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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 12/15/21 Ferrellgas Partners LP 10-Q 10/31/21 94:14M Toppan Merrill Bridge/FA Ferrellgas Finance Corp. Ferrellgas Partners Finance Corp. Ferrellgas LP |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.92M
2: EX-10.18 Material Contract HTML 52K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 34K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 34K
5: EX-31.3 Certification -- §302 - SOA'02 HTML 34K
6: EX-31.4 Certification -- §302 - SOA'02 HTML 34K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 28K
8: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
9: EX-32.3 Certification -- §906 - SOA'02 HTML 27K
10: EX-32.4 Certification -- §906 - SOA'02 HTML 27K
17: R1 Document And Entity Information HTML 99K
18: R2 Consolidated Balance Sheets HTML 168K
19: R3 Consolidated Balance Sheets (Parenthetical) HTML 53K
20: R4 Consolidated Statements Of Operations HTML 120K
21: R5 Consolidated Statements of Comprehensive Income HTML 64K
(Loss)
22: R6 Consolidated Statements Of Partners' Capital HTML 67K
23: R7 Consolidated Statements Of Cash Flows HTML 128K
24: R8 Partnership Organization And Formation HTML 43K
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27: R11 Supplemental Financial Statement Information HTML 179K
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29: R13 Debt HTML 123K
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31: R15 Equity HTML 75K
32: R16 Revenue from contracts with customers HTML 97K
33: R17 Fair Value Measurements HTML 156K
34: R18 Derivative Instruments and Hedging Activities HTML 283K
35: R19 Transactions With Related Parties HTML 57K
36: R20 Contingencies And Commitments HTML 51K
37: R21 Net Earnings (Loss) Per Unitholders' Interest HTML 42K
38: R22 Subsequent Events HTML 36K
39: R23 Summary Of Significant Accounting Policies HTML 28K
(Policy)
40: R24 Leases (Tables) HTML 364K
41: R25 Supplemental Financial Statement Information HTML 185K
(Tables)
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44: R28 Equity (Tables) HTML 63K
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(Tables)
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(Details)
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63: R47 Debt - Long-Term Debt Activity (Details) HTML 111K
64: R48 Debt - Covenants and Loss on Extinguishment HTML 83K
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Distributions (Details)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form i 10-Q
| |
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the quarterly period ended i October 31, 2021 |
or
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the transition period from to |
Commission file numbers: i 001-11331, i 333-06693-02, i 000-50182 and i 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)
i Delaware | | i 43-1698480 |
i Delaware | | i 43-1742520 |
i Delaware | | i 43-1698481 |
i Delaware | | i 14-1866671 |
(States or other jurisdictions of incorporation or organization) | | (I.R.S. Employer Identification Nos.) |
| | |
i 7500 College Boulevard, | | i 66210 |
(Address of principal executive office) | | (Zip Code) |
Registrants’ telephone number, including area code: ( i 913) i 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. i Yes ☒ No ☐
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “Large Accelerated Filer,” “Accelerated Filer,” “Smaller Reporting Company,” and “Emerging Growth Company” in Rule 12b-2 of the Exchange Act.
Ferrellgas Partners, L.P.: | | | |
Large Accelerated Filer ☐ | Accelerated Filer ☐ | i Non-accelerated Filer ☒ | Smaller Reporting Company ☒ |
| | | Emerging Growth Company i ☐ |
Ferrellgas Partners Finance Corp, Ferrellgas, L.P. and Ferrellgas Finance Corp.: | | ||
Large Accelerated Filer ☐ | Accelerated Filer ☐ | i Non-accelerated Filer ☒ | Smaller Reporting Company ☒ |
| | | Emerging Growth Company ☐ |
If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Ferrellgas Partners, L.P. and Ferrellgas, L.P. ☐
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. ☐
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
Ferrellgas Partners, L.P. and Ferrellgas, L.P. Yes i ☐ No ☒
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. Yes ☒ No ☐
Indicate by check mark whether the registrants have filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Ferrellgas Partners, L.P. and Ferrellgas Partners Finance Corp. Yes ☒ No ☐
Ferrellgas, L.P. and Ferrellgas Finance Corp. N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
N/A | | N/A | | N/A |
At November 30, 2021, the registrants had Class A Units, Class B Units or shares of common stock outstanding as follows:
Ferrellgas Partners, L.P. | i 4,857,605 | Class A Units |
| 1,300,000 | Class B 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.
2
PART I - FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS (unaudited) |
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
| | | | | | |
|
|
| ||||
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents (including $ i 11,500 of restricted cash at October 31, 2021 and July 31, 2021) | | $ | i 168,851 | | $ | i 281,952 |
Accounts and notes receivable, net | |
| i 163,473 | |
| i 131,574 |
Inventories | |
| i 131,280 | |
| i 88,379 |
Price risk management asset | | | i 129,389 | | | i 78,001 |
Prepaid expenses and other current assets | |
| i 59,600 | |
| i 39,092 |
Total current assets | |
| i 652,593 | |
| i 618,998 |
| |
|
| |
|
|
Property, plant and equipment, net | |
| i 585,993 | |
| i 582,118 |
Goodwill, net | |
| i 251,065 | |
| i 246,946 |
Intangible assets (net of accumulated amortization of $ i 434,166 and $ i 432,032 at October 31, 2021 and July 31, 2021, respectively) | |
| i 103,277 | |
| i 100,743 |
Operating lease right-of-use assets | | | i 87,379 | | | i 87,611 |
Other assets, net | |
| i 96,318 | |
| i 93,228 |
Total assets | | $ | i 1,776,625 | | $ | i 1,729,644 |
| |
|
| |
|
|
LIABILITIES, MEZZANINE AND EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | i 80,233 | | $ | i 47,913 |
Broker margin deposit liability | |
| i 126,325 | |
| i 79,178 |
Current portion of long-term debt | | | i 2,079 | | | i 1,670 |
Current operating lease liabilities | | | i 27,207 | | | i 25,363 |
Other current liabilities | |
| i 154,309 | |
| i 166,822 |
Total current liabilities | | | i 390,153 | | | i 320,946 |
| |
|
| |
|
|
Long-term debt | |
| i 1,446,895 | |
| i 1,444,890 |
Operating lease liabilities | | | i 72,117 | | | i 74,349 |
Other liabilities | |
| i 63,822 | |
| i 61,189 |
Contingencies and commitments (Note M) | | | | | | |
| | | | | | |
Mezzanine equity: | | | | | | |
Senior preferred units, net of issue discount and offering costs ( i i 700,000 / units outstanding at October 31, 2021 and July 31, 2021) | | | i 651,349 | | | i 651,349 |
| | | | | | |
Equity: | |
|
| |
|
|
Limited partner unitholders | |
| | |
| |
Class A ( i i 4,857,605 / units outstanding at October 31, 2021 and July 31, 2021) | | | ( i 1,239,276) | | | ( i 1,214,813) |
Class B ( i i 1,300,000 / units outstanding at October 31, 2021 and July 31, 2021) | | | i 333,014 | | | i 383,012 |
General partner unitholder ( i i 49,496 / units outstanding at October 31, 2021 and July 31, 2021) | |
| ( i 72,426) | |
| ( i 72,178) |
Accumulated other comprehensive income | |
| i 138,679 | |
| i 88,866 |
Total Ferrellgas Partners, L.P. equity | |
| ( i 840,009) | |
| ( i 815,113) |
Noncontrolling interest | |
| ( i 7,702) | |
| ( i 7,966) |
Total equity | |
| ( i 847,711) | |
| ( i 823,079) |
Total liabilities, mezzanine and equity | | $ | i 1,776,625 | | $ | i 1,729,644 |
3
See notes to condensed consolidated financial statements.
