Quarterly Report (10-q)

Date : 12/06/2018 @ 12:00PM
Source : Edgar (US Regulatory)
Stock : Ferrellgas Partners, L.P. (FGP)
Quote : 0.974  -0.126 (-11.45%) @ 9:02PM
Ferrellgas Partners share price Chart

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 31, 2018
or
o
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, 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
Delaware
Delaware
Delaware
 
43-1698480
43-1742520
43-1698481
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  x 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  x 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 o
 
Accelerated filer x
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
 
Emerging growth company ☐
 
Ferrellgas Partners Finance Corp, Ferrellgas, L.P. and Ferrellgas Finance Corp.:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
 
 
 
 
 
 
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  x
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. Yes  x No  ¨


1


At November 30, 2018, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



3


PART I - FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATE MENTS (unaudited)
 
 

    
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
 
 
October 31, 2018
 
July 31, 2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
63,188

 
$
119,311

 Accounts and notes receivable, net (including $137,560 and $120,079 of accounts receivable pledged as collateral at October 31, 2018 and July 31, 2018, respectively)
 
136,189

 
126,054

Inventories
 
106,560

 
83,694

Prepaid expenses and other current assets
 
34,003

 
34,862

Total current assets
 
339,940

 
363,921

 
 
 
 
 
Property, plant and equipment, net
 
566,078

 
557,723

Goodwill, net
 
247,478

 
246,098

Intangible assets (net of accumulated amortization of $403,690 and $399,629 at October 31, 2018 and July 31, 2018, respectively)
 
117,452

 
120,951

Other assets, net
 
72,842

 
74,588

Total assets
 
$
1,343,790

 
$
1,363,281

 
 
 
 
 
LIABILITIES AND PARTNERS' DEFICIT
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
59,664

 
$
46,820

Short-term borrowings
 

 
32,800

Collateralized note payable
 
90,000

 
58,000

Other current liabilities
 
185,968

 
142,025

Total current liabilities
 
335,632

 
279,645

 
 
 
 
 
Long-term debt
 
2,081,243

 
2,078,637

Other liabilities
 
38,654

 
39,476

Contingencies and commitments (Note K)
 


 


 
 
 
 
 
Partners' deficit:
 
 

 
 

Common unitholders (97,152,665 units outstanding at October 31, 2018 and July 31, 2018)
 
(1,041,971
)
 
(978,503
)
General partner unitholder (989,926 units outstanding at October 31, 2018 and July 31, 2018)
 
(70,433
)
 
(69,792
)
Accumulated other comprehensive income
 
8,050

 
20,510

Total Ferrellgas Partners, L.P. partners' deficit
 
(1,104,354
)
 
(1,027,785
)
Noncontrolling interest
 
(7,385
)
 
(6,692
)
Total partners' deficit
 
(1,111,739
)
 
(1,034,477
)
Total liabilities and partners' deficit
 
$
1,343,790

 
$
1,363,281

See notes to condensed consolidated financial statements.

4


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
 
 
 
 
 
For the three months ended October 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Propane and other gas liquids sales
 
$
334,966

 
$
302,758

Midstream operations
 

 
120,760

Other
 
17,343

 
31,137

Total revenues
 
352,309

 
454,655

 
 
 
 
 
Costs and expenses:
 
 
 
 
Cost of sales - propane and other gas liquids sales
 
204,136

 
179,515

Cost of sales - midstream operations
 

 
108,125

Cost of sales - other
 
3,047

 
13,702

Operating expense
 
110,331

 
110,462

Depreciation and amortization expense
 
18,992

 
25,732

General and administrative expense
 
14,179

 
13,164

Equipment lease expense
 
7,863

 
6,741

Non-cash employee stock ownership plan compensation charge
 
2,748

 
3,962

Loss on asset sales and disposals
 
4,504

 
895

 
 
 
 
 
Operating loss
 
(13,491
)
 
(7,643
)
 
 
 
 
 
Interest expense
 
(43,878
)
 
(40,807
)
Other income, net
 
19

 
511

 
 
 
 
 
Loss before income taxes
 
(57,350
)
 
(47,939
)
 
 
 
 
 
Income tax expense
 
158

 
377

 
 
 
 
 
Net loss
 
(57,508
)
 
(48,316
)
 
 
 
 
 
Net loss attributable to noncontrolling interest
 
(493
)
 
(401
)
 
 
 
 
 
Net loss attributable to Ferrellgas Partners, L.P.
 
(57,015
)
 
(47,915
)
 
 
 
 
 
Less: General partner's interest in net loss
 
(570
)
 
(479
)
 
 
 
 
 
Common unitholders' interest in net loss
 
$
(56,445
)
 
$
(47,436
)
 
 
 
 
 
Basic and diluted net loss per common unit
 
$
(0.58
)
 
$
(0.49
)
 
 
 
 
 
Cash distributions declared per common unit
 
$

 
$
0.10

See notes to condensed consolidated financial statements.

5


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
 
 
 
 
For the three months ended October 31,
 
 
2018
 
2017
 
 
 
 
 
Net loss
 
$
(57,508
)
 
$
(48,316
)
Other comprehensive income (loss):
 
 
 
 
Change in value of risk management derivatives
 
(8,154
)
 
22,449

Reclassification of gains on derivatives to earnings, net
 
(4,433
)
 
(3,949
)
Other comprehensive income (loss)
 
(12,587
)
 
18,500

Comprehensive loss
 
(70,095
)
 
(29,816
)
Less: Comprehensive loss attributable to noncontrolling interest
 
(620
)
 
(215
)
Comprehensive loss attributable to Ferrellgas Partners, L.P.
 
