10-Q 1 fgp_2018430x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from         to         
 
Commission file numbers: 001-11331, 333-06693, 000-50182 and 000-50183
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
Ferrellgas, L.P.
Ferrellgas Finance Corp.
(Exact name of registrants as specified in their charters)
Delaware
Delaware
Delaware
Delaware
 
43-1698480
43-1742520
43-1698481
14-1866671
(States or other jurisdictions of incorporation or organization)
 
(I.R.S. Employer Identification Nos.)
 
 
 
7500 College Boulevard,
Suite 1000, Overland Park, Kansas
 
66210
(Address of principal executive office)
 
(Zip Code)

Registrants’ telephone number, including area code: (913) 661-1500
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x No ¨ 
Indicate by check mark whether the registrants have submitted electronically 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Ferrellgas Partners, L.P.:
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
(do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
 
Emerging growth company ☐
 
Ferrellgas Partners Finance Corp, Ferrellgas, L.P. and Ferrellgas Finance Corp.:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
(do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
 
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Ferrellgas Partners, L.P. and Ferrellgas, L.P. ¨
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. ¨
 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
Ferrellgas Partners, L.P. and Ferrellgas, L.P. Yes ¨ No x
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. Yes x No ¨


1


At May 31, 2018, the registrants had common units or shares of common stock outstanding as follows:
Ferrellgas Partners, L.P.
 
97,152,665
 
Common Units
Ferrellgas Partners Finance Corp.
 
1,000
 
Common Stock
Ferrellgas, L.P.
 
n/a
 
n/a
Ferrellgas Finance Corp.
 
1,000
 
Common Stock
 
Documents Incorporated by Reference: None


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

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

 TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



3


PART I - FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS (unaudited)
 
 

    
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
 
 
April 30, 2018
 
July 31, 2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
9,499

 
$
5,760

 Accounts and notes receivable, net (including $182,486 and $109,407 of accounts receivable pledged as collateral at April 30, 2018 and July 31, 2017, respectively)
 
202,727

 
165,084

Inventories
 
85,062

 
92,552

Prepaid expenses and other current assets
 
44,090

 
33,388

Total current assets
 
341,378

 
296,784

 
 
 
 
 
Property, plant and equipment, net
 
637,688

 
731,923

Goodwill, net
 
246,098

 
256,103

Intangible assets (net of accumulated amortization of $460,011 and $436,428 at April 30, 2018 and July 31, 2017, respectively)
 
235,318

 
251,102

Other assets, net
 
72,094

 
74,057

Total assets
 
$
1,532,576

 
$
1,609,969

 
 
 
 
 
LIABILITIES AND PARTNERS' DEFICIT
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
52,472

 
$
85,561

Short-term borrowings
 

 
59,781

Collateralized note payable
 
104,000

 
69,000

Other current liabilities
 
158,875

 
126,224

Total current liabilities
 
315,347

 
340,566

 
 
 
 
 
Long-term debt
 
1,995,608

 
1,995,795

Other liabilities
 
34,225

 
31,118

Contingencies and commitments (Note J)
 


 


 
 
 
 
 
Partners' deficit:
 
 

 
 

Common unitholders (97,152,665 units outstanding at April 30, 2018 and July 31, 2017)
 
(758,325
)
 
(701,188
)
General partner unitholder (989,926 units outstanding at April 30, 2018 and July 31, 2017)
 
(67,568
)
 
(66,991
)
Accumulated other comprehensive income
 
17,672

 
14,601

Total Ferrellgas Partners, L.P. partners' deficit
 
(808,221
)
 
(753,578
)
Noncontrolling interest
 
(4,383
)
 
(3,932
)
Total partners' deficit
 
(812,604
)
 
(757,510
)
Total liabilities and partners' deficit
 
$
1,532,576

 
$
1,609,969

See notes to condensed consolidated financial statements.

4


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
 
 
 
 
 
 
 
For the three months ended April 30,
 
For the nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Propane and other gas liquids sales
 
$
451,302

 
$
369,437

 
$
1,346,299

 
$
1,049,211

Midstream operations
 
22,595

 
126,676

 
260,631

 
331,507

Other
 
41,913

 
41,996

 
118,691

 
116,183

Total revenues
 
515,810

 
538,109

 
1,725,621

 
1,496,901

 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales - propane and other gas liquids sales
 
260,419

 
197,487

 
802,852

 
551,728

Cost of sales - midstream operations
 
14,518

 
118,767

 
229,710

 
300,433

Cost of sales - other
 
19,850

 
20,810

 
54,339

 
53,213

Operating expense
 
116,579

 
104,773

 
350,757

 
322,935

Depreciation and amortization expense
 
25,348

 
25,737

 
76,565

 
77,546

General and administrative expense
 
11,678

 
9,978

 
39,733

 
36,526

Equipment lease expense
 
7,133

 
7,270

 
20,828

 
22,035

Non-cash employee stock ownership plan compensation charge
 
2,738

 
4,697

 
10,731

 
11,396

Asset impairments
 

 

 
10,005

 

Loss on asset sales and disposals
 
6,270

 
2,393

 
46,414

 
8,861

 
 
 
 
 
 
 
 
 
Operating income
 
51,277

 
46,197

 
83,687

 
112,228

 
 
 
 
 
 
 
 
 
Interest expense
 
(40,375
)
 
(39,860
)
 
(123,855
)
 
(112,107
)
Other income, net
 
227

 
162

 
1,422

 
1,433

 
 
 
 
 
 
 
 
 
Earnings (loss) before income taxes
 
11,129

 
6,499

 
(38,746
)
 
1,554

 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
 
67

 
(192
)
 
282

 
(194
)
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
11,062

 
6,691

 
(39,028
)
 
1,748

 
 
 
 
 
 
 
 
 
Net earnings (loss) attributable to noncontrolling interest
 
201

 
155

 
(131
)
 
187

 
 
 
 
 
 
 
 
 
Net earnings (loss) attributable to Ferrellgas Partners, L.P.
 