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
(unaudited)
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
Revenues: | | | | | | | |
Propane and other gas liquids sales | | $ | i 372,704 | | $ | i 281,049 | |
Other | |
| i 21,802 | |
| i 19,845 | |
Total revenues | |
| i 394,506 | |
| i 300,894 | |
| |
|
| |
|
| |
Costs and expenses: | |
| | |
|
| |
Cost of sales - propane and other gas liquids sales | |
| i 220,538 | |
| i 137,627 | |
Cost of sales - other | |
| i 3,610 | |
| i 3,667 | |
Operating expense - personnel, vehicle, plant and other | |
| i 117,112 | |
| i 109,027 | |
Operating expense - equipment lease expense | | | i 5,690 | |
| i 6,830 | |
Depreciation and amortization expense | |
| i 20,295 | |
| i 21,390 | |
General and administrative expense | |
| i 12,575 | |
| i 13,080 | |
Non-cash employee stock ownership plan compensation charge | |
| i 909 | |
| i 708 | |
Loss on asset sales and disposals | |
| i 1,410 | |
| i 813 | |
| |
|
| |
|
| |
Operating income | |
| i 12,367 | |
| i 7,752 | |
| | | | | | | |
Interest expense | |
| ( i 25,395) | |
| ( i 54,226) | |
Other income, net | |
| i 4,264 | |
| i 108 | |
| | | | | | | |
Loss before income taxes | |
| ( i 8,764) | |
| ( i 46,366) | |
| | | | | | | |
Income tax expense | |
| i 96 | |
| i 87 | |
| | | | | | | |
Net loss | |
| ( i 8,860) | |
| ( i 46,453) | |
| | | | | | | |
Net loss attributable to noncontrolling interest | |
| ( i 254) | |
| ( i 391) | |
| | | | | | | |
Net loss attributable to Ferrellgas Partners, L.P. | | | ( i 8,606) | | | ( i 46,062) | |
| | | | | | | |
Distribution to preferred unitholders | | | i 17,005 | | | — | |
| | | | | | | |
Less: General partner's interest in net loss | |
| ( i 86) | |
| ( i 461) | |
| | | | | | | |
Class A Unitholders' interest in net loss | | $ | ( i 25,525) | | $ | ( i 45,601) | |
| | | | | | | |
Basic and diluted net loss per Class A Unit | | $ | ( i 5.25) | | $ | ( i 9.39) | |
| | | | | | | |
See notes to condensed consolidated financial statements.
4
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
| | | | | | | |
Net loss | | $ | ( i 8,860) | | $ | ( i 46,453) | |
Other comprehensive income: | | | | | | | |
Change in value of risk management derivatives | |
| i 72,932 | |
| i 5,767 | |
Reclassification of (gains) losses on derivatives to earnings, net | |
| ( i 22,610) | |
| i 2,150 | |
Other comprehensive income | |
| i 50,322 | |
| i 7,917 | |
Comprehensive income (loss) | |
| i 41,462 | |
| ( i 38,536) | |
Less: Comprehensive income (loss) attributable to noncontrolling interest | |
| ( i 509) | |
| ( i 311) | |
Comprehensive income (loss) attributable to Ferrellgas Partners, L.P. | | $ | i 41,971 | | $ | ( i 38,225) | |
See notes to condensed consolidated financial statements.
5
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| | Number of units | | | | | | | | | | | Accumulated | | Total Ferrellgas | | | | | | | ||||||
| | | | |
| General | | | | | | |
| General | | other | | Partner, L.P. | | | | | | | |||
| | Class A | | Class B | | partner | | Class A | | Class B | | partner | | comprehensive | | partners' | | Non-controlling | | Total partners' | |||||||
|
| unitholders |
| unitholders | | unitholder |
| unitholders |
| unitholders | | unitholder |
| income |
| equity |
| interest |
| equity | |||||||
Balance at July 31, 2021 |
| i 4,857.6 |
| i 1,300.0 | | i 49.5 | | $ | ( i 1,214,813) | | $ | i 383,012 | | $ | ( i 72,178) | | $ | i 88,866 | | $ | ( i 815,113) | | $ | ( i 7,966) | | $ | ( i 823,079) |
Contributions in connection with non-cash ESOP compensation charges |
| — |
| — | | — | |
| i 892 | |
| — | |
| i 8 | |
| — | |
| i 900 | |
| i 9 | |
| i 909 |
Distributions to Class B unitholders |
| — |
| — | | — | |
| — | |
| ( i 49,998) | |
| — | |
| — | |
| ( i 49,998) | |
| — | |
| ( i 49,998) |
Net earnings allocated to preferred units |
| — |
| — | | — | |
| ( i 16,835) | |
| — | |
| ( i 170) | |
| — | |
| ( i 17,005) | |
| — | |
| ( i 17,005) |
Net loss |
| — |
| — | | — | |
| ( i 8,520) | |
| — | |
| ( i 86) | |
| — | |
| ( i 8,606) | |
| ( i 254) | |
| ( i 8,860) |
Other comprehensive income |
| — |
| — | | — | |
| — | |
| — | |
| — | |
| i 49,813 | |
| i 49,813 | |
| i 509 | |
| i 50,322 |
Balance at October 31, 2021 |
| i 4,857.6 |
| i 1,300.0 | | i 49.5 | |
| ( i 1,239,276) | |
| i 333,014 | |
| ( i 72,426) | |
| i 138,679 | |
| ( i 840,009) | |
| ( i 7,702) | |
| ( i 847,711) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| Number of units |
| | |
| | |
| Accumulated |
| Total Ferrellgas |
| | |
| | | ||||
| | | | General | | | | | General | | other | | Partner, L.P. | | | | | | | |||
| | Class A | | partner | | Class A | | partner | | comprehensive | | partners’ | | Non-controlling | | Total partners’ | ||||||
|
| unitholders |
| unitholder |
| unitholders |
| unitholder |
| income (loss) |
| equity |
| interest |
| equity | ||||||
Balance at July 31, 2020 |
| i 4,857.6 |
| i 49.5 | | $ | ( i 1,126,452) | | $ | ( i 71,287) | | $ | ( i 2,303) | | $ | ( i 1,200,042) | | $ | ( i 8,226) | | $ | ( i 1,208,268) |
Contributions in connection with non-cash ESOP compensation charges |
| — |
| — | |
| i 694 | |
| i 7 | |
| — | |
| i 701 | |
| i 7 | |
| i 708 |
Net loss |
| — |
| — | |
| ( i 45,601) | |
| ( i 461) | |
| — | |
| ( i 46,062) | |
| ( i 391) | |
| ( i 46,453) |
Other comprehensive loss |
| — |
| — | |
| — | |
| — | |
| i 7,837 | |
| i 7,837 | |
| i 80 | |
| i 7,917 |
Balance at October 31, 2020 |
| i 4,857.6 |
| i 49.5 | |
| ( i 1,171,359) | |
| ( i 71,741) | |
| i 5,534 | |
| ( i 1,237,566) | |
| ( i 8,530) | |
| ( i 1,246,096) |
See notes to condensed consolidated financial statements.