$
(69,475
)
 
$
(29,601
)
See notes to condensed consolidated financial statements.

6


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
(in thousands)
(unaudited)
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Number of units
 
 
 
 
 
Accumulated other comprehensive income
 
Total
Ferrellgas
Partners, L.P. partners'
deficit
 
 
 
Total partners'
deficit
 

Common
unitholders
 
General partner unitholder
 
Common
unitholders
 
General partner unitholder
 
 
 
Non-controlling
interest
 
Balance at July 31, 2018
97,152.7

 
989.9

 
$
(978,503
)
 
$
(69,792
)
 
$
20,510

 
$
(1,027,785
)
 
$
(6,692
)
 
$
(1,034,477
)
Contributions in connection with non-cash ESOP compensation charges

 

 
2,693

 
27

 

 
2,720

 
28

 
2,748

Distributions

 

 
(9,716
)
 
(98
)
 

 
(9,814
)
 
(101
)
 
(9,915
)
Net loss

 

 
(56,445
)
 
(570
)
 

 
(57,015
)
 
(493
)
 
(57,508
)
Other comprehensive loss

 

 

 

 
(12,460
)
 
(12,460
)
 
(127
)
 
(12,587
)
Balance at October 31, 2018
97,152.7

 
989.9

 
$
(1,041,971
)
 
$
(70,433
)
 
$
8,050

 
$
(1,104,354
)
 
$
(7,385
)
 
$
(1,111,739
)
See notes to condensed consolidated financial statements.


7


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
For the three months ended October 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(57,508
)
 
$
(48,316
)
Reconciliation of net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization expense
18,992

 
25,732

Non-cash employee stock ownership plan compensation charge
2,748

 
3,962

Loss on asset sales and disposals
4,504

 
895

Unrealized gain on derivative instruments

 
1,607

Provision for doubtful accounts
519

 
693

Deferred income tax expense
150

 
364

Other
3,193

 
2,238

Changes in operating assets and liabilities, net of effects from business acquisitions:
 
 
 
Accounts and notes receivable, net of securitization
(10,654
)
 
(23,862
)
Inventories
(22,866
)
 
(33,160
)
Prepaid expenses and other current assets
(6,391
)
 
(6,936
)
Accounts payable
13,159

 
13,496

Accrued interest expense
31,987

 
32,438

Other current liabilities
6,677

 
39,550

Other assets and liabilities
(2,124
)
 
(768
)
Net cash provided by (used in) operating activities
(17,614
)
 
7,933

 
 
 
 
Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(4,625
)
 
(13,867
)
Capital expenditures
(23,433
)
 
(20,154
)
Proceeds from sale of assets
1,061

 
1,208

Other
(292
)
 

Net cash used in investing activities
(27,289
)
 
(32,813
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Distributions
(9,814
)
 
(9,813
)
Proceeds from issuance of long-term debt

 
23,580

Payments on long-term debt
(281
)
 
(281
)
Net reductions in short-term borrowings
(32,800
)
 
(5,879
)
Net additions to collateralized short-term borrowings
32,000

 
19,000

Cash paid for financing costs
(224
)
 
(287
)
Noncontrolling interest activity
(101
)
 
(100
)
Net cash provided by (used in) financing activities
(11,220
)
 
26,220

 
 
 
 
Net change in cash and cash equivalents
(56,123
)
 
1,340

Cash and cash equivalents - beginning of period
119,311

 
5,760

Cash and cash equivalents - end of period
$
63,188

 
$
7,100

See notes to condensed consolidated financial statements.

8


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 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, 2018 , Ferrell Companies, Inc. ("Ferrell Companies") beneficially owns 22.8 million Ferrellgas Partners common units. Ferrellgas, Inc. (the "general partner"), a wholly-owned subsidiary of Ferrell Companies, has retained an approximate 1% general partner interest in Ferrellgas Partners and also holds an approximate 1% general partner interest in the operating partnership, representing an effective 2% general partner interest in Ferrellgas on a combined basis. As general partner, it performs all management functions required by Ferrellgas. Unless contractually provided for, creditors of the operating partnership have no recourse with regards to Ferrellgas Partners.
 
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 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, 2018 are not necessarily indicative of the results to be expected for the full fiscal year ending July 31, 2019 .
 
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. Certain prior period amounts have been reclassified to conform to the current period presentation. 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 2018 .

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 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 assets, 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 doubtful accounts, fair value of reporting units, recoverability of long-lived assets, assumptions used to value business combinations, fair values of derivative contracts and stock-based compensation calculations.

(2) New accounting standards:

FASB Accounting Standard Update No. 2014-09
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The issuance is part of a joint effort by the FASB and the International Accounting Standards Board ("IASB") to enhance financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards ("IFRS") and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. Upon adoption, Ferrellgas applied ASU 2014-09 only to contracts that were not completed, referred to as open contracts.