10,861

 
6,536

 
(38,897
)
 
1,561

 
 
 
 
 
 
 
 
 
Less: General partner's interest in net earnings (loss)
 
109

 
66

 
(389
)
 
16

 
 
 
 
 
 
 
 
 
Common unitholders' interest in net earnings (loss)
 
$
10,752

 
$
6,470

 
$
(38,508
)
 
$
1,545

 
 
 
 
 
 
 
 
 
Basic and diluted net earnings (loss) per common unit
 
$
0.11

 
$
0.07

 
$
(0.40
)
 
$
0.02

 
 
 
 
 
 
 
 
 
Cash distributions declared per common unit
 
$
0.10

 
$
0.10

 
$
0.30

 
$
0.30

See notes to condensed consolidated financial statements.

5


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
 
 
 
 
 
 
 
For the three months ended April 30,
 
For the nine months ended April 30,
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
11,062

 
$
6,691

 
$
(39,028
)
 
$
1,748

 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Change in value of risk management derivatives
 
(159
)
 
(6,496
)
 
23,362

 
13,904

 
Reclassification of (gains) losses on derivatives to earnings, net
 
(6,568
)
 
(1,933
)
 
(20,260
)
 
2,819

 
Other comprehensive income (loss)
 
(6,727
)
 
(8,429
)
 
3,102

 
16,723

 
Comprehensive income (loss)
 
4,335

 
(1,738
)
 
(35,926
)
 
18,471

 
Less: Comprehensive income (loss) attributable to noncontrolling interest
 
134

 
70

 
(100
)
 
356

 
Comprehensive income (loss) attributable to Ferrellgas Partners, L.P.
 
$
4,201

 
$
(1,808
)
 
$
(35,826
)
 
$
18,115

 
See notes to condensed consolidated financial statements.

6


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

 
 

 
 

 
 

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

Common
unitholders
 
General partner unitholder
 
Common
unitholders
 
General partner unitholder
 
 
 
Non-controlling
interest
 
Balance at July 31, 2017
97,152.7

 
989.9

 
$
(701,188
)
 
$
(66,991
)
 
$
14,601

 
$
(753,578
)
 
$
(3,932
)
 
$
(757,510
)
Contributions in connection with non-cash ESOP and stock-based compensation charges

 

 
10,517

 
106

 

 
10,623

 
108

 
10,731

Distributions

 

 
(29,146
)
 
(294
)
 

 
(29,440
)
 
(459
)
 
(29,899
)
Net loss

 

 
(38,508
)
 
(389
)
 

 
(38,897
)
 
(131
)
 
(39,028
)
Other comprehensive income

 

 

 

 
3,071

 
3,071

 
31

 
3,102

Balance at April 30, 2018
97,152.7

 
989.9

 
$
(758,325
)
 
$
(67,568
)
 
$
17,672

 
$
(808,221
)
 
$
(4,383
)
 
$
(812,604
)
See notes to condensed consolidated financial statements.


7


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
For the nine months ended April 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(39,028
)
 
$
1,748

Reconciliation of net earnings (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
76,565

 
77,546

Non-cash employee stock ownership plan compensation charge
10,731

 
11,396

Non-cash stock-based compensation charge

 
3,298

Asset impairments
10,005

 

Loss on asset sales and disposals
46,414

 
8,861

Unrealized gain on derivative instruments
(91
)
 
(3,888
)
Provision for doubtful accounts
1,906

 
39

Deferred income tax expense
423

 
45

Other
6,712

 
5,250

Changes in operating assets and liabilities, net of effects from business acquisitions:
 
 
 
Accounts and notes receivable, net of securitization
(46,771
)
 
(58,923
)
Inventories
7,755

 
(2,163
)
Prepaid expenses and other current assets
(4,070
)
 
12,115

Accounts payable
(18,429
)
 
18,830

Accrued interest expense
31,915

 
34,054

Other current liabilities
(1,084
)
 
5,053

Other assets and liabilities
(4,642
)
 
5,070

Net cash provided by operating activities
78,311

 
118,331

 
 
 
 
Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(14,862
)
 
(3,539
)
Capital expenditures
(58,961
)
 
(35,412
)
Proceeds from sale of assets
57,802

 
4,721

Other

 
(37
)
Net cash used in investing activities
(16,021
)
 
(34,267
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Distributions
(29,440
)
 
(69,920
)
Proceeds from issuance of long-term debt
23,580

 
220,354

Payments on long-term debt
(1,892
)
 
(173,471
)
Net reductions in short-term borrowings
(84,179
)
 
(62,902
)
Net additions to collateralized short-term borrowings
35,000

 
27,000

Cash paid for financing costs
(1,161
)
 
(5,633
)
Noncontrolling interest activity
(459
)
 
900

Repurchase of common units

 
(15,851
)
Net cash used in financing activities
(58,551
)
 
(79,523
)
 
 
 
 
Net change in cash and cash equivalents
3,739

 
4,541

Cash and cash equivalents - beginning of period
5,760

 
4,965

Cash and cash equivalents - end of period
$
9,499

 
$
9,506

See notes to condensed consolidated financial statements.

8


FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data, unless otherwise designated)
 (unaudited)
A.  Partnership organization and formation
 
Ferrellgas Partners, L.P. (“Ferrellgas Partners”) was formed April 19, 1994, and is a publicly traded limited partnership, owning an approximate 99% limited partner interest in Ferrellgas, L.P. (the "operating partnership"). Ferrellgas Partners and the operating partnership, collectively referred to as “Ferrellgas,” are both Delaware limited partnerships and are governed by their respective partnership agreements. Ferrellgas Partners was formed to acquire and hold a limited partner interest in the operating partnership. As of April 30, 2018, Ferrell Companies, Inc. ("Ferrell Companies") beneficially owns 22.8 million Ferrellgas Partners common units. Ferrellgas, Inc. (the "general partner"), a wholly-owned subsidiary of Ferrell Companies, has retained an approximate 1% general partner interest in Ferrellgas Partners and also holds an approximate 1% general partner interest in the operating partnership, representing an effective 2% general partner interest in Ferrellgas on a combined basis. As general partner, it performs all management functions required by Ferrellgas. Unless contractually provided for, creditors of the operating partnership have no recourse with regards to Ferrellgas Partners.
 