6
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: | | |
| | |
|
Net loss | | $ | ( i 8,860) | | $ | ( i 46,453) |
Reconciliation of net loss to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization expense | |
| i 20,295 | |
| i 21,390 |
Non-cash employee stock ownership plan compensation charge | |
| i 909 | |
| i 708 |
Loss on asset sales and disposals | |
| i 1,410 | |
| i 813 |
Provision for expected credit losses | |
| i 640 | |
| i 678 |
Deferred income tax expense (benefit) | |
| i 3 | |
| ( i 1) |
Other | |
| i 1,901 | |
| i 2,346 |
Changes in operating assets and liabilities, net of effects from business acquisitions: | |
| | |
|
|
Accounts and notes receivable, net of securitization | |
| ( i 32,539) | |
| ( i 18,728) |
Inventories | |
| ( i 42,901) | |
| ( i 6,316) |
Prepaid expenses and other current assets | |
| ( i 20,507) | |
| ( i 334) |
Accounts payable | |
| i 32,119 | |
| i 10,479 |
Accrued interest expense | |
| ( i 20,627) | |
| i 14,827 |
Other current liabilities | |
| i 52,376 | |
| i 6,154 |
Other assets and liabilities | |
| i 520 | |
| i 2,946 |
Net cash used in operating activities | |
| ( i 15,261) | |
| ( i 11,491) |
| |
|
| |
|
|
Cash flows from investing activities: | |
|
| |
|
|
Business acquisitions, net of cash acquired | |
| ( i 9,758) | |
| — |
Capital expenditures | |
| ( i 20,440) | |
| ( i 19,454) |
Proceeds from sale of assets | |
| i 641 | |
| i 1,407 |
Net cash used in investing activities | |
| ( i 29,557) | |
| ( i 18,047) |
| |
|
| |
|
|
Cash flows from financing activities: | |
|
| |
|
|
Preferred unit distributions | | | ( i 15,673) | | | — |
Distributions to Class B unitholders | |
| ( i 49,998) | |
| — |
Payments on long-term debt | |
| ( i 595) | |
| ( i 696) |
Cash paid for financing costs | |
| ( i 319) | |
| ( i 2,297) |
Cash payments for principal portion of lease liability | |
| ( i 1,698) | |
| ( i 1,703) |
Net cash used in financing activities | |
| ( i 68,283) | |
| ( i 4,696) |
| |
|
| |
|
|
Net change in cash, cash equivalents and restricted cash | |
| ( i 113,101) | |
| ( i 34,234) |
Cash, cash equivalents and restricted cash - beginning of period | |
| i 281,952 | |
| i 333,761 |
Cash, cash equivalents and restricted cash - end of period | | $ | i 168,851 | | $ | i 299,527 |
See notes to condensed consolidated financial statements.
7
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data, unless otherwise designated)
(unaudited)
iA. Partnership organization and formation
Ferrellgas Partners, L.P. (“Ferrellgas Partners”) was formed on April 19, 1994, and is a publicly traded limited partnership. Ferrellgas Partners is a holding entity that conducts no operations and has i two direct subsidiaries, Ferrellgas Partners Finance Corp. and Ferrellgas, L.P. (the “operating partnership”). Ferrellgas Partners owns a i 100% equity interest in Ferrellgas Partners Finance Corp., whose only business activity is to act as the co-issuer and co-obligor of any debt securities issued by Ferrellgas Partners. Our activities are primarily conducted through the operating partnership. Ferrellgas Partners and the holders of Preferred Units (as defined in Note G – Preferred units) are the only limited partners of 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.
Ferrellgas, Inc. (the “general partner”), a Delaware corporation and a wholly-owned subsidiary of Ferrell Companies, is the sole general partner of Ferrellgas Partners and the operating partnership and, excluding the economic interests attributable to Ferrellgas Partners’ Class B Units and the operating partnership’s Preferred Units, owns an approximate i 1% general partner economic interest in each, and, therefore, an effective i 2% general partner economic interest in the operating partnership. Excluding the economic interests attributable to the Preferred Units, Ferrellgas Partners owns an approximate i 99% limited partner interest in the operating partnership. Our general partner performs all management functions for us. Unless contractually provided for, creditors of the operating partnership have no recourse with regards to Ferrellgas Partners. As of July 31, 2021, Ferrell Companies Inc., a Kansas corporation (“Ferrell Companies”), the parent company of our general partner, currently beneficially owns approximately i 23.4% of Ferrellgas Partners’ outstanding Class A Units. Ferrell Companies is owned i 100% by an employee stock ownership trust.
Ferrellgas is primarily engaged in the retail distribution of propane and related equipment sales. The propane distribution market is seasonal because propane is used primarily for heating in residential and commercial buildings. Ferrellgas serves residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all i 50 states, the District of Columbia, and Puerto Rico.
The operating partnership was formed on April 22, 1994, and accounts for substantially all of our consolidated assets, sales and operating earnings.