9


Ferrellgas adopted ASU 2014-09 beginning on August 1, 2018 using the modified retrospective method. This method requires that the cumulative effect of initially applying ASU 2014-09 be recognized in partner’s deficit at the date of adoption, August 1, 2018. ASU 2014-09 has not materially impacted Ferrellgas’ consolidated financial statements, and as a result there was no cumulative effect to record as of the date of adoption. Results for reporting periods beginning after August 1, 2018 are presented under ASU 2014-09, while amounts reported for prior periods have not been adjusted and continue to be reported under accounting standards in effect for those periods. See Note G - Revenue from contracts with customers for additional information related to revenues and contract costs, including qualitative and quantitative disclosures required under ASU 2014-09.
FASB Accounting Standard Update No. 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is   effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Ferrellgas is currently evaluating the impact of its pending adoption of ASU 2016-02 on the consolidated financial statements. Ferrellgas has formed an implementation team, completed training on the new standard, and is working on its implementation process for the new standard. Ferrellgas believes that the adoption of this standard, which will be effective for Ferrellgas August 1, 2019, will result in material increases to right of use assets and lease liabilities on our consolidated balance sheet.

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 is currently evaluating the impact of its pending adoption of this standard on the consolidated financial statements.  

FASB Accounting Standard Update No. 2017-12
In August 2017, the FASB issued ASU 2017-12, Financial Instruments - Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities which is intended to improve the financial reporting for hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Ferrellgas is currently evaluating the impact of its pending adoption of this standard on the consolidated financial statements.

FASB Accounting Standard Update No. 2018-15
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract which is intended to clarify the accounting for implementation costs related to a cloud computing arrangement that is a service contract. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Ferrellgas is currently evaluating the impact of its pending adoption of this standard on the consolidated financial statements.

 
 
C. Supplemental financial statement information
 
Inventories consist of the following:
 
 
October 31, 2018
 
July 31, 2018
Propane gas and related products
 
$
93,195

 
$
71,180

Appliances, parts and supplies, and other
 
13,365

 
12,514

Inventories
 
$
106,560

 
$
83,694


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, 2018 , Ferrellgas had committed, for supply procurement purposes, to take delivery of approximately 32.0 million gallons of propane at fixed prices.

Other assets, net consist of the following:

10


 
 
October 31, 2018
 
July 31, 2018
Notes receivable, less current portion
 
$
27,569

 
$
27,491

Other
 
45,273

 
47,097

  Other assets, net
 
$
72,842

 
$
74,588


Other current liabilities consist of the following:
 
 
October 31, 2018
 
July 31, 2018
Accrued interest

$
54,210

 
$
22,222

Customer deposits and advances
 
34,056

 
22,829

Other
 
97,702

 
96,974

Other current liabilities
 
$
185,968

 
$
142,025


Shipping and handling expenses are classified in the following condensed consolidated statements of operations line items:
 
 
For the three months ended October 31,
 
 
2018
 
2017
Operating expense
 
$
47,443

 
$
43,314

Depreciation and amortization expense
 
1,072

 
1,112

Equipment lease expense
 
7,519

 
6,069

   Total shipping and handling expenses
 
$
56,034

 
$
50,495


Certain cash flow and significant non-cash activities are presented below:
 
 
For the three months ended October 31,
 
 
2018
 
2017
Cash paid for:
 
 
 
 
Interest
 
$
8,930

 
$
6,129

Income taxes
 
$
2

 
$
6

Non-cash investing and financing activities:
 
 
 
 
Liabilities incurred in connection with acquisitions
 
$
1,096

 
$
1,232

Change in accruals for property, plant and equipment additions
 
$
(315
)
 
$
140



D. Accounts and notes receivable, net and accounts receivable securitization
 
Accounts and notes receivable, net consist of the following:
 
 
October 31, 2018
 
July 31, 2018
Accounts receivable pledged as collateral
 
$
137,560

 
$
120,079

Accounts receivable
 
1,191

 
8,272

Note receivable - current portion
 
132

 
132

Other
 
27

 
26

Less: Allowance for doubtful accounts
 
(2,721
)
 
(2,455
)
Accounts and notes receivable, net
 
$
136,189

 
$
126,054


At October 31, 2018 , $137.6 million of trade accounts receivable were pledged as collateral against $90.0 million of collateralized notes payable due to a commercial paper conduit. At July 31, 2018 , $ 120.1 million of trade accounts receivable were pledged as collateral against $58.0 million of collateralized notes payable due to the 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, 2018 , Ferrellgas had received cash proceeds of $90.0 million from trade accounts receivables securitized, with no remaining capacity to receive additional proceeds or issue letters of credit. As of July 31, 2018 , Ferrellgas had received

11


cash proceeds of $58.0 million from trade accounts receivables securitized, with no remaining capacity to receive additional proceeds. Borrowings under the accounts receivable securitization facility had a weighted average interest rate of 5.3% and 5.2% as of October 31, 2018 and July 31, 2018 , respectively.

E.     Debt
 
Short-term borrowings

Ferrellgas classifies borrowings on the revolving line of credit portion of its Senior Secured Credit Facility as short-term because they are used to fund working capital needs that management intends to pay down within the twelve month period following the balance sheet date. As of October 31, 2018 , there were no amounts classified as short-term borrowings. As of July 31, 2018 , $32.8 million was classified as short-term borrowings. For further discussion see the secured credit facility section below.