Ferrellgas Partners is a holding entity that conducts no operations and has two subsidiaries, Ferrellgas Partners Finance Corp. and the operating partnership. Ferrellgas Partners owns a 100% equity interest in Ferrellgas Partners Finance Corp., whose only business activity is to act as the co-issuer and co-obligor of debt issued by Ferrellgas Partners. The operating partnership is the only operating subsidiary of Ferrellgas Partners.

Ferrellgas is engaged in the following primary businesses:
Propane operations and related equipment sales consists of the distribution of propane and related equipment and supplies. The propane distribution market is seasonal because propane is used primarily for heating in residential and commercial buildings. Ferrellgas serves residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia, and Puerto Rico.
Midstream operations consists of crude oil logistics and water solutions. Crude oil logistics primarily generates income by providing crude oil transportation and logistics services on behalf of producers and end-users of crude oil. Water solutions generates income primarily through the operation of salt water disposal wells in the Eagle Ford shale region of south Texas.

Due to seasonality, the results of operations for the nine months ended April 30, 2018 are not necessarily indicative of the results to be expected for the full fiscal year ending July 31, 2018.
 
The condensed consolidated financial statements of Ferrellgas reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim periods presented. All adjustments to the condensed consolidated financial statements were of a normal recurring nature. Certain prior period amounts have been reclassified to conform to the current period presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with (i) the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) the consolidated financial statements and accompanying notes included in Ferrellgas' Annual Report on Form 10-K for fiscal 2017.

B.    Summary of significant accounting policies
 
(1) Accounting estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. Significant estimates impacting the consolidated financial statements include accruals that have been established for contingent liabilities, pending claims and legal actions arising in the normal course of business, useful lives of property, plant and equipment assets, residual values of tanks, capitalization of customer tank installation costs, amortization methods of intangible assets, valuation methods used to value sales returns and allowances, allowance for doubtful accounts, fair value of reporting units, recoverability of long-lived assets, assumptions used to value business combinations, fair values of derivative contracts and stock-based compensation calculations.


9


(2) New accounting standards:

FASB Accounting Standard Update No. 2014-09
In May 2014, the Financial Accounting Standards Board, ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers. The issuance is part of a joint effort by the FASB and the International Accounting Standards Board ("IASB") to enhance financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards ("IFRS") and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The new standard will supersede much of the existing authoritative literature for revenue recognition. The standard and related amendments will be effective for Ferrellgas for its annual reporting period beginning August 1, 2018, including interim periods within that reporting period. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. Ferrellgas is in the final stages of analyzing the impact of the new guidance using an integrated approach which includes evaluating differences in the amount and timing of revenue recognition from applying the requirements of the new guidance, reviewing its accounting policies and practices, and assessing the need for changes to its processes, accounting systems and design of internal controls. Ferrellgas has completed the assessment of a significant number of its contracts with customers under the new guidance. Although Ferrellgas has not completed its assessment of the impact of the new guidance, it does not expect its adoption will have a material impact on its consolidated financial statements. Ferrellgas expects to utilize the modified retrospective transition method, which recognizes the cumulative effect upon adoption, when it adopts the new standard, effective August 1, 2018.

FASB Accounting Standard Update No. 2015-11
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory, which requires that inventory within the scope of the guidance be measured at the lower of cost or net realizable value. We adopted ASU 2015-11 effective August 1, 2017. The adoption of this standard did not materially impact our consolidated financial statements.

FASB Accounting Standard Update No. 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Ferrellgas is currently evaluating the impact of its pending adoption of ASU 2016-02 on the consolidated financial statements. Ferrellgas has formed an implementation team, completed training on the new standard, and is working on an initial assessment.

FASB Accounting Standard Update No. 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Ferrellgas is currently evaluating the impact of its pending adoption of this standard on the consolidated financial statements.  

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

 
 
C. Supplemental financial statement information
 
Inventories consist of the following:
 
 
April 30, 2018
 
July 31, 2017
Propane gas and related products
 
$
58,142

 
$
67,049

Appliances, parts and supplies, and other
 
26,920

 
25,503

Inventories
 
$
85,062

 
$
92,552


In addition to inventories on hand, Ferrellgas enters into contracts to take delivery of propane for supply procurement purposes with terms that generally do not exceed 36 months. Most of these contracts call for payment based on market prices at the date of delivery. As of April 30, 2018, Ferrellgas had committed, for supply procurement purposes, to take delivery of approximately 70.7 million gallons of propane at fixed prices.

10



Other assets, net consist of the following:
 
 
April 30, 2018
 
July 31, 2017
Notes receivable, less current portion
 
$
33,962

 
$
32,500

Other
 
38,132

 
41,557

  Other assets, net
 
$
72,094

 
$
74,057


Other current liabilities consist of the following:
 
 
April 30, 2018
 
July 31, 2017
Accrued interest

$
50,586

 
$
18,671

Customer deposits and advances
 
18,956

 
25,541

Other
 
89,333

 
82,012

Other current liabilities
 
$
158,875

 
$
126,224


Shipping and handling expenses are classified in the following condensed consolidated statements of operations line items:
 
 
For the three months ended April 30,
 
For the nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Operating expense
 
$
48,351

 
$
44,309

 
$
146,279

 
$
134,090

Depreciation and amortization expense
 
1,340

 
957

 
3,575

 
2,979

Equipment lease expense
 
6,507

 
6,564

 
18,872

 
19,882

   Total shipping and handling expenses
 
$
56,198

 
$
51,830

 
$
168,726

 
$
156,951


During the quarter ended January 31, 2018, Ferrellgas committed to a plan to dispose of all of its rail cars utilized in the Midstream operations segment and recognized a loss on assets held for sale of $35.5 million. During the quarter ended April 30, 2018, Ferrellgas completed the sale of all 1,292 rail cars and received approximately $51.3 million in cash. For the nine months ended April 30, 2018, "Loss on asset sales and disposals" includes a loss of $36.8 million related to the sale of these rail cars. Proceeds from the transaction were used to reduce outstanding debt on Ferrellgas' secured credit facility.

