10-K 1 fgp_20130731x10k.htm 10-K FGP_2013.07.31_10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended July 31, 2013
 
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
(States or other jurisdictions of incorporation or organization)
 
43-1698480
43-1742520
43-1698481
14-1866671
(I.R.S. Employer Identification Nos.)
 
 
 
7500 College Boulevard,
Suite 1000, Overland Park, Kansas
(Address of principal executive office)
 
66210
(Zip Code)
Registrants’ telephone number, including area code:
(913) 661-1500

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Units of Ferrellgas Partners, L.P.
 
New York Stock Exchange
 
Securities registered pursuant to section 12(g) of the Act:
 
Limited Partner Interests of Ferrellgas, L.P.
Common Stock of Ferrellgas Partners Finance Corp.
Common Stock of Ferrellgas Finance Corp.
(Title of class)
 
Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.
 
Ferrellgas Partners, L.P.: Yes ý No ¨
 
Ferrellgas Partners Finance Corp., Ferrellgas, L.P. and Ferrellgas Finance Corp.: Yes ¨  No ý
 
Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

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 ý No ¨
 
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
 

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Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Ferrellgas Partners, L.P.:
 
 
 
 
 
 
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
(do not check if a smaller reporting company)
 
Smaller reporting company o
Ferrellgas Partners Finance Corp, Ferrellgas, L.P. and Ferrellgas Finance Corp.:
 
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
(do not check if a smaller reporting company)
 
Smaller reporting company o
 
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 ý
 
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. Yes ý No ¨
 
The aggregate market value as of January 31, 2013, of Ferrellgas Partners, L.P.’s common units held by nonaffiliates of Ferrellgas Partners, L.P., based on the reported closing price of such units on the New York Stock Exchange on such date, was approximately $1,023,878,663. There is no aggregate market value of the common equity of Ferrellgas Partners Finance Corp., Ferrellgas, L.P. and Ferrellgas Finance Corp. as their common equity is not sold or traded.
 
At August 31, 2013, the registrants had common units or shares of common stock outstanding as follows:
Ferrellgas Partners, L.P.
 
79,072,819
 
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 I(1)(A) AND (B) OF FORM 10-K AND ARE THEREFORE, WITH RESPECT TO EACH SUCH REGISTRANT, FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.


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FERRELLGAS PARTNERS, L.P.
FERRELLGAS PARTNERS FINANCE CORP.
FERRELLGAS, L.P.
FERRELLGAS FINANCE CORP.

 For the fiscal year ended July 31, 2013
FORM 10-K ANNUAL REPORT
 
Table of Contents
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
 

ITEM 1.    BUSINESS.
 
Ferrellgas Partners, L.P. is a Delaware limited partnership. Our common units are listed on the New York Stock Exchange and our activities are primarily conducted through our operating partnership, Ferrellgas, L.P., a Delaware limited partnership. We are the sole limited partner of Ferrellgas, L.P. with an approximate 99% limited partner interest.
 
In this Annual Report on Form 10-K, unless the context indicates otherwise:
 
“us,” “we,” “our,” “ours,” or “consolidated” 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” refers to Ferrellgas, Inc.;

“Ferrell Companies” refers to Ferrell Companies, Inc., the sole shareholder of our general partner;

“unitholders” refers to holders of common units of Ferrellgas Partners;

“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; and

“Notes” refers to the notes of the consolidated financial statements of Ferrellgas Partners or the operating partnership, as applicable.

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 significant assets are its approximate 99% limited partnership interest in the operating partnership and its 100% equity interest in Ferrellgas Partners Finance Corp.
 
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 a 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 27.5% of our outstanding common units. Ferrell Companies is owned 100% by an employee stock ownership trust.
 
We file annual, quarterly, and other reports and information with 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. You may also read and copy our SEC filings at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information concerning the Public Reference Room and any applicable copy charges. Because our common units are traded on the New York Stock Exchange under the ticker symbol of “FGP,” we also provide our SEC filings and particular other information to the New York Stock Exchange. You may obtain copies of these filings and such other information at the offices of the New York Stock Exchange located at 11 Wall Street, New York, New York 10005. In

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addition, our SEC filings are 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 Annual Report on Form 10-K 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.
 
General
 
We believe we are a leading distributor of propane and related equipment and supplies to customers primarily in the United States and conduct our business as a single reportable operating segment. We believe that we are the second largest retail marketer of propane in the United States as measured by the volume of our retail sales in fiscal 2013, and the largest 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 distribution and sale of propane and related equipment and supplies with concentrations in the Midwest, Southeast, Southwest and Northwest regions of the United States. Sales from propane distribution are generated principally from transporting propane purchased from third parties to our propane distribution locations and then to tanks on customers’ premises or to portable propane tanks delivered to nationwide and local retailers. Sales from portable tank exchanges, nationally branded under the name Blue Rhino, are generated through a network of independent and partnership-owned distribution outlets. Our market areas for our residential and agricultural customers are generally rural, while our market areas for our industrial/commercial and portable tank exchange customers is generally urban.
 
In the residential and industrial/commercial markets, propane is primarily used for space heating, water heating, cooking and other propane fueled appliances. In the portable tank exchange market, propane is used primarily for outdoor cooking using gas grills. In the agricultural market, propane is primarily used for crop drying, space heating, irrigation and weed control. In addition, propane is used for a variety of industrial applications, including as an engine fuel which is burned in internal combustion engines that power vehicles and forklifts, and as a heating or energy source in manufacturing and drying processes.
 
In our past three fiscal years, our total annual propane sales volumes in gallons were:
Fiscal year ended
 
Propane sales volumes (in millions)

July 31, 2013
 
901

July 31, 2012
 
878

July 31, 2011
 
900


Our History
 
We were formed in 1994 in connection with our initial public offering. Our operations began in 1939 as a single location propane distributor in Atchison, Kansas. Our initial growth largely resulted from small acquisitions in rural areas of eastern Kansas, northern and central Missouri, Iowa, western Illinois, southern Minnesota, South Dakota and Texas. Since 1986, we have acquired approximately 195 propane distributors. As of July 31, 2013, we distribute product to our propane customers from 875 propane distribution locations. See Item 2. “Properties” for more information about our propane distribution locations.
 
Business Strategy

Our business strategy is to:
 
expand our operations through disciplined acquisitions and internal growth;
capitalize on our national presence and economies of scale;
maximize operating efficiencies through utilization of our technology platform; and
align employee interests with our investors through significant employee ownership.
 
Expand our operations through disciplined acquisitions and internal growth
 
We expect to continue the expansion of our propane customer base through the acquisition of other propane distributors. We intend to concentrate on acquisition activities in geographical areas within or adjacent to our existing operating areas, and on a selected basis in areas that broaden our geographic coverage. We also intend to focus on acquisitions that can be efficiently combined with our existing propane operations to provide an attractive return on investment after taking into account the

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economies of scale and cost savings we anticipate will result from those combinations. Our goal is to improve the operations and profitability of our core business as well as the businesses we acquire by integrating best  practices and leveraging our established national organization and technology platforms to help reduce costs and enhance customer service. We believe that our enhanced operational synergies, improved customer service and ability to better track the financial performance of acquired operations provide us a distinct competitive advantage and better analysis as we consider future acquisition opportunities.
 
We believe that we are positioned to successfully compete for growth opportunities within and outside of our existing operating regions. Our efforts will focus on adding density to our existing customer base, providing propane and complementary services to national accounts and providing other product offerings to existing customer relationships. This continued expansion will give us new growth opportunities by leveraging the capabilities of our operating platforms.
 
Capitalize on our national presence and economies of scale
 
We believe our national presence of 875 propane distribution locations in the United States as of July 31, 2013 gives us advantages over our smaller competitors. These advantages include economies of scale in areas such as:
 
product procurement;
transportation;
fleet purchases;
propane customer administration; and
general administration.

We believe that our national presence allows us to be one of the few propane distributors that can competitively serve commercial and portable tank exchange customers on a nationwide basis, including the ability to serve such propane customers through leading home-improvement centers, mass merchants and hardware, grocery and convenience stores. In addition, we believe that our national presence provides us opportunities to make acquisitions of other propane distribution companies whose operations  overlap with ours, providing economies of scale and significant cost savings in these markets.
 
We also believe that investments in technology similar to ours require both a large scale and a national presence, in order to generate sustainable operational savings to produce a sufficient return on investment. For this reason, we believe our technology platforms provide us with an on-going competitive advantage.
 
Maximize operating efficiencies through utilization of our technology platform
 
We believe our significant investments in technology give us a competitive advantage to operate more efficiently and effectively at a lower cost compared to most of our competitors. We do not believe that many of our competitors will be able to justify similar investments in the near term. Our technology advantage has resulted from significant investments made in our retail propane distribution operating platform together with our state-of-the-art tank exchange operating platform.
 
Our technology platform allows us to efficiently route and schedule our customer deliveries, customer administration and operational workflow for the retail sale and delivery of bulk propane. Our service centers are staffed to provide oversight and management to multiple distribution locations, referred to as service units. Currently we operate a retail distribution network, including portable tank exchange operations, using a structure of 103 service centers and 875 service units. The service unit locations utilize hand-held computers, cellular or satellite technology to communicate with management personnel who are typically located at the associated service center. We believe this structure and our technology platform allow us to more efficiently route and schedule customer deliveries and significantly reduce the need for daily on-site management.

The efficiencies gained from operating our technology platform allow us to consolidate our management teams at fewer locations, quickly adjust the sales prices to our customers and manage our personnel and vehicle costs more effectively to meet customer demand.
 
The technology platform allows for efficient forecasting of our customers’ demand and our routing and scheduling. Our call center support capabilities allow us to accept emergency customer calls 24 hours a day, seven days a week. These combined capabilities provide us cost savings while improving customer service by reducing customer inconvenience associated with multiple, unnecessary deliveries.
 
Align employee interests with our investors through significant employee ownership
 

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In 1998, we established an employee benefit plan that we believe aligns the interests of our employees with those of our investors. Through the Ferrell Companies, Inc. Employee Stock Ownership Trust, our employees beneficially own approximately 27.5% of our outstanding common units, allowing them to participate directly in our overall success. We believe this plan is unique in the propane distribution industry and that the entrepreneurial culture fostered by employee-ownership provides us with another distinct competitive advantage.
 
Distribution of Propane and Related Equipment and Supplies
 
Sales from propane distribution are generated principally from transporting propane purchased from third parties to our propane distribution locations and then to tanks on customers’ premises or to portable propane tanks delivered to nationwide and local retailers. Sales from portable tank exchanges, nationally branded under the name Blue Rhino, are generated through a network of independent and partnership-owned distribution outlets. Our market areas for our residential and agricultural customers are generally rural, while our market areas for our industrial/commercial and portable tank exchange customers is generally urban. We utilize marketing programs targeting both new and existing customers by emphasizing:

our efficiency in delivering propane to customers;
our employee training and safety programs;
our enhanced customer service, facilitated by our technology platform and our 24 hours a day, seven days a week emergency retail customer call support capabilities; and
our national distributor network for our commercial and portable tank exchange customers.
 
The distribution of propane to residential customers generally involves large numbers of small volume deliveries. Our retail deliveries of propane are typically transported from our retail propane distribution locations to our customers by our fleet of bulk delivery trucks, which are generally fitted with tanks ranging in size from 2,600 to 3,000 gallons. Propane storage tanks located on our customers' premises are then filled from these bulk delivery trucks. We also deliver propane to our industrial/commercial and portable tank exchange customers using our fleet of portable tank and portable tank exchange delivery trucks, truck tractors and portable tank exchange delivery trailers.
 
A substantial majority of our gross margin from propane and other gas liquids sales is derived from the distribution and sale of propane and related risk management activities, and is derived primarily from the following customer groups:

residential;
portable tank exchange;
industrial/commercial;
agricultural;
wholesale; and
other.

Our gross margin from the retail distribution of propane is primarily based on the cents-per-gallon difference between the sales price we charge our customers and our costs to purchase and deliver propane to our propane distribution locations. Our residential customers and portable tank exchange customers typically provide us a greater cents-per-gallon margin than our industrial/commercial, agricultural, wholesale and other customers. We track “Propane sales volumes,” “Revenues – Propane and other gas liquids sales” and “Gross Margin – Propane and other gas liquids sales” by customer; however, we are not able to specifically allocate operating and other costs in a manner that would determine their specific profitability with a high degree of accuracy. The wholesale propane price per gallon is subject to various market conditions, including inflation, and may fluctuate based on changes in demand, supply and other energy commodity prices, primarily crude oil and natural gas, as propane prices tend to correlate with the fluctuations of these underlying commodities.
 
Approximately 54% of our residential customers rent their tanks from us. Our rental terms and the fire safety regulations in some states require rented bulk tanks to be filled only by the propane supplier owning the tank. The cost and inconvenience of switching bulk tanks helps minimize a customer’s tendency to switch suppliers of propane on the basis of minor variations in price, helping us minimize customer loss.

In addition, we lease tanks to some of our independent distributors involved with our delivery of propane for portable tank exchanges. Our owned and independent distributors provide portable tank exchange customers with a national delivery presence that is generally not available from most of our competitors.
 

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Some of our propane distribution locations also conduct the retail sale of propane appliances and related parts and fittings, as well as other retail propane related services and consumer products. We also sell gas grills, grilling tools and accessories, patio heaters, fireplace and garden accessories, mosquito traps and other outdoor products through Blue Rhino Global Sourcing, Inc.
 
In fiscal 2013, no one customer accounted for 10% or more of our consolidated revenues.
 
Effect of Weather and Seasonality
 
Weather conditions have a significant impact on demand for propane for heating purposes 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 warming trend, we could expect nationwide demand for propane to decrease which could lead to a reduction in our sales, income and liquidity availability.
 
The market for propane is seasonal because of increased demand during the winter heating season primarily for the purpose of providing heating in residential and commercial buildings. Consequently, sales and operating profits are concentrated in our second and third fiscal quarters, which are during the winter heating season. However, our propane by portable tank exchange sales volume provides us increased operating profits during our first and fourth fiscal quarters due to its counter-seasonal business activities. These sales also provide us the ability to better utilize our seasonal resources at our propane distribution locations. Other factors affecting our results of operations include competitive conditions, volatility in energy commodity prices, demand for propane, timing of acquisitions and general economic conditions in the United States.
 
We believe that our broad geographic distribution helps us minimize exposure to regional weather and economic patterns. During times of colder-than-normal winter weather, we have been able to take advantage of our large, efficient distribution network to avoid supply disruptions, thereby providing us a competitive advantage in the markets we serve.
 
Risk Management Activities – Commodity Price Risk
 
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 on a short-term basis. 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 risk management strategy involves taking positions in the forward or financial markets that are equal and opposite to our positions in the physical products market in order to minimize the risk of financial loss from an adverse price change. This risk management strategy is successful when our gains or losses in the physical product markets are offset by our losses or gains in the forward or financial markets. These financial derivatives are generally designated as cash flow hedges.
 
Our risk management activities may include the use of financial derivative instruments including, but not limited to, swaps, options, and futures to seek protection from adverse price movements and to minimize potential losses. We enter into these financial derivative instruments directly with third parties in the over-the-counter market and with brokers who are clearing members with the New York Mercantile Exchange. We also enter into forward propane purchase and sales contracts with counterparties. These forward contracts qualify for the normal purchase normal sales exception within generally accepted accounting principles (“GAAP”) and are therefore not recorded on our financial statements until settled.
 
Through our supply procurement activities, we purchase propane primarily from major domestic energy companies. Supplies of propane from these sources have traditionally been readily available, although no assurance can be given that they will be readily available in the future. We may purchase and store inventories of propane to avoid delivery interruptions during the periods of increased demand and to take advantage of favorable commodity prices. As a result of our ability to buy large volumes of propane and utilize our national distribution system, we believe we are in a position to achieve product cost savings and avoid shortages during periods of tight supply to an extent not generally available to other propane distributors. During fiscal 2013, six

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suppliers accounted for approximately 55% of our total propane purchases. Because there are numerous alternative suppliers available, we do not believe it is reasonably possible that this supplier concentration could cause a near-term severe impact on our ability to procure propane. If supplies were interrupted or difficulties in obtaining alternative transportation were to arise, the cost of procuring replacement supplies may materially increase. These transactions are accounted for at cost in “Cost of product sold – propane and other gas liquids sales” in our consolidated statement of earnings.
 
A portion of our propane inventory is purchased under supply contracts that typically have a one-year term and a price that fluctuates based on the spot market prices. In order to limit overall price risk, we will enter into fixed price over-the-counter propane forward and swap contracts that generally have terms of less than 36 months. We may also use options to hedge a portion of our forecasted purchases for up to 36 months in the future.
 
We also incur risks related to the price and availability of propane during periods of much colder-than-normal weather, temporary supply shortages concentrated in certain geographic regions and commodity price distortions between geographic regions. We attempt to mitigate these risks through our transportation activities by utilizing our transport truck and railroad tank car fleet to distribute propane between supply or storage locations and propane distribution locations. The propane we sell to our customers is generally transported from gas processing plants and refineries, pipeline terminals and storage facilities to propane distribution locations or storage facilities by our leased railroad tank cars, our owned or leased highway transport trucks, common carrier, or owner-operated transport trucks.
 
Industry
 
Natural gas liquids are derived from petroleum products and are sold in compressed or liquefied form. Propane, the predominant natural gas liquid, is typically extracted from natural gas or separated during crude oil refining. Although propane is gaseous at normal pressures, it is compressed into liquid form at relatively low pressures for storage and transportation. Propane is a clean-burning energy source, recognized for its transportability and ease of use relative to alternative forms of stand-alone energy sources.
 
