a contract asset or liability. Additionally, from time to time, we have customers that pay in advance for goods or services, and such amounts result in contract liabilities.

Ferrellgas, L.P. incurs incremental commissions directly related to the acquisition or renewal of customer contracts. The commissions are calculated and paid based upon the number of gallons sold to the acquired or renewed customer. The total amount of commissions that we incur is not material and the commissions are expensed commensurate with the deliveries to which they relate; therefore, Ferrellgas, L.P. does not capitalize these costs.

44


The following table presents the opening and closing balances of Ferrellgas, L.P.’s receivables, contract assets, and contract liabilities:

    

October 31, 2020

    

July 31, 2020

Accounts receivable

$

132,570

$

108,483

Contract assets

$

3,699

$

7,079

Contract liabilities

 

 

  

Deferred revenue (1)

$

52,220

$

42,911


(1)Of the beginning balance of deferred revenue, $11.4 million was recognized as revenue during the three months ended October 31, 2020.

Remaining performance obligations

Ferrellgas, L.P.’s remaining performance obligations are generally limited to situations where its customers have remitted payment but have not yet received deliveries of propane. This most commonly occurs in Ferrellgas, L.P.’s even pay billing programs and Ferrellgas, L.P. expects that these balances will be recognized within a year or less as the customer takes delivery of propane.

I.    Fair value measurements

Derivative financial instruments

The following table presents Ferrellgas, L.P.’s financial assets and financial liabilities that are measured at fair value on a recurring basis for each of the fair value hierarchy levels, including both current and noncurrent portions, as of October 31, 2020 and July 31, 2020:

Asset (Liability)

Quoted Prices in Active

Markets for Identical

Significant Other

Assets and Liabilities

Observable Inputs

Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

October 31, 2020:

Assets:

 

  

 

  

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

7,161

$

$

7,161

Liabilities:

 

  

 

  

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

(1,557)

$

$

(1,557)

July 31, 2020:

 

  

 

  

 

  

 

  

Assets:

 

  

 

  

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

3,112

$

$

3,112

Liabilities:

 

  

 

  

 

  

 

  

Derivative financial instruments:

 

  

 

  

 

  

 

  

Commodity derivatives

$

$

(5,425)

$

$

(5,425)

Methodology

The fair values of Ferrellgas, L.P.’s non-exchange traded commodity derivative contracts are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators.

Other financial instruments

The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. At October 31, 2020 and

45


July 31, 2020, the estimated fair value of Ferrellgas, L.P.’s long-term debt instruments was $2,157.4 million and $2,054.4 million, respectively. Ferrellgas, L.P. estimates the fair value of long-term debt based on quoted market prices. The fair value of Ferrellgas, L.P.’s consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.

Ferrellgas, L.P. has other financial instruments such as trade accounts receivable which could expose it to concentrations of credit risk. The credit risk from trade accounts receivable is limited because of a large customer base which extends across many different U.S. markets.

J.    Derivative instruments and hedging activities

Ferrellgas, L.P. is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas, L.P. utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Of these, the propane commodity derivative instruments are designated as cash flow hedges.

Derivative instruments and hedging activity

During the three months ended October 31, 2020 and 2019, Ferrellgas, L.P. did not recognize any gain or loss in earnings related to hedge ineffectiveness and did not exclude any component of financial derivative contract gains or losses from the assessment of hedge effectiveness related to commodity cash flow hedges.

The following tables provide a summary of the fair value of derivatives within Ferrellgas, L.P.’s condensed consolidated balance sheets as of October 31, 2020 and July 31, 2020:

Final

October 31, 2020

Maturity

Asset Derivatives

Liability Derivatives

Derivative Instrument

    

Date

Location

    

Fair value

    

Location

    

Fair value

Derivatives designated as hedging instruments

December 2021

Commodity derivatives-propane

 

Prepaid expenses and other current assets

$

6,656

 

Other current liabilities

$

1,506

Commodity derivatives-propane

 

Other assets, net

 

505

 

Other liabilities

51

 

Total

$

7,161

 

Total

$

1,557

Final

July 31, 2020

Maturity

Asset Derivatives

Liability Derivatives

Derivative Instrument

    

Date

Location

    

Fair value

    

Location

    

Fair value

Derivatives designated as hedging instruments

December 2021

Commodity derivatives-propane

 

Prepaid expenses and other current assets

$

2,846

 

Other current liabilities

$

5,029

Commodity derivatives-propane

 

Other assets, net

 

266

 

Other liabilities

 

396

 

Total

$

3,112

 

Total

$

5,425

46


Ferrellgas, L.P.’s exchange traded commodity derivative contracts require cash margin deposit as collateral for contracts that are in a negative mark-to-market position. These cash margin deposits will be returned if mark-to-market conditions improve or will be applied against cash settlement when the contracts are settled. Liabilities represent cash margin deposits received by Ferrellgas, L.P. for contracts that are in a positive mark-to-market position. The following tables provide a summary of cash margin balances as of October 31, 2020 and July 31, 2020, respectively:

October 31, 2020

Assets

Liabilities

Description

    

Location

    

Amount

    

Location

    

Amount

Margin Balances

 

Prepaid expense and other current assets

$

9,381

 

Other current liabilities

$

5,768

 

Other assets, net

 

544

 

Other liabilities

 

483

$

9,925

 

  

$

6,251

July 31, 2020

Assets

Liabilities

Description

    

Location

    

Amount

    

Location

    

Amount

Margin Balances

 

Prepaid expense and other current assets

$

14,398

Other current liabilities

$

510

 

Other assets, net

 

1,433

Other liabilities

 

$

15,831

  

$

510

The following tables provide a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of comprehensive income (loss) for the three months ended October 31, 2020 and 2019 due to derivatives designated as cash flow hedging instruments:

For the three months ended October 31, 2020

Amount of Gain (Loss)

Location of Gain (Loss)

Reclassified from

Amount of Gain (Loss)

Reclassified from AOCI

AOCI into Income

Derivative Instrument

    

Recognized in AOCI

    

into Income

    

Effective portion

    

Ineffective portion

Commodity derivatives

$

5,767

    

Cost of product sold- propane and other gas liquids sales

$

(2,150)

$

$

5,767

 

  

$

(2,150)

$

For the three months ended October 31, 2019

Amount of Gain (Loss)

Location of Gain (Loss)

Reclassified from

Amount of Gain (Loss)

Reclassified from AOCI

AOCI into Income

Derivative Instrument

    

Recognized in AOCI

    

into Income

    

Effective portion

    

Ineffective portion

Commodity derivatives

$

(13,627)

 

Cost of product sold- propane and other gas liquids sales

$

(7,479)

$

$

(13,627)

$

(7,479)

$

The changes in derivatives included in AOCI for the three months ended October 31, 2020 and 2019 were as follows:

For the three months ended October 31, 

Gains and losses on derivatives included in AOCI

    

2020

    

2019

Beginning balance

$

(2,313)

$

(14,756)

Change in value of risk management commodity derivatives

 

5,767

 

(13,627)

Reclassification of losses on commodity hedges to cost of sales - propane and other gas liquids sales, net

 

2,150

 

7,479

Ending balance

$

5,604

$

(20,904)

Ferrellgas, L.P. expects to reclassify net gains of approximately $5.2 million to earnings during the next 12 months. These net gains are expected to be offset by increased margins on propane sales commitments Ferrellgas, L.P. has with its customers that qualify for the normal purchase normal sale exception.

During the three months ended October 31, 2020 and 2019, Ferrellgas, L.P. had no reclassifications to operations resulting from the discontinuance of any cash flow hedges arising from the probability of the original forecasted transactions not occurring within the originally specified period of time defined within the hedging relationship.

47


As of October 31, 2020, Ferrellgas, L.P. had financial derivative contracts covering 3.6 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.

Derivative financial instruments credit risk

Ferrellgas, L.P. is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas, L.P.’s counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas, L.P. maintains credit policies with regard to its counterparties that it believes reduce its overall credit risk. These policies include evaluating and monitoring its counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by Ferrellgas, L.P. in the forms of letters of credit, parental guarantees or cash. Ferrellgas, L.P. has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties. If these counterparties that make up the concentration failed to perform according to the terms of their contracts at October 31, 2020, the maximum amount of loss due to credit risk that Ferrellgas, L.P. would incur based upon the gross fair values of the derivative financial instruments is $3.5 million.

From time to time Ferrellgas, L.P. enters into derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas, L.P.’s debt rating. There were no open derivative contracts with credit-risk-related contingent features as of October 31, 2020.