Due to seasonality, the results of operations for the three months ended October 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year ending July 31, 2022.
The condensed consolidated financial statements of Ferrellgas reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim periods presented. All adjustments to the condensed consolidated financial statements were of a normal recurring nature. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with (i) the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) the consolidated financial statements and accompanying notes included in Ferrellgas’ Annual Report on Form 10-K for fiscal 2021.
/
8
B. Summary of significant accounting policies
(1) Accounting estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. Significant estimates impacting the condensed consolidated financial statements include accruals that have been established for contingent liabilities, pending claims and legal actions arising in the normal course of business, useful lives of property, plant and equipment, residual values of tanks, capitalization of customer tank installation costs, amortization methods of intangible assets, valuation methods used to value sales returns and allowances, allowance for expected credit losses, fair value of reporting units, fair value of Class B units, recoverability of long-lived assets, assumptions used to value business combinations, determination of incremental borrowing rate used to measure right-of-use asset and lease liability, fair values of derivative contracts and stock-based compensation calculations.
(2) New accounting standards:
iNo new accounting standards were adopted during the current quarter.
/ iC. Leases
The following table provides the operating and financing right-of-use assets and lease liabilities as of October 31, 2021 and July 31, 2021:
i
| | | | | | | | |
Leases | | Classification | | | | | ||
Assets | | | | | | | | |
Operating lease assets | | Operating lease right-of-use assets | | $ | i 87,379 | | $ | i 87,611 |
Financing lease assets | | Other assets, net | | | i 33,814 | | | i 34,858 |
Total leased assets | | | | $ | i 121,193 | | $ | i 122,469 |
| | | | | | | | |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating | | Current operating lease liabilities | | $ | i 27,207 | | $ | i 25,363 |
Financing | | Other current liabilities | | | i 5,811 | | | i 7,479 |
Noncurrent | | | | | | | | |
Operating | | Operating lease liabilities | | | i 72,117 | | | i 74,349 |
Financing | | Other liabilities | | | i 27,801 | | | i 28,029 |
Total leased liabilities | | | | $ | i 132,936 | | $ | i 135,220 |
/9
The following table provides the lease expenses for the three months ended October 31, 2021 and 2020:
i
| | | | | | | | |
| | | | For the three months ended October 31, | ||||
Leases expense |
| Classification | | 2021 | | 2020 | ||
| | | | | | | | |
Operating lease expense | | Operating expense - personnel, vehicle, plant and other | | $ | i 1,709 | | $ | i 1,783 |
| | Operating expense - equipment lease expense | | | i 5,232 | | | i 6,442 |
| | Cost of sales - propane and other gas liquids sales | | | i 440 | | | i 526 |
| | General and administrative expense | | | i 473 | | | i 282 |
Total operating lease expense | | | | | i 7,854 | | | i 9,033 |
| | | | | | | | |
Short-term expense | | Operating expense - personnel, vehicle, plant and other | | | i 1,808 | | | i 2,033 |
| | General and administrative expense | | | i 86 | | | i 242 |
Total short-term expense | | | | | i 1,894 | | | i 2,275 |
| | | | | | | | |
Variable lease expense | | Operating expense - personnel, vehicle, plant and other | | | i 770 | | | i 746 |
| | Operating expense - equipment lease expense | | | i 458 | | | i 388 |
Total variable lease expense | | | | | i 1,228 | | | i 1,134 |
| | | | | | | | |
Finance lease expense: | | | | | | | | |
Amortization of leased assets | | Depreciation and amortization expense | | | i 851 | | | i 2,165 |
Interest on lease liabilities | | Interest expense | | | i 938 | | | i 945 |
Total finance lease expense | | | | | i 1,789 | | | i 3,110 |
| | | | | | | | |
Total lease expense (a) | | | | $ | i 12,765 | | $ | i 15,552 |
| | | | | | | | |
| (a) | For the three months ended October 31, 2021 and 2020 Ferrellgas has also recognized $ i 0.2 million and $ i 0.1 million, respectively, of expense related to the accretion of lease exit costs associated with a crude oil storage agreement that is no longer being utilized, primarily due to the various dispositions and other significant transactions, and for which Ferrellgas does not anticipate any future economic benefit. |
Minimum annual payments under existing operating and finance lease liabilities as of October 31, 2021 are as follows:
i i
| | | | | | | | | |
Maturities of lease liabilities | | | Operating leases | | | Finance leases | | | Total |
2022 | | $ | i 23,351 | | $ | i 6,607 | | $ | i 29,958 |
2023 | | | i 40,085 | | | i 8,095 | | | i 48,180 |
2024 | | | i 20,801 | | | i 7,869 | | | i 28,670 |
2025 | | | i 14,305 | | | i 7,766 | | | i 22,071 |
2026 | | | i 5,663 | | | i 6,913 | | | i 12,576 |
Thereafter | | | i 17,746 | | | i 4,943 | | | i 22,689 |
Total lease payments | | $ | i 121,951 | | $ | i 42,193 | | $ | i 164,144 |
Less: Imputed interest | | | i 22,627 | | | i 8,581 | | | i 31,208 |
Present value of lease liabilities | | $ | i 99,324 | | $ | i 33,612 | | $ | i 132,936 |
/10
The following table represents the weighted-average remaining lease term and discount rate as of October 31, 2021:
i
| | | | |
| | As of October 31, 2021 | ||
Lease type | | Weighted-average remaining lease term (years) | | Weighted-average discount rate |
Operating leases | | i 4.6 | | i 7.9% |
Finance leases | | i 5.2 | | i 8.6% |
Cash flow information is presented below:
i
| | | | | |
| For the three months ended October 31, | ||||
| 2021 | | 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities for operating leases: | | | | | |
Operating cash flows | $ | i 5,579 | | $ | i 8,395 |
| | | | | |
Cash paid for amounts included in the measurement of lease liabilities for financing leases: | | | | | |
Operating cash flows | $ | i 768 | | $ | i 877 |
Financing cash flows | $ | i 1,698 | | $ | i 1,703 |
iD. Supplemental financial statement information
Inventories consist of the following:
i
| | | | | | |
|
|
| ||||
Propane gas and related products | | $ | i 118,113 | | $ | i 75,848 |
Appliances, parts and supplies, and other | |
| i 13,167 | |
| i 12,531 |
Inventories | | $ | i 131,280 | | $ | i 88,379 |
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 i 36 months. Most of these contracts call for payment based on market prices at the date of delivery. As of October 31, 2021, Ferrellgas had committed, for supply procurement purposes, to take delivery of approximately i 2.5 million gallons of propane at fixed prices.