Based upon industry publications, propane accounts for approximately 3% to 4% of energy consumption in the United States, a level which has remained relatively constant for the past two decades. Propane competes primarily with natural gas, electricity and fuel oil as an energy source principally on the basis of price, availability and portability. Propane serves as an alternative to natural gas in rural and urban areas where natural gas is unavailable or portability of product is required. Propane is generally more expensive than natural gas on an equivalent British Thermal Unit (“BTU”) basis in locations served by natural gas, although propane is often sold in such areas as a standby fuel for use during peak demands and during interruption in natural gas service. The expansion of natural gas into traditional propane markets has historically been inhibited by the capital costs required to expand distribution and pipeline systems. Although the extension of natural gas pipelines tends to displace propane distribution in the neighborhoods affected, we believe that new opportunities for propane sales arise as more geographically remote neighborhoods are developed.
 
Propane has historically been less expensive to use than electricity for space heating, water heating and cooking and competes effectively with electricity in the parts of the country where propane is less expensive than electricity on an equivalent BTU basis. Although propane is similar to fuel oil in application, market demand and price, propane and fuel oil have generally developed their own distinct geographic markets. Because residential furnaces and appliances that burn propane will not operate on fuel oil, a conversion from one fuel to the other requires the installation of new equipment. Residential propane customers will have an incentive to switch to fuel oil only if fuel oil becomes significantly less expensive than propane. Conversely, we may be unable to expand our customer base in areas where fuel oil is widely used, particularly the northeast United States, unless propane becomes significantly less expensive than fuel oil. However, many industrial customers who use propane as a heating fuel have the capacity to switch to other fuels, such as fuel oil, on the basis of availability or minor variations in price.
 
Competition
 
In addition to competing with marketers of other fuels, we compete with other companies engaged in the propane distribution business. Competition within the propane distribution industry stems from two types of participants: the larger, multi-state marketers, including farmers’ cooperatives, and the smaller, local independent marketers, including rural electric cooperatives. Based on our propane sales volumes in fiscal 2013, we believe that we are the second largest marketer of propane in the United States and the largest national provider of propane by portable tank exchange.
 
Most of our retail propane distribution locations compete with three or more marketers or distributors, primarily on the basis of reliability of service and responsiveness to customer needs, safety and price. Each retail distribution outlet operates in its own

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competitive environment because propane marketers typically reside in close proximity to their customers to lower the cost of providing service.

Other Activities
 
Our other activities primarily include the following:
 
the sale of refined fuels; and
common carrier services.


These other activities comprised less than 10% of our total revenues in fiscal 2013, 2012 and 2011.
 
Employees
 
We have no employees and are managed by our general partner pursuant to our partnership agreement. At August 31, 2013, our general partner had 3,623 full-time employees.
 
Our general partner's employees consisted of individuals in the following areas:
Propane distribution locations
3,050

Centralized corporate functions
401

Risk management, transportation, and wholesale
172

Total
3,623

 
Less than one percent of these employees are represented by an aggregate of five different local labor unions, which are all affiliated with the International Brotherhood of Teamsters. Our general partner has not experienced any significant work stoppages or other labor problems.
 
Governmental Regulation - Environmental and Safety Matters
 
Propane is not currently subject to any price or allocation regulation and has not been defined by any federal or state environment law as an environmentally hazardous substance.
 
In connection with all acquisitions of propane distribution businesses that involve the purchase of real property, we conduct a due diligence investigation to attempt to determine whether any substance other than propane has been sold from, stored on or otherwise come into contact with any such real property prior to its purchase. At a minimum, due diligence includes questioning the sellers, obtaining representations and warranties concerning the sellers' compliance with environmental laws and visual inspections of the real property.
 
With respect to the transportation of propane by truck, we are subject to regulations promulgated under the Federal Motor Carrier Safety Act. These regulations cover the transportation of flammable materials and are administered by the United States Department of Transportation. The National Fire Protection Association Pamphlet No. 58 establishes a national standard for the safe handling and storage of propane. Those rules and procedures have been adopted by us and serve as the industry standard by the states in which we operate.
 
We believe that we are in material compliance with all governmental regulations and industry standards applicable to environmental and safety matters.
 
Trademarks and Service Marks
 
We market our goods and services under various trademarks and trade names, which we own or have a right to use. Those trademarks and trade names include marks or pending marks before the United States Patent and Trademark Office such as Ferrellgas, Ferrell North America, and Ferrellmeter. Our general partner has an option to purchase for a nominal value the trade names “Ferrellgas” and “Ferrell North America” and the trademark “Ferrellmeter” that it contributed to us during 1994, if it is removed as our general partner other than “for cause.” If our general partner ceases to serve as our general partner for any reason other than “for cause,” it will have the option to purchase our other trade names and trademarks from us for fair market value.
 

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We believe that the Blue Rhino mark and Blue Rhino’s other trademarks, service marks and patents are an important part of our consistent growth in both tank exchange and outdoor living product categories. Included in the registered and pending trademarks and service marks are the designations Blue Rhino®, Blue Rhino & Design®, Rhino Design, Grill Gas & Design®, A Better Way, Spark Something Fun®, America’s Choice for Grill Gas®, RhinoTUFF®, Tri-Safe®, Drop, Swap and Go, Rhino Power, Uniflame®, UniGrill®, Patriot®, Grill Aficionado®, Skeetervac®, Fine Tune®, Vac & Tac®, Wavedrawer®, It’s Your Backyard. Enjoy It More With Skeetervac®, Less Biting Insects. More Backyard Fun®, DuraClay®, Endless Summer®, Endless Summer Comfort®, ChefMaster® and Mr. Bar-B-Q®. In addition, we have patents issued for a Method for Reconditioning a Propane Gas Tank and an Overflow Protection Valve Assembly, which expire in 2017 and 2018, respectively, as well as various other patents and patent applications pending. The protection afforded by our patents furthers our ability to cost-effectively service our customers and to maintain our competitive advantages.
 
Businesses of Other Subsidiaries
 
Ferrellgas Partners Finance Corp. is a Delaware corporation formed in 1996 and is our wholly-owned subsidiary. Ferrellgas Partners Finance Corp. has nominal assets, no employees other than officers and does not conduct any operations, but serves as a co-issuer and co-obligor for debt securities of Ferrellgas Partners. Institutional investors that might otherwise be limited in their ability to invest in debt securities of Ferrellgas Partners because it is a partnership are potentially able to invest in debt securities of Ferrellgas Partners because Ferrellgas Partners Finance Corp. acts as a co-issuer and co-obligor. Because of its structure and pursuant to the reduced disclosure format, a discussion of the results of operations, liquidity and capital resources of Ferrellgas Partners Finance Corp. is not presented in this Annual Report on Form 10-K. See Note B – Contingencies and Commitments – to Ferrellgas Partners Finance Corp.’s financial statements for a discussion of the debt securities with respect to which Ferrellgas Partners Finance Corp. is serving as a co-issuer and co-obligor.
 
Ferrellgas Finance Corp. is a Delaware corporation formed in 2003 and is a wholly-owned subsidiary of the operating partnership. Ferrellgas Finance Corp. has nominal assets, no employees other than officers and does not conduct any operations, but serves as a co-issuer and co-obligor for debt securities of the operating partnership. Institutional investors that might otherwise be limited in their ability to invest in debt securities of the operating partnership because it is a partnership are potentially able to invest in debt securities of the operating partnership because Ferrellgas Finance Corp. acts as a co-issuer and co-obligor. Because of its structure and pursuant to the reduced disclosure format, a discussion of the results of operations, liquidity and capital resources of Ferrellgas Finance Corp. is not presented in this Annual Report on Form 10-K. See Note B – Contingencies and commitments – to Ferrellgas Finance Corp.’s financial statements for a discussion of the debt securities with respect to which Ferrellgas Finance Corp. is serving as a co-issuer and co-obligor.
 
We have agreements to transfer, on an ongoing basis, a portion of our trade accounts receivable through Ferrellgas Receivables, LLC (“Ferrellgas Receivables”), a wholly-owned subsidiary that maintains an accounts receivable securitization facility. We retain servicing responsibilities for transferred accounts receivable but have no other continuing involvement with the transferred receivables. The accounts receivable securitization facility is more fully described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financing Activities - Accounts receivable securitization” and in Note F – Accounts and notes receivable, net and accounts receivable securitization – to our consolidated financial statements provided herein.
 
We also sell gas grills, grilling tools and accessories, patio heaters, fireplace and garden accessories, mosquito traps and other outdoor products. These products are manufactured by independent third parties in Asia and are sold to mass market retailers in Asia or shipped to the United States, where they are sold under our various trade names. These products are sold through Blue Rhino Global Sourcing, Inc. a taxable corporation that is a wholly-owned subsidiary of the operating partnership.
 
ITEM 1A.    RISK FACTORS.
 
Risks Inherent in the Distribution of Propane
 
Weather conditions may reduce the demand for propane; our financial condition is vulnerable to warm winters and poor weather in the grilling season.
 
Weather conditions have a significant impact on the demand for propane for both heating and agricultural purposes. Many of our customers rely heavily on propane as a heating fuel. Accordingly, our sales volumes of propane are highest during the five-month winter-heating season of November through March and are directly affected by the temperatures during these months. During fiscal 2013, approximately 55% of our propane sales volume was attributable to sales during the winter-heating season. Actual weather conditions can vary substantially from year to year, which may significantly affect our financial performance. Furthermore, variations in weather in one or more regions in which we operate can significantly affect our total propane sales

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volume and therefore our realized profits. A negative effect on our sales volume may in turn affect our financial position or results of operations. The agricultural demand for propane is also affected by weather, as dry or warm weather during the harvest season may reduce the demand for propane used in some crop drying applications.
 
Sales from portable tank exchanges experience higher volumes in the spring and summer, which includes the majority of the grilling season. Sustained periods of poor weather, particularly in the grilling season, can negatively affect our portable tank exchange revenues. In addition, poor weather may reduce consumers’ propensity to purchase and use grills and other propane-fueled appliances thereby reducing demand for portable tank exchange as well as the demand for our outdoor products.
 
Sudden and sharp propane wholesale price increases cannot be passed on to customers with contracted pricing arrangements and these contracted pricing arrangements will adversely affect our profit margins if they are not immediately hedged with an offsetting propane purchase commitment.

Gross margin from the retail distribution of propane is primarily based on the cents-per-gallon difference between the sales price we charge our customers and our costs to purchase and deliver propane to our propane distribution locations. 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. The wholesale propane price per gallon is subject to various market conditions and may fluctuate based on changes in demand, supply and other energy commodity prices. Propane prices tend to correlate primarily with crude oil and natural gas prices. We employ risk management activities that attempt to mitigate risks related to the purchasing, storing, transporting, and selling of propane. However, sudden and sharp propane price increases cannot be passed on to customers with contracted pricing arrangements. Therefore, these commitments expose us to product price risk and reduced profit margins if those transactions are not immediately hedged with an offsetting propane purchase commitment.
 
Sudden and sharp wholesale propane price decreases may result in customers not fulfilling their obligations under contracted pricing arrangements previously entered into with us. The decreased sales volumes of these higher sales price arrangements may adversely affect our profit margins.
 
We may attempt to lock-in a gross margin per gallon on our contracted sales commitments by immediately hedging or entering into a fixed price propane purchase contract. If we were to experience sudden and sharp propane price decreases, our customers may not fulfill their obligation to purchase propane from us at their previously contracted price per gallon and we may not be able to sell the related hedged or fixed price propane at a profitable sales price per gallon in the current pricing environment.
 
Our failure or our counterparties’ failure to perform on obligations under commodity derivative and financial derivative contracts could materially affect our liquidity, cash flows and results of operations.  
 
Volatility in the oil and gas commodities sector for an extended period of time or intense volatility in the near term could impair us or our counterparties’ ability to meet margin calls which could cause us or our counterparties to default on commodity and financial derivative contracts. This could have a material adverse effect on our liquidity or our ability to procure product or procure it at prices reasonable to us.
 
Hurricanes and other natural disasters could have a material adverse effect on our business, financial condition and results of operations.
 
Hurricanes and other natural disasters can potentially destroy thousands of business structures and homes and, if occurring in the Gulf Coast region of the United States, could disrupt the supply chain for oil and gas products. Disruptions in supply could have a material adverse effect on our business, financial condition, results of operations and cash flow. Damages and higher prices caused by hurricanes and other natural disasters could have an adverse effect on our financial condition due to the impact on the financial condition of our customers.
 
The propane distribution business is highly competitive, which may negatively affect our sales volumes and/or our results of operations.
 
Our profitability is affected by the competition for customers among all of the participants in the propane distribution business. We compete with a number of large national and regional firms and several thousand small independent firms. Because of the relatively low barriers to entry into the propane market, there is the potential for small independent propane distributors, as well as other companies not previously engaged in propane distribution, to compete with us. Some rural electric cooperatives and fuel oil distributors have expanded their businesses to include propane distribution. As a result, we are subject to the risk of additional competition in the future. Some of our competitors may have greater financial resources than we do. Should a

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competitor attempt to increase market share by reducing prices, our operating margins and customer base may be negatively impacted. Generally, warmer-than-normal weather and increasing fuel prices further intensifies competition. We believe that our ability to compete effectively depends on our service reliability, our responsiveness to customers, and our ability to maintain competitive propane prices and control our operating expenses.
 
The propane distribution industry is a mature one, which may limit our growth.
 
The propane distribution industry is a mature one. We foresee only limited growth in total national demand for propane in the near future. Year-to-year industry volumes are primarily impacted by fluctuations in temperatures and economic conditions. Our ability to grow our sales volumes within the propane distribution industry is primarily dependent upon our ability to acquire other propane distributors, to integrate those acquisitions into our operations, and upon the success of our marketing efforts to acquire new customers. If we are unable to compete effectively in the propane distribution business, we may lose existing customers or fail to acquire new customers.
 
The propane distribution business faces competition from other energy sources, which may reduce the existing demand for our propane.
 
Propane competes with other sources of energy, some of which can be less costly for equivalent energy value. We compete for customers against suppliers of electricity, natural gas and fuel oil. Electricity is a major competitor of propane, but propane has historically enjoyed a competitive price advantage over electricity. Except for some industrial and commercial applications, propane is generally not competitive with natural gas in areas where natural gas pipelines already exist, because such pipelines generally make it possible for the delivered cost of natural gas to be less expensive than the bulk delivery of propane. The expansion of natural gas into traditional propane markets has historically been inhibited by the capital cost required to expand distribution and pipeline systems, however, the gradual expansion of the nation’s natural gas distribution systems has resulted in the availability of natural gas in areas that were previously dependent upon propane. Although propane is similar to fuel oil in some applications and market demand, propane and fuel oil compete to a lesser extent primarily because of the cost of converting from one to the other and due to the fact that both fuel oil and propane have generally developed their own distinct geographic markets. We cannot predict the effect that the development of alternative energy sources might have on our financial position or results of operations.
 
Energy efficiency and technology advances may affect demand for propane; increases in propane prices may cause our residential customers to increase their conservation efforts.
 
The national trend toward increased conservation and technological advances, including installation of improved insulation and the development of more efficient furnaces and other heating devices, has reduced the demand for propane in our industry. We cannot predict the effect of future conservation measures or the effect that any technological advances in heating, conservation, energy generation or other devices might have on our operations. As the price of propane increases, some of our customers tend to increase their conservation efforts and thereby decrease their consumption of propane.
 
Disruptions in the capital and credit markets may adversely affect our business, including the availability and cost of debt and equity issuances for liquidity requirements, our ability to meet long-term commitments and our ability to hedge effectively; each could adversely affect our results of operations, cash flows and financial condition.
 
We rely on our ability to access the capital and credit markets at rates and terms reasonable to us. A disruption in the capital and credit markets could impair our ability to access capital and credit markets at rates and terms reasonable to us. This could limit our ability to access capital or credit markets for working capital needs, risk management activities and long-term debt maturities, or could force us to access capital and credit markets at rates or terms normally considered to be unreasonable or force us to take other aggressive actions including the suspension of our quarterly distribution.
 
Current economic and political conditions may harm the energy business disproportionately to other industries.
 
Deteriorating regional and global economic conditions and the effects of ongoing military actions may cause significant disruptions to commerce throughout the world. If those disruptions occur in areas of the world which are tied to the energy industry, such as the Middle East, it is most likely that our industry will be either affected first or affected to a greater extent than other industries. These conditions or disruptions may:
 
impair our ability to effectively market or acquire propane; or
impair our ability to raise equity or debt capital for acquisitions, capital expenditures or ongoing operations.


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A significant increase in motor fuel prices may adversely affect our profits.
 
Motor fuel is a significant operating expense for us in connection with the delivery of propane to our customers. Because we do not attempt to hedge motor fuel price risk, a significant increase in motor fuel prices will result in increased transportation costs to us. The price and supply of motor fuel is unpredictable and fluctuates based on events we cannot control, such as geopolitical developments, supply and demand for oil and gas, actions by oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and weather concerns. As a result, any increases in these prices may adversely affect our profitability and competitiveness. 
 
The revenues received from our portable tank exchange are concentrated with a limited number of retailers under non-exclusive arrangements that may be terminated at will.
 
The propane gallons sales that we generate from our delivery of propane by portable tank exchange are concentrated with a limited number of retailers. If one or more of these retailers were to materially reduce or terminate its business with us, the results from our delivery of propane from portable tank exchanges may decline. For fiscal 2013, three retailers represented approximately 50% of our portable tank exchange’s net revenues. None of our significant retail accounts associated with portable tank exchanges are contractually bound to offer portable tank exchange service or products. Therefore, retailers can discontinue our delivery of propane to them by portable tank exchange service, or sales of our propane related products, at any time and accept a competitor’s delivery of propane by portable tank exchange, or its related propane products or none at all. Continued relations with a retailer depend upon various factors, including price, customer service, consumer demand and competition. In addition, most of our significant retailers have multiple vendor policies and may seek to accept a competitor’s delivery of propane by portable tank exchange, or accept products competitive with our propane related products, at new or existing locations of these significant retailers. If any significant retailer materially reduces, terminates or requires price reductions or other adverse modifications in our selling terms, our results from our delivery of propane from portable tank exchanges may decline.
 