K.    Transactions with related parties

Ferrellgas, L.P. has no employees and is managed and controlled by its general partner. Pursuant to Ferrellgas, L.P.’s partnership agreement, the general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on behalf of Ferrellgas, L.P. and all other necessary or appropriate expenses allocable to Ferrellgas, L.P. or otherwise reasonably incurred by its general partner in connection with operating Ferrellgas, L.P.’s business. These costs primarily include compensation and benefits paid to employees of the general partner who perform services on Ferrellgas, L.P.’s behalf and are reported in the condensed consolidated statements of operations as follows:

For the three months ended October 31, 

    

2020

    

2019

 

Operating expense

$

60,980

$

63,471

General and administrative expense

$

6,719

$

6,487

See additional discussions about transactions with the general partner and related parties in Note G – Partners’ deficit.

L.    Contingencies and commitments

Litigation

Ferrellgas, L.P.’s operations are subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane and, prior to the sales of midstream operations in fiscal 2018, crude oil. As a result, at any given time, Ferrellgas, L.P. can be threatened with or named as a defendant in various lawsuits arising in the ordinary course of business. Other than as discussed below, Ferrellgas, L.P. is not a party to any legal proceedings other than various claims and lawsuits arising in the ordinary course of business. It is not possible to determine the ultimate disposition of these matters; however, management is of the opinion that there are no known claims or contingent claims that are reasonably expected to have a material adverse effect on the consolidated financial condition, results of operations and cash flows of Ferrellgas, L.P.

Ferrellgas, L.P. has been named as a defendant, along with a competitor, in putative class action lawsuits filed in multiple jurisdictions. The lawsuits, which were consolidated in the Western District of Missouri on October 16, 2014, allege that Ferrellgas and a competitor coordinated in 2008 to reduce the fill level in barbeque cylinders and combined to persuade a common customer to accept that fill reduction, resulting in increased cylinder costs to direct customers and end-user customers in violation of federal and certain state antitrust laws. The lawsuits seek treble damages, attorneys’

48


fees, injunctive relief and costs on behalf of the putative class. These lawsuits have been coordinated for pretrial purposes by the multidistrict litigation panel. The Federal Court for the Western District of Missouri initially dismissed all claims brought by direct and indirect customers other than state law claims of indirect customers under Wisconsin, Maine and Vermont law. The direct customer plaintiffs filed an appeal, which resulted in a reversal of the district court’s dismissal. We filed a petition for a writ of certiorari which was denied. An appeal by the indirect customer plaintiffs resulted in the court of appeals affirming the dismissal of the federal claims and remanding the case to the district court to decide whether to exercise supplemental jurisdiction over the remaining state law claims. Thereafter, in August 2019, Ferrellgas, L.P. reached a settlement with the direct customers, pursuant to which it agreed to pay a total of $6.25 million to resolve all claims asserted by the putative direct purchaser class. With respect to the indirect customers, the district court exercised supplemental jurisdiction over the remaining state law claims, but then granted in part Ferrellgas’ pleadings-based motion and dismissed 11 of the 24 remaining state law claims. As a result, there are 13 remaining state law claims brought by a putative class of indirect customers. Ferrellgas, L.P. believes it has strong defenses and intends to vigorously defend itself against these remaining claims. Ferrellgas, L.P. does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuit.

Ferrellgas, L.P. and Bridger Logistics, LLC (“Bridger”), have been named, along with two former officers, in a lawsuit filed by Eddystone Rail Company ("Eddystone") on February 2, 2017 in the Eastern District of Pennsylvania (the "EDPA Lawsuit"). Eddystone indicated that it has prevailed in or settled an arbitration against Jamex Transfer Services (“JTS”), previously named Bridger Transfer Services, a former subsidiary of Bridger. The arbitration involved a claim against JTS for money due for deficiency payments under a contract for the use of an Eddystone facility used to offload crude from rail onto barges. Eddystone alleges that Ferrellgas transferred assets out of JTS prior to the sale of the membership interest in JTS to Jamex Transfer Holdings, and that those transfers should be avoided so that the assets can be used to satisfy the amount owed by JTS to Eddystone as a result of the arbitration. Eddystone also alleges that JTS was an “alter ego” of Bridger and Ferrellgas and that Bridger and Ferrellgas breached fiduciary duties owed to Eddystone as a creditor of JTS. Ferrellgas believes that Ferrellgas and Bridger have valid defenses to these claims and to Eddystone’s primary claim against JTS for breach of contract. The lawsuit does not specify a specific amount of damages that Eddystone is seeking; however, Ferrellgas believes that the amount of such damages, if ultimately owed to Eddystone, could be material to Ferrellgas. Ferrellgas intends to vigorously defend this claim. On August 24, 2017, Ferrellgas filed a third-party complaint against JTS, Jamex Transfer Holdings, and other related persons and entities (the "Third-Party Defendants"), asserting claims for breach of contract, indemnification of any losses in the EDPA Lawsuit, tortious interference with contract, and contribution. On June 25, 2018, Ferrellgas entered into an agreement with the Third-Party Defendants which, among other things, resulted in a dismissal of the claims against the Third-Party Defendants from the lawsuit. The lawsuit is in the discovery stage; as such, management does not currently believe a loss is probable or reasonably estimable at this time.

M.    Guarantor financial information

The $500.0 million aggregate principal amount of registered 6.75% senior notes due 2023 co-issued by Ferrellgas, L.P. and Ferrellgas Finance Corp. are fully and unconditionally and jointly and severally guaranteed by all of Ferrellgas, L.P.’s 100% owned subsidiaries except: (i) Ferrellgas Finance Corp; (ii) certain special purposes subsidiaries formed for use in connection with our accounts receivable securitization; and (iii) foreign subsidiaries. Guarantees of these senior notes will be released under certain circumstances, including (i) in connection with any sale or other disposition of (a) all or substantially all of the assets of a guarantor or (b) all of the capital stock of such guarantor (including by way of merger or consolidation), in each case, to a person that is not Ferrellgas, L.P. or a restricted subsidiary of Ferrellgas, L.P., (ii) if Ferrellgas, L.P. designates any restricted subsidiary that is a guarantor as an unrestricted subsidiary, (iii) upon defeasance or discharge of the notes, (iv) upon the liquidation or dissolution of such guarantor, or (v) at such time as such guarantor ceases to guarantee any other indebtedness of either of the issuers and any other guarantor.

The guarantor financial information discloses in separate columns the financial position, results of operations and the cash flows of Ferrellgas, L.P. (Parent), Ferrellgas Finance Corp. (co-issuer), Ferrellgas, L.P.’s guarantor subsidiaries on a combined basis, and Ferrellgas, L.P.’s non-guarantor subsidiaries on a combined basis. The dates and the periods presented in the guarantor financial information are consistent with the periods presented in Ferrellgas, L.P.’s condensed consolidated financial statements.

49


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(in thousands)

    

As of October 31, 2020

    

Ferrellgas, L.P.

    

Ferrellgas

    

    

    

    

(Parent and

Finance Corp.

Guarantor

Non-Guarantor

Co-Issuer)

(Co-Issuer)

Subsidiaries

Subsidiaries

Eliminations

Consolidated

ASSETS

Current assets:

Cash and cash equivalents

$

296,890

$

1

$

$

2,631

$

$

299,522

Accounts and notes receivable, net

 

15,547

 

 

 

103,941

 

 

119,488

Intercompany receivables

 

87,191

 

 

 

 

(87,191)

 

Inventories

 

78,980

 

 

 

 

 

78,980

Prepaid expenses and other current assets

 

40,044

 

 

 

 

 

40,044

Total current assets

 

518,652

 

1

 

 

106,572

 

(87,191)

 

538,034

Property, plant and equipment, net

 

592,132

 

 

 

 

 

592,132

Goodwill, net

 

246,946

 

 

 

 

 

246,946

Intangible assets, net

 

101,812

 

 

 

 

 

101,812

Investments in consolidated subsidiaries

 

37,821

 

 

 

 

(37,821)

 

Operating lease right-of-use assets

100,349

100,349

Other assets, net

 

71,029

 

 

2,255

 

238

 

 

73,522

Total assets

$

1,668,741

$

1

$

2,255

$

106,810

$

(125,012)

$

1,652,795

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

 

  

 

  

 

  

 

  

 

  

 

  

Current liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Accounts payable

$

44,641

$

$

$

$

$

44,641

Intercompany payables

 

 

 

 

87,191

 

(87,191)

 

Current portion of long-term debt

502,095

502,095

Current operating lease liabilities

28,280

28,280

Other current liabilities

 

175,856

 

 

 

(15,946)

 

 

159,910

Total current liabilities

 

750,872

 

 

 

71,245

 

(87,191)

 

734,926

Long-term debt

1,647,106

 

 

 

 

 

1,647,106

Operating lease liabilities

83,337

83,337

Other liabilities

 

49,543

 

 

 

 

 

49,543

Contingencies and commitments

 

  

 

  

 

  

 

  

 

  

 

  

Partners' capital (deficit):

 

  

 

  

 

  

 

  

 

  

 

  

Partners' equity

 

(867,721)

 

1

 

2,255

 

35,565

 

(37,821)

 

(867,721)

Accumulated other comprehensive income

 

5,604

 

 

 

 

 

5,604

Total partners' capital (deficit)

 

(862,117)

 

1

 

2,255

 

35,565

 

(37,821)

 

(862,117)

Total liabilities and partners' capital (deficit)

$

1,668,741

$

1

$

2,255

$

106,810

$

(125,012)

$

1,652,795

50


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(in thousands)

    

As of July 31, 2020

    

Ferrellgas, L.P.