Prepaid expenses and other current assets consist of the following:
i
| | | | | | |
|
|
| ||||
Broker margin deposit assets | | $ | i 31,129 | | $ | i 21,068 |
Other | |
| i 28,471 | |
| i 18,024 |
Prepaid expenses and other current assets | | $ | i 59,600 | | $ | i 39,092 |
Other current liabilities consist of the following:
i
| | | | | | |
|
|
| ||||
Accrued interest | | $ | i 8,468 | | $ | i 29,095 |
Customer deposits and advances | |
| i 48,442 | |
| i 35,734 |
Accrued payroll | |
| i 15,117 | |
| i 28,143 |
Accrued insurance | |
| i 12,698 | |
| i 11,104 |
Accrued senior preferred units distributions | | | i 17,345 | | | i 16,013 |
Other | |
| i 52,239 | |
| i 46,733 |
Other current liabilities | | $ | i 154,309 | | $ | i 166,822 |
/11
Shipping and handling expenses are classified in the following condensed consolidated statements of operations line items:
i
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Operating expense - personnel, vehicle, plant and other | | $ | i 54,447 | | $ | i 47,531 |
Depreciation and amortization expense | |
| i 2,535 | |
| i 4,523 |
Operating expense - equipment lease expense | |
| i 4,535 | |
| i 5,883 |
| | $ | i 61,517 | | $ | i 57,937 |
Cash and cash equivalents consist of the following:
i
| | | | | | |
|
|
| ||||
Cash and cash equivalents | | $ | i 157,351 | | $ | i 270,452 |
Restricted cash (1) | |
| i 11,500 | |
| i 11,500 |
Cash, cash equivalents and restricted cash | | $ | i 168,851 | | $ | i 281,952 |
| (1) | As of October 31, 2021 and July 31, 2021, restricted cash consists of an $ i i 11.5 / million cash deposit made with the administrative agent under the operating partnership’s senior secured credit facility that was terminated in April 2020, which may be used by the administrative agent to pay contingent obligations arising under the financing agreement that governed the terminated senior secured credit facility. |
For purposes of the condensed consolidated statements of cash flows, Ferrellgas considers cash equivalents to include all highly liquid debt instruments purchased with an original maturity of three months or less. Certain cash flow and significant non-cash activities are presented below:
i
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Cash paid for: |
| |
|
| |
|
Interest | | $ | i 44,152 | | $ | i 36,997 |
Income taxes | | $ | — | | $ | i 35 |
Non-cash investing and financing activities: | | |
| |
|
|
Liabilities incurred in connection with acquisitions | | $ | i 644 | | $ | — |
Change in accruals for property, plant and equipment additions | | $ | i 65 | | $ | ( i 65) |
Lease liabilities arising from operating right-of-use assets | | $ | i 7,558 | | $ | i 366 |
Lease liabilities arising from finance right-of-use assets | | $ | i 812 | | $ | i 554 |
Accrued senior preferred units distributions | | $ | i 17,005 | | $ | — |
iE. Accounts and notes receivable, net
Accounts and notes receivable, net consist of the following:
i
| | | | | | |
|
|
| ||||
Accounts receivable | | $ | i 167,505 | | $ | i 135,182 |
Note receivable | |
| i 13,648 | |
| i 13,648 |
Less: Allowance for expected credit losses | |
| ( i 17,680) | |
| ( i 17,256) |
Accounts and notes receivable, net | | $ | i 163,473 | | $ | i 131,574 |
/
12
F. Debt
Long-term debt
Long-term debt consists of the following:
i
| | | | | | |
|
|
| ||||
Unsecured senior notes |
| |
|
| |
|
Fixed rate, i i 5.375 / %, due 2026 (1) | | $ | i 650,000 | | $ | i 650,000 |
Fixed rate, i i 5.875 / %, due 2029 (1) | | | i 825,000 | | | i 825,000 |
| | | | | | |
Notes payable | |
|
| |
|
|
i 8.5% and i 8.8% weighted average interest rate at October 31, 2021 and July 31, 2021, respectively, due 2021 to 2029, net of unamortized discount of $ i 648 and $ i 573 at October 31, 2021 and July 31, 2021, respectively | |
| i 5,181 | |
| i 3,882 |
Total debt, excluding unamortized debt issuance and other costs | |
| i 1,480,181 | |
| i 1,478,882 |
Unamortized debt issuance and other costs | |
| ( i 31,207) | |
| ( i 32,322) |
Less: current portion of long-term debt | |
| i 2,079 | |
| i 1,670 |
Long-term debt | | $ | i 1,446,895 | | $ | i 1,444,890 |
| (1) | On March 30, 2021 (the “Effective Date”), i two wholly-owned subsidiaries of the operating partnership (referred to herein as the Escrow Issuers) issued $ i 650.0 million aggregate principal amount of i 5.375% senior notes due 2026 (referred to herein as the “2026 Notes”) and $ i 825.0 million aggregate principal amount of i 5.875% senior notes due 2029 (referred to herein as the “2029 Notes”). On the Effective Date and immediately after the issuance of the 2026 Notes and 2029 Notes by the Escrow Issuers, (i) the Escrow Issuers were merged into the operating partnership and Ferrellgas Finance Corp., respectively, and the operating partnership and Ferrellgas Finance Corp. assumed the obligations of the Escrow Issuers as co-issuers of the 2026 Notes and the 2029 Notes, and (ii) the general partner and certain subsidiaries of the operating partnership guaranteed the 2026 Notes and the 2029 Notes. The 2026 Notes and 2029 Notes bear interest from the date of issuance, payable semi-annually in arrears on October 1 and April 1 of each year. The 2026 Notes will mature on April 1, 2026, and the 2029 Notes will mature on April 1, 2029. See “–Senior unsecured notes” below for additional discussion. |
Senior secured revolving credit facility
On the Effective Date, the operating partnership, the general partner and certain of the operating partnership’s subsidiaries entered into a credit agreement (the “Credit Agreement”), which provides for a four-year revolving credit facility (the “Credit Facility”) in an aggregate principal amount of up to $ i 350.0 million, including a sublimit not to exceed $ i 225.0 million for the issuance of letters of credit for a period of 60 days after March 30, 2021, reducing to $ i 200.0 million thereafter.
All borrowings under the Credit Facility are guaranteed by the general partner and the direct and indirect subsidiaries of the operating partnership (other than Ferrellgas Finance Corp. and Ferrellgas Receivables, LLC) and a limited-recourse guaranty from Ferrellgas Partners (limited to its equity interests in the operating partnership). Additionally, all borrowings are secured, on a first priority basis, by substantially all of the assets of the operating partnership and its subsidiaries and all of the equity interests in the operating partnership held by the general partner and Ferrellgas Partners.