If the distribution locations that some of our national customers rely upon for the delivery of propane do not perform up to the expectations of these customers, if we encounter difficulties in managing the operations of these distribution locations or if we or these distribution locations are not able to manage growth effectively, our relationships with our national customers may be adversely impacted and our delivery of propane to our national customers may decline.
 
We rely on independently-owned and company-owned distributors to deliver propane to our national customers. Accordingly, our success depends on our ability to maintain and manage distributor relationships and operations and on the distributors’ ability to set up and adequately service accounts. National customers impose demanding service requirements on us, and we could experience a loss of consumer or customer goodwill if our distributors do not adhere to our quality control and service guidelines or fail to ensure the timely delivery of an adequate supply of propane to our national customers. The poor performance of a distribution location for a national customer could jeopardize our entire relationship with that national customer and cause our delivery of propane to that particular customer to decline.
 
Potential retail partners may not be able to obtain necessary permits or may be substantially delayed in obtaining necessary permits, which may adversely impact our ability to increase our delivery of propane by portable tank exchange to new retail locations.
 
Local ordinances, which vary from jurisdiction to jurisdiction, generally require retailers to obtain permits to store and sell propane tanks. These ordinances influence retailers’ acceptance of propane by portable tank exchange, distribution methods, propane tank packaging and storage. The ability and time required to obtain permits varies by jurisdiction. Delays in obtaining permits have from time to time significantly delayed the installation of new retail locations. Some jurisdictions have refused to issue the necessary permits, which has prevented some installations. Some jurisdictions may also impose additional restrictions on our ability to market and our distributors’ ability to transport propane tanks or otherwise maintain its portable tank exchange services.
 
Risks Inherent to Our Business
 
Our substantial debt and other financial obligations could impair our financial condition and our ability to fulfill our obligations.
 
We have substantial indebtedness and other financial obligations. As of July 31, 2013:

we had total indebtedness of approximately $1.25 billion;
Ferrellgas Partners had partners’ deficit of approximately $86.6 million;

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we had availability under our credit facility of approximately $174.7 million; and
we had aggregate future minimum rental commitments under non-cancelable operating leases of approximately $90.3 million; provided, however, if we elect to purchase the underlying assets at the end of the lease terms, such aggregate buyout would be $13.5 million.
 
We have long and short-term payment obligations with maturity dates ranging from fiscal 2013 to 2021 that bear interest at rates ranging from 6.5% to 9.125%. Borrowings from our secured credit facility classified as "Long-term debt" of $121.3 million currently bear an interest rate of 2.7%. As of July 31, 2013, the long-term obligations do not contain any sinking fund provisions but do require the following aggregate principal payments, without premium, during the following fiscal years:

$3.1 million - 2014
$2.9 million - 2015;
$2.8 million - 2016;
$123.8 million - 2017;
$300.9 million - 2018; and
$683.2 million - thereafter.
 
Our secured credit facility provides $400.0 million in revolving credit for loans and has a $200.0 million sublimit for letters of credit. The obligations under this credit facility are secured by substantially all assets of the operating partnership, the general partner and certain subsidiaries of the operating partnership but specifically excluding (a) assets that are subject to the operating partnership’s accounts receivable securitization facility, (b) the general partner’s equity interest in Ferrellgas Partners and (c) equity interest in certain unrestricted subsidiaries. Such obligations are also guaranteed by the general partner and certain subsidiaries of the operating partnership. The secured revolving credit facility will mature in September 2016.  
 
All of the indebtedness and other obligations described above are obligations of the operating partnership except for $182.0 million of senior debt due 2020 issued by Ferrellgas Partners and Ferrellgas Partners Finance Corp.
 
Subject to the restrictions governing the operating partnership’s indebtedness and other financial obligations and the indenture governing Ferrellgas Partners’ outstanding senior notes due 2020, we may incur significant additional indebtedness and other financial obligations, which may be secured and/or structurally senior to any debt securities we may issue.
 
Our substantial indebtedness and other financial obligations could have important consequences to our security holders. For example, it could:

make it more difficult for us to satisfy our obligations with respect to our securities;
impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;
result in higher interest expense in the event of increases in interest rates since some of our debt is, and will continue to be, at variable rates of interest;
impair our operating capacity and cash flows if we fail to comply with financial and restrictive covenants in our debt agreements and an event of default occurs as a result of that failure that is not cured or waived;
require us to dedicate a substantial portion of our cash flow to payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund distributions, working capital, capital expenditures and other general partnership requirements;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
place us at a competitive disadvantage compared to our competitors that have proportionately less debt.
 
Ferrellgas Partners or the operating partnership may be unable to refinance their indebtedness or pay that indebtedness if it becomes due earlier than scheduled.
 
If Ferrellgas Partners or the operating partnership is unable to meet their debt service obligations or other financial obligations, they could be forced to:
 
restructure or refinance their indebtedness;

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enter into other necessary financial transactions;
seek additional equity capital; or
sell their assets.
 
They may then be unable to obtain such financing or capital or sell their assets on satisfactory terms, if at all. Their failure to make payments, whether after acceleration of the due date of that indebtedness or otherwise, or our failure to refinance the indebtedness would impair their operating capacity and cash flows.
 
Restrictive covenants in the agreements governing our indebtedness and other financial obligations may reduce our operating flexibility.
 
The indenture governing the outstanding notes of Ferrellgas Partners and the agreements governing the operating partnership’s indebtedness and other financial obligations contain, and any indenture that will govern debt securities issued by Ferrellgas Partners or the operating partnership may contain, various covenants that limit our ability and the ability of specified subsidiaries of ours to, among other things:

incur additional indebtedness;
make distributions to our unitholders;
purchase or redeem our outstanding equity interests or subordinated debt;
make specified investments;
create or incur liens;
sell assets;
engage in specified transactions with affiliates;
restrict the ability of our subsidiaries to make specified payments, loans, guarantees and transfers of assets or interests in assets;
engage in sale-leaseback transactions;
effect a merger or consolidation with or into other companies or a sale of all or substantially all of our properties or assets; and
 engage in other lines of business.

These restrictions could limit the ability of Ferrellgas Partners, the operating partnership and our other subsidiaries:

to obtain future financings;
to make needed capital expenditures;
to withstand a future downturn in our business or the economy in general; or
to conduct operations or otherwise take advantage of business opportunities that may arise.
 
Some of the agreements governing our indebtedness and other financial obligations also require the maintenance of specified financial ratios and the satisfaction of other financial conditions. Our ability to meet those financial ratios and conditions can be affected by unexpected downturns in business operations beyond our control, such as significantly warmer than normal weather, a volatile energy commodity cost environment or an economic downturn. Accordingly, we may be unable to meet these ratios and conditions. This failure could impair our operating capacity and cash flows and could restrict our ability to incur debt or to make cash distributions, even if sufficient funds were available.
 
Our breach of any of these covenants or the operating partnership’s failure to meet any of these ratios or conditions could result in a default under the terms of the relevant indebtedness, which could cause such indebtedness or other financial obligations, and by reason of cross-default provisions, any of Ferrellgas Partners’ or the operating partnership’s other outstanding notes or future debt securities, to become immediately due and payable. If we were unable to repay those amounts, the lenders could initiate a bankruptcy proceeding or liquidation proceeding or proceed against the collateral, if any. If the lenders of the operating partnership’s indebtedness or other financial obligations accelerate the repayment of borrowings or other amounts owed, we may not have sufficient assets to repay our indebtedness or other financial obligations, including our outstanding notes and any future debt securities.
 

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Our results of operations and our ability to make distributions or pay interest or principal on debt securities could be negatively impacted by price and inventory risk and management of these risks.
 
The amount of gross profit we make depends significantly on the excess of the sales price over our costs to purchase and distribute propane. Consequently, our profitability is sensitive to changes in energy prices, in particular, changes in wholesale propane prices. Propane is a commodity whose market price can fluctuate significantly based on changes in supply, changes in other energy prices or other market conditions. We have no control over these market conditions. In general, product supply contracts permit suppliers to charge posted prices plus transportation costs at the time of delivery or the current prices established at major delivery points. Any increase in the price of product could reduce our gross profit because we may not be able to immediately pass rapid increases in such costs, or costs to distribute product, on to our customers.
 
While we generally attempt to minimize our inventory risk by purchasing product on a short-term basis, we may purchase and store propane or other natural gas liquids depending on inventory and price outlooks. We may purchase large volumes of propane at the then current market price during periods of low demand and low prices, which generally occurs during the summer months. The market price for propane could fall below the price at which we made the purchases, which would adversely affect our profits or cause sales from that inventory to be unprofitable. A portion of our inventory is purchased under supply contracts that typically have a one-year term and at a price that fluctuates based on the prevailing market prices. Our contracts with our independent portable tank exchange distributors provide for a portion of our payment to the distributor to be based upon a price that fluctuates based on the prevailing propane market prices. To limit our overall price risk, we may purchase and store physical product and enter into fixed price over-the-counter energy commodity forward contracts, swaps and options that have terms of up to 36 months. This strategy may not be effective in limiting our price risk if, for example, weather conditions significantly reduce customer demand, or market or weather conditions prevent the delivery of physical product during periods of peak demand, resulting in excess physical product after the end of the winter heating season and the expiration of related forward or option contracts.
 
Some of our sales are pursuant to commitments at contracted price agreements. To manage these commitments, we may purchase and store physical product and/or enter into fixed price-over-the-counter energy commodity forward contracts, swaps and options. We may enter into these agreements at volume levels that we believe are necessary to mitigate the price risk related to our anticipated sales volumes under the commitments. If the price of propane declines and our customers purchase less propane than we have purchased from our suppliers, we could incur losses when we sell the excess volumes. If the price of propane increases and our customers purchase more propane than we have purchased from our suppliers, we could incur losses when we are required to purchase additional propane to fulfill our customers’ orders. The risk management of our inventory and contracts for the future purchase of product could impair our profitability if the price of product changes in ways we do not anticipate.
 
The Board of Directors of our general partner has adopted a commodity risk management policy which places specified restrictions on all of our commodity risk management activities such as limits on the types of commodities, loss limits, time limits on contracts and limitations on our ability to enter into derivative contracts. The policy also requires the establishment of a risk management committee that includes senior executives. This committee is responsible for monitoring commodity risk management activities, establishing and maintaining timely reporting and establishing and monitoring specific limits on the various commodity risk management activities. These limits may be waived on a case-by-case basis by a majority vote of the risk management committee and/or Board of Directors, depending on the specific limit being waived. From time to time, for valid business reasons based on the facts and circumstances, authorization has been granted to allow specific commodity risk management positions to exceed established limits. If we sustain material losses from our risk management activities due to our failure to anticipate future events, a failure of the policy, incorrect waivers or otherwise, our ability to make distributions to our unitholders or pay interest or principal of any debt securities may be negatively impacted as a result of such loss.
 
We are dependent on our principal suppliers, which increases the risks from an interruption in supply and transportation.
 
Through our supply procurement activities, we purchased approximately 55% of our propane from six suppliers during fiscal 2013. In addition, during extended periods of colder-than-normal weather, suppliers may temporarily run out of propane necessitating the transportation of propane by truck, rail car or other means from other areas. If supplies from these sources were interrupted or difficulties in alternative transportation were to arise, the cost of procuring replacement supplies and transporting those supplies from alternative locations might be materially higher and, at least on a short-term basis, our margins could be reduced.
 
The availability of cash from our credit facility may be impacted by many factors beyond our control.
 
We typically borrow on the operating partnership’s credit facility or sell accounts receivable under its accounts receivable securitization facility to fund our working capital requirements. We may also borrow on the operating partnership’s credit facility

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to fund debt service payments, distributions to our unitholders, acquisition and capital expenditures. We purchase product from suppliers and make payments with terms that are typically within five to ten days of delivery. We believe that the availability of cash from the operating partnership’s credit facility and the accounts receivable securitization facility will be sufficient to meet our future working capital needs. However, if we were to experience an unexpected significant increase in working capital requirements or have insufficient funds to fund distributions, this need could exceed our immediately available resources. Events that could cause increases in working capital borrowings or letter of credit requirements may include:

a significant increase in the wholesale cost of propane;
a significant delay in the collections of accounts receivable;
increased volatility in energy commodity prices related to risk management activities;
increased liquidity requirements imposed by insurance providers;
a significant downgrade in our credit rating leading to decreased trade credit; or
a significant acquisition.
  
As is typical in our industry, our retail customers do not pay upon receipt, but generally pay between 30 and 60 days after delivery. During the winter heating season, we experience significant increases in accounts receivable and inventory levels and thus a significant decline in working capital availability. Although we have the ability to fund working capital with borrowings from the operating partnership’s credit facility and sales of accounts receivable under its accounts receivable securitization facility, we cannot predict the effect that increases in propane prices and colder-than-normal winter weather may have on future working capital availability.
 
We may not be successful in making acquisitions and any acquisitions we make may not result in our anticipated results; in either case, this would potentially limit our growth, limit our ability to compete and impair our results of operations.
 
We have historically expanded our business through acquisitions. We regularly consider and evaluate opportunities to acquire local, regional and national propane distributors. We may choose to finance these acquisitions through internal cash flow, external borrowings or the issuance of additional common units or other securities. We have substantial competition for acquisitions of propane companies. Although we believe there are numerous potential large and small acquisition candidates in our industry, there can be no assurance that:

we will be able to acquire any of these candidates on economically acceptable terms;
we will be able to successfully integrate acquired operations with any expected cost savings;
any acquisitions made will not be dilutive to our earnings and distributions;
any additional equity we issue as consideration for an acquisition will not be dilutive to our unitholders; or
any additional debt we incur to finance an acquisition will not affect the operating partnership’s ability to make distributions to Ferrellgas Partners or service the operating partnership’s existing debt.
 
We are subject to operating and litigation risks, which may not be covered by insurance.
 
Our operations are subject to all operating hazards and risks normally incidental to the handling, storing and delivering of combustible liquids such as propane. As a result, we have been, and are likely to be, a defendant in various legal proceedings arising in the ordinary course of business. We maintain insurance policies with insurers in such amounts and with such coverages and deductibles as we believe are reasonable and prudent. However, we cannot guarantee that such insurance will be adequate to protect us from all material expenses related to potential future claims for personal injury and property damage or that such levels of insurance will be available in the future at economical prices.
 
We depend on particular management information systems to effectively manage all aspects of our delivery of propane.
 
We depend on our management information systems to process orders, manage inventory and accounts receivable collections, maintain distributor and customer information, maintain cost-efficient operations and assist in delivering propane on a timely basis. In addition, our staff of management information systems professionals relies heavily on the support of several key personnel and vendors. Any disruption in the operation of those management information systems, loss of employees knowledgeable about such systems, termination of our relationship with one or more of these key vendors or failure to continue to modify such systems effectively as our business expands could negatively affect our business.
 
Risks Inherent to an Investment in Our Debt Securities
 

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Ferrellgas Partners and the operating partnership are required to distribute all of their available cash to their equity holders and Ferrellgas Partners and the operating partnership are not required to accumulate cash for the purpose of meeting their future obligations to holders of their debt securities, which may limit the cash available to service those debt securities.
 
Subject to the limitations on restricted payments contained in the indenture that governs Ferrellgas Partners’ outstanding notes, the instruments governing the outstanding indebtedness of the operating partnership and any applicable indenture that will govern any debt securities Ferrellgas Partners or the operating partnership may issue, the partnership agreements of both Ferrellgas Partners and the operating partnership require us to distribute all of our available cash each fiscal quarter to our limited partners and our general partner and do not require us to accumulate cash for the purpose of meeting obligations to holders of any debt securities of Ferrellgas Partners or the operating partnership. Available cash is generally all of our cash receipts, less cash disbursements and adjustments for net changes in reserves. As a result of these distribution requirements, we do not expect either Ferrellgas Partners or the operating partnership to accumulate significant amounts of cash. Depending on the timing and amount of our cash distributions and because we are not required to accumulate cash for the purpose of meeting obligations to holders of any debt securities of Ferrellgas Partners or the operating partnership, such distributions could significantly reduce the cash available to us in subsequent periods to make payments on any debt securities of Ferrellgas Partners or the operating partnership.
 
Debt securities of Ferrellgas Partners will be structurally subordinated to all indebtedness and other liabilities of the operating partnership and its subsidiaries.

Debt securities of Ferrellgas Partners will be effectively subordinated to all existing and future claims of creditors of the operating partnership and its subsidiaries, including:

the lenders under the operating partnership’s indebtedness;
the claims of lessors under the operating partnership’s operating leases;
the claims of the lenders and their affiliates under the operating partnership’s accounts receivable securitization facility;
debt securities, including any subordinated debt securities, issued by the operating partnership; and
all other possible future creditors of the operating partnership and its subsidiaries.
 
This subordination is due to these creditors’ priority as to the assets of the operating partnership and its subsidiaries over Ferrellgas Partners’ claims as an equity holder in the operating partnership and, thereby, indirectly, the claims of holders of Ferrellgas Partners’ debt securities. As a result, upon any distribution to these creditors in a bankruptcy, liquidation or reorganization or similar proceeding relating to Ferrellgas Partners or its property, the operating partnership’s creditors will be entitled to be paid in full before any payment may be made with respect to Ferrellgas Partners’ debt securities. Thereafter, the holders of Ferrellgas Partners’ debt securities will participate with its trade creditors and all other holders of its indebtedness in the assets remaining, if any. In any of these cases, Ferrellgas Partners may have insufficient funds to pay all of its creditors, and holders of its debt securities may therefore receive less, ratably, than creditors of the operating partnership and its subsidiaries. As of July 31, 2013, the operating partnership had approximately $1,066.7 million of outstanding indebtedness and other liabilities to which any of the debt securities of Ferrellgas Partners will effectively rank junior.
 
All payments on any subordinated debt securities that we may issue will be subordinated to the payments of any amounts due on any senior indebtedness that we may have issued or incurred.
 