During the quarter ended January 31, 2018, Ferrellgas completed the sale of Bridger Energy, LLC, included in the Midstream operations segment, in exchange for an $8.5 million secured promissory note due in May 2020. For the nine months ended April 30, 2018, "Loss on asset sales and disposals" includes a loss of $3.8 million related to this sale. 

"Loss on asset sales and disposals" during the three and nine months ended April 30, 2018 and 2017 consists of:
 
 
For the three months ended April 30,
 
For the nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Loss on sale of assets classified as held for sale
 
$
1,237

 
$

 
$
36,752

 
$

Loss on sale of assets and other
 
5,033

 
2,393

 
9,662

 
8,861

Loss on asset sales and disposals
 
$
6,270

 
$
2,393

 
$
46,414

 
$
8,861


Certain cash flow and significant non-cash activities are presented below:
 
 
For the nine months ended April 30,
 
 
2018
 
2017
Cash paid (refunded) for:
 
 
 
 
Interest
 
$
85,171

 
$
73,276

Income taxes
 
$
(458
)
 
$
28

Non-cash investing and financing activities:
 
 
 
 
Liabilities incurred in connection with acquisitions
 
$
1,508

 
$
856

Change in accruals for property, plant and equipment additions
 
$
386

 
$
(111
)


11



D. Accounts and notes receivable, net and accounts receivable securitization
 
As discussed further in Note M - Subsequent events, on May 14, 2018, the operating partnership entered into an amendment which extended the maturity date of its accounts receivable securitization facility by three years and increased the maximum borrowing capacity from $225.0 million to $250.0 million. The accounts receivable securitization facility disclosures below pertain to the facility that was in place as of April 30, 2018.

Accounts and notes receivable, net consist of the following:
 
 
April 30, 2018
 
July 31, 2017
Accounts receivable pledged as collateral
 
$
182,486

 
$
109,407

Accounts receivable
 
13,131

 
47,346

Note receivable - current portion
 
10,000

 
10,000

Other
 
232

 
307

Less: Allowance for doubtful accounts
 
(3,122
)
 
(1,976
)
Accounts and notes receivable, net
 
$
202,727

 
$
165,084


At April 30, 2018, $182.5 million of trade accounts receivable were pledged as collateral against $104.0 million of collateralized notes payable due to the commercial paper conduit. At July 31, 2017, $109.4 million of trade accounts receivable were pledged as collateral against $69.0 million of collateralized notes payable due to the commercial paper conduit. These accounts receivable pledged as collateral are bankruptcy remote from the operating partnership. The operating partnership does not provide any guarantee or similar support to the collectability of these accounts receivable pledged as collateral. 
 
As of April 30, 2018, Ferrellgas had received cash proceeds of $104.0 million from trade accounts receivables securitized, with $19.0 million of remaining capacity to receive additional proceeds. As of July 31, 2017, Ferrellgas had received cash proceeds of $69.0 million from trade accounts receivables securitized, with no remaining capacity to receive additional proceeds. Borrowings under the accounts receivable securitization facility had a weighted average interest rate of 4.2% and 4.0% as of April 30, 2018 and July 31, 2017, respectively.

E.    Debt
 
As discussed further in Note M - Subsequent events, on May 4, 2018, the operating partnership entered into a new $575.0 million senior secured credit facility, which replaced the $575.0 million secured credit facility that was scheduled to mature in October 2018. Credit facility disclosures below pertain to the secured credit facility that was in place as of April 30, 2018.

Short-term borrowings
 
Ferrellgas classifies as short-term the portion of its secured credit facility borrowings that were used to fund working capital needs and that management intends to pay down within the 12 month period following the balance sheet date. As of April 30, 2018, there were no amounts classified as short-term borrowings because all amounts outstanding were refinanced on May 4, 2018 under the five-year term loan discussed in Note M - Subsequent events. As of July 31, 2017, $59.8 million was classified as short-term borrowings. For further discussion see the senior secured credit facility section below.

Financial covenants

The indenture governing the outstanding notes of Ferrellgas Partners and the agreements governing the operating partnership’s indebtedness contain various covenants that limit Ferrellgas Partners' ability and its subsidiaries to, among other things, make restricted payments and incur additional indebtedness. The general partner believes that the most restrictive of these covenants is the consolidated fixed charge coverage ratio, as defined in the indenture governing the outstanding notes of Ferrellgas Partners.

Consolidated fixed charge coverage ratio

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


12


This covenant requires that the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of Ferrellgas Partners be at least 1.75x before a restricted payment (as defined in the indenture) can be made by Ferrellgas Partners. If this ratio were to drop below 1.75x, the indenture allows Ferrellgas Partners to make restricted payments of up to $50.0 million in total over a 16 quarter period while below this ratio. As of April 30, 2018, the ratio was 1.56x. As a result, the $9.8 million distribution to be paid to common unitholders on June 14, 2018 will be taken from the $50.0 million restricted payment limitation, which after considering the $9.8 million deductions taken as a result of the distributions paid in September 2017, December 2017 and March 2018, leaves $10.8 million for future restricted payments. Unless the indenture governing the outstanding notes is amended or refinanced, if our consolidated fixed charge coverage ratio does not improve to at least 1.75x and we continue our current quarterly distribution rate of $0.10 per common unit, this covenant will not allow us to make common unit distributions for our quarter ending October 31, 2018 and beyond. Ferrellgas Partners is presently considering potential solutions to cure the limitation on distributions under the consolidated fixed charge covenant ratio related to the outstanding unsecured bonds due in June 2020. The potential solutions, among others, include a refinancing or a transaction to exchange new bonds for some or all of the bonds due June 2020.