Availability under the Credit Facility is, at any time, an amount equal to (a) the lesser of the revolving commitment (initially $ i 350.0 million) and the Borrowing Base (as defined below) minus (b) the sum of the aggregate outstanding amount of borrowings under the Credit Facility plus the undrawn amount of outstanding letters of credit under the Credit Facility plus unreimbursed drawings in respect of letters of credit (unless otherwise converted into revolving loans). The "Borrowing Base" equals the sum of: (a) $ i 200.0 million, plus (b) i 80% of the eligible accounts receivable of the operating partnership and its subsidiaries, plus (c) i 70% of the eligible propane inventory of the operating partnership and its subsidiaries, valued at weighted average cost, less (d) certain reserves, as determined and subject to certain modifications by the administrative agent in its permitted discretion.
/13
Amounts borrowed under the Credit Facility bear interest, at the operating partnership's option, at either (a) for base rate loans, (i) a base rate determined by reference to the highest of (A) the rate of interest last quoted by The Wall Street Journal in the U.S. as the prime rate in effect, (B) the NYFRB Rate from time to time plus i 0.50% per annum and (C) the Adjusted LIBO Rate for a one-month interest period plus i 1.00% per annum plus (ii) a margin of i 1.50% to i 2.00% per annum depending on total net leverage or (b) for Eurodollar rate loans, (i) a rate determined by reference to the Adjusted LIBO Rate plus (ii) a margin of i 2.50% to i 3.00% per annum depending on total net leverage. The operating partnership will be required to pay an undrawn fee to the lenders on the average daily unused amount of the Credit Facility at a rate of i 0.375% to i 0.50% per annum depending on total net leverage.
The Credit Agreement contains customary representations, warranties, covenants and events of default.
The financial covenants in the Credit Agreement require the operating partnership to maintain: (1) a minimum interest coverage ratio (defined generally as the ratio of adjusted EBITDA to cash interest expense) of i 2.50 to 1.00, (2) a maximum secured leverage ratio (defined generally as the ratio of total first priority secured indebtedness to adjusted EBITDA) of i 2.50 to 1.00, and (3) a maximum total net leverage ratio (defined generally as the ratio of total indebtedness (net of unrestricted cash, subject to certain limits) to adjusted EBITDA) of i 5.50 to 1.00 initially. The maximum total net leverage ratio adjusts to i 5.25 to 1.00 starting with the quarter ending April 30, 2022, i 5.00 to 1.00 starting with the quarter ending October 31, 2022, and i 4.75 to 1.00 starting with the quarter ending April 30, 2023.
In addition to the financial covenants, the Credit Agreement includes covenants that may (or if not met will) restrict the ability of the operating partnership to, among other things: incur indebtedness or liens; effect certain fundamental changes, including mergers, consolidations, liquidations, dissolutions and changes in line of business; make certain restricted payments, including distributions to holders of Preferred Units, Ferrellgas Partners and the general partner and redemptions of Preferred Units; make investments, loans or advances; dispose of assets; effect sale and leaseback transactions; enter into swap agreements; make optional payments and modifications of subordinated and other debt instruments; enter into transactions with affiliates; agree to negative pledge clauses and burdensome agreements; and effect amendments to organizational documents.
In particular, under these covenants, subject to certain exceptions and additional requirements, the operating partnership is permitted to make cash distributions to holders of Preferred Units, Ferrellgas Partners and the general partner, redemptions of Preferred Units and other restricted payments (i) only in limited amounts specified in the Credit Agreement and (ii) only if availability under the Credit Facility exceeds the greater of $ i 50.0 million and i 15% of the Borrowing Base and the operating partnership’s total net leverage ratio is not greater than i 5.0 to 1.0 (or i 4.75 to 1.0 starting on April 30, 2023). As of October 31, 2021, the operating partnership is in compliance with the availability and total net leverage ratio requirements.
On June 11, 2021, the operating partnership, the general partner and certain of the operating partnership’s subsidiaries entered into a First Amendment to the Credit Agreement (the “Credit Agreement Amendment”), with an effective date of April 30, 2021. Among other matters, the Credit Agreement Amendment amended the minimum-interest-coverage-ratio covenant described above by (i) waiving compliance with the covenant for the trailing four fiscal quarters ended April 30, 2021 and (ii) annualizing the cash interest expense component of the covenant for (a) the fiscal quarter ended on July 31, 2021, (b) the two fiscal quarters ending October 31, 2021, and (c) the three fiscal quarters ending January 31, 2022.
14
Senior unsecured notes
On the Effective Date, (i) the Escrow Issuers issued $ i 650.0 million aggregate principal amount of 2026 Notes and $ i 825.0 million aggregate principal amount of 2029 Notes, and (ii) the operating partnership and Ferrellgas Finance Corp. assumed the obligations of the Escrow Issuers as co-issuers of the 2026 Notes and the 2029 Notes upon the merger of the Escrow Issuers into the operating partnership and Ferrellgas Finance Corp., respectively. The operating partnership received aggregate net proceeds from the issuance and sale of the 2026 Notes and the 2029 Notes of approximately $ i 1,441.2 million, after deducting the initial purchasers’ discount and estimated offering expenses. The operating partnership used such net proceeds, together with the net proceeds of the issuance and sale of the Preferred Units, as discussed in Note G – Preferred units, and cash on hand, (i) to redeem (or satisfy and discharge the indentures governing and subsequently redeem) all of the issued and outstanding i 6.50% senior unsecured notes due 2021 (the “2021 Notes”), i 6.75% senior unsecured notes due 2022 (the “2022 Notes”), i 6.75% senior unsecured notes due 2023 (the “2023 Notes”) and i 10.00% senior secured notes due 2025 (the “2025 Notes”), in the aggregate combined principal amount for all such notes of $ i 2,175.0 million, and (ii) to repay all outstanding obligations under the agreement governing the accounts receivable securitization facility (the “Accounts Receivables Facility”) in connection with the termination of that facility.
The 2026 Notes and 2029 Notes are the senior unsecured obligations of the operating partnership and Ferrellgas Finance Corp. and are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the general partner and all domestic subsidiaries of the operating partnership other than Ferrellgas Finance Corp. and Ferrellgas Receivables, LLC.