The right of the holders of subordinated debt securities to receive payment of any amounts due to them, whether interest, premium or principal, will be subordinated to the right of all of the holders of our senior indebtedness, as such term will be defined in the applicable subordinated debt indenture, to receive payments of all amounts due to them. If an event of default on any of our senior indebtedness occurs, then until such event of default has been cured, we may be unable to make payments of any amounts due to the holders of our subordinated debt securities. Accordingly, in the event of insolvency, creditors who are holders of our senior indebtedness may recover more, ratably, than the holders of our subordinated debt securities.
 
Debt securities of Ferrellgas Partners are expected to be non-recourse to the operating partnership, which will limit remedies of the holders of Ferrellgas Partners’ debt securities.
 
Ferrellgas Partners’ obligations under any debt securities are expected to be non-recourse to the operating partnership. Therefore, if Ferrellgas Partners should fail to pay the interest or principal on the notes or breach any of its other obligations under its debt securities or any applicable indenture, holders of debt securities of Ferrellgas Partners will not be able to obtain any such payments or obtain any other remedy from the operating partnership or its subsidiaries. The operating partnership and its subsidiaries will not be liable for any of Ferrellgas Partners’ obligations under its debt securities or the applicable indenture.
 

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Ferrellgas Partners or the operating partnership may be unable to repurchase debt securities upon a change of control; it may be difficult to determine if a change of control has occurred.
 
Upon the occurrence of “change of control” events as may be described from time to time in our filings with the SEC and related to the issuance by Ferrellgas Partners or the operating partnership of debt securities, the applicable issuer or a third party may be required to make a change of control offer to repurchase those debt securities at a premium to their principal amount, plus accrued and unpaid interest. The applicable issuer may not have the financial resources to purchase its debt securities in that circumstance, particularly if a change of control event triggers a similar repurchase requirement for, or results in the acceleration of, other indebtedness. The indenture governing Ferrellgas Partners’ outstanding notes contains such a repurchase requirement. Some of the agreements governing the operating partnership’s indebtedness currently provide that specified change of control events will result in the acceleration of the indebtedness under those agreements. Future debt agreements of Ferrellgas Partners or the operating partnership may also contain similar provisions. The obligation to repay any accelerated indebtedness of the operating partnership will be structurally senior to Ferrellgas Partners’ obligations to repurchase its debt securities upon a change of control. In addition, future debt agreements of Ferrellgas Partners or the operating partnership may contain other restrictions on the ability of Ferrellgas Partners or the operating partnership to repurchase its debt securities upon a change of control. These restrictions could prevent the applicable issuer from satisfying its obligations to purchase its debt securities unless it is able to refinance or obtain waivers under any indebtedness of Ferrellgas Partners or of the operating partnership containing these restrictions. The applicable issuer’s failure to make or consummate a change of control repurchase offer or pay the change of control purchase price when due may give the trustee and the holders of the debt securities particular rights as may be described from time to time in our filings with the SEC.

In addition, one of the events that may constitute a change of control is a sale of all or substantially all of the applicable issuer’s assets. The meaning of “substantially all” varies according to the facts and circumstances of the subject transaction and has no clearly established meaning under New York law, which is the law that will likely govern any indenture for the debt securities. This ambiguity as to when a sale of substantially all of the applicable issuer’s assets has occurred may make it difficult for holders of debt securities to determine whether the applicable issuer has properly identified, or failed to identify, a change of control.
 
There may be no active trading market for our debt securities, which may limit a holder’s ability to sell our debt securities.
 
We do not intend to list the debt securities we may issue from time to time on any securities exchange or to seek approval for quotations through any automated quotation system. An established market for the debt securities may not develop, or if one does develop, it may not be maintained. Although underwriters may advise us that they intend to make a market in the debt securities, they are not expected to be obligated to do so and may discontinue such market making activity at any time without notice. In addition, market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act. For these reasons, we cannot assure a debt holder that:

a liquid market for the debt securities will develop;
a debt holder will be able to sell its debt securities; or
a debt holder will receive any specific price upon any sale of its debt securities.
 
If a public market for the debt securities did develop, the debt securities could trade at prices that may be higher or lower than their principal amount or purchase price, depending on many factors, including prevailing interest rates, the market for similar debt securities and our financial performance. Historically, the market for non-investment grade debt, such as our debt securities, has been subject to disruptions that have caused substantial fluctuations in the prices of these securities.
 
Risks Inherent to an Investment in Ferrellgas Partners’ Equity
 
Ferrellgas Partners may sell additional limited partner interests, diluting existing interests of unitholders.
 
The partnership agreement of Ferrellgas Partners generally allows Ferrellgas Partners to issue additional limited partner interests and other equity securities. When Ferrellgas Partners issues additional equity securities, a unitholder’s proportionate partnership interest will decrease. Such an issuance could negatively affect the amount of cash distributed to unitholders and the market price of common units. The issuance of additional common units will also diminish the relative voting strength of the previously outstanding common units.
 
Cash distributions are not guaranteed and may fluctuate with our performance and other external factors.
 

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Although we are required to distribute all of our “available cash,” we cannot guarantee the amounts of available cash that will be distributed to the holders of our equity securities. Available cash is generally all of our cash receipts, less cash disbursements and adjustments for net changes in reserves. The actual amounts of available cash will depend upon numerous factors, including:

cash flow generated by operations;
weather in our areas of operation;
borrowing capacity under our credit facility;
principal and interest payments made on our debt;
the costs of acquisitions, including related debt service payments;
restrictions contained in debt instruments;
issuances of debt and equity securities;
fluctuations in working capital;
capital expenditures;
adjustments in reserves made by our general partner in its discretion;
prevailing economic conditions; and
financial, business and other factors, a number of which will be beyond our control.

 
Cash distributions are dependent primarily on cash flow, including from reserves and, subject to limitations, working capital borrowings. Cash distributions are not dependent on profitability, which is affected by non-cash items. Therefore, cash distributions might be made during periods when we record losses and might not be made during periods when we record profits.
 
Our general partner has broad discretion to determine the amount of “available cash” for distribution to holders of our equity securities through the establishment and maintenance of cash reserves, thereby potentially lessening and limiting the amount of “available cash” eligible for distribution.

Our general partner determines the timing and amount of our distributions and has broad discretion in determining the amount of funds that will be recognized as “available cash.” Part of this discretion comes from the ability of our general partner to establish and make additions to our reserves. Decisions as to amounts to be placed in or released from reserves have a direct impact on the amount of available cash for distributions because increases and decreases in reserves are taken into account in computing available cash. Funds within or added to our reserves are not considered to be “available cash” and are therefore not required to be distributed. Each fiscal quarter, our general partner may, in its reasonable discretion, determine the amounts to be placed in or released from reserves, subject to restrictions on the purposes of the reserves. Reserves may be made, increased or decreased for any proper purpose, including, but not limited to, reserves:

to comply with the terms of any of our agreements or obligations, including the establishment of reserves to fund the payment of interest and principal in the future of any debt securities of Ferrellgas Partners or the operating partnership;
to provide for level distributions of cash notwithstanding the seasonality of our business; and
to provide for future capital expenditures and other payments deemed by our general partner to be necessary or advisable.
  
The decision by our general partner to establish, increase or decrease our reserves may limit the amount of cash available for distribution to holders of our equity securities. Holders of our equity securities will not receive payments required by such securities unless we are able to first satisfy our own obligations and the establishment of any reserves. See the first risk factor under “Risks Arising from Our Partnership Structure and Relationship with Our General Partner.”
 
The debt agreements of Ferrellgas Partners and the operating partnership may limit their ability to make distributions to holders of their equity securities.
 
The debt agreements governing Ferrellgas Partners’ and the operating partnership’s outstanding indebtedness contain restrictive covenants that may limit or prohibit distributions to holders of their equity securities under various circumstances. Ferrellgas Partners’ existing indenture generally prohibits it from:

making any distributions to unitholders if an event of default exists or would exist when such distribution is made;
distributing amounts in excess of 100% of available cash for the immediately preceding fiscal quarter if its consolidated fixed charge coverage ratio as defined in the indenture is less than 1.75 to 1.00;  or

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distributing amounts in excess of $25.0 million less any restricted payments made for the prior sixteen fiscal quarters plus the aggregate cash contributions made to us during that period if its consolidated fixed charge coverage ratio as defined in the indenture is less than or equal to 1.75 to 1.00.

See the first risk factor under “Risks Arising from Our Partnership Structure and Relationship with Our General Partner” for a description of the restrictions on the operating partnership’s ability to distribute cash to Ferrellgas Partners. Any indenture applicable to future issuances of debt securities by Ferrellgas Partners or the operating partnership may contain restrictions that are the same as or similar to those in their existing debt agreements.
 
Persons owning 20% or more of Ferrellgas Partners’ common units cannot vote. This limitation does not apply to common units owned by Ferrell Companies, our general partner and its affiliates.
 
All common units held by a person that owns 20% or more of Ferrellgas Partners’ common units cannot be voted. This provision may:

discourage a person or group from attempting to remove our general partner or otherwise change management; and
reduce the price at which our common units will trade under various circumstances.
 
This limitation does not apply to our general partner and its affiliates. Ferrell Companies, the parent of our general partner, beneficially owns all of the outstanding capital stock of our general partner in addition to approximately 27.5% of our common units.
 
Risks Arising from Our Partnership Structure and Relationship with Our General Partner
 
Ferrellgas Partners is a holding entity and has no material operations or assets. Accordingly, Ferrellgas Partners is dependent on distributions from the operating partnership to service its obligations. These distributions are not guaranteed and may be restricted.
 
Ferrellgas Partners is a holding entity for our subsidiaries, including the operating partnership. Ferrellgas Partners has no material operations and only limited assets. Ferrellgas Partners Finance Corp. is Ferrellgas Partners’ wholly-owned finance subsidiary, serves as a co-obligor on any of its debt securities, conducts no business and has nominal assets. Accordingly, Ferrellgas Partners is dependent on cash distributions from the operating partnership and its subsidiaries to service obligations of Ferrellgas Partners. The operating partnership is required to distribute all of its available cash each fiscal quarter, less the amount of cash reserves that our general partner determines is necessary or appropriate in its reasonable discretion to provide for the proper conduct of our business, to provide funds for distributions over the next four fiscal quarters or to comply with applicable law or with any of our debt or other agreements. This discretion may limit the amount of available cash the operating partnership may distribute to Ferrellgas Partners each fiscal quarter. Holders of Ferrellgas Partners’ securities will not receive payments required by those securities unless the operating partnership is able to make distributions to Ferrellgas Partners after the operating partnership first satisfies its obligations under the terms of its own borrowing arrangements and reserves any necessary amounts to meet its own financial obligations.
 
In addition, the various agreements governing the operating partnership’s indebtedness and other financing transactions permit quarterly distributions only so long as each distribution does not exceed a specified amount, the operating partnership meets a specified financial ratio and no default exists or would result from such distribution. Those agreements include the indentures governing the operating partnership’s existing notes, credit facility and an accounts receivable securitization facility. Each of these agreements contains various negative and affirmative covenants applicable to the operating partnership and some of these agreements require the operating partnership to maintain specified financial ratios. If the operating partnership violates any of these covenants or requirements, a default may result and distributions would be limited. These covenants limit the operating partnership’s ability to, among other things:

incur additional indebtedness;
engage in transactions with affiliates;
create or incur liens;
sell assets;
make restricted payments, loans and investments;
enter into business combinations and asset sale transactions; and
engage in other lines of business.
 

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Unitholders have limits on their voting rights; our general partner manages and operates us, thereby generally precluding the participation of our unitholders in operational decisions.
 
Our general partner manages and operates us. Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business. Amendments to the agreement of limited partnership of Ferrellgas Partners may be proposed only by or with the consent of our general partner. Proposed amendments must generally be approved by holders of at least a majority of our outstanding common units.
 
Unitholders will have no right to elect our general partner, or any directors of our general partner on an annual or other continuing basis, nor will any proxies be received for such voting. Our general partner may not be removed except pursuant to:

the vote of the holders of at least 66 2/3% of the outstanding units entitled to vote thereon, which includes the common units owned by our general partner and its affiliates; and
upon the election of a successor general partner by the vote of the holders of not less than a majority of the outstanding common units entitled to vote.
  
Because Ferrell Companies is the parent of our general partner and beneficially owns approximately 27.5% of our outstanding common units and James E. Ferrell, Chairman of the Board of Directors of our general partner, indirectly owns approximately 6% of our outstanding common units, amendments to the agreement of limited partnership of Ferrellgas Partners or the removal of our general partner are unlikely if neither Ferrell Companies nor Mr. Ferrell consent to such action.
 
Our general partner has a limited call right with respect to the limited partner interests of Ferrellgas Partners.
 
If at any time less than 20% of the then-issued and outstanding limited partner interests of any class of Ferrellgas Partners are held by persons other than our general partner and its affiliates, our general partner has the right, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the remaining limited partner interests of such class held by such unaffiliated persons at a price generally equal to the then-current market price of limited partner interests of such class. As a consequence, a unitholder may be required to sell its common units at a time when the unitholder may not desire to sell them or at a price that is less than the price desired to be received upon such sale.
 
Unitholders may not have limited liability in specified circumstances and may be liable for the return of distributions.

The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some states. If it were determined that we had been conducting business in any state without compliance with the applicable limited partnership statute, or that the right, or the exercise of the right by the limited partners as a group, to:

remove or replace our general partner;
make specified amendments to our partnership agreements; or
take other action pursuant to our partnership agreements that constitutes participation in the “control” of our business,

then the limited partners could be held liable in some circumstances for our obligations to the same extent as a general partner.
  
In addition, under some circumstances a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution. Unitholders will not be liable for assessments in addition to their initial capital investment in our common units. Under Delaware law, we may not make a distribution to our unitholders if the distribution causes all our liabilities to exceed the fair value of our assets. Liabilities to partners on account of their partnership interests and liabilities for which recourse is limited to specific property are not counted for purposes of determining whether a distribution is permitted. Delaware law provides that a limited partner who receives such a distribution and knew at the time of the distribution that the distribution violated the Delaware law will be liable to the limited partnership for the distribution amount for three years from the distribution date. Under Delaware law, an assignee that becomes a substituted limited partner of a limited partnership is liable for the obligations of the assignor to make contributions to the partnership. However, such an assignee is not obligated for liabilities unknown to that assignee at the time such assignee became a limited partner if the liabilities could not be determined from the partnership agreements.
 
Our general partner’s liability to us and our unitholders may be limited.
 

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The partnership agreements of Ferrellgas Partners and the operating partnership contain language limiting the liability of our general partner to us and to our unitholders. For example, those partnership agreements provide that:

the general partner does not breach any duty to us or our unitholders by borrowing funds or approving any borrowing; our general partner is protected even if the purpose or effect of the borrowing is to increase incentive distributions to our general partner;
our general partner does not breach any duty to us or our unitholders by taking any actions consistent with the standards of reasonable discretion outlined in the definitions of available cash and cash from operations contained in our partnership agreements; and
our general partner does not breach any standard of care or duty by resolving conflicts of interest unless our general partner acts in bad faith.
  
The modifications of state law standards of fiduciary duty contained in our partnership agreements may significantly limit the ability of unitholders to successfully challenge the actions of our general partner as being a breach of what would otherwise have been a fiduciary duty. These standards include the highest duties of good faith, fairness and loyalty to the limited partners. Such a duty of loyalty would generally prohibit a general partner of a Delaware limited partnership from taking any action or engaging in any transaction for which it has a conflict of interest. Under our partnership agreements, our general partner may exercise its broad discretion and authority in our management and the conduct of our operations as long as our general partner’s actions are in our best interest.
 
Our general partner and its affiliates may have conflicts with us.
 
The directors and officers of our general partner and its affiliates have fiduciary duties to manage itself in a manner that is beneficial to its stockholder. At the same time, our general partner has fiduciary duties to manage us in a manner that is beneficial to us and our unitholders. Therefore, our general partner’s duties to us may conflict with the duties of its officers and directors to its stockholder.
 
Matters in which, and reasons that, such conflicts of interest may arise include:

decisions of our general partner with respect to the amount and timing of our cash expenditures, borrowings, acquisitions, issuances of additional securities and changes in reserves in any quarter may affect the amount of incentive distributions we are obligated to pay our general partner;
borrowings do not constitute a breach of any duty owed by our general partner to our unitholders even if these borrowings have the purpose or effect of directly or indirectly enabling us to make distributions to the holder of our incentive distribution rights, currently our general partner;
we do not have any employees and rely solely on employees of our general partner and its affiliates;
under the terms of our partnership agreements, we must reimburse our general partner and its affiliates for costs incurred in managing and operating us, including costs incurred in rendering corporate staff and support services to us;
our general partner is not restricted from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or causing us to enter into additional contractual arrangements with any of such entities;
neither our partnership agreements nor any of the other agreements, contracts and arrangements between us, on the one hand, and our general partner and its affiliates, on the other, are or will be the result of arms-length negotiations;
whenever possible, our general partner limits our liability under contractual arrangements to all or a portion of our assets, with the other party thereto having no recourse against our general partner or its assets;
our partnership agreements permit our general partner to make these limitations even if we could have obtained more favorable terms if our general partner had not limited its liability;
any agreements between us and our general partner or its affiliates will not grant to our unitholders, separate and apart from us, the right to enforce the obligations of our general partner or such affiliates in favor of us; therefore, our general partner will be primarily responsible for enforcing those obligations;
our general partner may exercise its right to call for and purchase common units as provided in the partnership agreement of Ferrellgas Partners or assign that right to one of its affiliates or to us;
our partnership agreements provide that it will not constitute a breach of our general partner’s fiduciary duties to us for its affiliates to engage in activities of the type conducted by us, other than retail propane sales to end users in the continental United States in the manner engaged in by our general partner immediately prior to our initial public offering, even if these activities are in direct competition with us;

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our general partner and its affiliates have no obligation to present business opportunities to us;
our general partner selects the attorneys, accountants and others who perform services for us. These persons may also perform services for our general partner and its affiliates. our general partner is authorized to retain separate counsel for us or our unitholders, depending on the nature of the conflict that arises; and
James E. Ferrell is the Chairman of the Board of Directors of our general partner. Mr. Ferrell also owns other companies with whom we may, from time to time, conduct transactions within our ordinary course of business. Mr. Ferrell’s ownership of these entities may conflict with his duties as a director of our general partner, including our relationship and conduct of business with any of Mr. Ferrell’s companies.
 