Secured credit facilities

As of  October 31, 2018 , the operating partnership had borrowings of  $275.0 million  under the Term Loan at a rate of  8.01% , which was classified as long-term debt, and  no  borrowings under the Revolving Facility. As of October 31, 2018 , Ferrellgas had available borrowing capacity under its Revolving Facility of  $186.9 million . As of  July 31, 2018 , the operating partnership had borrowings of $275.0 million under the Term Loan at a rate of 7.86% , which was classified as long-term debt, and $32.8 million under the Revolving Facility at a rate of 9.75% , which was classified as short-term borrowings. As of July 31, 2018 , Ferrellgas had available borrowing capacity under its Revolving Facility of $159.3 million .

Letters of credit outstanding at  October 31, 2018  and July 31, 2018 totaled  $113.1 million and $107.9 million , respectively, and were used to secure insurance arrangements, product purchases and commodity hedges. At  October 31, 2018 , Ferrellgas had available letter of credit remaining capacity of $11.9 million . At July 31, 2018 , Ferrellgas had available letter of credit remaining capacity of $17.1 million .

Debt and interest expense reduction and refinancing strategy

Ferrellgas continues to execute on a strategy to further reduce its debt and interest expense. This strategy included entering into the new Senior Secured Credit Facility and amending its accounts receivable securitization facility in May 2018 and certain asset sales during fiscal 2018. Ferrellgas continues to evaluate all available options to address its leverage.

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 believes that the most restrictive of these covenants is the consolidated fixed charge coverage ratio, as defined in the indenture governing the outstanding notes of Ferrellgas Partners, and the consolidated fixed charge coverage ratio, as defined in the indentures governing the outstanding notes of the operating partnership.

Consolidated fixed charge coverage ratio - Ferrellgas Partners, L.P., the master limited partnership

Before a restricted payment (as defined in the Ferrellgas Partners indenture) can be made by Ferrellgas Partners, Ferrellgas Partners must be in compliance with the consolidated fixed charge coverage ratio covenant under the Ferrellgas Partners indenture. If Ferrellgas Partners is unable to make restricted payments, Ferrellgas Partners will not have the ability to make distributions to Ferrellgas Partners common unitholders.

This covenant requires that the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of Ferrellgas Partners be at least 1.75 x before a restricted payment (as defined in the indenture) can be made by Ferrellgas Partners. If this ratio were to drop below 1.75 x, the indenture allows Ferrellgas Partners to make restricted payments of up to $50.0 million in total over a sixteen quarter period while below this ratio. As of October 31, 2018 , the ratio was 1.40 x. 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 1.75 x, Ferrellgas Partners is currently restricted by this covenant from making future restricted payments, including distributions to common unitholders. Accordingly, no distributions will be paid to common unitholders in December 2018 for the three months ended October 31, 2018 . Unless this indenture is amended or replaced, or our consolidated fixed charge coverage ratio improves to at least 1.75 x this covenant will continue to restrict us from making common unit distributions for our quarter ending January 31, 2019 and beyond.

12



Consolidated fixed charge coverage ratio - Ferrellgas, L.P., the operating partnership

Before a restricted payment (as defined in the indentures governing the outstanding notes of the operating partnership) can be made by the operating partnership to Ferrellgas Partners, the operating partnership must be in compliance with the consolidated fixed charge coverage ratio covenant under the operating partnership indentures. If the operating partnership is unable to make restricted payments, Ferrellgas Partners will not have the ability to make distributions to Ferrellgas Partners common unitholders or make interest payments on Ferrellgas Partners’ unsecured senior notes due 2020.

The covenant requires that the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of the operating partnership be at least  1.75 x before a restricted payment (as defined in the indentures) can be made by the operating partnership. If this ratio were to drop below  1.75 x, the indentures allow the operating partnership to make restricted payments with certain limitations. If it were in violation of the covenant as of October 31, 2018 , the operating partnership believes that it would have sufficient capacity within these limitations to satisfy the current restricted payment requirements of Ferrellgas Partners through the maturity of the unsecured senior notes due 2020. As of October 31, 2018 , the ratio was  1.77 x; the margin allows for approximately  $1.1 million  of additional interest expense or approximately  $2.0 million  less EBITDA.

F.   Partners' deficit

As of October 31, 2018 and July 31, 2018 , Ferrellgas Partners limited partner units, which are listed on the New York Stock Exchange under the symbol “FGP,” were beneficially owned by the following:

 
 
October 31, 2018
 
July 31, 2018
Public common unitholders
 
69,612,939

 
69,612,939

Ferrell Companies (1)
 
22,529,361

 
22,529,361

FCI Trading Corp. (2)
 
195,686

 
195,686

Ferrell Propane, Inc. (3)
 
51,204

 
51,204

James E. Ferrell (4)
 
4,763,475

 
4,763,475


(1) Ferrell Companies is the owner of the general partner and is 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' beneficial ownership to 23.4% at October 31, 2018 .
(2) FCI Trading is an affiliate of the general partner and thus a related party.
(3) Ferrell Propane is controlled by the general partner and thus a related party.
(4) 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 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.

13



Partnership distributions paid
 
Ferrellgas Partners has paid the following distributions:
 
 
For the three months ended October 31,
 
 
2018
 
2017
Public common unitholders
 
$
6,962

 
$
6,961

Ferrell Companies
 
2,253

 
2,253

FCI Trading Corp.
 
20

 
20

Ferrell Propane, Inc.
 