Debt and interest expense reduction strategy

Ferrellgas continues to execute on a strategy to further reduce its debt and interest expense. This strategy included amending our secured credit facility and accounts receivable securitization facility, as discussed in Note M - Subsequent events, as well as certain asset sales executed to date, and may include refinancing existing debt agreements, additional asset sales, a reduction in Ferrellgas Partners' annual distribution rate or the issuance of equity. Ferrellgas believes any debt and interest expense reduction strategies would remain in effect until Ferrellgas' consolidated leverage ratio reaches 4.5x or a level Ferrellgas deems appropriate for its business.

Senior secured credit facility

As of April 30, 2018, Ferrellgas had total borrowings outstanding under its secured credit facility of $184.9 million, all of which was classified as long-term debt. Ferrellgas had $252.3 million of capacity under the secured credit facility as of April 30, 2018. As of July 31, 2017, Ferrellgas had total borrowings outstanding under its secured credit facility of $245.5 million, of which $185.7 million was classified as long-term debt. Ferrellgas had $190.3 million of capacity under the secured credit facility as of July 31, 2017. Borrowings outstanding at April 30, 2018 and July 31, 2017 under the secured credit facility had weighted average interest rates of 6.7% and 6.0%, respectively.
 
Letters of credit outstanding at April 30, 2018 totaled $111.8 million and were used to secure commodity hedges, product purchases, and insurance arrangements. Letters of credit outstanding at July 31, 2017 totaled $139.2 million and were used to secure commodity hedges, product purchases, and insurance arrangements. At April 30, 2018, Ferrellgas had remaining letter of credit capacity of $88.2 million. At July 31, 2017, Ferrellgas had remaining letter of credit capacity of $60.8 million.

F.  Partners' deficit

As of April 30, 2018 and July 31, 2017, Ferrellgas Partners limited partner units, which are listed on the New York Stock Exchange under the symbol “FGP,” were beneficially owned by the following:

 
 
April 30, 2018
 
July 31, 2017
Public common unitholders
 
69,612,939

 
69,612,939

Ferrell Companies (1)
 
22,529,361

 
22,529,361

FCI Trading Corp. (2)
 
195,686

 
195,686

Ferrell Propane, Inc. (3)
 
51,204

 
51,204

James E. Ferrell (4)
 
4,763,475

 
4,763,475


(1) Ferrell Companies is the owner of the general partner and is an approximate 23% direct owner of Ferrellgas Partners' common units and thus a related party. Ferrell Companies also beneficially owns 195,686 and 51,204 common units of Ferrellgas Partners held by FCI Trading Corp. ("FCI Trading") and Ferrell Propane, Inc. ("Ferrell Propane"), respectively, bringing Ferrell Companies' beneficial ownership to 23.4% at April 30, 2018.
(2) FCI Trading is an affiliate of the general partner and thus a related party.
(3) Ferrell Propane is controlled by the general partner and thus a related party.
(4) James E. Ferrell is the Interim Chief Executive Officer and President of the general partner; and is Chairman of the Board of Directors of the general partner and thus a related party. JEF Capital Management owns 4,758,859 of these common units and is wholly-owned by the James E. Ferrell Revocable Trust Two for which James E. Ferrell is the trustee and sole

13


beneficiary. The remaining 4,616 common units are held by Ferrell Resources Holding, Inc., which is wholly-owned by the James E. Ferrell Revocable Trust One, for which James E. Ferrell is the trustee and sole beneficiary.

Partnership distributions paid
 
Ferrellgas Partners has paid the following distributions:
 
 
For the three months ended April 30,
 
For the nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Public common unitholders
 
$
6,961

 
$
6,961

 
$
20,884

 
$
49,600

Ferrell Companies
 
2,253

 
2,253

 
6,759

 
16,052

FCI Trading Corp.
 
20

 
20

 
60

 
140

Ferrell Propane, Inc.
 
5

 
5

 
15

 
36

James E. Ferrell
 
476

 
476

 
1,428

 
3,393

General partner
 
98

 
98

 
294

 
699

 
 
$
9,813

 
$
9,813

 
$
29,440

 
$
69,920


On May 24, 2018, Ferrellgas Partners declared a cash distribution of $0.10 per common unit for the three months ended April 30, 2018, which is expected to be paid on June 14, 2018. Included in this cash distribution are the following amounts to be paid to related parties:
Ferrell Companies
 
$
2,253

FCI Trading Corp.
 
20

Ferrell Propane, Inc.
 
5

James E. Ferrell
 
476

General partner
 
98


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

Accumulated other comprehensive income (loss) (“AOCI”)
 
See Note H – Derivative instruments and hedging activities – for details regarding changes in the fair value of risk management financial derivatives recorded within AOCI for the three and nine months ended April 30, 2018 and 2017.
 
General partner’s commitment to maintain its capital account
 
Ferrellgas’ partnership agreements allow the general partner to have an option to maintain its effective 2% general partner interest concurrent with the issuance of other additional equity.

During the nine months ended April 30, 2018, the general partner made non-cash contributions of $0.2 million to Ferrellgas to maintain its effective 2% general partner interest.

During the nine months ended April 30, 2017, the general partner made cash contributions of $1.7 million and non-cash contributions of $0.3 million to Ferrellgas to maintain its effective 2% general partner interest.