    

Ferrellgas

    

    

    

    

(Parent and

Finance Corp.

Guarantor

Non-Guarantor

Co-Issuer)

(Co-Issuer)

Subsidiaries

Subsidiaries

Eliminations

Consolidated

ASSETS

  

  

  

  

  

  

Current assets:

  

  

  

  

  

  

Cash and cash equivalents

$

332,244

$

1

$

$

1,510

$

$

333,755

Accounts and notes receivable, net

 

11,879

 

 

24

 

89,535

 

 

101,438

Intercompany receivables

 

69,980

 

 

 

 

(69,980)

 

Inventories

 

72,664

 

 

 

 

.

 

72,664

Prepaid expenses and other current assets

 

35,897

 

 

 

 

 

35,897

Total current assets

 

522,664

 

1

 

24

 

91,045

 

(69,980)

 

543,754

Property, plant and equipment, net

 

591,042

 

 

 

 

 

591,042

Goodwill, net

 

247,195

 

 

 

 

 

247,195

Intangible assets, net

 

104,049

 

 

 

 

 

104,049

Investments in consolidated subsidiaries

 

37,662

 

 

 

 

(37,662)

 

Operating lease right-of-use assets

107,349

107,349

Other assets, net

 

72,137

 

 

2,255

 

356

 

 

74,748

Total assets

$

1,682,098

$

1

$

2,279

$

91,401

$

(107,642)

$

1,668,137

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

 

  

 

  

 

  

 

  

 

  

 

  

Current liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Accounts payable

$

33,944

$

$

$

$

$

33,944

Intercompany payables

69,980

(69,980)

Current portion of long-term debt

502,095

502,095

Current operating lease liabilities

29,345

29,345

Other current liabilities

 

162,097

 

 

 

(13,961)

 

 

148,136

Total current liabilities

 

727,481

 

 

 

56,019

 

(69,980)

 

713,520

Long-term debt

 

1,646,396

 

 

 

 

 

1,646,396

Operating lease liabilities

89,022

89,022

Other liabilities

 

51,190

 

 

 

 

 

51,190

Contingencies and commitments

 

  

 

  

 

  

 

  

 

  

 

  

Partners' capital (deficit):

 

  

 

  

 

  

 

  

 

  

 

  

Partners' equity

(829,678)

1

2,279

35,382

(37,662)

(829,678)

Accumulated other comprehensive income

 

(2,313)

 

 

 

 

 

(2,313)

Total partners' capital (deficit)

 

(831,991)

 

1

 

2,279

 

35,382

 

(37,662)

 

(831,991)

Total liabilities and partners' capital (deficit)

$

1,682,098

$

1

$

2,279

$

91,401

$

(107,642)

$

1,668,137

51


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(in thousands)

    

For the three months ended October 31, 2020

    

Ferrellgas, L.P.

    

Ferrellgas

    

    

    

    

(Parent and

Finance Corp.

Guarantor

Non-Guarantor

Co-Issuer)

(Co-Issuer)

Subsidiaries

Subsidiaries

Eliminations

Consolidated

Revenues:

  

 

  

 

  

 

  

 

  

 

  

Propane and other gas liquids sales

$

281,049

$

$

$

$

$

281,049

Other

 

19,845

 

 

 

 

 

19,845

Total revenues

 

300,894

 

 

 

 

 

300,894

Costs and expenses:

 

 

  

 

  

 

  

 

  

 

  

Cost of sales - propane and other gas liquids sales

 

137,627

 

 

 

 

 

137,627

Cost of sales - other

 

3,667

 

 

 

 

 

3,667

Operating expense - personnel, vehicle, plant and other

 

109,027

 

 

 

737

 

(737)

 

109,027

Operating expense - equipment lease expense

 

6,830

 

 

 

 

 

6,830

Depreciation and amortization expense

 

21,390

 

 

 

 

 

21,390

General and administrative expense

 

13,074

 

2

 

 

 

 

13,076

Non-cash employee stock ownership plan compensation charge

 

708

 

 

 

 

 

708

Loss on asset sales and disposals

 

813

 

 

 

 

 

813

Operating income (loss)

 

7,758

 

(2)

 

 

(737)

 

737

 

7,756

Interest expense

 

(45,901)

 

 

 

(627)

 

 

(46,528)

Other income (expense), net

 

129

 

 

(21)

 

1,679

 

(1,679)

 

108

Earnings (loss) before income taxes

 

(38,014)

 

(2)

 

(21)

 

315

 

(942)

 

(38,664)

Income tax expense

 

87

 

 

 

 

 

87

Equity in earnings (loss) of subsidiaries

 

292

 

 

 

 

(292)

 

Net earnings (loss)

 

(37,809)

 

(2)

 

(21)

 

315

 

(1,234)

 

(38,751)

Other comprehensive income

 

7,917

 

 

 

 

 

7,917

Comprehensive income (loss)

$

(29,892)

$

(2)

$

(21)

$

315

$

(1,234)

$

(30,834)

52


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(in thousands)

    

For the three months ended October 31, 2019

    

Ferrellgas, L.P.

    

Ferrellgas

    

    

    

    

(Parent and

Finance Corp.

Guarantor

Non-Guarantor

Co-Issuer)

(Co-Issuer)

Subsidiaries

Subsidiaries

Eliminations

Consolidated

Revenues:

  

 

  

 

  

 

  

 

  

 

  

Propane and other gas liquids sales

$

273,385

$

$

$

$

$

273,385

Other

 

19,829

 

 

 

 

 

19,829

Total revenues

 

293,214

 

 

 

 

 

293,214

Costs and expenses:

 

  

 

  

 

  

 

  

 

  

 

  

Cost of sales - propane and other gas liquids sales

 

134,028

 

 

 

 

 

134,028

Cost of sales - other

 

3,681

 

 

 

 

 

3,681

Operating expense - personnel, vehicle, plant and other

 

114,543

 

 

 

885

 

(885)

 

114,543

Operating expense - equipment lease expense

 

8,388

 

 

 

 

 

8,388

Depreciation and amortization expense

 

19,107

 

 

 

112

 

 

19,219

General and administrative expense

 

9,695

 

1

 

 

 

 

9,696

Non-cash employee stock ownership plan compensation charge

 

795

 

 

 

 

 

795

Loss on asset sales and disposals

 

2,235

 

 

 

 

 

2,235

Operating income (loss)

 

742

 

(1)

 

 

(997)

 

885

 

629

Interest expense

 

(35,691)

 

 

 

(1,186)

 

 

(36,877)

Other income (expense), net

 

(132)

 

 

720

 

(720)

 

(132)

Earnings (loss) before income taxes

 

(35,081)

 

(1)

 

 

(1,463)

 

165

 

(36,380)

Income tax expense

 

518

 

 

 

 

 

518

Equity in earnings (loss) of subsidiary

 

(1,464)

 

 

 

 

1,464

 

Net earnings (loss)

 

(37,063)

 

(1)

 

 

(1,463)

 

1,629

 

(36,898)

Other comprehensive loss

 

(6,148)

 

 

 

 

 

(6,148)

Comprehensive income (loss)

$

(43,211)

$

(1)

$

$

(1,463)

$

1,629

$

(43,046)

53


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(in thousands)

For the three months ended October 31, 2020

  

Ferrellgas, L.P.