5

 
5

James E. Ferrell
 
476

 
476

General partner
 
98

 
98

 
 
$
9,814

 
$
9,813


Ferrellgas Partners paid cash distributions during the three months ended October 31, 2018 and 2017 as detailed in the table above. Ferrellgas Partners did not declare a cash distribution during November 2018 related to the three months ended October 31, 2018 . As discussed in Note E – Debt, Ferrellgas Partners was not in compliance with the consolidated fixed charge coverage ratio under its note indenture, and thus was unable to make restricted payments, including distributions to unitholders.
See additional discussions about transactions with related parties in Note J – Transactions with related parties.

Accumulated other comprehensive income (loss) (“AOCI”)
 
See Note I – 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, 2018 and 2017 .
 
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, 2018 , the general partner made non-cash contributions of $0.1 million to Ferrellgas to maintain its effective 2% general partner interest.

During the three months ended October 31, 2017 , the general partner made non-cash contributions of $0.1 million to Ferrellgas to maintain its effective 2% general partner interest.

G. Revenue from contracts with customers
Ferrellgas adopted ASU 2014-09 beginning on August 1, 2018 using the modified retrospective method. Ferrellgas earns revenue from contracts with customers primarily through the distribution of propane, as well as through the sale of propane related equipment and supplies. Revenues from propane and other gas liquids sales are comprised of revenue earned from the delivery of propane to tanks on customers’ premises, delivery of propane filled cylinders to customers, or from the sale of portable propane tanks to nationwide and local retailers and end use customers. Other revenues primarily include sales of appliances and other materials as well as other fees charged to customers. Upon adoption, Ferrellgas applied ASU 2014-09 only to contracts that were not completed.
Contracts with customers
Ferrellgas’ contracts with customers are principally for the bulk delivery of propane to tanks, delivery of propane filled cylinders or the delivery of portable propane tanks to retailers. Ferrellgas sells propane to a wide variety of customers, including residential, industrial/commercial, portable tank exchange, agricultural, wholesale and others. Ferrellgas’ performance obligations in these contracts are generally limited to the delivery of propane thus revenues from these contracts are earned at the time product is delivered or in the case of some of Ferrellgas’ portable tank exchange retailers who have consignment agreements, at the time the tanks are sold to the end use customer. Payment is generally due within 30 days. Revenues from sales of propane are included in Propane and other gas liquids sales on the consolidated statements of operations.

14


Typically, Ferrellgas bills customers upon delivery and payment is generally due within 30 days. With its residential customers, Ferrellgas offers customers the ability to spread their annual heating costs over a longer period, typically twelve months. Customers who opt to spread their heating costs over a longer period are referred to as “even-pay” customers.
Ferrellgas charges other amounts to customers associated with the delivery of propane including hazardous materials fees and fuel surcharge fees. In some regions, Ferrellgas also sells appliances and related parts and fittings as well as other retail propane related services. Ferrellgas charges on an annual basis tank and equipment rental charges for customers that are using our equipment to store propane. Other revenues associated with deliveries of propane are earned at the time product is delivered. Revenues associated with sales of appliances and other materials or services are earned at the time of delivery or installation. Revenues associated with tank and equipment rentals are generally recognized on a straight-line basis over one year.
Accounting estimates related to recognition of revenue require that Ferrellgas make estimates and assumptions about various factors including credits issued for completed sales, future returns and total consideration payable in instances where we have customer incentives payable to the customer.
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, 2018
Retail - Sales to End Users
 
$
217,764

Wholesale - Sales to Resellers
 
93,944

Other Gas Sales
 
23,258

Other
 
17,343

Propane and related equipment revenues
 
$
352,309

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, thus Ferrellgas does not capitalize these costs.
The following table presents the opening and closing balances of our receivables, contract assets, and contract liabilities:
 
 
October 31, 2018
 
July 31, 2018
Accounts receivable
 
$
125,864

 
$
119,818

 
 
 
 
 
Contract assets
 
$
13,046

 
$
8,691

 
 
 
 
 
Contract liabilities
 
 
 
 
   Deferred revenue (1)
 
$
42,880

 
$
29,933


15


(1) Of the beginning balance of deferred revenue, $8.7 million was recognized as revenue during the quarter ended October 31, 2018.

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.

H.     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, 2018 and July 31, 2018 :
 
 
Asset (Liability)
 
 
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
 
Total
October 31, 2018:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
15,302

 
$

 
$
15,302

Liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
(7,331
)
 
$

 
$
(7,331
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 31, 2018:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
22,470

 
$

 
$
22,470

Liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
(1,910
)
 
$

 
$
(1,910
)

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. The estimated fair value of various note receivable financial instruments classified in "Other assets, net" on the condensed consolidated balance sheets, are approximately $23.6 million , or $4.0 million less than their carrying amount as of October 31, 2018 . The estimated fair values of these notes receivable were calculated using a discounted cash flow method which relied on significant unobservable inputs. At October 31, 2018 and July 31, 2018 , the estimated fair value of Ferrellgas’ long-term debt instruments was $1,899.5 million and $1,935.1 million , respectively. Ferrellgas estimates the fair value of long-term debt based on quoted market prices. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.


16


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.

I.   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. Prior to the sale of Bridger Energy, LLC in January 2018, all other commodity derivative instruments were neither qualified nor were designated as cash flow hedges, therefore, changes in their fair value were recorded currently in earnings. Ferrellgas also periodically utilizes derivative instruments to manage its exposure to fluctuations in interest rates.
 