14


G.    Fair value measurements
 
Derivative financial instruments
 
The following table presents Ferrellgas’ financial assets and financial liabilities that are measured at fair value on a recurring basis for each of the fair value hierarchy levels, including both current and noncurrent portions, as of April 30, 2018 and July 31, 2017:
 
 
Asset (Liability)
 
 
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
 
Total
April 30, 2018:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$
41

 
$

 
$
41

Commodity derivatives
 
$

 
$
19,750

 
$

 
$
19,750

Liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$
(3,222
)
 
$

 
$
(3,222
)
Commodity derivatives
 
$

 
$
(2,239
)
 
$

 
$
(2,239
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 31, 2017:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$
583

 
$

 
$
583

Commodity derivatives
 
$

 
$
16,212

 
$

 
$
16,212

Liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$
(707
)
 
$

 
$
(707
)
Commodity derivatives
 
$

 
$
(1,258
)
 
$

 
$
(1,258
)

Methodology

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

Other financial instruments
 
The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. The estimated fair value of various note receivable financial instruments classified in "Other assets, net" on the condensed consolidated balance sheets, are approximately $29.3 million, or $4.7 million less than their carrying amount as of April 30, 2018. The estimated fair values of these notes receivable were calculated using a discounted cash flow method which relied on significant unobservable inputs. At April 30, 2018 and July 31, 2017, the estimated fair value of Ferrellgas’ long-term debt instruments was $1,890.1 million and $1,966.6 million, respectively. Ferrellgas estimates the fair value of long-term debt based on quoted market prices. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.

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



15


H.  Derivative instruments and hedging activities
 
Ferrellgas is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Of these, the propane commodity derivative instruments are designated as cash flow hedges. Prior to the sale of Bridger Energy, LLC in January 2018, all other commodity derivative instruments were neither qualified nor were designated as cash flow hedges, therefore, changes in their fair value were recorded currently in earnings. Ferrellgas also periodically utilizes derivative instruments to manage its exposure to fluctuations in interest rates.
 
Derivative instruments and hedging activity
 
During the nine months ended April 30, 2018 and 2017, Ferrellgas did not recognize any gain or loss in earnings related to hedge ineffectiveness and did not exclude any component of financial derivative contract gains or losses from the assessment of hedge effectiveness related to commodity cash flow hedges.

The following tables provide a summary of the fair value of derivatives in Ferrellgas’ condensed consolidated balance sheets as of April 30, 2018 and July 31, 2017:  
 
 
April 30, 2018
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Location
 
 Fair value
 
Location
 
 Fair value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
  Commodity derivatives-propane
 
Prepaid expenses and other current assets
 
$
14,449

 
Other current liabilities
 
$
2,207

  Commodity derivatives-propane
 
Other assets, net
 
5,301

 
Other liabilities
 
32

  Interest rate swap agreements
 
Prepaid expenses and other current assets
 
41

 
Other current liabilities
 
738

  Interest rate swap agreements
 
Other assets, net
 

 
Other liabilities
 
2,484

 
 
Total
 
$
19,791

 
Total
 
$
5,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 31, 2017
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Location
 
 Fair value
 
Location
 
 Fair value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
  Commodity derivatives-propane
 
Prepaid expenses and other current assets
 
$
11,061

 
Other current liabilities
 
$
415

  Commodity derivatives-propane
 
Other assets, net
 
4,413

 
Other liabilities
 
15

  Interest rate swap agreements
 
Prepaid expenses and other current assets
 
583

 
Other current liabilities
 
595

  Interest rate swap agreements
 
Other assets, net
 

 
Other liabilities
 
112

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
  Commodity derivatives-crude oil
 
Prepaid expenses and other current assets
 
738

 
Other current liabilities
 
828


 
Total
 
$
16,795

 
Total
 
$
1,965



16


Ferrellgas' exchange traded commodity derivative contracts require cash margin deposit as collateral for contracts that are in a negative mark-to-market position. These cash margin deposits will be returned if mark-to-market conditions improve or will be applied against cash settlement when the contracts are settled. Liabilities represent cash margin deposits received by Ferrellgas for contracts that are in a positive mark-to-market position. The following tables provide a summary of cash margin balances as of April 30, 2018 and July 31, 2017, respectively:

 
 
April 30, 2018
 
 
Assets
 
Liabilities
Description
 
Location
 
Amount
 
Location
 
Amount
Margin Balances
 
Prepaid expenses and other current assets
 
$
1,623

 
Other current liabilities
 
$
8,434

 
 
Other assets, net
 
1,405

 
Other liabilities
 
3,631

 
 
 
 
$
3,028

 
 
 
$
12,065

 
 
July 31, 2017
 
 
Assets
 
Liabilities
Description
 
Location
 
Amount
 
Location
 
Amount
Margin Balances
 
Prepaid expenses and other current assets
 
$
1,778

 
Other current liabilities
 
$
7,729

 
 
Other assets, net
 
1,631

 
Other liabilities
 
3,073

 
 
 
 
$
3,409

 
 
 
$
10,802


The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three and nine months ended April 30, 2018 and 2017 due to derivatives designated as fair value hedging instruments:  
 
 
 
 
Amount of Gain Recognized on Derivative
 
Amount of Interest Expense Recognized on Fixed-Rate Debt (Related Hedged Item)
Derivative Instrument
 
Location of Amounts Recognized on Derivative
 
For the three months ended April 30,
 
For the three months ended April 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
Interest rate swap agreements
 
Interest expense
 
$
40

 
$
323

 
$
(2,275
)
 
$
(2,275
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain Recognized on Derivative
 
Amount of Interest Expense Recognized on Fixed-Rate Debt (Related Hedged Item)
Derivative Instrument
 
Location of Amounts Recognized on Derivative
 
For the nine months ended April 30,
 
For the nine months ended April 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
Interest rate swap agreements
 