See “Conflicts of Interest” and “Fiduciary Responsibilities” below.
 
Ferrell Companies may transfer the ownership of our general partner which could cause a change of our management and affect the decisions made by our general partner regarding resolutions of conflicts of interest.
 
Ferrell Companies, the owner of our general partner, may transfer the capital stock of our general partner without the consent of our unitholders. In such an instance, our general partner will remain bound by our partnership agreements. If, however, through share ownership or otherwise, persons not now affiliated with our general partner were to acquire its general partner interest in us or effective control of our general partner, our management and resolutions of conflicts of interest, such as those described above, could change substantially.
 
Our general partner may voluntarily withdraw or sell its general partner interest.
 
Our general partner may withdraw as the general partner of Ferrellgas Partners and the operating partnership without the approval of our unitholders. Our general partner may also sell its general partner interest in Ferrellgas Partners and the operating partnership without the approval of our unitholders. Any such withdrawal or sale could have a material adverse effect on us and could substantially change the management and resolutions of conflicts of interest, as described above.
 
Our general partner can protect itself against dilution.
 
Whenever we issue equity securities to any person other than our general partner and its affiliates, our general partner has the right to purchase additional limited partner interests on the same terms. This allows our general partner to maintain its partnership interest in us. No other unitholder has a similar right. Therefore, only our general partner may protect itself against dilution caused by our issuance of additional equity securities.
 
Tax Risks
 
The IRS could treat us as a corporation for tax purposes or changes in federal or state laws could subject us to entity level taxation, which would substantially reduce the cash available for distribution to our unitholders.
 
The anticipated after-tax economic benefit of an investment in us depends largely on our being treated as a partnership for federal income tax purposes. We believe that, under current law, we have been and will continue to be classified as a partnership for federal income tax purposes. One of the requirements for such classification is that at least 90% of our gross income for each taxable year has been and will be “qualifying income” within the meaning of Section 7704 of the Internal Revenue Code. Whether we will continue to be classified as a partnership in part depends on our ability to meet this qualifying income test in the future.
 
If we were classified as a corporation for federal income tax purposes, we would pay tax on our income at corporate rates, currently 35% at the federal level, and we would probably pay additional state income taxes as well. In addition, distributions would generally be taxable to the recipient as corporate dividends and no income, gains, losses or deductions would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, the cash available for distribution to our unitholders would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders and thus would likely result in a substantial reduction in the value of our common units.
 
A change in current law or a change in our business could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. Our partnership agreements provide that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, provisions of our partnership agreements will be subject to change. These

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changes would include a decrease in the minimum quarterly distribution and the target distribution levels to reflect the impact of such law on us.
 
A successful IRS contest of the federal income tax positions we take may reduce the market value of our common units and the costs of any contest will be borne by us and therefore indirectly by our unitholders and our general partner.
 
The IRS may adopt positions that differ from those expressed herein or from the positions we take. It may be necessary to resort to administrative or court proceedings in an effort to sustain some or all of the positions we take, and some or all of these positions ultimately may not be sustained. Any contest with the IRS may materially reduce the market value of our common units and the prices at which our common units trade. In addition, our costs of any contest with the IRS will be borne by us and therefore indirectly by our unitholders and our general partner.
 
Unitholders may be required to pay taxes on income from us even if unitholders do not receive any cash distributions from us.
 
A unitholder will be required to pay federal income taxes and, in some cases, state and local income taxes on its share of our taxable income, even if it does not receive cash distributions from us. A unitholder may not receive cash distributions equal to its share of our taxable income or even the tax liability that results from that income. Further, a unitholder may incur a tax liability in excess of the amount of cash it receives upon the sale of its units.
 
The ratio of taxable income to cash distributions could be higher or lower than our estimates, which could result in a material reduction of the market value of our common units.
 
We estimate that a person who acquires common units in the 2013 calendar year and owns those common units through the record dates for all cash distributions payable for all periods within the 2013 calendar year will be allocated, on a cumulative basis, an amount of federal taxable income that will be less than 10% of the cumulative cash distributed to such person for those periods. The taxable income allocable to a unitholder for subsequent periods may constitute an increasing percentage of distributable cash. These estimates are based on several assumptions and estimates that are subject to factors beyond our control. Accordingly, the actual percentage of distributions that will constitute taxable income could be higher or lower and any differences could result in a material reduction in the market value of our common units.
 
There are limits on the deductibility of losses.
 
In the case of unitholders subject to the passive loss rules (generally, individuals, closely held corporations and regulated investment companies), any losses generated by us will only be available to offset our future income and cannot be used to offset income from other activities, including passive activities or investments. Unused losses may be deducted when the unitholder disposes of its entire investment in us in a fully taxable transaction with an unrelated party. A unitholder’s share of our net passive income may be offset by unused losses carried over from prior years, but not by losses from other passive activities, including losses from other publicly-traded partnerships.

Tax gain or loss on the disposition of our common units could be different than expected.
 
If a unitholder sells their common units, the unitholder will recognize a gain or loss equal to the difference between the amount realized and its tax basis in those common units. Prior distributions in excess of the total net taxable income the unitholder was allocated for a common unit, which decreased its tax basis in that common unit, will, in effect, become taxable income to the unitholder if the common unit is sold at a price greater than its tax basis in that common unit, even if the price received is less than its original cost. A substantial portion of the amount realized, whether or not representing a gain, will likely be ordinary income to that unitholder. Should the IRS successfully contest some positions we take, a selling unitholder could recognize more gain on the sale of units than would be the case under those positions, without the benefit of decreased income in prior years. In addition, if a unitholder sells its units, the unitholder may incur a tax liability in excess of the amount of cash that unitholder receives from the sale.
 
Tax-exempt entities, regulated investment companies, and foreign persons face unique tax issues from owning common units that may result in additional tax liability or reporting requirements for them.
 
An investment in common units by tax-exempt entities, such as employee benefit plans, individual retirement accounts, regulated investment companies, generally known as mutual funds, and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and thus will be taxable to them. Net income from a “qualified publicly-traded partnership” is qualifying income for a regulated investment company, or mutual fund. However, no

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more than 25% of the value of a regulated investment company’s total assets may be invested in the securities of one or more qualified publicly-traded partnerships. We expect to be treated as a qualified publicly-traded partnership. Distributions to non-U.S. persons will be reduced by withholding taxes, at the highest effective tax rate applicable to individuals, and non-U.S. persons will be required to file federal income tax returns and generally pay tax on their share of our taxable income.
 
Certain information relating to a unitholder’s investment may be subject to special IRS reporting requirements.
 
Treasury regulations require taxpayers to report particular information on Form 8886 if they participate in a “reportable transaction.” Unitholders may be required to file this form with the IRS. A transaction may be a reportable transaction based upon any of several factors. The IRS may impose significant penalties on a unitholder for failure to comply with these disclosure requirements. Disclosure and information maintenance obligations are also imposed on “material advisors” that organize, manage or sell interests in reportable transactions, which may require us or our material advisors to maintain and disclose to the IRS certain information relating to unitholders.
 
An audit of us may result in an adjustment or an audit of a unitholder’s own tax return.
 
We may be audited by the IRS and tax adjustments could be made. The rights of a unitholder owning less than a 1% interest in us to participate in the income tax audit process are very limited. Further, any adjustments in our tax returns will lead to adjustments in the unitholders’ tax returns and may lead to audits of unitholders’ tax returns and adjustments of items unrelated to us. A unitholder will bear the cost of any expenses incurred in connection with an examination of its personal tax return.
 
Reporting of partnership tax information is complicated and subject to audits; we cannot guarantee conformity to IRS requirements.
 
We will furnish each unitholder with a Schedule K-1 that sets forth that unitholder’s allocable share of income, gains, losses and deductions. In preparing these schedules, we will use various accounting and reporting conventions and adopt various depreciation and amortization methods. We cannot guarantee that these schedules will yield a result that conforms to statutory or regulatory requirements or to administrative pronouncements of the IRS. If any of the information on these schedules is successfully challenged by the IRS, the character and amount of items of income, gain, loss or deduction previously reported by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.
 
Unitholders may lose tax benefits as a result of nonconforming depreciation conventions.
 
Because we cannot match transferors and transferees of common units, uniformity of the economic and tax characteristics of our common units to a purchaser of common units of the same class must be maintained. To maintain uniformity and for other reasons, we have adopted certain depreciation and amortization conventions which we believe conform to Treasury Regulations under 743(b) of the Internal Revenue Code. A successful IRS challenge to those positions could reduce the amount of tax benefits available to our unitholders. A successful challenge could also affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to a unitholder’s tax returns.
 
As a result of investing in our common units, a unitholder will likely be subject to state and local taxes and return filing requirements in jurisdictions where it does not live.

In addition to federal income taxes, unitholders will likely be subject to other taxes, such as state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property. A unitholder will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of the various jurisdictions in which we do business or own property and may be subject to penalties for failure to comply with those requirements. We currently conduct business in all 50 states, the District of Columbia and Puerto Rico. It is a unitholder’s responsibility to file all required United States federal, state and local tax returns.
 
States may subject partnerships to entity-level taxation in the future; thereby decreasing the amount of cash available to us for distributions and potentially causing a decrease in our distribution levels, including a decrease in the minimum quarterly distribution.
 
Several states have enacted or are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. If additional states were to impose a tax upon us as an entity, the cash available for distribution to unitholders would be reduced. The partnership agreements of Ferrellgas Partners and the operating partnership

24


each provide that if a law is enacted or existing law is modified or interpreted in a manner that subjects one or both partnerships to taxation as a corporation or otherwise subjects one or both partnerships to entity-level taxation for federal, state or local income tax purposes, provisions of one or both partnership agreements will be subject to change. These changes would include a decrease in the minimum quarterly distribution and the target distribution levels to reflect the impact of those taxes.
 
Unitholders may have negative tax consequences if we default on our debt or sell assets.
 
If we default on any of our debt, the lenders will have the right to sue us for non-payment. That action could cause an investment loss and negative tax consequences for our unitholders through the realization of taxable income by unitholders without a corresponding cash distribution. Likewise, if we were to dispose of assets and realize a taxable gain while there is substantial debt outstanding and proceeds of the sale were applied to the debt, our unitholders could have increased taxable income without a corresponding cash distribution.
 
Conflicts of Interest
 
Conflicts of interest could arise as a result of the relationships between us, on the one hand, and our general partner and its affiliates, on the other. The directors and officers of our general partner have fiduciary duties to manage our general partner in a manner beneficial to its stockholder. At the same time, our general partner has fiduciary duties to manage us in a manner beneficial to us and our unitholders. The duties of our general partner to us and our unitholders, therefore, may conflict with the duties of the directors and officers of our general partner to its stockholder.
 
Matters in which, and reasons that, such conflicts of interest may arise include:

decisions of our general partner with respect to the amount and timing of our cash expenditures, borrowings, acquisitions, issuances of additional securities and changes in reserves in any quarter may affect the amount of incentive distributions we are obligated to pay our general partner;
borrowings do not constitute a breach of any duty owed by our general partner to our unitholders even if these borrowings have the purpose or effect of directly or indirectly enabling us to make distributions to the holder of our incentive distribution rights, currently our general partner;
we do not have any employees and rely solely on employees of our general partner and its affiliates; 
under the terms of our partnership agreements, we must reimburse our general partner and its affiliates for costs incurred in managing and operating us, including costs incurred in rendering corporate staff and support services to us, with the exception of payments made in connection with Ferrell Companies Incentive Compensation Plan; 
our general partner is not restricted from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or causing us to enter into additional contractual arrangements with any of such entities; 
neither our partnership agreements nor any of the other agreements, contracts and arrangements between us, on the one hand, and our general partner and its affiliates, on the other, are or will be the result of arms-length negotiations;  
whenever possible, our general partner limits our liability under contractual arrangements to all or a portion of our assets, with the other party thereto having no recourse against our general partner or its assets; 
our partnership agreements permit our general partner to make these limitations even if we could have obtained more favorable terms if our general partner had not limited its liability; 
any agreements between us and our general partner or its affiliates will not grant to our unitholders, separate and apart from us, the right to enforce the obligations of our general partner or such affiliates in favor of us; therefore, our general partner will be primarily responsible for enforcing those obligations; 
our general partner may exercise its right to call for and purchase common units as provided in the partnership agreement of Ferrellgas Partners or assign that right to one of its affiliates or to us; 
our partnership agreements provide that it will not constitute a breach of our general partner’s fiduciary duties to us for its affiliates to engage in activities of the type conducted by us, other than retail propane sales to end users in the continental United States in the manner engaged in by our general partner immediately prior to our initial public offering, even if these activities are in direct competition with us; 
our general partner and its affiliates have no obligation to present business opportunities to us;
our general partner selects the attorneys, accountants and others who perform services for us. These persons may also perform services for our general partner and its affiliates. our general partner is authorized to retain separate counsel for us or our unitholders, depending on the nature of the conflict that arises; and 

25


James E. Ferrell is the Chairman of the Board of Directors of our general partner. Mr. Ferrell also owns other companies with whom we may, from time to time, conduct transactions within our ordinary course of business. Mr. Ferrell’s ownership of these entities may conflict with his duties as a director of our general partner, including our relationship and conduct of business with any of Mr. Ferrell's companies.
 
Fiduciary Responsibilities
 
Unless otherwise provided for in a partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit the general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. Our partnership agreements expressly permit our general partner to resolve conflicts of interest between itself or its affiliates, on the one hand, and us or our unitholders, on the other, and to consider, in resolving such conflicts of interest, the interests of other parties in addition to the interests of our unitholders. In addition, the partnership agreement of Ferrellgas Partners provides that a purchaser of common units is deemed to have consented to specified conflicts of interest and actions of our general partner and its affiliates that might otherwise be prohibited, including those described above, and to have agreed that such conflicts of interest and actions do not constitute a breach by our general partner of any duty stated or implied by law or equity. Our general partner will not be in breach of its obligations under our partnership agreements or its duties to us or our unitholders if the resolution of such conflict is fair and reasonable to us. Any resolution of a conflict approved by the audit committee of our general partner is conclusively deemed fair and reasonable to us. The latitude given in our partnership agreements to our general partner in resolving conflicts of interest may significantly limit the ability of a unitholder to challenge what might otherwise be a breach of fiduciary duty.
 
The partnership agreements of Ferrellgas Partners and the operating partnership expressly limit the liability of our general partner by providing that our general partner, its affiliates and their respective officers and directors will not be liable for monetary damages to us, our unitholders or assignees thereof for errors of judgment or for any acts or omissions if our general partner and such other persons acted in good faith. In addition, we are required to indemnify our general partner, its affiliates and their respective officers, directors, employees, agents and trustees to the fullest extent permitted by law against liabilities, costs and expenses incurred by our general partner or such other persons if our general partner or such persons acted in good faith and in a manner it or they reasonably believed to be in, or (in the case of a person other than our general partner) not opposed to, the best interests of us and, with respect to any criminal proceedings, had no reasonable cause to believe the conduct was unlawful.
 
ITEM 1B.    UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2.    PROPERTIES.
 
We own or lease the following transportation equipment at July 31, 2013 that is utilized primarily in propane distribution operations:
 
 
Owned

 
Leased

 
Total

Truck tractors
 
87

 
59

 
146

Propane transport trailers
 
262

 

 
262

Portable tank delivery trucks
 
374

 
238

 
612

Portable tank exchange delivery trailers
 
161

 
118

 
279

Bulk propane delivery trucks
 
1,187

 
503

 
1,690

Pickup and service trucks
 
877

 
277

 
1,154

Railroad tank cars
 

 
96

 
96

 
 
The propane transport trailers have an average capacity of approximately 10,000 gallons. The bulk propane delivery trucks are generally fitted with tanks ranging in size from 2,600 to 3,000 gallons. Each railroad tank car has a capacity of approximately 30,000 gallons.
 
We typically manage our propane distribution locations using a structure where one location, referred to as a service center, is staffed to provide oversight and management to multiple distribution locations, referred to as service units.  Our propane distribution locations are comprised of 103 service centers and 875 service units. The service unit locations utilize hand-held computers and cellular or satellite technology to communicate with management typically located in the associated service

26


center. We believe this structure together with our technology platform allows us to more efficiently route and schedule customer deliveries and significantly reduces the need for daily on-site management. 
 
We also distribute propane for portable tank exchanges from 16 independently-owned distributors.
 
We own approximately 44.4 million gallons of propane storage capacity at our propane distribution locations. We own our land and buildings in the local markets of approximately 61% of our operating locations and lease the remaining facilities on terms customary in the industry.
 
We own approximately 1.0 million propane tanks, most of which are located on customer property and rented to those customers. We also own approximately 3.6 million portable propane tanks, most of which are used by us to deliver propane to our portable tank exchange customers and to deliver propane to our industrial/commercial customers.
 
We lease approximately 54.6 million gallons of propane storage capacity located at underground storage facilities and pipelines at various locations around the United States.
 
We lease 73,988 square feet of office space at separate locations that comprise our corporate headquarters in the Kansas City metropolitan area.
 
We believe that we have satisfactory title to or valid rights to use all of our material properties. Although some of those properties may be subject to liabilities and leases, liens for taxes not yet currently due and payable and immaterial encumbrances, easements and restrictions, we do not believe that any such burdens will materially interfere with the continued use of such properties in our business. We believe that we have obtained, or are in the process of obtaining, all required material approvals. These approvals include authorizations, orders, licenses, permits, franchises, consents of, registrations, qualifications and filings with, the various state and local governmental and regulatory authorities which relate to our ownership of properties or to our operations.
 