  

Ferrellgas

  

  

  

  

(Parent and

Finance Corp.

Guarantor

Non-Guarantor

Co-Issuer)

(Co-Issuer)

Subsidiaries

Subsidiaries

Eliminations

Consolidated

Cash flows from operating activities:

 

  

 

  

 

  

 

  

 

  

 

  

Net cash provided by (used in) operating activities

$

(9,925)

$

(2)

$

3

$

(2,687)

$

1,121

$

(11,490)

Cash flows from investing activities:

 

  

 

  

 

  

 

  

 

  

 

  

Business acquisitions, net of cash acquired

 

 

 

 

 

 

Capital expenditures

 

(19,454)

 

 

 

 

 

(19,454)

Proceeds from sale of assets

 

1,407

 

 

 

 

 

1,407

Cash collected for purchase of interest in accounts receivable

 

 

 

 

153,131

 

(153,131)

 

Cash remitted to Ferrellgas, L.P. for accounts receivable

 

 

 

 

(152,010)

 

152,010

 

Intercompany loan to affiliate

(2,686)

2,686

Net cash provided by (used in) investing activities

 

(20,733)

 

 

 

1,121

 

1,565

 

(18,047)

Cash flows from financing activities:

 

  

 

  

 

  

 

  

 

  

 

  

Payments on long-term debt

 

(696)

 

 

 

 

 

(696)

Net changes in advances with consolidated entities

 

2

 

(3)

 

2,687

(2,686)

 

Cash payments for principal portion of finance lease liability

 

(1,703)

 

 

 

 

 

(1,703)

Cash paid for financing costs and other

(2,297)

 

 

 

 

(2,297)

Net cash provided by (used in) financing activities

 

(4,696)

 

2

 

(3)

 

2,687

 

(2,686)

 

(4,696)

Net change in cash and cash equivalents

 

(35,354)

 

 

 

1,121

 

 

(34,233)

Cash and cash equivalents - beginning of year

 

332,244

 

1

 

 

1,510

 

 

333,755

Cash, cash equivalents and restricted cash - end of year

$

296,890

$

1

$

$

2,631

$

$

299,522

54


FERRELLGAS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(in thousands)

For the three months ended October 31, 2019

    

Ferrellgas, L.P.

    

Ferrellgas

    

    

    

    

(Parent and

Finance Corp.

Guarantor

Non-Guarantor

Co-Issuer)

(Co-Issuer)

Subsidiaries

Subsidiaries

Eliminations

Consolidated

Cash flows from operating activities:

 

  

 

  

 

  

 

  

 

  

 

  

Net cash provided by (used in) operating activities

$

21,350

$

(1)

$

506

$

(3,708)

$

(11,000)

$

7,147

Cash flows from investing activities:

 

  

 

  

 

  

 

  

 

  

 

  

Business acquisitions, net of cash acquired

 

(6,400)

 

 

 

 

 

(6,400)

Capital expenditures

 

(18,126)

 

 

 

 

 

(18,126)

Proceeds from sale of assets

 

835

 

 

 

 

 

835

Cash collected for purchase of interest in accounts receivable

 

 

 

 

161,600

 

(161,600)

 

Cash remitted to Ferrellgas, L.P. for accounts receivable

 

 

 

 

(172,600)

 

172,600

 

Intercompany loan to affiliate

 

(3,203)

 

 

 

 

3,203

 

Cash payment to construct assets in connection with future lease transactions

(16,879)

(16,879)

Cash receipts in connection with leased vehicles

5,863

5,863

Net cash provided by (used in) investing activities

 

(37,910)

 

 

 

(11,000)

 

14,203

 

(34,707)

Cash flows from financing activities:

 

  

 

  

 

  

 

  

 

  

 

  

Distributions

 

(101)

 

 

 

 

 

(101)

Reductions in long-term debt

 

(512)

 

 

 

 

 

(512)

Net additions to short-term borrowings

 

37,000

 

 

 

 

 

37,000

Net additions to collateralized short-term borrowings

 

 

 

 

11,000

 

 

11,000

Net changes in advances with consolidated entries

 

 

1

 

(506)

 

3,708

 

(3,203)

 

Cash payments for principal portion of finance lease liability

(38)

(38)

Cash paid for financing costs and other

 

(1,102)

 

 

 

 

 

(1,102)

Net cash provided by (used in) financing activities

 

35,247

 

1

 

(506)

 

14,708

 

(3,203)

 

46,247

Net change in cash and cash equivalents

 

18,687

 

 

 

 

 

18,687

Cash and cash equivalents - beginning of year

 

11,045

 

1

 

 

 

 

11,046

Cash and cash equivalents - end of year

$

29,732

$

1

$

$

$

$

29,733

55


N.    Subsequent events

Ferrellgas, L.P. has evaluated events and transactions occurring after the balance sheet date through the date Ferrellgas, L.P.’s condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that require recognition or disclosure in its condensed consolidated financial statements, except as follows.

Transaction Support Agreement

On December 10, 2020, Ferrellgas Partners, Ferrellgas Partners Finance Corp., Ferrellgas, L.P. and additional Ferrellgas entities (collectively, the “Company Parties”) entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims (collectively, the “Consenting Noteholders”) arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. As of December 10, 2020, the Consenting Noteholders hold or represent, in the aggregate, approximately 74% of the outstanding amount of the Ferrellgas Partners Notes due June 15, 2020.

The TSA sets forth (i) a restructuring process to satisfy the obligations of Ferrellgas Partners and Ferrellgas Partners Finance Corp. under the Ferrellgas Partners Notes due June 15, 2020 (the “Ferrellgas Partners Transactions”), which will be effectuated through pre-packaged voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code filed by only Ferrellgas Partners and Ferrellgas Partners Finance Corp. and the confirmation of a pre-packaged plan of reorganization for Ferrellgas Partners and Ferrellgas Partners Finance Corp., and (ii) a refinancing process of Ferrellgas, L.P., including but not limited to, replacement of Ferrellgas, L.P.’s existing unsecured notes due 2021, 2022 and 2023 (the “operating partnership Transactions” and, together with the Ferrellgas Partners Transactions, the “Transactions”), which will be consummated on the effective date (the “Effective Date”) of Ferrellgas Partners’ plan of reorganization that implements the Ferrellgas Partners Transactions (the “Plan”) and will close simultaneously with the Ferrellgas Partners Transactions effectuated under the Plan.

Generally, the TSA and the Transactions contemplate, among other things, the transactions and certain changes to the capital structure and governance of the Company Parties as described in more detail in the TSA.

Pursuant to the TSA, and subject to the terms and conditions thereof, the parties thereto have agreed to support, act in good faith and take all steps reasonably necessary and desirable to implement and consummate the Transactions until the TSA is terminated. The Consenting Noteholders have agreed, among other things, (i) to forbear from taking actions with respect to any default or event of default by the Company Parties under the indenture governing the Ferrellgas Partners Notes which arises solely as a result of the failure to make payments of the principal due on the Ferrellgas Partners Notes, and (ii) to vote in favor of any matter requiring approval to the extent necessary to implement the Transactions and the Plan.

The TSA contains certain milestones relating to the commencement of the solicitation of acceptances of the Plan (the “Solicitation”), the refinancing process and the Chapter 11 Cases, which include the dates by which Ferrellgas Partners is required to commence the Solicitation and, thereafter, commence the Chapter 11 Cases or obtain certain approval orders of the United States Bankruptcy Court for the District of Delaware. In addition, the milestones include the obligation of Ferrellgas Partners and Ferrellgas Partners Finance Corp. to emerge from chapter 11 protection no later than April 4, 2021, unless that deadline is extended pursuant to the terms of the TSA.

The TSA also provides that the TSA may be terminated by the Required Consenting Noteholders (as defined therein) with respect to the Consenting Noteholders or by any Company Party with respect to the Company Parties upon the occurrence of certain events set forth therein. In particular, the Company Parties may terminate the TSA in the event the governing body of any Company Party determines, after consulting with counsel, (i) that continuing to pursue any of the Transactions in the manner contemplated by the TSA would be inconsistent with the exercise of its contractual or fiduciary duties or applicable law or (ii) in the exercise of its contractual or fiduciary duties, to pursue an alternative transaction proposal.

There is no assurance that the restructuring and refinancing processes described in the TSA will be consummated.

56


FERRELLGAS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas, L.P.)