Interest expense
 
$
266

 
$
1,071

 
$
(6,825
)
 
$
(6,825
)
 
 
 
 
 
 
 
 
 
 
 



17


The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income (loss) for the three and nine months ended April 30, 2018 and 2017 due to derivatives designated as cash flow hedging instruments:
 
 
For the three months ended April 30, 2018
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
(169
)
 
Cost of sales-propane and other gas liquids sales
 
$
6,628

 
$

Interest rate swap agreements
 
10

 
Interest expense
 
(60
)
 

 
 
$
(159
)
 
 
 
$
6,568

 
$

 
 
 
 
 
 
 
 
 
 
 
For the three months ended April 30, 2017
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
(6,642
)
 
Cost of sales-propane and other gas liquids sales
 
$
2,411

 
$

Interest rate swap agreements
 
146

 
Interest expense
 
(478
)
 

 
 
$
(6,496
)
 
 
 
$
1,933

 
$

 
 
 
 
 
 
 
 
 
 
 
For the nine months ended April 30, 2018
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
23,114

 
Cost of sales-propane and other gas liquids sales
 
$
20,646

 
$

Interest rate swap agreements
 
248

 
Interest expense
 
(386
)
 

 
 
$
23,362

 
 
 
$
20,260

 
$

 
 
 
 
 
 
 
 
 
 
 
For the nine months ended April 30, 2017
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
12,930

 
Cost of sales-propane and other gas liquids sales
 
$
(1,112
)
 
$

Interest rate swap agreements
 
974

 
Interest expense
 
(1,707
)
 

 
 
$
13,904

 
 
 
$
(2,819
)
 
$



18


The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three and nine months ended April 30, 2018 and 2017 due to the change in fair value of derivatives not designated as hedging instruments:

 
 
For the three months ended April 30, 2018
Derivatives Not Designated as Hedging Instruments
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil
 
$

 
Cost of sales - midstream operations
 
 
 
 
 
 
 
For the three months ended April 30, 2017
Derivatives Not Designated as Hedging Instruments
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil
 
$
1,464

 
Cost of sales - midstream operations
Commodity derivatives - vehicle fuel
 
$
(393
)
 
Operating expense
 
 
 
 
 
 
 
For the nine months ended April 30, 2018
Derivatives Not Designated as Hedging Instruments
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil
 
$
(3,470
)
 
Cost of sales - midstream operations
 
 
 
 
 
 
 
For the nine months ended April 30, 2017
Derivatives Not Designated as Hedging Instruments
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil
 
$
(784
)
 
Cost of sales - midstream operations
Commodity derivatives - vehicle fuel
 
$
1,123

 
Operating expense

The changes in derivatives included in AOCI for the nine months ended April 30, 2018 and 2017 were as follows:  

 
 
For the nine months ended April 30,
Gains and losses on derivatives included in AOCI
 
2018
 
2017
Beginning balance
 
$
14,648

 
$
(9,815
)
Change in value of risk management commodity derivatives
 
23,114

 
12,930

Reclassification of (gains) and losses on commodity hedges to cost of sales - propane and other gas liquids sales, net
 
(20,646
)
 
1,112

Change in value of risk management interest rate derivatives
 
248

 
974

Reclassification of losses on interest rate hedges to interest expense
 
386

 
1,707

Ending balance
 
$
17,750

 
$
6,908


Ferrellgas expects to reclassify net gains related to the risk management commodity derivatives of approximately $12.2 million to earnings during the next 12 months. These net gains are expected to be offset by decreased margins on propane sales commitments Ferrellgas has with its customers that qualify for the normal purchase normal sales exception.
 
During the nine months ended April 30, 2018 and 2017, Ferrellgas had no reclassifications to operations resulting from the discontinuance of any cash flow hedges arising from the probability of the original forecasted transactions not occurring within the originally specified period of time defined within the hedging relationship.
 
As of April 30, 2018, Ferrellgas had financial derivative contracts covering 2.3 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.


19


Derivative financial instruments credit risk
 
Ferrellgas is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas’ counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas maintains credit policies with regard to its counterparties that it believes reduces its overall credit risk. These policies include evaluating and monitoring its counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by Ferrellgas in the forms of letters of credit, parent guarantees or cash. Ferrellgas has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties. If these counterparties that make up the concentration failed to perform according to the terms of their contracts at April 30, 2018, the maximum amount of loss due to credit risk that Ferrellgas would incur is $5.7 million, which is based upon the gross fair values of the derivative financial instruments.
 
From time to time Ferrellgas enters into derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas' debt rating. There were no open derivative contracts with credit-risk-related contingent features as of April 30, 2018.

I.    Transactions with related parties
 
Ferrellgas has no employees and is managed and controlled by its general partner. Pursuant to Ferrellgas’ partnership agreements, the general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on behalf of Ferrellgas and all other necessary or appropriate expenses allocable to Ferrellgas or otherwise reasonably incurred by the general partner in connection with operating Ferrellgas’ business. These costs primarily include compensation and benefits paid to employees of the general partner who perform services on Ferrellgas’ behalf and are reported in the condensed consolidated statements of operations as follows:
 
 
For the three months ended April 30,
 
For the nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Operating expense
 
$
58,842

 
$
53,747

 
$
181,484

 
$
170,953

 
 
 
 
 
 
 
 
 
General and administrative expense
 
$
5,707

 
$
6,913

 
$
21,637

 
$
23,713

 
 

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

J.    Contingencies and commitments

Litigation

Ferrellgas’ operations are subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane and crude oil. As a result, at any given time, Ferrellgas can be threatened with or named as a defendant in various lawsuits arising in the ordinary course of business. Other than as discussed below, Ferrellgas is not a party to any legal proceedings other than various claims and lawsuits arising in the ordinary course of business. It is not possible to determine the ultimate disposition of these matters; however, management is of the opinion that there are no known claims or contingent claims that are reasonably expected to have a material adverse effect on the consolidated financial condition, results of operations and cash flows of Ferrellgas.
 