Derivative instruments and hedging activity
 
During the three months ended October 31, 2018 and 2017 , Ferrellgas did no t 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 in Ferrellgas’ condensed consolidated balance sheets as of October 31, 2018 and July 31, 2018 :  
 
 
October 31, 2018
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Location
 
 Fair value
 
Location
 
 Fair value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
  Commodity derivatives-propane
 
Prepaid expenses and other current assets
 
$
12,379

 
Other current liabilities
 
$
6,894

  Commodity derivatives-propane
 
Other assets, net
 
2,923

 
Other liabilities
 
437

 
 
Total
 
$
15,302

 
Total
 
$
7,331

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 31, 2018
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Location
 
 Fair value
 
Location
 
 Fair value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
  Commodity derivatives-propane
 
Prepaid expenses and other current assets
 
$
17,123

 
Other current liabilities
 
$
1,832

  Commodity derivatives-propane
 
Other assets, net
 
5,347

 
Other liabilities
 
78


 
Total
 
$
22,470

 
Total
 
$
1,910



17


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, 2018 and July 31, 2018 , respectively:

 
 
October 31, 2018
 
 
Assets
 
Liabilities
Description
 
Location
 
Amount
 
Location
 
Amount
Margin Balances
 
Prepaid expenses and other current assets
 
$
4,265

 
Other current liabilities
 
$
6,605

 
 
Other assets, net
 
1,083

 
Other liabilities
 
1,778

 
 
 
 
$
5,348

 
 
 
$
8,383

 
 
July 31, 2018
 
 
Assets
 
Liabilities
Description
 
Location
 
Amount
 
Location
 
Amount
Margin Balances
 
Prepaid expenses and other current assets
 
$
2,851

 
Other current liabilities
 
$
12,308

 
 
Other assets, net
 
927

 
Other liabilities
 
4,235

 
 
 
 
$
3,778

 
 
 
$
16,543


The following table provides a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months ended October 31, 2018 and 2017 due to derivatives that were designated as fair value hedging instruments:  
 
 
 
 
Amount of Gain Recognized on Derivative
 
Amount of Interest Expense Recognized on Fixed-Rate Debt (Related Hedged Item)
Derivative Instrument
 
Location of Amounts Recognized on Derivative
 
For the three months ended October 31,
 
For the three months ended October 31,
 
 
 
 
2018
 
2017
 
2018
 
2017
Interest rate swap agreements
 
Interest expense
 
$

 
$
138

 
$

 
$
(2,275
)
 
 
 
 
 
 
 
 
 
 
 



18


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, 2018 and 2017 due to derivatives designated as cash flow hedging instruments:
 
 
For the three months ended October 31, 2018
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
(8,154
)
 
Cost of sales-propane and other gas liquids sales
 
$
4,433

 
$

 
 
$
(8,154
)
 
 
 
$
4,433

 
$

 
 
 
 
 
 
 
 
 
 
 
For the three months ended October 31, 2017
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
22,323

 
Cost of sales-propane and other gas liquids sales
 
$
4,132

 
$

Interest rate swap agreements
 
126

 
Interest expense
 
(183
)
 

 
 
$
22,449

 
 
 
$
3,949

 
$

 
 
 
 
 
 
 
 
 

The following table provides a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months ended October 31, 2017 due to the change in fair value of derivatives not designated as hedging instruments:

 
 
For the three months ended October 31, 2017
Derivatives Not Designated as Hedging Instruments
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil
 
$
(1,390
)
 
Cost of sales - midstream operations

The changes in derivatives included in AOCI for the three months ended October 31, 2018 and 2017 were as follows:  

 
 
For the three months ended October 31,
Gains and losses on derivatives included in AOCI
 
2018
 
2017
Beginning balance
 
$
20,560

 
$
14,648

Change in value of risk management commodity derivatives
 
(8,154
)
 
22,323

Reclassification of gains on commodity hedges to cost of sales - propane and other gas liquids sales, net
 
(4,433
)
 
(4,132
)
Change in value of risk management interest rate derivatives
 

 
126

Reclassification of losses on interest rate hedges to interest expense
 

 
183

Ending balance
 
$
7,973

 
$
33,148


Ferrellgas expects to reclassify net gains related to the risk management commodity derivatives of approximately $5.5 million to earnings during the next 12 months. These net gains are expected to be offset by decreased margins on propane sales commitments Ferrellgas has with its customers that qualify for the normal purchase normal sales exception.
 
During the three months ended October 31, 2018 and 2017 , 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.

19


 
As of October 31, 2018 , Ferrellgas had financial derivative contracts covering  4.2 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 reduces 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, parent 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, 2018 , the maximum amount of loss due to credit risk that Ferrellgas would incur is $ 9.7 million, which is based upon the gross fair values of the derivative financial instruments.
 
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, 2018 .

J.     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 the 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,
 
 
2018
 
2017
Operating expense
 
$
59,958

 
$
57,351

 
 
 
 
 
General and administrative expense
 
$
6,112

 
$
7,508

 
 

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

K.     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 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 consolidated into one case by a 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

20


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. Ferrellgas believes it has strong defenses to the claims and intends to vigorously defend against the consolidated case. Ferrellgas does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuit.

Ferrellgas has been named, along with several current and former officers, in several class action lawsuits alleging violations of certain securities laws based on alleged materially false and misleading statements in certain of our public disclosures. The lawsuits, the first of which was filed on October 6, 2016 in the Southern District of New York, seek unspecified compensatory damages. Derivative lawsuits with similar allegations have been filed naming Ferrellgas and several current and former officers and directors as defendants. On April 2, 2018, the securities class action lawsuits were dismissed with prejudice.  On April 30, 2018, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Second Circuit and the parties are preparing appellate briefs.  At this time the derivative lawsuits remain stayed by agreement. Ferrellgas believes that it has defenses and will vigorously defend these cases. Ferrellgas does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuits or the derivative actions.