The 2026 Notes may be redeemed prior to April 1, 2023 and the 2029 Notes may be redeemed prior to April 1, 2024 at the issuer’s option, in whole or in part, at a redemption price of par plus the applicable make-whole premium and accrued and unpaid interest. On and after April 1, 2023 and April 1, 2024, the 2026 Notes and the 2029 Notes, respectively, may be redeemed at the issuer’s option, in whole or in part, at the redemption prices set forth in the respective indenture governing such notes, plus accrued and unpaid interest. Beginning on April 1, 2025 and April 1, 2026, the 2026 Notes and 2029 Notes, respectively, may be redeemed at par plus accrued and unpaid interest.
The indentures governing the 2026 Notes and 2029 Notes contain customary affirmative and negative covenants restricting, among other things, the ability of the operating partnership and its restricted subsidiaries to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions (including distributions to holders of Preferred Units, Ferrellgas Partners and the general partner) or repurchase or redeem their equity interests (including redemptions of Preferred Units); repurchase or redeem certain debt; make certain other restricted payments or investments; sell assets, incur liens, enter into transactions with affiliates, enter into agreements restricting the operating partnership’s subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of their assets. The indentures also restrict the ability of the general partner to engage in certain activities.
In particular, under these covenants, subject to certain exceptions and additional requirements, the operating partnership is permitted to make cash distributions to holders of Preferred Units, Ferrellgas Partners and the general partner, redemptions of Preferred Units and other restricted payments (i) only in limited amounts specified in the indentures and (ii) only if the operating partnership’s net leverage ratio (defined generally to mean the ratio of consolidated total net debt to trailing i four quarters consolidated EBITDA, both as adjusted for certain, specified items) is not greater than i 5.0 to 1.0, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. Further, if the operating partnership’s consolidated fixed charge coverage ratio (defined generally to mean the ratio of trailing i four quarters consolidated EBITDA to consolidated fixed charges, both as adjusted for certain, specified items) is equal to or less than i 1.75 to 1.00 (on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events), the amount of distributions and other restricted payments the operating partnership is permitted to make under the indentures is further limited. As of October 31, 2021, the operating partnership is in compliance with the total net leverage ratio and fixed charge coverage ratio requirements.
15
The scheduled annual principal payments on long-term debt are as follows:
i
| | | |
| | Scheduled | |
Payment due by fiscal year |
| principal payments | |
2022 | | $ | i 1,075 |
2023 | |
| i 1,709 |
2024 | |
| i 1,139 |
2025 | |
| i 930 |
2026 | |
| i 650,710 |
Thereafter | |
| i 825,266 |
Total | | $ | i 1,480,829 |
Letters of credit outstanding at October 31, 2021 and July 31, 2021 totaled $ i 97.5 million and $ i 107.7 million, respectively, and were used to secure insurance arrangements, product purchases and commodity hedges. As of October 31, 2021, Ferrellgas had available borrowing capacity under its Credit Facility of $ i 252.5 million.
iG. Preferred units
On the Effective Date, pursuant to an Investment Agreement with certain purchasers named therein, the operating partnership issued and sold an aggregate of i 700,000 Preferred Units (the “Preferred Units”), having an aggregate initial liquidation preference of $ i 700.0 million. The purchase price per Preferred Unit was $ i 1,000 less a i 3.0% purchase price discount, for an aggregate purchase price of $ i 679.0 million. The operating partnership received net proceeds from the issuance and sale of the Preferred Units of approximately $ i 651.3 million, after deduction of the purchase price discount and certain expenses.
The operating partnership used such net proceeds, together with the net proceeds of the issuance and sale of the 2026 Notes and the 2029 Notes and cash on hand, (i) to redeem (or satisfy and discharge the indentures governing and subsequently redeem) all of the issued and outstanding 2021 Notes, 2022 Notes, 2023 Notes and 2025 Notes, as described in Note F - Debt, and (ii) to repay all outstanding obligations under the Accounts Receivable Facility in connection with the termination of that facility.
Redemption of the Preferred Units in the near term is not probable because of the high redemption price in the first three to five years. As described in greater detail under “Issuer Redemption Right” below, the Redemption Price for the Preferred Units is based upon the greater of the amount that would result in a i 1.47x MOIC (defined below) and the amount that would result in a i 12.25% internal rate of return. If the Preferred Units were redeemed at any time during the first three to four years after issuance, the i 1.47x MOIC would require a large premium payment and that large premium payment would result in an internal rate of return far in excess of the minimum i 12.25%. Consequently, it is unlikely that Ferrellgas would be able to achieve any savings in its cost of capital by redeeming the Preferred Units during the first three to four years after issuance.
“MOIC” means, with respect to a Preferred Unit, a multiple on invested capital equal to the quotient determined by dividing (A) the sum of (x) the aggregate amount of all distributions made in cash with respect to such Preferred Unit prior to the applicable date of determination, with certain exclusions, plus (y) each Redemption Price paid in cash in respect of such Preferred Unit, on or prior to the applicable date of determination, by (B) the Purchase Price (defined below) of such Preferred Unit.
On the Effective Date the general partner entered into (i) the Fifth Amended and Restated Agreement of Limited Partnership of Ferrellgas, L.P. (the “Amended OpCo LPA”), which amended and restated in its entirety the Fourth Amended and Restated Agreement of Limited Partnership of Ferrellgas L.P., and (ii) the First Amendment to the Amended OpCo LPA (the “OpCo LPA Amendment”), which sets forth the preferences, rights, privileges and other terms of the Preferred Units.
/16
Issuer Redemption Right
The operating partnership has the right to redeem all or a portion of the Preferred Units for cash, pro rata and at any time and from time to time, including in connection with a Change of Control (as defined in the OpCo LPA Amendment), at an amount per Preferred Unit (the “Redemption Price”) equal to, without duplication, the sum of (a) the greater of (i) the amount necessary to result in a MOIC of i 1.47x in respect of the purchase price, before discount, of such Preferred Unit, which is $ i 1,000 per Preferred Unit (the “Purchase Price”), and (ii) the amount necessary to result in the applicable internal rate of return equal to i 12.25%, which is increased by i 150 basis points if the operating partnership has elected to pay more than four Quarterly Distributions (as defined below) in PIK Units (as defined below) and (b) the accumulated but unpaid Quarterly Distributions to the date of redemption, if any. A partial redemption of the Preferred Units is permitted only in the event the aggregate amount to be paid in respect of all Preferred Units included in such partial redemption is at least $ i 25.0 million.
Investor Redemption Right
In the event that (i) any Class B Units are outstanding, or (ii) (x) i no Class B Units are outstanding and (y) no more than i 233,300 Preferred Units are outstanding, at any time on and after the tenth anniversary of the Effective Date the Required Holders may elect, by delivery of written notice, to have the operating partnership fully redeem each remaining outstanding Preferred Unit for an amount in cash equal to the Redemption Price. “Required Holders” refers to both (i) holders owning at least i 33.3% of the total Preferred Units outstanding at any time and (ii) certain initial affiliated purchasers, for so long as such initial affiliated purchasers collectively own at least i 25% of the Preferred Units outstanding at such time.