Ferrellgas has been named as a defendant, along with a competitor, in putative class action lawsuits filed in multiple jurisdictions. The lawsuits, which were consolidated in the Western District of Missouri on October 16, 2014, allege that Ferrellgas and a competitor coordinated in 2008 to reduce the fill level in barbeque cylinders and combined to persuade a common customer to accept that fill reduction, resulting in increased cylinder costs to direct customers and end-user customers in violation of federal and certain state antitrust laws. The lawsuits seek treble damages, attorneys’ fees, injunctive relief and costs on behalf of the putative class. These lawsuits have been consolidated into one case by a multidistrict litigation panel. The Federal Court for the Western District of Missouri initially dismissed all claims brought by direct and indirect customers other than state law claims of indirect customers under Wisconsin, Maine and Vermont law. The direct customer plaintiffs filed an appeal, which resulted in a reversal of the district court’s dismissal. We filed a petition for a writ of certiorari which was denied. An appeal by the indirect customer plaintiffs remains pending. Ferrellgas believes it has strong defenses to the claims and intends to vigorously defend against the consolidated case. Ferrellgas does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuit.


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

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


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

There was no dilutive effect resulting from this method based on basic and diluted net earnings (loss) per common unit for the three and nine months ended April 30, 2018 or 2017.
 
In periods with net losses, the allocation of the net losses to the limited partners and the general partner will be determined based on the same allocation basis specified in Ferrellgas Partners’ partnership agreement that would apply to periods in which there were no undistributed earnings. Additionally, there are no dilutive securities in periods with net losses.

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For the three months ended April 30,
 
For the nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except per common unit amounts)
Common unitholders’ interest in net earnings (loss)
 
$
10,752

 
$
6,470

 
$
(38,508
)
 
$
1,545

 
 
 
 
 
 
 
 
 
Weighted average common units outstanding - basic and diluted
 
97,152.7

 
97,152.7

 
97,152.7

 
97,255.4

 
 
 
 
 
 
 
 
 
Basic and diluted net earnings (loss) per common unit
 
$
0.11

 
$
0.07

 
$
(0.40
)
 
$
0.02



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L.    Segment reporting

Ferrellgas has two primary operations that result in two reportable operating segments: propane operations and related equipment sales and midstream operations. During the quarter ended January 31, 2018, Ferrellgas recorded a goodwill impairment of $10.0 million related to a decline in future expected cash flows of an immaterial reporting unit of our Propane operations and related equipment sales segment.

Following is a summary of segment information for the three and nine months ended April 30, 2018 and 2017:

 
 
Three months ended April 30, 2018
 
 
Propane operations and related equipment sales
 
Midstream operations
 
Corporate
 
Total
Segment revenues
 
$
493,215

 
$
22,595

 
$

 
$
515,810

Direct costs (1)
 
397,568

 
21,593

 
9,727

 
428,888

Adjusted EBITDA
 
$
95,647

 
$
1,002

 
$
(9,727
)
 
$
86,922

 
 
 
 
 
 
 
 
 
 
 
Three months ended April 30, 2017
 
 
Propane operations and related equipment sales
 
Midstream operations
 
Corporate
 
Total
Segment revenues
 
$
411,433

 
$
126,676

 
$

 
$
538,109

Direct costs (1)
 
324,442

 
127,223

 
9,654

 
461,319

Adjusted EBITDA
 
$
86,991

 
$
(547
)
 
$
(9,654
)
 
$
76,790

 
 
 
 
 
 
 
 
 
 
 
Nine months ended April 30, 2018
 
 
Propane operations and related equipment sales
 
Midstream operations
 
Corporate
 
Total
Segment revenues
 
$
1,464,990

 
$
260,631

 
$

 
$
1,725,621

Direct costs (1)
 
1,208,283

 
250,423

 
33,150

 
1,491,856

Adjusted EBITDA
 
$
256,707

 
$
10,208

 
$
(33,150
)
 
$
233,765

 
 
 
 
 
Nine months ended April 30, 2017
 
 
Propane operations and related equipment sales
 
Midstream operations
 
Corporate
 
Total
Segment revenues
 
$
1,165,394

 
$
331,507

 
$

 
$
1,496,901

Direct costs (1)
 
931,631

 
323,714

 
30,717

 
1,286,062

Adjusted EBITDA
 
$
233,763

 
$
7,793

 
$
(30,717
)
 
$
210,839

 
 
 
 
 
 
 
 
 

(1) Direct costs are comprised of "cost of sales-propane and other gas liquids sales", "cost of products sold-midstream operations", "cost of products sold-other", "operating expense", "general and administrative expense", and "equipment lease expense" less , "severance charge", "professional fees", and "unrealized (non-cash) loss (gain) on changes in fair value of derivatives not designated as hedging instruments".



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Following is a reconciliation of Ferrellgas' total segment performance measure to condensed consolidated net earnings (loss):
 
 
Three months ended April 30,
 
Nine months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Net earnings (loss) attributable to Ferrellgas Partners, L.P.
 
$
10,861

 
$
6,536

 
$
(38,897
)
 
$
1,561

Income tax expense (benefit)
 
67

 
(192
)
 
282

 
(194
)
Interest expense
 
40,375

 
39,860

 
123,855

 
112,107

Depreciation and amortization expense
 
25,348

 
25,737

 
76,565

 
77,546

EBITDA
 
76,651

 
71,941

 
161,805

 
191,020

Non-cash employee stock ownership plan compensation charge
 
2,738

 
4,697

 
10,731

 
11,396

Non-cash stock-based compensation charge
 

 

 

 
3,298

Asset impairments
 

 

 
10,005

 

Loss on asset sales and disposals
 
6,270