ITEM 3.    LEGAL PROCEEDINGS.
 
Our 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. As a result, at any given time, we are threatened with or named as a defendant in various lawsuits arising in the ordinary course of business. Other than as discussed below, we are 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 our financial condition, results of operations and cash flows.
 
We have received notice that the Offices of the District Attorneys of several counties in California and the Federal Trade Commission are investigating cylinder labeling and filling practices and any anti-trust issues relating to the amount of propane contained in propane tanks. These government agencies issued administrative subpoenas seeking documents and information relating to those practices and we have responded. We believe that our cylinders were correctly filled and labeled and will defend any claims that may result from this investigation. We do not believe any loss is probable or reasonably estimable at this time related to these investigations. 
 
We have also been named as a defendant in a putative class action lawsuit filed in the United States District Court in Kansas. The complaint was the subject of a motion to dismiss which was granted, in part, in August, 2011. The surviving claims allege breach of contract and breach of the implied duty of good faith and fair dealing, both of which allegedly arise from the existence of an oral contract for continuous propane service. We believe that the claims are without merit and intend to defend them vigorously. The case, which has not been certified for class treatment, is currently on appeal before the Tenth Circuit Court of Appeals following the denial of a motion to arbitrate the individual plaintiff's claim. We do not believe loss is probable or reasonably estimable at this time related to this putative class action lawsuit.

ITEM 4.    MINE SAFETY DISCLOSURES.
 
Not applicable.
 

PART II
 
ITEM 5.
MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED UNITHOLDER AND STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

27


 
Common Units of Ferrellgas Partners
 
Our common units represent limited partner interests in Ferrellgas Partners and are listed and traded on the New York Stock Exchange under the symbol “FGP.” As of August 31, 2013, we had 679 common unitholders of record. The following table sets forth the high and low sales prices for our common units on the New York Stock Exchange and the cash distributions declared per common unit for our fiscal periods indicated.
 
 
 
 Common Unit Price Range
 
Distributions
 
 
 High
 
 Low
 
 Declared Per Unit
2012
 
 
 
 
 
 
First Quarter
 
$
22.59

 
$
17.94

 
$
0.50

Second Quarter
 
22.98

 
16.85

 
0.50

Third Quarter
 
18.92

 
13.44

 
0.50

Fourth Quarter
 
20.23

 
15.45

 
0.50

 
 
 
 
 
 
 
2013
 
 
 
 
 
 
First Quarter

$
21.76


$
17.81


$
0.50

Second Quarter

19.60


15.52


0.50

Third Quarter

21.20


18.53


0.50

Fourth Quarter

22.97


19.40


0.50

 

We make quarterly cash distributions of our available cash. Available cash is defined in our partnership agreement as, generally, the sum of our consolidated cash receipts less consolidated cash disbursements and changes in cash reserves established by our general partner for future requirements. To the extent necessary and due to the seasonal nature of our operations, we will generally reserve cash inflows from our second and third fiscal quarters for distributions during our first and fourth fiscal quarters. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion of the financial tests and covenants which place limits on the amount of cash that we can use to pay distributions.
 
Recent Sales of Unregistered Securities
 
On November 24, 2010, the operating partnership issued $500.0 million in aggregate principal amount of its 6.50% senior notes due 2021 at an offering price equal to par. The net proceeds after commissions and fees of $491.3 million were used to redeem $450.0 million of existing senior notes and related make-whole payments and accrued interest and to reduce borrowings on our secured credit facility. The notes were not registered and were offered and sold only to qualified institutional buyers as defined in Rule 144A under the Securities Act. During July 2011, the operating partnership completed an offer to exchange $500.0 million principal amount of 6.50% senior notes due 2021, which have been registered under the Securities Act of 1933, as amended, for a like principal amount of their outstanding and unregistered notes which were issued on November 24, 2010.
 
Ferrellgas Partners Tax Matters
 
Ferrellgas Partners is a master limited partnership and thus not subject to federal income taxes. Instead, our common unitholders are required to report for income tax purposes their allocable share of our income, gains, losses, deductions and credits, regardless of whether we make distributions to our common unitholders. Accordingly, each common unitholder should consult its own tax advisor in analyzing the federal, state, and local tax consequences applicable to its ownership or disposition of our common units. Ferrellgas Partners reports its tax information on a calendar year basis, while financial reporting is based on a fiscal year ending July 31.
 
Common Equity of Other Registrants
 
There is no established public trading market for the common equity of the operating partnership, Ferrellgas Partners Finance Corp. or Ferrellgas Finance Corp. All of the common equity of the operating partnership and Ferrellgas Partners Finance Corp. is held by Ferrellgas Partners and all of the common equity of Ferrellgas Finance Corp. is held by the operating partnership. There are no equity securities of the operating partnership, Ferrellgas Partners Finance Corp. or Ferrellgas Finance Corp. authorized for issuance under any equity compensation plan. During fiscal 2013, there were no issuances of securities of the operating partnership, Ferrellgas Partners Finance Corp. or Ferrellgas Finance Corp.  
 

28


Neither Ferrellgas Partners Finance Corp. nor Ferrellgas Finance Corp. declared or paid any cash dividends on its common equity during fiscal 2013 or fiscal 2012. The operating partnership distributes cash to its partners four times per fiscal year. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources – Financing Activities – Distributions” for a discussion of its distributions during fiscal 2013. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion of the financial tests and covenants which place limits on the amount of cash that the operating partnership can use to pay distributions. 
 
Equity Compensation Plan Information
 
See Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters – Securities Authorized for Issuance Under Equity Compensation Plans.”
 

29


ITEM 6.     SELECTED FINANCIAL DATA.
 
The following tables present selected consolidated historical financial and operating data for Ferrellgas Partners and the operating partnership.

 
 
Ferrellgas Partners, L.P.
 
 
Year Ended July 31,
(in thousands, except per unit data)
 
2013
 
2012
 
2011
 
2010
 
2009
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
1,975,467

 
$
2,339,092

 
$
2,423,215

 
$
2,099,060

 
$
2,069,522

Interest expense
 
89,145

 
93,254

 
101,885

 
101,284

 
89,519

Net earnings (loss) attributable to Ferrellgas Partners, L.P.
 
56,426

 
(10,952
)
 
(43,648
)
 
32,709

 
52,572

Basic and diluted net earnings (loss) per common unitholders’ interest
 
$
0.71

 
$
(0.14
)
 
$
(0.60
)
 
$
0.47

 
$
0.79

Cash distributions declared per common unit
 
$
2.00

 
$
2.00

 
$
2.00

 
$
2.00

 
$
2.00

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital (1)
 
$
(21,305
)
 
$
(50,875
)
 
$
28,712

 
$
57,473

 
$
34,556

Total assets
 
1,356,028

 
1,397,279

 
1,460,586

 
1,442,351

 
1,404,977

Long-term debt
 
1,106,940

 
1,059,085

 
1,050,920

 
1,111,088

 
1,010,073

Partners' capital (deficit)
 
(86,627
)
 
(27,526
)
 
88,317

 
85,902

 
151,345

 
 
 
 
 
 
 
 
 
 
 
Operating Data (unaudited):
 
 
 
 
 
 
 
 
 
 
Propane sales volumes (in thousands of gallons)
 
901,370

 
878,130

 
899,683

 
922,524

 
874,826

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
 
 
 
Maintenance
 
$
15,248

 
$
15,864

 
$
15,330

 
$
19,908

 
$
21,082

Growth
 
25,916

 
32,865

 
34,699

 
24,861

 
32,046

Acquisition
 
31,919

 
14,034

 
12,587

 
49,500

 
9,944

Total
 
$
73,083

 
$
62,763

 
$
62,616

 
$
94,269

 
$
63,072

 
 
 
 
 
 
 
 
 
 
 
Supplemental data (unaudited):
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
$
272,249

 
$
193,086

 
$
227,645

 
$
266,492

 
$
251,090

 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Net Earnings (Loss) to EBITDA and Adjusted EBITDA :
 
 
 
 
 
 
 
 
 
 
Net earnings (loss) attributable to Ferrellgas Partners, L.P.
 
$
56,426

 
$
(10,952
)
 
$
(43,648
)
 
$
32,709

 
$
52,572

Income tax expense
 
1,855

 
1,128

 
1,241

 
1,916

 
2,292

Interest expense
 
89,145

 
93,254

 
101,885

 
101,284

 
89,519

Depreciation and amortization expense
 
83,344

 
83,841

 
82,486

 
82,491

 
82,494

EBITDA
 
230,770

 
167,271

 
141,964

 
218,400

 
226,877

Loss on extinguishment of debt
 

 

 
46,962

 
20,716

 

Non-cash employee stock ownership plan compensation charge
 
15,769

 
9,440

 
10,157

 
9,322

 
6,755

Non-cash stock and unit-based compensation charge
 
13,545

 
8,843

 
13,488

 
7,831

 
2,312

Loss on disposal of assets and other
 
10,421

 
6,035

 
3,633

 
8,485

 
13,042

Other income (expense), net
 
(565
)
 
(506
)
 
(567
)
 
1,108

 
1,321


30


Severance charges
 

 
1,055

 

 

 

Nonrecurring litigation accrual and related legal fees
 
1,568

 
892

 
12,120

 

 

Net earnings (loss) attributable to noncontrolling interest
 
741

 
56

 
(112
)
 
630

 
783

Adjusted EBITDA
 
$
272,249

 
$
193,086

 
$
227,645

 
$
266,492

 
$
251,090



 
 
(1) Working capital is the sum of current assets less current liabilities.

31


 
 
Ferrellgas, L.P.
 
 
Year Ended July 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
1,975,467

 
$
2,339,092

 
$
2,423,215

 
$
2,099,060

 
$
2,069,522

Interest expense
 
72,974

 
77,127

 
80,074

 
76,786

 
65,785

Net earnings (loss)
 
73,375

 
5,589

 
(11,062
)
 
62,361

 
77,501

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital (1)
 
$
(19,289
)
 
$
(48,843
)
 
$
30,738

 
$
60,770

 
$
36,967

Total assets
 
1,352,932

 
1,393,662

 
1,456,816

 
1,436,177

 
1,403,049

Long-term debt
 
924,940

 
877,085

 
868,920

 
831,088

 
740,982

Partners' capital
 
94,476

 
153,140

 
268,686

 
363,047

 
421,610

 
 
 
 
 
 
 
 
 
 
 
Operating Data (unaudited):
 
 
 
 
 
 
 
 
 
 
Propane sales volumes (in thousands of gallons)
 
901,370

 
878,130

 
899,683

 
922,524

 
874,826

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
 
 
 
Maintenance
 
$
15,248

 
$
15,864

 
$
15,330

 
$
19,908

 
$
21,082

Growth
 
25,916

 
32,865

 
34,699

 
24,861

 
32,046

Acquisition
 
31,919

 
14,034

 
12,587

 
49,500

 
9,944

Total
 
$
73,083

 
$
62,763

 
$
62,616

 
$
94,269

 
$
63,072

 
 
 
 
 
 
 
 
 
 
 
Supplemental data (unaudited):
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
$
272,269

 
$
193,436

 
$
228,003

 
$
266,916

 
$
251,418

 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Net Earnings (Loss) to EBITDA and Adjusted EBITDA :
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
73,375

 
$
5,589

 
$
(11,062
)
 
$
62,361

 
$
77,501

Income tax expense
 
1,838

 
1,120

 
1,225

 
1,890

 
2,208

Interest expense
 
72,974

 
77,127

 
80,074

 
76,786

 
65,785

Depreciation and amortization expense
 
83,344

 
83,841

 
82,486

 
82,491

 
82,494

EBITDA
 
231,531

 
167,677

 
152,723

 
223,528

 
227,988

Loss on extinguishment of debt
 

 

 
36,449

 
17,308

 

Non-cash employee stock ownership plan compensation charge
 
15,769

 
9,440

 
10,157

 
9,322

 
6,755

Non-cash stock and unit-based compensation charge
 
13,545

 
8,843

 
13,488

 
7,831

 
2,312

Loss on disposal of assets and other
 
10,421

 
6,035

 
3,633

 
8,485

 
13,042

Other income (expense), net
 
(565
)
 
(506
)
 
(567
)
 
442

 
1,321

Severance charges
 

 
1,055

 

 

 

Nonrecurring litigation accrual and related legal fees
 
1,568

 
892

 
12,120

 

 

Adjusted EBITDA
 
$
272,269

 
$
193,436

 
$
228,003

 
$
266,916

 
$
251,418

 
(1) Working capital is the sum of current assets less current liabilities.

Our capital expenditures fall generally into three categories:

maintenance capital expenditures, which include capitalized expenditures for betterment and replacement of property, plant and equipment;
growth capital expenditures, which include expenditures for purchases of both bulk and portable propane tanks and other equipment to facilitate expansion of our customer base and operating capacity; and 

32


acquisition capital expenditures, which include expenditures related to the acquisition of retail distribution propane operations and other operations; acquisition capital expenditures represent the total cost of acquisitions less working capital acquired.

During fiscal 2011 and 2010, the prepayment of outstanding principal amounts of fixed rate senior notes resulted in amounts recorded as “Loss on extinguishment of debt.”
 
During fiscal 2013, 2012 and 2011, a class action lawsuit resulted in a nonrecurring litigation accrual and related legal fees.
 
 
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
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 and 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 section.
 
The following is a discussion of our historical financial condition and results of operations and should be read in conjunction with our historical consolidated financial statements and accompanying Notes thereto included elsewhere in this Annual Report on Form 10-K.
 
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 exist two material differences between Ferrellgas Partners and the operating partnership. Those material differences are:
 
because Ferrellgas Partners has outstanding $182.0 million in aggregate principal amount of 8.625% senior notes due fiscal 2020, the two partnerships incur different amounts of interest expense on their outstanding indebtedness; see the statements of earnings in their respective consolidated financial statements and Note H – Debt in the respective notes to their consolidated financial statements; and
Ferrellgas Partners issued common units during both fiscal 2012 and 2013.

Overview
 
We believe we are a leading distributor of propane and related equipment and supplies to customers primarily in the United States and conduct our business as a single reportable operating segment. We believe that we are the second largest retail marketer of propane in the United States as measured by the volume of our retail sales in fiscal 2013, and the largest 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 distribution and sale of propane and related equipment and supplies with concentrations in the Midwest, Southeast, Southwest and Northwest regions of the United States. Sales from propane distribution are generated principally from transporting propane purchased from third parties to propane distribution locations and then to tanks on customers’ premises or to portable propane tanks delivered to nationwide and local retailers. Sales from portable tank exchanges, nationally branded under the name Blue Rhino, are generated through a network of independent and partnership-owned distribution outlets. Our market areas for our residential and agricultural customers are generally rural, while our market areas for our industrial/commercial and portable tank exchange customers is generally urban.
 
In the residential and industrial/commercial markets, propane is primarily used for space heating, water heating, cooking and other propane fueled appliances. In the portable tank exchange market, propane is used primarily for outdoor cooking using gas grills. In the agricultural market, propane is primarily used for crop drying, space heating, irrigation and weed control. In addition, propane is used for a variety of industrial applications, including as an engine fuel which is burned in internal combustion engines that power vehicles and forklifts, and as a heating or energy source in manufacturing and drying processes.

33



The market for propane is seasonal because of increased demand during the months of November through March (the “winter heating season”) primarily for the purpose of providing heating in residential and commercial buildings. Consequently, sales and operating profits are concentrated in our second and third fiscal quarters, which are during the winter heating season. However, our propane by portable tank exchange sales volume provides us increased operating profits during our first and fourth fiscal quarters due to its counter-seasonal business activities. These sales also provide us the ability to better utilize our seasonal resources at our propane distribution locations. Other factors affecting our results of operations include competitive conditions, volatility in energy commodity prices, demand for propane, timing of acquisitions and general economic conditions in 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. We use the definition of “normal” temperatures based on information published by the National Oceanic and Atmospheric Administration (“NOAA”). 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 during the winter heating season. Accordingly, the volume of propane used by our customers for this purpose is 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 warming trend, we could expect nationwide demand for propane to decrease which could lead to a reduction in our sales, income and liquidity availability. For the twelve months ended July 31, 2013, weather in the more highly concentrated geographic areas we serve was 19% colder than that of the prior year period.
 
Our gross margin from the retail distribution of propane is primarily based on the cents-per-gallon difference between the sale price we charge our customers and our costs to purchase and deliver propane to our propane distribution locations. Our residential customers and portable tank exchange customers typically provide us a greater cents-per-gallon margin than our industrial/commercial, agricultural, wholesale and other customers. We track “Propane sales volumes,” “Revenues – Propane and other gas liquids sales” and “Gross margin – Propane and other gas liquids sales” by customer; however, we are not able to specifically allocate operating and other costs in a manner that would determine their specific profitability with a high degree of accuracy. The wholesale propane price per gallon is subject to various market conditions, including inflation, and may fluctuate based on changes in demand, supply and other energy commodity prices, primarily crude oil and natural gas, as propane prices tend to correlate with the fluctuations of these underlying commodities. Propane prices were lower in fiscal 2013 as compared to fiscal 2012. The average wholesale market prices per gallon at one of the major supply points, Mt. Belvieu, Texas during fiscal 2013 and 2012 were $0.89 and $1.25, respectively. We believe the effect of this 29% decrease in the average wholesale market price of propane and colder weather, as discussed above, together contributed to an increase in sales volumes as customers were less likely to conserve during this period of colder weather and lower propane prices. We also believe the effect of this significant decrease in the average wholesale market price of propane caused an increase in gross margin per gallon. In this period of sharply declining prices, we earned relatively greater gross margin per gallon as we were able to manage the decline in sales price per gallon to a level below the corresponding decline in product prices.
 