Ferrellgas and Bridger Logistics, LLC, 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 or settled an arbitration against Jamex Transfer Services (“JTS”), then named Bridger Transfer Services, a former subsidiary of Bridger Logistics, LLC (“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 under the arbitration. Eddystone also alleges that JTS was an “alter ego” of Bridger and Ferrellgas. Ferrellgas believes that Ferrellgas and Bridger have valid defenses to these claims and to Eddystone’s primary claim against JTS on the contract claim. The lawsuit does not specify a specific amount of damages that Eddystone is seeking; however, Ferrellgas believes that the amount of such damage claims, if ultimately owed to Eddystone, could be material to Ferrellgas. Ferrellgas intends to vigorously defend this claim. The lawsuit is in its early stages; as such, management does not currently believe a loss is probable or reasonably estimable at this time. 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.


L.     Net earnings (loss) per common unit
 
Below is a calculation of the basic and diluted net earnings (loss) per common unit in the condensed consolidated statements of operations for the periods indicated. Ferrellgas calculates net earnings (loss) per common unit for each period presented according to distributions declared and participation rights in undistributed earnings, as if all of the earnings or loss for the period had been distributed according to the incentive distribution rights in the Ferrellgas partnership agreement. Due to the seasonality of the propane business, the dilutive effect of the two-class method typically impacts only the three months ending January 31. In periods with undistributed earnings above certain levels, the calculation according to the two-class method results in an increased allocation of undistributed earnings to the general partner and a dilution of the earnings to the limited partners as follows:
 
 
 
Ratio of total distributions payable to:
Quarterly distribution per common unit
 
Common unitholder
 
General partner
$0.56 to $0.63
 
86.9
%
 
13.1
%
$0.64 to $0.82
 
76.8
%
 
23.2
%
$0.83 and above
 
51.5
%
 
48.5
%

There was no dilutive effect resulting from this method based on basic and diluted net earnings (loss) per common unit for the three months ended October 31, 2018 or 2017 .
 
In periods with net losses, the allocation of the net losses to the limited partners and the general partner will be determined based on the same allocation basis specified in Ferrellgas Partners’ partnership agreement that would apply to periods in which there were no undistributed earnings. Additionally, there are no dilutive securities in periods with net losses.

21


 
 
For the three months ended October 31,
 
 
2018
 
2017
 
 
(in thousands, except per common unit amounts)
Common unitholders’ interest in net loss
 
$
(56,445
)
 
$
(47,436
)
 
 
 
 
 
Weighted average common units outstanding - basic and diluted
 
97,152.7

 
97,152.7

 
 
 
 
 
Basic and diluted net loss per common unit
 
$
(0.58
)
 
$
(0.49
)


22


M.     Segment reporting

As of October 31, 2018 , Ferrellgas has one reportable operating segment: propane operations and related equipment sales. All remaining activities are included in Corporate and other.

Following is a summary of segment information for the three months ended October 31, 2018 and 2017 :

 
 
Three months ended October 31, 2018
 
 
Propane operations and related equipment sales
 
Corporate and other
 
Total
Segment revenues
 
$
352,309

 
$

 
$
352,309

Direct costs (1)
 
323,594

 
10,874

 
334,468

Adjusted EBITDA
 
$
28,715

 
$
(10,874
)
 
$
17,841

 
 
 
 
 
 
 
 
 
Three months ended October 31, 2017
 
 
Propane operations and related equipment sales
 
Corporate and other
 
Total
Segment revenues
 
$
333,895

 
$
120,760

 
$
454,655

Direct costs (1)
 
303,329

 
125,110

 
428,439

Adjusted EBITDA
 
$
30,566

 
$
(4,350
)
 
$
26,216


(1) Direct costs are comprised of "cost of sales-propane and other gas liquids sales", "cost of sales- midstream operations", "cost of sales-other", "operating expense", "general and administrative expense", and "equipment lease expense" less "severance charge", "legal fees and settlements", "unrealized (non-cash) losses on changes in fair value of derivatives not designated as hedging instruments" and "multi-employer pension plan withdrawal settlement".


Following is a reconciliation of Ferrellgas' total segment performance measure to condensed consolidated net loss:
 
 
Three months ended October 31,
 
 
2018
 
2017
Net loss attributable to Ferrellgas Partners, L.P.
 
$
(57,015
)
 
$
(47,915
)
Income tax expense
 
158

 
377

Interest expense
 
43,878

 
40,807

Depreciation and amortization expense
 
18,992

 
25,732

EBITDA
 
6,013

 
19,001

Non-cash employee stock ownership plan compensation charge
 
2,748

 
3,962

Loss on asset sales and disposals
 
4,504

 
895

Other income, net
 
(19
)
 
(511
)
Severance costs
 

 
1,663

Legal fees and settlements
 
3,564

 

Unrealized (non-cash) loss on changes in fair value of derivatives not designated as hedging instruments
 

 
1,607

Multi-employer pension plan withdrawal settlement
 
1,524

 

Net loss attributable to noncontrolling interest
 
(493
)
 