CONDENSED BALANCE SHEETS

(unaudited)

October 31, 2020

July 31, 2020

ASSETS

 

  

 

  

Cash

$

1,100

$

1,100

Prepaid expenses and other current assets

 

 

1,500

Total assets

$

1,100

$

2,600

Contingencies and commitments (Note B)

 

  

 

  

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

 

84,240

 

84,187

Accumulated deficit

 

(84,140)

 

(82,587)

Total stockholder's equity

$

1,100

$

2,600

See notes to condensed financial statements.

57


FERRELLGAS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas, L.P.)

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

 

General and administrative expense

$

1,553

$

1,019

Net loss

$

(1,553)

$

(1,019)

See notes to condensed financial statements.

58


FERRELLGAS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas, L.P.)

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

For the three months ended October 31, 

    

2020

    

2019

Cash flows from operating activities:

Net loss

$

(1,553)

$

(1,019)

Changes in operating assets and liabilities:

Prepaid expenses and other current assets

 

1,500

 

966

Cash used in operating activities

 

(53)

 

(53)

Cash flows from financing activities:

Capital contribution

 

53

 

53

Cash provided by financing activities

 

53

 

53

Net change in cash

 

 

Cash - beginning of period

 

1,100

 

1,100

Cash - end of period

$

1,100

$

1,100

See notes to condensed financial statements.

59


FERRELLGAS FINANCE CORP.

(a wholly-owned subsidiary of Ferrellgas, L.P.)

(unaudited)

NOTES TO CONDENSED FINANCIAL STATEMENTS

A.    Formation

Ferrellgas Finance Corp. (the “Finance Corp.”), a Delaware corporation, was formed on January 16, 2003, and is a wholly-owned subsidiary of Ferrellgas, L.P. (the “Partnership”).

The Partnership contributed $1,000 to the Finance Corp. on January 24, 2003 in exchange for 1,000 shares of common stock.

The Finance Corp. has nominal assets, does not conduct any operations and has no employees.

Going Concern

The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note B – Contingencies and commitments, the Finance Corp serves as co-issuer and co-obligor for debt securities of the Partnership. The Partnership has $500.0 million in unsecured notes due May 1, 2021 that are classified as current in its condensed consolidated financial statements. This obligation is only reported on the condensed consolidated balance sheet of the Partnership. The ability of the Partnership to restructure, refinance or otherwise satisfy these notes is uncertain considering the level of other outstanding indebtedness. The Finance Corp. does not have sufficient cash reserves or the ability to generate sufficient future cash flows to satisfy its obligations as co-obligor of the debt securities of the Partnership. Given these concerns, we believe there is substantial doubt about the Finance Corp’s ability to continue as a going concern. The Partnership has engaged Moelis & Company LLC as its financial advisor and the law firm of Squire Patton Boggs LLP to assist in the Partnership’s ongoing process to reduce existing debt and address its debt maturities. On December 10, 2020, Ferrellgas Partners, Ferrellgas Partners Finance Corp., the Partnership, Finance Corp. and additional Ferrellgas entities entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. There is no assurance that the transactions contemplated by the TSA will be consummated and the outcome of Ferrellgas’ debt reduction strategy continues to remain uncertain. See Note C – Subsequent Events, for a discussion of the TSA and the transactions contemplated thereunder.

B.    Contingencies and commitments

The Finance Corp. serves as co-issuer and co-obligor for debt securities of the Partnership. The Finance Corp. is liable as co-issuer and co-obligor for (i) the $500 million aggregate principal amount of the Partnership’s unsecured senior notes due 2021, (ii) the $475 million aggregate principal amount of the Partnership’s unsecured senior notes due 2022, and (iii) the $500 million aggregate principal amount of the Partnership’s unsecured senior notes due 2023, which obligations are only reported on the Partnership’s condensed consolidated balance sheet.

C. Subsequent events

The Partnership has evaluated events and transactions occurring after the balance sheet date through the date the Partnership’s condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that require recognition or disclosure in its condensed consolidated financial statements, except as follows.

60


Transaction Support Agreement

On December 10, 2020, Ferrellgas Partners, Ferrellgas Partners Finance Corp., the Partnership, Finance Corp. and additional Ferrellgas entities (collectively, the “Company Parties”) entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims (collectively, the “Consenting Noteholders”) arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. As of December 10, 2020, the Consenting Noteholders hold or represent, in the aggregate, approximately 74% of the outstanding amount of the Ferrellgas Partners Notes due June 15, 2020.

The TSA sets forth (i) a restructuring process to satisfy the obligations of Ferrellgas Partners and Ferrellgas Partners Finance Corp. under the Ferrellgas Partners Notes due June 15, 2020 (the “Ferrellgas Partners Transactions”), which will be effectuated through pre-packaged voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code filed by only Ferrellgas Partners and Ferrellgas Partners Finance Corp. and the confirmation of a pre-packaged plan of reorganization for Ferrellgas Partners and Ferrellgas Partners Finance Corp., and (ii) a refinancing process of the Partnership and the Finance Corp., including but not limited to, replacement of the Partnership’s and the Finance Corp.’s existing unsecured notes due 2021, 2022 and 2023 (the “operating partnership Transactions” and, together with the Ferrellgas Partners Transactions, the “Transactions”), which will be consummated on the effective date (the “Effective Date”) of Ferrellgas Partners’ plan of reorganization that implements the Ferrellgas Partners Transactions (the “Plan”) and will close simultaneously with the Ferrellgas Partners Transactions effectuated under the Plan.

Generally, the TSA and the Transactions contemplate, among other things, the transactions and certain changes to the capital structure and governance of the Company Parties as described in more detail in the TSA.

Pursuant to the TSA, and subject to the terms and conditions thereof, the parties thereto have agreed to support, act in good faith and take all steps reasonably necessary and desirable to implement and consummate the Transactions until the TSA is terminated. The Consenting Noteholders have agreed, among other things, (i) to forbear from taking actions with respect to any default or event of default by the Company Parties under the indenture governing the Ferrellgas Partners Notes which arises solely as a result of the failure to make payments of the principal due on the Ferrellgas Partners Notes, and (ii) to vote in favor of any matter requiring approval to the extent necessary to implement the Transactions and the Plan.

The TSA contains certain milestones relating to the commencement of the solicitation of acceptances of the Plan (the “Solicitation”), the refinancing process and the Chapter 11 Cases, which include the dates by which Ferrellgas Partners is required to commence the Solicitation and, thereafter, commence the Chapter 11 Cases or obtain certain approval orders of the United States Bankruptcy Court for the District of Delaware. In addition, the milestones include the obligation of Ferrellgas Partners and Ferrellgas Partners Finance Corp. to emerge from chapter 11 protection no later than April 4, 2021, unless that deadline is extended pursuant to the terms of the TSA.

The TSA also provides that the TSA may be terminated by the Required Consenting Noteholders (as defined therein) with respect to the Consenting Noteholders or by any Company Party with respect to the Company Parties upon the occurrence of certain events set forth therein. In particular, the Company Parties may terminate the TSA in the event the governing body of any Company Party determines, after consulting with counsel, (i) that continuing to pursue any of the Transactions in the manner contemplated by the TSA would be inconsistent with the exercise of its contractual or fiduciary duties or applicable law or (ii) in the exercise of its contractual or fiduciary duties, to pursue an alternative transaction proposal.

There is no assurance that the restructuring and refinancing processes described in the TSA will be consummated.

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ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Our management’s discussion and analysis of financial condition and results of operations relates to Ferrellgas Partners and the operating partnership.

Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. have nominal assets, do not conduct any operations and have no employees other than officers. Ferrellgas Partners Finance Corp. serves as co-issuer and co-obligor for debt securities of Ferrellgas Partners, while Ferrellgas Finance Corp. serves as co-issuer and co-obligor for debt securities of the operating partnership. Accordingly, and due to the reduced disclosure format, a discussion of the results of operations, liquidity and capital resources of Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. is not presented.