We employ risk management activities that attempt to mitigate price risks related to the purchase, storage, transport and sale of propane. 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 economically hedged with an offsetting propane purchase commitment. Moreover, customers may not fulfill their purchase agreement due to the effects of warmer than normal weather, customer conservation or other economic conditions.
 
Our open financial derivative purchase commitments are designated as hedges primarily for fiscal 2014 and 2015 sales commitments and, as of July 31, 2013, have experienced net mark to market gains of approximately $1.6 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 consolidated balance sheets as “Prepaid expenses and other current assets,” "Other assets, net," “Other current liabilities,” "Other liabilities" and “Accumulated other comprehensive income (loss),” respectively, until settled. Upon settlement, realized gains or losses on these contracts will be reclassified to “Cost of product sold-propane and other gas liquid sales” in the consolidated statements of earnings 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

34


qualify for the normal purchase normal sale exception. At July 31, 2013, we estimate 48% 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.

We also enter into interest rate derivative contracts, including swaps, to manage our exposure to interest rate risk associated with our fixed rate senior notes and our floating rate borrowings from both the secured credit facility and the accounts receivable securitization facility. Fluctuations in interest rates subject us to interest rate risk. Decreases in interest rates increase the fair value of our fixed rate debt, while increases in interest rates subject us to the risk of increased interest expense related to our variable rate borrowings.
 
Our business strategy is to:

expand our operations through disciplined acquisitions and internal growth;
capitalize on our national presence and economies of scale;
maximize operating efficiencies through utilization of our technology platform; and
align employee interests with our investors through significant employee ownership. 
 
“Net earnings (loss) attributable to Ferrellgas Partners, L.P.” in fiscal 2013 was a net earnings of $56.4 million as compared to a net loss of $11.0 million in fiscal 2012. This improvement in net earnings of $67.4 million was primarily due to an $87.9 million increase in “Gross margin – propane and other gas liquids” and a $8.9 million increase in “Gross margin – other” which were partially offset by a $10.7 million increase in operating expenses primarily from an increase in performance related incentives, a $10.0 million increase in “General and administrative expenses” primarily from an increase in performance based incentives and a $6.3 million increase in 'non-cash employee stock ownership plan charge."
 
We have completed our annual goodwill impairment tests for each of our applicable reporting units and believe estimated fair values substantially exceed the carrying values of our reporting units as of January 31, 2013.
 
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 our forward-looking statements include the following:

whether the operating partnership will have sufficient funds to meet its obligations, including its obligations under its debt securities, and to enable it to distribute to Ferrellgas Partners sufficient funds to permit Ferrellgas Partners to meet its obligations with respect to its existing debt;
whether Ferrellgas Partners and the operating partnership will continue to meet all of the quarterly financial tests required by the agreements governing their indebtedness; and
 our expectations that “Net earnings” in fiscal 2014 will be consistent with our "Net earnings" in fiscal 2013 primarily due to our anticipation of normal winter weather, as defined by NOAA, and stable wholesale pricing of propane, both of which should result in consistent propane gallons sales and "gross margin- propane and other gas liquids."
 
When considering any forward-looking statement, you should also keep in mind the risk factors set forth in “Item 1A. Risk Factors.” 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, if any, of our securities could decline as a result of any such impairment.

35


 
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 Annual Report on Form 10-K.

In addition, the classification of Ferrellgas Partners and the operating partnership as partnerships for federal income tax purposes means that we do not generally pay federal income taxes. We do, however, pay taxes on the income of our subsidiaries that are corporations. We rely on a legal opinion from our counsel, and not a ruling from the Internal Revenue Service, as to our proper classification for federal income tax purposes. See the section entitled, “Item 1A. Risk Factors — Tax Risks.” The IRS could treat us as a corporation for tax purposes or changes in federal or state laws could subject us to entity-level taxation, which would substantially reduce the cash available for distribution to our unitholders or to pay interest on the principal of any of our debt securities.
 
Results of Operations
 
Fiscal Year Ended July 31, 2013 compared to July 31, 2012
 
 
 
 
 
 
Favorable
(amounts in thousands)
 
 
 
 
 
(unfavorable)
Fiscal Year-Ended July 31,
 
2013
 
2012
 
Variance
Propane sales volumes (gallons):
 
 
 
 
 
 
 
 
Retail – Sales to End Users
 
637,923

 
619,318

 
18,605

 
3
 %
Wholesale – Sales to Resellers
 
263,447

 
258,812

 
4,635

 
2
 %
 
 
901,370

 
878,130

 
23,240

 
3
 %
 
 
 
 
 
 
 
 
 
Revenues -
 
 
 
 
 
 
 
 
Propane and other gas liquids sales:
 
 
 
 
 
 
 
 
Retail – Sales to End Users
 
$
1,127,748

 
$
1,287,485

 
$
(159,737
)
 
(12
)%
Wholesale – Sales to Resellers
 
479,533

 
557,950

 
(78,417
)
 
(14
)%
Other Gas Sales (a)
 
131,986

 
315,510

 
(183,524
)
 
(58
)%
 
 
$
1,739,267

 
$
2,160,945

 
$
(421,678
)
 
(20
)%
 
 
 
 
 
 
 
 
 
Gross margin -
 
 
 
 
 
 
 
 
Propane and other gas liquids sales: (b)
 
 
 
 
 
 
 
 
Retail – Sales to End Users (a)
 
$
476,040

 
$
400,982

 
$
75,058

 
19
 %
Wholesale – Sales to Resellers (a)
 
170,966

 
158,077

 
12,889

 
8
 %
 
 
$
647,006

 
$
559,059

 
$
87,947

 
16
 %
 
 
 
 
 
 
 
 
 
Gross margin - Other
 
$
91,744

 
$
82,824

 
$
8,920

 
11
 %
Operating income
 
147,602

 
82,980

 
64,622

 
78
 %
Adjusted EBITDA (c)
 
272,249

 
193,086

 
79,163

 
41
 %
Interest expense
 
89,145

 
93,254

 
4,109

 
4
 %
Interest expense - operating partnership
 
72,974

 
77,127

 
4,153

 
5
 %

a)
Gross margin from Other Gas Sales is allocated to Gross margin Retail - Sales to End Users and Wholesale - Sales to Resellers based on the volumes of fixed-price sales commitments in each respective category.
b)
Gross margin from propane and other gas liquids sales represents “Revenues - propane and other gas liquids sales” less “Cost of product sold – propane and other gas liquids sales” and does not include depreciation and amortization.
c)
Adjusted EBITDA is calculated as net earnings (loss) attributable to Ferrellgas Partners, L.P., interest expense, depreciation and amortization expense, non-cash employee stock ownership plan compensation charge, non-cash stock and unit-based compensation charge, loss on disposal of assets, other income, net, severance charges, nonrecurring litigation accrual and related legal fees and net earnings 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 management uses, adjusted for items management believes makes 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

36


consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance with GAAP.


The following table summarizes EBITDA and Adjusted EBITDA for the fiscal year ended July 31, 2013 and 2012, respectively:
 
(amounts in thousands)
 
2013
 
2012
Net earnings (loss) attributable to Ferrellgas Partners, L.P.
 
$
56,426

 
$
(10,952
)
Income tax expense
 
1,855

 
1,128

Interest expense
 
89,145

 
93,254

Depreciation and amortization expense
 
83,344

 
83,841

EBITDA
 
$
230,770

 
$
167,271

Non-cash employee stock ownership plan compensation charge
 
15,769

 
9,440

Non-cash stock and unit-based compensation charge
 
13,545

 
8,843

Loss on disposal of assets
 
10,421

 
6,035

Other income, net
 
(565
)
 
(506
)
Severance charges
 

 
1,055

Nonrecurring litigation accrual and related legal fees
 
1,568

 
892

Net earnings attributable to noncontrolling interest
 
741

 
56

Adjusted EBITDA
 
$
272,249

 
$
193,086


 
 
Propane sales volumes during fiscal 2013 increased 23.2 million gallons from that of the prior year period due to 18.6 million of increased gallon sales to our retail customers and 4.6 million of increased gallon sales to our wholesale customers. We believe wholesale customer sales volume increased due to our emphasis on expanding this portion of our business.
 
Weather in the more highly concentrated geographic areas we serve was approximately 19% colder than that of the prior year period, which we believe was the primary factor for the increase in retail propane sales volumes during the year.
 
Our sales price per gallon correlates to the wholesale market price of propane. The wholesale market price at one of the major supply points, Mt. Belvieu, Texas, during fiscal 2013 averaged 29% less than the prior year period. The wholesale market price averaged $0.89 and $1.25 per gallon during fiscal 2013 and 2012, respectively. We believe this decrease in the wholesale cost of propane also contributed to the increase in propane sales volumes as customers tend to conserve less, and thus purchase more propane volumes during periods of decreasing propane prices.
 
The effect of this significant decrease in the average wholesale market price of propane resulted in an increase in our gross margin per gallon. During this period of significantly lower prices, we earned relatively greater gross margin per gallon as our selling price per gallon did not decline at the same rate as the corresponding decline in wholesale propane prices.
 
Revenues - Propane and other gas liquids sales
 
Retail sales decreased $159.7 million compared to the prior year period. This decrease resulted primarily from a $198.4 million decrease in sales price per gallon, partially offset by $38.7 million from increased retail propane sales volumes, both as discussed above.
 
Wholesale sales decreased $78.4 million compared to the prior year period. This decrease resulted primarily from $82.0 million of decreased sales price per gallon, partially offset by $3.6 million of increased sales volumes, both as discussed above.
 
Other gas sales decreased $183.5 million compared to the prior year period primarily due to a $118.5 million from decreased sales volumes and $65.0 million of decreased sales price per gallon.
 
Gross margin - Propane and other gas liquids sales
 
Retail sales gross margin increased $75.0 million compared to the prior year period. This increase resulted primarily from a $47.5 million increase in gross margin per gallon and a $27.5 million increase in propane sales volumes, both as discussed above.


37


Wholesale sales gross margin increased $12.9 million compared to the prior year period primarily from an increase in gross margin per gallon, as discussed above.
  
Gross margin - other

Gross margin - other increased $8.9 million primarily due to $3.9 million of grilling tool and accessory sales gained through acquisitions and a $2.9 million increase in material and appliance sales.

Operating income
 
Operating income increased $64.6 million compared to the prior year period primarily due to $87.9 million of increased “Gross margin – Propane and other gas liquid sales,” as discussed above, and an $8.9 million increase in “Gross margin – Other,” partially offset by a $10.7 million increase in “Operating expense”, a $10.0 million increase in “General and administrative expense”, a $6.3 million increase in "Non-cash employee stock ownership plan compensation charge" and a $4.4 million increase in "Loss on disposal of assets."
 
“Operating expense” increased primarily due to $10.0 million in additional variable operating expense resulting from increased gallons sold, $8.3 million in increased performance-based incentive expense and $6.9 million in increased general liability and workers' compensation costs, partially offset by $14.1 million in reduced operating expenses resulting from the successful implementation of our efficiency initiatives and cost cutting projects initiated during the prior year. “General and administrative expense” increased primarily due to $7.3 million in performance based incentive expense, $5.1 million in increased non-cash stock based compensation charges, partially offset by a $2.4 million reduction in personnel and other corporate costs. "Non-cash employee stock ownership plan compensation charge" increased primarily due to an increase in the allocation of Ferrell Companies shares to employees. The increase in "Loss on disposal of assets" was due to the timing of the disposals.
 
Adjusted EBITDA
 
Adjusted EBITDA increased $79.2 million compared to the prior year period primarily due to a $87.9 million increase in “Gross margin - Propane and other gas liquids sales” and an $8.9 million increase in “Gross margin – Other,” both as discussed above, partially offset by a $11.1 million increase in “Operating expense” as discussed above and a $4.9 million increase in “General and administrative expense.”
 
“General and administrative expense” increased primarily due to a $7.3 million increase in performance-based incentive expenses, partially offset by a $2.4 million reduction in personnel and other corporate costs.
 
Interest expense - consolidated
 
Interest expense decreased $4.1 million primarily due to $2.5 million from the effect of interest rate swaps entered into during the fourth quarter of the prior year period and $1.3 million primarily from reduced rates on our secured credit facility and our accounts receivable securitization facility.
 
Interest expense - operating partnership
 
Interest expense decreased $4.2 million primarily due to $2.5 million from the effect of interest rate swaps entered into during the fourth quarter of the prior year period and $1.3 million primarily from reduced rates on our secured credit facility and our accounts receivable securitization facility.
 
Forward-looking statements
 
We expect propane gallons, "Total revenues" and “Net earnings” in fiscal 2014 remain consistent compared to fiscal 2013 primarily due to our anticipation of normal winter weather, as defined by NOAA, and stable pricing of propane.

Fiscal Year Ended July 31, 2012 compared to July 31, 2011
 

38


 
 
 
 
 
 
Favorable
(amounts in thousands)
 
 
 
 
 
(unfavorable)
Fiscal year ended July 31,
 
2012
 
2011
 
Variance
Propane sales volumes (gallons):
 
 
 
 
 
 
 
 
Retail – Sales to End Users
 
619,318

 
655,408

 
(36,090
)
 
(6
)%
Wholesale – Sales to Resellers
 
258,812

 
244,275

 
14,537

 
6
 %
 
 
878,130

 
899,683

 
(21,553
)
 
(2
)%
 
 
 
 
 
 
 
 
 
Revenues -
 
 
 
 
 
 
 
 
Propane and other gas liquids sales:
 
 
 
 
 
 
 
 
Retail – Sales to End Users
 
$
1,287,485

 
$
1,330,746

 
$
(43,261
)
 
(3
)%
Wholesale – Sales to Resellers
 
557,950

 
544,817

 
13,133

 
2
 %
Other Gas Sales (a)
 
315,510

 
336,694

 
(21,184
)
 
(6
)%
 
 
$
2,160,945

 
$
2,212,257

 
$
(51,312
)
 
(2
)%
 
 
 
 
 
 
 
 
 
Gross margin -
 
 
 
 
 
 
 
 
Propane and other gas liquids sales: (b)
 
 
 
 
 
 
 
 
Retail – Sales to End Users (a)
 
$
400,982

 
$
429,751

 
$
(28,769
)
 
(7
)%
Wholesale – Sales to Resellers (a)
 
158,077

 
173,162

 
(15,085
)
 
(9
)%
 
 
$
559,059

 
$
602,913

 
$
(43,854
)
 
(7
)%
 
 
 
 
 
 
 
 
 
Gross margin - Other
 
$
82,824

 
$
86,488

 
$
(3,664
)
 
(4
)%
Operating income
 
82,980

 
105,761

 
(22,781
)
 
(22
)%
Adjusted EBITDA (c)
 
193,086

 
227,645

 
(34,559
)
 
(15
)%
Interest expense
 
93,254

 
101,885

 
8,631

 
8
 %
Interest expense - operating partnership
 
77,127

 
80,074

 
2,947

 
4
 %
Loss on extinguishment of debt
 

 
46,962

 
46,962

 
100
 %

a)
Gross margin from Other Gas Sales is allocated to Gross margin Retail - Sales to End Users and Wholesale - Sales to Resellers based on the volumes of fixed-price sales commitments in each respective category.
b)
Gross margin from propane and other gas liquids sales represents “Revenues - propane and other gas liquids sales” less “Cost of product sold – propane and other gas liquids sales” and does not include depreciation and amortization.
c)
Adjusted EBITDA is calculated as net earnings (loss) attributable to Ferrellgas Partners, L.P., interest expense, depreciation and amortization expense, loss on extinguishment of debt, non-cash employee stock ownership plan compensation charge, non-cash stock and unit-based compensation charge, loss on disposal of assets, other income, net, severance charges, non-recurring litigation accrual and related legal fees and net earnings (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 management uses, adjusted for items management believes makes 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 consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance with GAAP.


39


The following table summarizes EBITDA and Adjusted EBITDA for the fiscal year ended July 31, 2012 and 2011, respectively:
(amounts in thousands)
 
2012
 
2011
Net loss attributable to Ferrellgas Partners, L.P.
 
$
(10,952
)
 
$
(43,648
)
Income tax expense
 
1,128

 
1,241

Interest expense
 
93,254

 
101,885

Depreciation and amortization expense
 
83,841

 
82,486

EBITDA
 
$
167,271

 
$
141,964

Loss on extinguishment of debt
 

 
46,962

Non-cash employee stock ownership plan compensation charge
 
9,440

 
10,157

Non-cash stock and unit-based compensation charge
 
8,843

 
13,488

Loss on disposal of assets
 
6,035

 
3,633

Other income, net
 
(506
)
 
(567
)
Severance charges
 
1,055

 

Nonrecurring litigation accrual and related legal fees
 
892

 
12,120

Net earnings (loss) attributable to noncontrolling interest
 
56

 
(112
)
Adjusted EBITDA
 
$
193,086

 
$
227,645


 
 
Propane sales volumes during fiscal 2012 decreased 21.6 million gallons from that of the prior year period due to 36.1 million of decreased gallon sales to our retail customers, partially offset by 14.5 million of increased gallon sales to our wholesale customers. We believe wholesale customer sales volume increased due to our emphasis on expanding this portion of our business.

Weather in the more highly concentrated geographic areas we serve was approximately 18% warmer than that of the prior year period, which we believe was the primary factor in the decline of propane sales volumes. We also believe our decrease in sales volume was due to customer conservation resulting from the continuing overall poor economic environment.

Our sales price per gallon is impacted by the wholesale market price of propane. The wholesale market price at one of the major supply points, Mt. Belvieu, Texas, during fiscal 2012 averaged 7% less than the prior year period. The wholesale market price averaged $1.25 and $1.35 per gallon during fiscal 2012 and 2011, respectively.