(401
)
Adjusted EBITDA
 
$
17,841

 
$
26,216



23


Following are total assets by segment:
Assets
 
October 31, 2018
 
July 31, 2018
Propane operations and related equipment sales
 
$
1,238,171

 
$
1,196,084

Corporate and other
 
105,619

 
167,197

Total consolidated assets
 
$
1,343,790

 
$
1,363,281


Following are capital expenditures by segment:
 
 
Three months ended October 31, 2018
 
 
Propane operations and related equipment sales
 
Corporate and other
 
Total
Capital expenditures:
 
 
 
 
 
 
Maintenance
 
$
4,880

 
$
360

 
$
5,240

Growth
 
16,384

 

 
16,384

Total
 
$
21,264

 
$
360

 
$
21,624

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended October 31, 2017
 
 
Propane operations and related equipment sales
 
Corporate and other
 
Total
Capital expenditures:
 
 
 
 
 
 
Maintenance
 
$
8,351

 
$
242

 
$
8,593

Growth
 
9,688

 
664

 
10,352

Total
 
$
18,039

 
$
906

 
$
18,945


24


N. Subsequent events
 
Ferrellgas 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.











25



FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
CONDENSED BALANCE SHEETS
(unaudited)
 
October 31, 2018
 
July 31, 2018
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
29,112

 
29,020

Accumulated deficit
(29,112
)
 
(27,170
)
Total stockholder's equity
$
1,000

 
$
2,850

See notes to condensed financial statements.


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,
 
2018
 
2017
 
 
 
 
General and administrative expense
$
1,941

 
$
50

 
 
 
 
Net loss
$
(1,941
)
 
$
(50
)
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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(1,941
)
 
$
(50
)
Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other current assets
1,850

 

Cash used in operating activities
(91
)
 
(50
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Capital contribution
91

 
50

Cash provided by financing activities
91

 
50

 
 
 
 
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 condensed financial statements 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 financial statements were of a normal recurring nature.

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

B.     Contingencies and commitments
 
The Finance Corp. serves as co-issuer and co-obligor for debt securities of the Partnership.

The indenture governing the senior unsecured notes contains various restrictive covenants applicable to the Partnership and its subsidiaries, the most restrictive relating to additional indebtedness and restricted payments. As of October 31, 2018 , the Partnership is in compliance with all requirements, tests, limitations and covenants related to this debt agreement, except for the consolidated fixed charge coverage ratio.

The indenture governing the outstanding notes of the Partnership includes a consolidated fixed charge coverage ratio test for the incurrence of debt and the making of restricted payments. This covenant requires that the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of the Partnership be at least 1.75 x before a restricted payment (as defined in the indenture) can be made by the Partnership. If this ratio were to drop below 1.75 x, the indenture allows the Partnership to make restricted payments of up to $50.0 million in total over a 16 quarter period while below this ratio. As of October 31, 2018 , the ratio was 1.40 x. 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 1.75 x, Ferrellgas Partners, L.P. is currently restricted by this covenant from making future restricted payments, including distributions to common unitholders. Accordingly, no distributions will be paid to common unitholders in December 2018 for the three months ended October 31, 2018 . Unless this indenture is amended or replaced, or the Partnership's consolidated fixed charge coverage ratio improves to at least 1.75 x, this covenant will continue to restrict us from making common unit distributions for the quarter ending January 31, 2019 and beyond.
 


28


FERRELLGAS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

October 31, 2018
 
July 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
63,093

 
$
119,308

 Accounts and notes receivable, net (including $137,560 and $120,079 of accounts receivable pledged as collateral at October 31, 2018 and July 31, 2018, respectively)
136,189

 
126,054

Inventories
106,560

 
83,694

Prepaid expenses and other current assets
33,940

 
34,830

Total current assets
339,782

 
363,886

 
 
 
 
Property, plant and equipment, net
566,078

 
557,723

Goodwill, net
247,478

 
246,098

Intangible assets (net of accumulated amortization of $403,690 and $399,629 at October 31, 2018 and July 31, 2018, respectively)
117,452

 
120,951

Other assets, net
72,842

 
74,588

Total assets
$
1,343,632

 
$
1,363,246

 
 
 
 
LIABILITIES AND PARTNERS' DEFICIT
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
59,664

 
$
46,820

Short-term borrowings

 
32,800

Collateralized note payable
90,000

 
58,000

Other current liabilities
174,336

 
138,091

Total current liabilities
324,000

 
275,711

 
 
 
 
Long-term debt
1,729,724

 
1,728,137

Other liabilities
38,654

 
39,476

Contingencies and commitments (Note K)


 


 
 
 
 
Partners' deficit:
 

 
 

Limited partner
(749,411
)
 
(693,896
)
General partner
(7,481
)
 
(6,915
)
Accumulated other comprehensive income
8,146

 
20,733

Total partners' deficit
(748,746
)
 
(680,078
)
Total liabilities and partners' deficit
$
1,343,632

 
$
1,363,246

See notes to condensed consolidated financial statements.

29


FERRELLGAS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
 
 
 
 
 
For the three months ended October 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Propane and other gas liquids sales
 
$
334,966

 
$
302,758

Midstream operations
 

 
120,760

Other
 
17,343

 
31,137

Total revenues
 
352,309

 
454,655

 
 
 
 
 
Costs and expenses:
 
 
 
 
Cost of sales - propane and other gas liquids sales
 
204,136

 
179,515

Cost of sales - midstream operations
 

 
108,125

Cost of sales - other