In this Item 2 of the Quarterly Report on Form 10-Q, unless the context indicates otherwise:

“us,” “we,” “our,” “ours,” “consolidated,” or "Ferrellgas" are references exclusively to Ferrellgas Partners, L.P. together with its consolidated subsidiaries, including Ferrellgas Partners Finance Corp., Ferrellgas, L.P. and Ferrellgas Finance Corp., except when used in connection with “common units,” in which case these terms refer to Ferrellgas Partners, L.P. without its consolidated subsidiaries;
“Ferrellgas Partners” refers to Ferrellgas Partners, L.P. itself, without its consolidated subsidiaries;
the “operating partnership” refers to Ferrellgas, L.P., together with its consolidated subsidiaries, including Ferrellgas Finance Corp.;
our “general partner” (i) with respect to Ferrellgas Partners refers to Ferrellgas, Inc. and (ii) with respect to the operating partnership refers to (a) Ferrellgas, Inc., in the case of any economic general partner interest and (b) Ferrellgas, Inc., Ferrellgas GP II, LLC and Ferrellgas GP III, LLC, collectively, in the case of any voting general partner interest;
“Ferrell Companies” refers to Ferrell Companies, Inc., the sole shareholder or sole member, as applicable, of our general partners;
“unitholders” refers to holders of common units of Ferrellgas Partners;
"GAAP" refers to accounting principles generally accepted in the United States;
“retail sales” refers to Propane and other gas liquid sales: Retail - Sales to End Users or the volume of propane sold primarily to our residential, industrial/commercial and agricultural customers;
“wholesale sales” refers to Propane and other gas liquid sales: Wholesale - Sales to Resellers or the volume of propane sold primarily to our portable tank exchange customers and bulk propane sold to wholesale customers;
“other gas sales” refers to Propane and other gas liquid sales: Other Gas Sales or the volume of bulk propane sold to other third-party propane distributors or marketers and the volume of refined fuel sold;
“propane sales volume” refers to the volume of propane sold to our retail sales and wholesale sales customers;
“Ferrellgas Partners Notes” refers to the $357.0 million aggregate principal amount of 8.625% unsecured senior notes due June 15, 2020 co-issued by Ferrellgas Partners and Ferrellgas Partners Finance Corp.;
“Notes” refers to the notes of the condensed consolidated financial statements of Ferrellgas Partners or the operating partnership, as applicable; and

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“fiscal 2021” means the fiscal year ended July 31, 2021, “fiscal 2020” means the fiscal year ended July 31, 2020, “fiscal 2019” means the fiscal year ended July 31, 2019, and “fiscal 2018” means the fiscal year ended July 31, 2018.

Ferrellgas Partners is a holding entity that conducts no operations and has two direct subsidiaries, Ferrellgas Partners Finance Corp. and the operating partnership. Ferrellgas Partners’ only assets are its approximate 99% limited partnership interest in the operating partnership and its 100% equity interest in Ferrellgas Partners Finance Corp. The common units of Ferrellgas Partners are traded on the OTC Pink Market and our activities are primarily conducted through the operating partnership.

The operating partnership was formed on April 22, 1994, and accounts for substantially all of our consolidated assets, sales and operating earnings, except for interest expense related to the senior notes co-issued by Ferrellgas Partners and Ferrellgas Partners Finance Corp.

Our general partner performs all management functions for us and our subsidiaries and holds an approximate 1% general partner interest in Ferrellgas Partners and an approximate 1% general partner interest in the operating partnership. The parent company of our general partner, Ferrell Companies, beneficially owns approximately 23.4% of our outstanding common units. Ferrell Companies is owned 100% by an employee stock ownership trust.

We file annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and download our SEC filings over the Internet from several commercial document retrieval services as well as at the SEC’s website at www.sec.gov. Our SEC filings are also available on our website at www.ferrellgas.com at no cost as soon as reasonably practicable after our electronic filing or furnishing thereof with the SEC. Please note that any Internet addresses provided in this Quarterly Report on Form 10-Q are for informational purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such Internet addresses is intended or deemed to be incorporated by reference herein.

The following is a discussion of our historical financial condition and results of operations and should be read in conjunction with our audited historical consolidated financial statements and accompanying Notes thereto included in our Annual Report on Form 10-K for fiscal 2020 and in our unaudited historical condensed consolidated financial statements and accompanying Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

The discussions set forth in the “Results of Operations” and “Liquidity and Capital Resources” sections generally refer to Ferrellgas Partners and its consolidated subsidiaries. However, in these discussions there exists one material difference between Ferrellgas Partners and the operating partnership: Ferrellgas Partners has outstanding $357.0 million aggregate principal amount of 8.625% senior notes due June 15, 2020, and, accordingly, has interest expense that the operating partnership does not have. Ferrellgas Partners’ access to liquidity is dependent on distributions from the operating partnership. See the statements of operations in their respective condensed consolidated financial statements.

Cautionary Note Regarding Forward-looking Statements

Statements included in this report include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. These statements often 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. These statements often discuss plans, strategies, events or developments that we expect or anticipate will or may occur in the future and are based upon the beliefs and assumptions of our management and on the information currently available to them. In particular, statements, express or implied, concerning our future operating results or our ability to generate sales, income or cash flow are forward-looking statements.

Forward-looking statements are not guarantees of performance. You should not put undue reliance on any forward-looking statements. All forward-looking statements are subject to risks, uncertainties and assumptions that could cause our actual results to differ materially from those expressed in or implied by these forward-looking statements. Many of the factors that will affect our future results are beyond our ability to control or predict. Some of the risk factors that may affect our business, financial condition or results of operations include:

the effect of weather conditions on the demand for propane;

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the prices of wholesale propane, motor fuel and crude oil;
disruptions to the supply of propane;
competition from other industry participants and other energy sources;
energy efficiency and technology advances;
adverse changes in our relationships with our national tank exchange customers;
significant delays in the collection of accounts or notes receivable;
customer, counterparty, supplier or vendor defaults;
changes in demand for, and production of, hydrocarbon products;
disruptions to railroad operations on the railroads we use;
increased trucking and rail regulations;
inherent operating and litigation risks in gathering, transporting, handling and storing propane;
our inability to complete acquisitions or to successfully integrate acquired operations;
costs of complying with, or liabilities imposed under, environmental, health and safety laws;
the impact of pending and future legal proceedings;
the interruption, disruption, failure or malfunction of our information technology systems including due to cyber-attack;
the impact of changes in tax law that could adversely affect the tax treatment of Ferrellgas Partners for federal income tax purposes;
economic and political instability, particularly in areas of the world tied to the energy industry;
disruptions in the capital and credit markets;
access to available capital to meet our operating requirements up to and including the refinancing and/or restructuring of maturing debt instruments; and
the impact of the inclusion in the report of our auditor of an “emphasis of matter” paragraph regarding substantial doubt as to our ability to continue as a going concern.

When considering any forward-looking statement, you should also keep in mind the risk factors set forth in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for fiscal 2020. Any of these risks could impair our business, financial condition or results of operations. Any such impairment may affect our ability to make distributions to our unitholders or pay interest on the principal of any of our debt securities. In addition, the trading price of our securities could decline as a result of any such impairment.

Except for our ongoing obligations to disclose material information as required by federal securities laws, we undertake no obligation to update any forward-looking statements or risk factors after the date of this Quarterly Report on Form 10-Q.

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Recent developments

COVID-19

The coronavirus disease 2019 (COVID-19), which has been declared by the World Health Organization as a “Public Health Emergency of International Concern,” continues to spread and severely impact the economy of the United States and other countries around the world. COVID-19 poses the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from or limited in conducting business activities for an indefinite period of time. The outbreak of COVID-19 has already resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, manufacturing restrictions, declarations of national emergency and states of emergency, business shutdowns and restrictions on the movement of people throughout the United States and the world. While some of our business operations and support systems are deemed essential in many jurisdictions, we are continuing to assess the impact that COVID-19 may have on our results of operations and financial condition and cannot at this time accurately predict what effects these conditions will have on our operations and sales due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak and the length of the travel restrictions and business closures imposed by governments in different jurisdictions. Additionally, initiatives we have implemented or may implement to slow and/or reduce the impact of COVID-19, such as using staggered start times for drivers, may increase our operating expenses and reduce the efficiency of our operations. Any of the foregoing events or other unforeseen consequences of public health epidemics may have further adverse impacts on U.S. and global economic conditions, including a general slowdown in the U.S. economy, which could decrease demand for our products and have a material adverse effect on our results of operations and financial condition.

Transaction Support Agreement

On December 10, 2020, Ferrellgas Partners, Ferrellgas Partners Finance Corp., the operating partnership and additional Ferrellgas entities (collectively, the “Company Parties”) entered into a Transaction Support Agreement (the “TSA”) with certain holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that hold, claims (collectively, the “Consenting Noteholders”) arising under, derived from or based upon the indenture governing the Ferrellgas Partners Notes due June 15, 2020. As of December 10, 2020, the Consenting Noteholders hold or represent, in the aggregate, approximately 74% of the outstanding amount of the Ferrellgas Partners Notes due June 15, 2020.