Propane prices continued to be volatile in fiscal 2012 as the average wholesale market price at Mt. Belvieu, Texas during the six months ended January 31, 2012 averaged 19% more than the prior period; however, the same average wholesale market price during the six months ended July 31, 2012, averaged 29% less than the prior year period. We believe the effect of this significant increase in the average wholesale market price of propane in the first half of fiscal 2012 caused a decrease in sales volumes and a decrease in gross margin per gallon during the first half of fiscal 2012. In this period of increasing prices, we believe customers conserved and purchased less propane and it was more difficult to maintain gross margins as our ability to increase sales price per gallon did not keep up with the corresponding increase in product prices. Conversely, we believe the effect of this significant decrease in the average wholesale market price of propane during the second half of fiscal 2012 caused an increase in gross margin per gallon. In this period of sharply declining prices, we earned relatively greater gross margin per gallon as our ability to moderate the decline in sales price per gallon did not keep up with the corresponding decline in product prices.

Revenues - Propane and other gas liquids sales

Retail sales decreased $43.3 million compared to the prior year period. This decrease resulted primarily from a $73.3 million decrease in retail propane sales volumes, as discussed above, partially offset by a $30.0 million increase in sales price per gallon, both as discussed above.

Wholesale sales increased $13.1 million compared to the prior year period. This increase resulted from $27.5 million of increased sales volumes, partially offset by $14.4 million of decreased sales price per gallon, both as discussed above.

Other gas sales decreased $21.2 million compared to the prior year period primarily due to a $31.4 million decrease in sales volume of excess inventory to third party propane distributors and marketers, partially offset by $10.2 million of increased sales price per gallon, resulting from sales of excess inventory during the first half of fiscal 2012, as discussed above.


40


Gross margin - Propane and other gas liquids sales

Retail sales gross margin decreased $28.8 million compared to the prior year period. This decrease resulted primarily from a $22.5 million decrease in propane sales volumes and a $6.3 million decrease in gross margin per gallon, each as discussed above.

Wholesale sales gross margin decreased $15.1 million compared to the prior year period. This decrease resulted primarily from $21.4 million of decreased gross margin per gallon, partially offset by $6.3 million related to increased sales volumes, both as discussed above.

Operating income

Operating income decreased $22.8 million compared to the prior year period primarily due to $43.9 million of decreased “Gross margin – Propane and other gas liquid sales,” as discussed above, and $3.7 million of decreased “Gross margin – Other,” partially offset by a $18.7 million decrease in “General and administrative expense” and a $9.3 million decrease in “Operating expense.”

“Gross margin – Other” decreased primarily due to a $3.0 million decrease in material and appliance sales. “General and administrative expense” decreased primarily due to a $11.2 million reduction in litigation accrual and related legal fees, a $3.6 million decrease in noncash stock compensation charges, a $2.7 million reduction in personnel related costs and a $1.6 million reduction in performance-based incentive expenses. “Operating expense” decreased primarily due to management’s focus on long-term cost reductions which resulted in a $6.4 million reduction in personnel related costs, a $4.5 million reduction in plant and office costs and a $3.5 million reduction in vehicle costs, partially offset by $6.9 million in increased fuel costs.

Adjusted EBITDA

Adjusted EBITDA decreased $34.6 million compared to the prior year period primarily due to $43.9 million of decreased “Gross margin - Propane and other gas liquids sales” and $3.7 million of decreased “Gross margin – Other,” both as discussed above, partially offset by a $8.9 million decrease in “Operating expense” and a $4.2 million decrease in “General and administrative expense.”

“Operating expense” decreased primarily due to management’s focus on long-term cost reductions which resulted in a $6.4 million reduction in personnel related costs, a $4.5 million reduction in plant and office costs and a $3.5 million reduction in vehicle costs, partially offset by $6.9 million in increased fuel costs. “General and administrative expense” decreased primarily due to a $2.7 million reduction in personnel related costs and a $1.6 million reduction in performance-based incentive expenses.

Interest expense - consolidated

Interest expense decreased $8.6 million primarily due to $2.8 million of decreased amortization of discounts and capitalized debt costs and $2.7 million resulting from a decrease in long-term debt borrowings, both of which are the result of refinancings completed during the prior fiscal year, and $2.3 million primarily from lower rates on our secured credit facility and $0.8 million from the effect of interest rate swaps entered into during the current year period.

Interest expense - operating partnership

Interest expense decreased $2.9 million primarily due to $2.7 million of decreased amortization of discounts and capitalized debt costs, which is the result of refinancings completed during the prior fiscal year and $2.3 million primarily from lower rates on our secured credit facility and $0.8 million from the effect of interest rate swaps entered into during the current year period, partially offset by a $2.9 million increase due to increased borrowings.

Loss on extinguishment of debt

During fiscal 2011, we prepaid both the outstanding principal amount on our $450.0 million 6.75% fixed rate senior notes due May 1, 2014 and $98.0 million of our $280.0 million 8.625% fixed rate senior notes due June 15, 2020, incurring a “Loss on extinguishment of debt” of $47.0 million.
 
Liquidity and Capital Resources
 
General

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Our liquidity and capital resources enable us to fund our working capital requirements, letter of credit requirements, debt service payments, acquisition and capital expenditures and distributions to our unitholders. Our liquidity and capital resources may be affected by our ability to access the capital markets or by unforeseen demands on cash, or other events beyond our control.
 
During fiscal 2013, our propane operations were positively impacted by a combination of weather that was significantly colder than the same period in the prior fiscal year, wholesale propane prices that were significantly lower than the same period in the prior fiscal year and a series of efficiency initiatives, cost cutting projects and pricing initiatives designed to improve operating income. The combination of these positive factors has assisted us in improving our distributable cash flow. For fiscal 2013, our distributable cash flow was approximately 113% of the total cash distributions paid for that period.
 
Subject to meeting the financial tests discussed below and also subject to the risk factors identified in “Item 1A. Risk Factors,” we believe we will continue to have sufficient access to capital markets at yields acceptable to us to support our expected growth expenditures and refinancing of debt maturities. Our disciplined approach to fund necessary capital spending and other partnership needs, combined with sufficient trade credit to operate our business efficiently and available credit under our secured credit facility and our accounts receivable securitization facility should provide us the means to meet our anticipated liquidity and capital resource requirements.
 
During periods of high volatility, our risk management activities may expose us to the risk of counterparty margin calls in amounts greater than we have the capacity to fund. Likewise our counterparties may not be able to fulfill their margin calls from us or may default on the settlement of positions with us.
 
Our working capital requirements are subject to, among other things, the price of propane, delays in the collection of receivables, volatility in energy commodity prices, liquidity imposed by insurance providers, downgrades in our credit ratings, decreased trade credit, significant acquisitions, the weather, customer retention and purchasing patterns and other changes in the demand for propane. Relatively colder weather or higher propane prices during the winter heating season are factors that could significantly increase our working capital requirements.
 
Our ability to satisfy our obligations is dependent upon our future performance, which will be subject to prevailing economic, financial, business and weather conditions and other factors, many of which are beyond our control. Due to the seasonality of the retail propane distribution business, a significant portion of our cash flow from operations is generated during the winter heating season. Our net cash provided by operating activities primarily reflects earnings from our business activities adjusted for depreciation and amortization and changes in our working capital accounts. Historically, we generate significantly lower net cash from operating activities in our first and fourth fiscal quarters as compared to the second and third fiscal quarters due to the seasonality of our business.
 
A quarterly distribution of $0.50 was paid on September 13, 2013, to all common units that were outstanding on September 6, 2013. This represents the seventy-sixth consecutive minimum quarterly distribution paid to our common unitholders dating back to October 1994.
 
Our secured credit facility, publicly-held debt and accounts receivable securitization facility contain several financial tests and covenants restricting our ability to pay distributions, incur debt and engage in certain other business transactions. In general, these tests are based on our debt-to-cash flow ratio and cash flow-to-interest expense ratio. Our general partner currently believes that the most restrictive of these tests are debt incurrence limitations under the terms of our secured credit and accounts receivable securitization facilities and limitations on the payment of distributions within our 8.625% senior notes due 2020.
 
As of July 31, 2013, we met all of our required quarterly financial tests and covenants. Based upon current estimates of our cash flow, our general partner believes that we will be able to continue to meet all of our required quarterly financial tests and covenants in fiscal 2014. However, we may not meet the applicable financial tests in future quarters if we were to experience:

significantly warmer than normal temperatures during the winter heating season;
a more volatile energy commodity cost environment;
an unexpected downturn in business operations;
a change in customer retention or purchasing patterns due to economic or other factors in the United States; or
a material downturn in the credit and/or equity markets.
 

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Failure to meet applicable financial tests could have a material effect on our operating capacity and cash flows and could restrict our ability to incur debt or to make cash distributions to our unitholders, even if sufficient funds were available. Depending on the circumstances, we may consider alternatives to permit the incurrence of debt or the continued payment of the quarterly cash distribution to our unitholders. No assurances can be given, however, that such alternatives can or will be implemented with respect to any given quarter.
 
We expect our future capital expenditures and working capital needs to be provided by a combination of cash generated from future operations, existing cash balances, the secured credit facility or the accounts receivable securitization facility. See additional information about the accounts receivable securitization facility in “Financing Activities – Accounts receivable securitization.” In order to reduce existing indebtedness, fund future acquisitions and expansive capital projects, we may obtain funds from our facilities, we may issue additional debt to the extent permitted under existing financing arrangements or we may issue additional equity securities, including, among others, common units.
 
Toward this purpose, the following registration statements were effective upon filing or declared effective by the SEC:

a shelf registration statement for the periodic sale of up to $750.0 million in common units, debt securities and/or other securities; Ferrellgas Partners Finance Corp. may, at our election, be the co-issuer and co-obligor on any debt securities issued by Ferrellgas Partners under this shelf registration statement; as of August 31, 2013, these two registrants collectively had $750.0 million available under this shelf registration statement; and
an “acquisition” shelf registration statement for the periodic sale of up to $250.0 million in common units to fund acquisitions; as of August 31, 2013, Ferrellgas Partners had $227.3 million available under this shelf agreement.
 
Operating Activities
 
Fiscal 2013 v 2012

Net cash provided by operating activities was $210.1 million for fiscal 2013, compared to net cash provided by operating activities of $124.4 million for fiscal 2012. This increase in cash provided by operating activities was primarily due to a $81.5 million improvement in cash flow from operations and a $3.3 million decrease in working capital requirements.

The increase in cash flow from operations is primarily due to a $87.9 million increase in “Gross margin - Propane and other gas liquids sales” and a $8.9 million increase in "Gross margin - Other," partially offset by a combined $16.0 million increase in "Operating expense" and General and administrative expense", each as discussed above

The decrease in working capital requirements was primarily due to a $19.7 million increase from the timing of accounts payable purchases and disbursements, a $14.7 million decrease in prepaid expenses and other current assets primarily due to the timing of deposits made toward the purchase of propane appliances and a $7.3 million decrease from the timing of inventory purchases. These decreases in working capital requirements were partially offset by $36.4 million increase in accounts receivable resulting from the timing of billings and collections on accounts receivable.
 
Fiscal 2012 v 2011

Net cash provided by operating activities was $124.4 million for fiscal 2012, compared to net cash provided by operating activities of $117.6 million for fiscal 2011. This increase in cash provided by operating activities was primarily due to a $7.2 million decrease in working capital requirements and a $0.5 million increase in cash flow from operations.

The decrease in working capital requirements was primarily due to a  $59.2 million decrease in accounts receivable resulting from the significant decrease in the wholesale costs of propane during the second half of fiscal 2012 as well as the timing of billings and collections on accounts receivable and $12.6 million from the timing of customers’ uses of their deposits and advances. These increases were partially offset by $37.8 million from the timing of accounts payable purchases and disbursements and  $22.2 million from the timing of inventory purchases.
 
The increase in cash flow from operations is primarily due to a $19.5 million decrease in make-whole payments and an $11.2 million decrease in “Litigation accrual and related legal fees” both paid in fiscal 2011 and not repeated in fiscal 2012, a $8.3 million decrease in “Operating expense” and an $8.6 million reduction in “Interest expense” which were offset primarily by a $43.9 million decrease in “Gross margin – Propane and other gas liquids sales.”
 
The operating partnership
 

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Fiscal 2013 v 2012

Net cash provided by operating activities was $225.9 million for fiscal 2013, compared to net cash provided by operating activities of $140.5 million for fiscal 2012. This increase in cash provided by operating activities was primarily due to a $81.3 million improvement in cash flow from operations and a $3.4 million decrease in working capital requirements.

The increase in cash flow from operations is primarily due to a $87.9 million increase in “Gross margin - Propane and other gas liquids sales” and a $8.9 million increase in "Gross margin - Other," partially offset by a combined $16.0 million increase in "Operating expense" and General and administrative expense", each as discussed above

The decrease in working capital requirements was primarily due to a $19.7 million increase from the timing of accounts payable purchases and disbursements, a $14.6 million decrease in prepaid expenses and other current assets primarily due to the timing of deposits made toward the purchase of propane appliances and a $7.3 million decrease from the timing of inventory purchases. These decreases in working capital requirements were partially offset by a $36.4 million increase in accounts receivable resulting from the timing of billings and collections on accounts receivable. 

Fiscal 2012 v 2011

Net cash provided by operating activities was $140.5 million for fiscal 2012, compared to net cash provided by operating activities of $148.8 million for fiscal 2011. This decrease in cash provided by operating activities was primarily due to a $13.4 million decrease in cash flow from operations, partially offset by a $6.0 million decrease in working capital requirements.
 
The decrease in cash flow from operations is primarily due to a $43.9 million decrease in “Gross margin - Propane and other gas liquids sales,” partially offset by an $11.2 million decrease in “Litigation accrual and related legal fees” a $11.0 million decrease in make-whole payments both paid in fiscal 2011 and not repeated in fiscal 2012 and a $8.3 million decrease in “Operating expense.”
 
The decrease in working capital requirements was primarily due to a $59.2 million decrease in accounts receivable resulting from the significant decrease in the wholesale costs of propane during the second half of fiscal 2012 as well as the timing of billings and collections on accounts receivable and $12.6 million from the timing of customers’ uses of their deposits and advances. These increases were partially offset by $37.8 million from the timing of accounts payable purchases and disbursements and $22.2 million from the timing of inventory purchases. 
 
Investing Activities
 
Fiscal 2013 v 2012

Net cash used in investing activities was $68.1 million for fiscal 2013, compared to net cash used in investing activities of $53.9 million for fiscal 2012. This increase in net cash used in investing activities is primarily due to increases of $26.8 million in business acquisitions, net of cash acquired, partially offset by a $8.4 million decrease in capital expenditures and an increase of $4.2 million in “Proceeds from assets sales”. The decrease in capital expenditures relates primarily to decreased purchases of propane cylinders in our effort to better utilize existing assets. The increase in proceeds from assets sales relates primarily to a one-time sale of underutilized real estate assets.
 
Fiscal 2012 v 2011

Net cash used in investing activities was $53.9 million for fiscal 2012, compared to net cash used in investing activities of $51.1 million for fiscal 2011. This slight increase in net cash used in investing activities is primarily due to increases of $3.1 million in capital expenditures related to acquisitions.
 
Financing Activities
 
Fiscal 2013 v 2012

Net cash used in financing activities was $143.8 million for fiscal 2013, compared to net cash used in financing activities of $69.4 million for fiscal 2011. This increase in net cash used in financing activities was primarily due to a $81.5 million net decrease in the short term portion of our secured credit facility and accounts receivable securitization facility borrowings, both of which are a result of improved cash flows from operating activities. A $57.6 million net increase in proceeds from long-term borrowings was somewhat offset by a $50.0 million decrease in proceeds from equity offerings.

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Fiscal 2012 v 2011

Net cash used in financing activities was $69.4 million for fiscal 2012, compared to net cash used in financing activities of $70.5 million for fiscal 2011. This slight decrease in net cash used in financing activities was primarily due to a $32.1 million net increase in secured credit facility and accounts receivable securitization facility short-term borrowings, partially offset by a net $25.0 million decrease in proceeds from both common unit issuances and long-term debt borrowings that were used to refinance long-term debt during fiscal 2011 that was not repeated in fiscal 2012 and a $11.5 million increase in common unit distributions related to equity issuances during the prior twelve month period.
 
Distributions
 
Ferrellgas Partners paid a $0.50 per unit quarterly distribution on all common units, as well as the related general partner distributions, totaling $159.7 million during fiscal 2013 in connection with the distributions declared for the three months ended July 31, 2012, October 31, 2012, January 31, 2013 and April 30, 2013. The quarterly distribution on all common units and the related general partner distribution for the three months ended July 31, 2013 of $39.9 million was paid on September 13, 2013 to holders of record on September 6, 2013.
 
Ferrellgas Partners paid a $0.50 per unit quarterly distribution on all common units, as well as the related general partner distributions, totaling $156.5 million during fiscal 2012 in connection with the distributions declared for the three months ended July 31, 2011, October 31, 2011, January 31, 2012 and April 30, 2012.

Secured credit facility
 
As of July 31, 2013, we had total borrowings outstanding under our secured credit facility of $171.4 million, of which $121.3 million was classified as long-term debt. Additionally, Ferrellgas had $174.7 million of available borrowing capacity under our secured credit facility as of July 31, 2013.
 
Borrowings outstanding at July 31, 2013 under the secured credit facility had a weighted average interest rate of 3.7%. All borrowings under the secured credit facility bear interest, at our option, at a rate equal to either:

for Base Rate Loans or Swing Line Loans, the Base Rate, which is defined as the higher of i) the federal funds rate plus 0.50%, ii) Bank of America’s prime rate; or iii) the Eurodollar Rate plus 1%; plus a margin varying from 1.00% to 2.00%; or
 for Eurodollar Rate Loans, the Eurodollar Rate, which is defined as the LIBOR Rate plus a margin varying from 2.00% to 3.00%.
 
As of July 31, 2013, the federal funds rate and Bank of America’s prime rate were 0.09% and 3.25 %, respectively. As of July 31, 2013