The TSA sets forth (i) a restructuring process to satisfy the obligations of Ferrellgas Partners and Ferrellgas Partners Finance Corp. under the Ferrellgas Partners Notes due June 15, 2020 (the “Ferrellgas Partners Transactions”), which will be effectuated through pre-packaged voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code filed by only Ferrellgas Partners and Ferrellgas Partners Finance Corp. and the confirmation of a pre-packaged plan of reorganization for Ferrellgas Partners and Ferrellgas Partners Finance Corp., and (ii) a refinancing process of the operating partnership, including but not limited to, replacement of the operating partnership’s existing unsecured notes due 2021, 2022 and 2023 (the “operating partnership Transactions” and, together with the Ferrellgas Partners Transactions, the “Transactions”), which will be consummated on the effective date (the “Effective Date”) of Ferrellgas Partners’ plan of reorganization that implements the Ferrellgas Partners Transactions (the “Plan”) and will close simultaneously with the Ferrellgas Partners Transactions effectuated under the Plan.

Generally, the TSA and the Transactions contemplate, among other things, the transactions and certain changes to the capital structure and governance of the Company Parties as described in more detail in the TSA.

Pursuant to the TSA, and subject to the terms and conditions thereof, the parties thereto have agreed to support, act in good faith and take all steps reasonably necessary and desirable to implement and consummate the Transactions until the TSA is terminated. The Consenting Noteholders have agreed, among other things, (i) to forbear from taking actions with respect to any default or event of default by the Company Parties under the indenture governing the Ferrellgas Partners Notes which arises solely as a result of the failure to make payments of the principal due on the Ferrellgas Partners Notes, and (ii) to vote in favor of any matter requiring approval to the extent necessary to implement the Transactions and the Plan.

The TSA contains certain milestones relating to the commencement of the solicitation of acceptances of the Plan (the “Solicitation”), the refinancing process and the Chapter 11 Cases, which include the dates by which Ferrellgas Partners is required to commence the Solicitation and, thereafter, commence the Chapter 11 Cases or obtain certain approval

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orders of the United States Bankruptcy Court for the District of Delaware. In addition, the milestones include the obligation of Ferrellgas Partners and Ferrellgas Partners Finance Corp. to emerge from chapter 11 protection no later than April 4, 2021, unless that deadline is extended pursuant to the terms of the TSA.

The TSA also provides that the TSA may be terminated by the Required Consenting Noteholders (as defined therein) with respect to the Consenting Noteholders or by any Company Party with respect to the Company Parties upon the occurrence of certain events set forth therein. In particular, the Company Parties may terminate the TSA in the event the governing body of any Company Party determines, after consulting with counsel, (i) that continuing to pursue any of the Transactions in the manner contemplated by the TSA would be inconsistent with the exercise of its contractual or fiduciary duties or applicable law or (ii) in the exercise of its contractual or fiduciary duties, to pursue an alternative transaction proposal.

There is no assurance that the restructuring and refinancing processes described in the TSA will be consummated.

Financial covenants

The indenture governing the outstanding notes of Ferrellgas Partners and the agreements governing the operating partnership’s indebtedness contain various covenants that limit our ability to, among other things, make restricted payments and incur additional indebtedness. Our general partner believes that the most restrictive of these covenants are the restricted payments covenants discussed below.

Ferrellgas Partners, L.P., the master limited partnership

The indenture governing the $357.0 million aggregate principal amount of outstanding notes of Ferrellgas Partners due June 15, 2020 contains a covenant that restricts the ability of Ferrellgas Partners to make certain restricted payments, including distributions on its common units. Ferrellgas Partners continues to comply with the restrictive covenants with

respect to the Ferrellgas Partners Notes due June 15, 2020 as Ferrellgas Partners continues to negotiate with the Forbearing Noteholders. Under this covenant, subject to the limited exception described below, Ferrellgas Partners may not make a restricted payment unless its consolidated fixed charge coverage ratio (defined in the indenture generally to mean the ratio of trailing four quarters consolidated EBITDA to consolidated interest expense, both as adjusted for certain, specified items) is at least 1.75x, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. As of October 31, 2020, Ferrellgas Partners’ consolidated fixed charge coverage ratio was 1.38x. 

If the consolidated fixed charge coverage ratio is below 1.75x, Ferrellgas Partners may make restricted payments of up to $50.0 million in total over a sixteen quarter period. As a result of distributions paid to common unitholders in September 2017, December 2017, March 2018, June 2018 and September 2018, while this ratio was less than 1.75x, Ferrellgas Partners has used substantially all of its capacity under the limited exception and therefore is currently restricted by this covenant from making future restricted payments, including distributions to common unitholders. Accordingly, no distributions have been or will be paid to common unitholders for the three months ended October 31, 2020, and the general partner expects that this covenant will continue to prohibit Ferrellgas Partners from making common unit distributions unless and until the outstanding notes of Ferrellgas Partners due 2020 are restructured, refinanced or otherwise satisfied. While there can be no assurance of success, as part of our debt and interest expense reduction strategy, we are presently considering potential solutions to address the maturity of the outstanding notes of Ferrellgas Partners due June 15, 2020, as well as the upcoming maturity of the Ferrellgas, L.P.’s $500.0 million in unsecured notes due May 1, 2021. The potential solutions include, among others, restructuring, refinancing or a transaction to exchange new notes for some or all of these notes.

Ferrellgas, L.P., the operating partnership

Similar to the indenture governing the outstanding notes of Ferrellgas Partners, the indentures governing the outstanding notes of the operating partnership contain covenants that restrict the ability of the operating partnership to make certain restricted payments, including distributions to Ferrellgas Partners.  Under these covenants in the indentures governing the operating partnership’s unsecured notes, subject to the limited exceptions described below, the operating partnership may not make a restricted payment unless its consolidated fixed charge coverage ratio (defined in the indentures generally to mean the ratio of trailing four quarters consolidated EBITDA to consolidated interest expense, both as adjusted for certain, specified items) is at least 1.75x, on a pro forma basis giving effect to the restricted payment and, if

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applicable, certain other specified events. As of October 31, 2020, the operating partnership’s consolidated fixed charge coverage ratio was 1.65x.

Under the covenants in the indentures governing the operating partnership’s unsecured notes, if the consolidated fixed charge coverage ratio is below 1.75x, the operating partnership may still make restricted payments in limited amounts determined under the indentures governing the operating partnership’s unsecured notes. The distributions made by the operating partnership on June 15, 2019 and December 15, 2019 for payment of interest on Ferrellgas Partners’ unsecured senior notes due June 2020 were made from capacity under this limited exception to the ratio requirement under the indentures governing the operating partnership’s unsecured notes.

The indenture governing the operating partnership’s senior secured first lien notes due 2025 contains a similar but, in some respects, different restricted payments covenant. The covenant in the secured notes indenture provides for the same 1.75x consolidated fixed charge coverage ratio test as the unsecured notes indentures and a limited exception when that ratio is below 1.75x. In addition, the secured notes indenture also provides that, subject to a separate limited exception, described below, the operating partnership generally may not make a restricted payment unless the operating partnership’s consolidated leverage ratio (defined in the secured notes indenture generally to mean the ratio of consolidated total debt to trailing four quarters consolidated EBITDA, both as adjusted for certain, specified items) is no greater than 5.5x, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. The consolidated leverage ratio test applies regardless of whether the operating partnership’s consolidated fixed coverage ratio is at least 1.75x or below 1.75x. As of October 31, 2020, the operating partnership’s consolidated leverage ratio was substantially in excess of 5.5x. Additionally, the secured notes indenture provides for restricted payments under its limited exception to the consolidated fixed charge coverage ratio test that is less than the capacity available under the similar exception in the unsecured notes indentures. However, the secured notes indenture contains a separate exception to both the consolidated fixed charge coverage ratio test and the consolidated leverage ratio test that can be utilized to make certain specified restricted payments in a limited amount when the operating partnership does not meet either the consolidated fixed charge coverage ratio test or the consolidated leverage ratio test. This separate exception under the secured notes indenture currently has capacity for such specified restricted payments that is substantially the same as the capacity under the most restrictive of the operating partnership’s unsecured notes indentures.

As described above, Ferrellgas Partners’ unsecured notes due 2020 matured on June 15, 2020, and the outstanding principal amount of those notes was due to be paid on that date, together with accrued interest to the maturity date. Although the operating partnership has some capacity to make distributions under the operating partnership’s unsecured and secured notes indentures, this capacity will not allow the operating partnership to make distributions to Ferrellgas Partners sufficient to pay the principal of and accrued interest on Ferrellgas Partners’ unsecured senior notes due 2020 that was due at the maturity of those notes. Additionally, the restrictions in these indentures currently limit the ability of the operating partnership to make distributions to Ferrellgas Partners to enable it to pay cash distributions to its unitholders.

Debt and interest expense reduction strategy

We continue to pursue a strategy to reduce our debt and interest expense. Opportunities include the generation of additional cash flows through accretive acquisitions, continued restructuring or refinancing of existing indebtedness, selling additional assets, maintaining the suspension of Ferrellgas Partners’ common unit distributions, issuing equity or executing one or more debt exchanges. We expect to maintain our debt and interest expense reduction strategy until our consolidated leverage ratio reaches a level that we deem appropriate for our business.

Ferrellgas Partners has $357.0 million in unsecured notes due June 15, 2020, which Ferrellgas Partners failed to repay, that are classified as current in its condensed consolidated financial statements. Ferrellgas Partners’ ability to restructure, refinance or otherwise satisfy these notes is directly impacted by the cash flows of Ferrellgas, L.P. The ability of Ferrellgas Partners to restructure or refinance these notes is uncertain considering the level of other outstanding indebtedness.

Distributions

As discussed above, no distributions will be paid to common unitholders for the three months ended October 31, 2020, and the general partner expects that Ferrellgas Partners will continue to be prohibited from making common unit

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distributions unless and until the outstanding notes of Ferrellgas Partners due 2020 are restructured, refinanced or otherwise satisfied.

How We Evaluate Our Operations

We evaluate our overall business performance based primarily on a metric we refer to as “Adjusted EBITDA”, which is not defined by GAAP and should not be considered an alternative to earnings measures defined by GAAP. We do not utilize depreciation, depletion and amortization expense in our key measures because we focus our performance management on cash flow generation and our revenue generating assets have long useful lives. For the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to Net earnings (loss) attributable to Ferrellgas Partners, L.P., the most directly comparable GAAP measure, see the subheading “Non-GAAP Financial Measures” below.

Based on our propane sales volumes in fiscal 2020, we believe that we are the second largest retail marketer of propane in the United States and a leading national provider of propane by portable tank exchange. We serve residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia and Puerto Rico. Our operations primarily include the retail distribution and sale of propane and related equipment and supplies with concentrations in the Midwest, Southeast, Southwest and Northwest regions of the United States.

We use information on temperatures to understand how our results of operations are affected by temperatures that are warmer or colder than normal. Normal temperatures computed by us are the average of the last 10 years of information published by the National Oceanic and Atmospheric Administration. Based on this information we calculate a ratio of actual heating degree days to normal heating degree days. Heating degree days are a general indicator of weather impacting propane usage.

Weather conditions have a significant impact on demand for propane for heating purposes primarily during the months of November through March (the “winter heating season”). Accordingly, the volume of propane used by our customers for this purpose is directly affected by the severity of the winter weather in the regions we serve and can vary substantially from year to year. In any given region, sustained warmer-than-normal temperatures will tend to result in reduced propane usage, while sustained colder-than-normal temperatures will tend to result in greater usage. Although there is a strong correlation between weather and customer usage, general economic conditions in the United States and the wholesale price of propane can have a significant impact on this correlation. Additionally, there is a natural time lag between the onset of cold weather and increased sales to customers. If the United States were to experience a cooling trend we could expect nationwide demand for propane to increase which could lead to greater sales, income and liquidity availability. Conversely, if the United States were to experience a continued warming trend, we could expect nationwide demand for propane for heating purposes to decrease which could lead to a reduction in our sales, income and liquidity availability as well as impact our ability to maintain compliance with our debt covenants.

We employ risk management activities that attempt to mitigate price risks related to the purchase, storage, transport and sale of propane generally in the contract and spot markets from major domestic energy companies. We attempt to mitigate these price risks through the use of financial derivative instruments and forward propane purchase and sales contracts. We enter into propane sales commitments with a portion of our customers that provide for a contracted price agreement for a specified period of time. These commitments can expose us to product price risk if not immediately hedged with an offsetting propane purchase commitment.

Our open financial derivative propane purchase commitments are designated as hedges primarily for fiscal 2021 sales commitments and, as of October 31, 2020, we have experienced net mark-to-market gains of approximately $5.6 million. Because these financial derivative purchase commitments qualify for hedge accounting treatment, the resulting asset, liability and related mark-to-market gains or losses are recorded on the condensed consolidated balance sheets as “Prepaid expenses and other current assets,” “Other current liabilities,” "Other liabilities" and “Accumulated other comprehensive loss,” respectively, until settled. Upon settlement, realized gains or losses on these contracts will be reclassified to “Cost of sales-propane and other gas liquid sales” in the condensed consolidated statements of operations as the underlying inventory is sold. These financial derivative purchase commitment net gains are expected to be offset by decreased margins on propane sales commitments that qualify for the normal purchase normal sale exception. At October 31, 2020, we estimate 92% of currently open financial derivative purchase commitments, the related propane sales commitments and the resulting gross margin will be realized into earnings during the next twelve months.

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Summary Discussion of Results of Operations:

Executive Overview

For the three months ended October 31, 2020 and 2019

During the three months ended October 31, 2020, we recognized a net loss attributable to Ferrellgas Partners, L.P. of $46.1 million, compared to a net loss attributable to Ferrellgas Partners, L.P. of $45.3 million during the three months ended October 31, 2019. This slight increase reflects an $8.5 million increase in interest expense, partially offset by an $7.1 million increase in operating income. Operating income increased primarily due to a $4.1 million increase in gross margin and a $2.1 million decrease in operating, general and administrative expenses. Interest expense increased primarily due to the net additional borrowings incurred in April 2020 related to the refinancing of our terminated Senior Secured Credit Facility with the issuance of the $700.0 million of notes due 2025 and to a lesser extent, increased interest rates on the new notes.

Distributable cash flow shortage decreased slightly to $21.8 million in the current period from $22.7 million in the prior year period, primarily due to a $8.8 million increase to our Adjusted EBITDA and a $1.3 million decrease in our maintenance capital expenditures, partially offset by a $9.1 million increase in our net cash interest expense.

Consolidated Results of Operations

Three months ended October 31, 

(amounts in thousands)

 

2020

    

2019

    

Total revenues

$

300,894

$

293,214

Total cost of sales

 

141,294

 

137,709

Operating expense

 

109,027

 

114,543

Depreciation and amortization expense

 

21,390

 

19,219

General and administrative expense

 

13,080

 

9,695

Equipment lease expense

 

6,830

 

8,388

Non-cash employee stock ownership plan compensation charge

 

708

 

795

Loss on asset sales and disposals

 

813

 

2,235

Operating income

 

7,752

 

630

Interest expense

 

(54,226)

 

(45,697)

Other income (expense), net

 

108

 

(132)

Loss before income taxes

 

(46,366)

 

(45,199)

Income tax expense

 

87

 

518

Net loss

 

(46,453)

 

(45,717)

Net loss attributable to noncontrolling interest

 

(391)

 

(373)

Net loss attributable to Ferrellgas Partners, L.P.

 

(46,062)

 

(45,344)

Less: General partner's interest in net loss

 

(461)

 

(453)

Common unitholders' interest in net loss

$

(45,601)

$

(44,891)

Non-GAAP Financial Measures

In this Quarterly Report we present the following Non-GAAP financial measures: Adjusted EBITDA, Distributable cash flow attributable to equity investors, Distributable cash flow attributable to common unitholders, and Distributable cash flow excess.

Adjusted EBITDA. Adjusted EBITDA for Ferrellgas Partners is calculated as net loss attributable to Ferrellgas Partners, L.P., plus the sum of the following: income tax expense, interest expense, depreciation and amortization expense, non-cash employee stock ownership plan compensation charge, loss on asset sales and disposals, other income (expense), net, severance costs, legal fees and settlements related to non-core businesses, lease accounting standard adjustment and net loss attributable to noncontrolling interest. Management believes the presentation of this measure is relevant and useful because it allows investors to view the partnership’s performance in a manner similar to the method

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management uses, adjusted for items management believes make it easier to compare its results with other companies that have different financing and capital structures. This method of calculating Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measurements used by other companies. Items added into our calculation of Adjusted EBITDA that will not occur on a continuing basis may have associated cash payments. This method of calculating Adjusted EBITDA should be viewed in conjunction with measurements that are computed in accordance with GAAP.