In the event that (i) i no Class B Units are outstanding and (ii) more than i 233,300 Preferred Units are outstanding, the Required Holders will have the right to trigger a sale of the operating partnership after the tenth anniversary of the Effective Date. If the operating partnership fails to consummate a sale that would pay the Redemption Price in full within i 180 days of written notice requiring such sale, the Required Holders will have the right to appoint a majority of the members of the Board of Directors of the general partner and initiate a sale of the operating partnership.
Change of Control
Upon a Change of Control (as defined in the OpCo LPA Amendment), the Required Holders will have the option to require the redemption of all or a portion of the Preferred Units in cash in an amount equal to the Redemption Price; provided, that such Redemption Price shall not be payable unless the operating partnership shall have first made any required change of control offer pursuant to the indentures governing the 2026 Notes and the 2029 Notes and purchased all such 2026 Notes and 2029 Notes tendered pursuant to such offer (unless otherwise waived by such noteholders); provided, further that the Redemption Price shall be paid immediately following the purchase of such tendered Notes (if any).
Fair Value of Embedded Derivatives
Ferrellgas identified the investor redemption right and the change in control option as embedded derivatives that require bifurcation as they are not clearly and closely related to the debt host contract and has concluded that the fair values at issuance and at October 31, 2021, are immaterial to the financial statements.
Distributions
Pursuant to the OpCo LPA Amendment, the operating partnership is required to pay to the holders of each Preferred Unit a cumulative, quarterly distribution (the "Quarterly Distribution") at the Distribution Rate (as defined below) on the Purchase Price.
"Distribution Rate" means, for the first five years after March 30, 2021, a rate per annum equal to i 8.956%, with certain increases in the Distribution Rate on each of the 5th, 6th and 7th anniversaries of March 30, 2021, subject to a maximum rate of i 11.125% and certain other adjustments and exceptions.
17
The Quarterly Distribution may be paid in cash or, at the election of the operating partnership, "in kind" through the issuance of additional Preferred Units ("PIK Units") at the quarterly Distribution Rate plus an applicable premium that escalates each year from i 75 bps to i 300 bps so long as the Preferred Units remain outstanding. In the event the operating partnership fails to make any Quarterly Distribution in cash, such Quarterly Distribution will automatically be paid in PIK Units.
The Distribution Rate on the Preferred Units will increase upon violation of certain protective provisions for the benefit of Preferred Unit holders notwithstanding the cap mentioned above.
As of October 31, 2021, the Quarterly Distribution accrued was $ i 17.3 million. $ i 15.1 million of the Quarterly Distribution was paid in cash to holders of Preferred Units on November 15, 2021.
Tax Distributions
For any quarter in which the operating partnership makes a Quarterly Distribution in PIK Units in lieu of cash, it will be required to make a subsequent cash tax distribution for such quarter in an amount equal to the (i) the lesser of (x) i 25% and (y) the highest combined federal, state and local tax rate applicable for corporations organized in New York, multiplied by (ii) the excess (if any) of (A) one-fourth (1/4th) of the estimated taxable income to be allocated to the holders of Preferred Units for the year in which the Quarterly Tax Payment Date (which refers to certain specified dates that next follow a Quarterly Distribution date on which PIK Units were issued) occurs, over (B) any cash paid on the Quarterly Distribution date immediately preceding the Quarterly Tax Payment Date on which a quarterly tax amount would otherwise be paid (such amount, the "Tax Distribution"). Tax Distributions are treated as advances against, and reduce, future cash distributions for any reason, including payments in redemption of Preferred Units or PIK Units, or payments to the holders in their capacity as such pursuant to any side letter or other agreement.
Additional Amounts for Certain Purchasers
The operating partnership is required to pay certain additional amounts of cash (the “Additional Amounts”) as necessary to certain holders of Preferred Units that hold their interests through a “blocker,” which is a U.S. entity that is owned and organized by certain original purchasers of Preferred Units who are non-U.S. persons or tax exempt for U.S. tax purposes and is treated as a corporation for U.S. tax purposes. Only certain original purchasers of Preferred Units who hold their Preferred Units through such blockers are, and none of their transferees is, entitled to Additional Amounts. Additional Amounts are capped at the lesser of: (a) the product of i 20% multiplied by taxable income allocated to a “blocker” (as defined) divided by i 0.8, and (b) the actual taxes payable by the “blocker” as a result of holding Senior Preferred Units.
Board Rights
For so long as at least i 140,000 Preferred Units remain outstanding, holders of the Preferred Units have the right to designate i one director to the Board of the general partner, subject to approval by the general partner.
Protective Provisions
The OpCo LPA Amendment and the Amended Ferrellgas Partners LPA (as defined in Note H – Equity) include, among other things, certain covenants for the benefit of holders of Preferred Units applicable to the operating partnership and, in certain instances, Ferrellgas Partners, for so long as at least $ i 35,000,000 of Preferred Units and PIK Units remain outstanding. These covenants include, among other things, limitations on (i) effecting a Change of Control, (ii) amending organizational documents, (iii) issuing certain equity securities, (iv) issuing Preferred Units, (v) filing for bankruptcy, (vi) non-ordinary course investments, and (vii) incurring certain levels of indebtedness.
Ranking and Liquidation Preference
The Preferred Units rank senior to any other class or series of equity interests of the operating partnership (including the partnership interests held by Ferrellgas Partners and the general partner). Upon a liquidation, dissolution or winding up of the operating partnership, each holder of Preferred Units will be entitled to receive, prior and in preference to any distribution of any assets of the operating partnership to the holders of any other class or series of equity interests in the operating partnership (including Ferrellgas Partners and the general partner), an amount per Preferred Unit equal to the Redemption Price.
18
Restrictions on Cash Distributions to Ferrellgas Partners and the General Partner
The operating partnership is permitted to make distributions of Available Cash (as defined in the Amended OpCo LPA) to Ferrellgas Partners only if (i) the operating partnership has made all required Quarterly Distributions (in cash or PIK Units), Tax Distributions and payments of Additional Amounts, (ii) the operating partnership has redeemed all PIK Units issued, (iii) the operating partnership’s consolidated net leverage (defined generally to mean the ratio of the operating partnership’s consolidated total net debt (including the total redemption price of all outstanding Preferred Units and PIK Units but excluding certain letters of credit and capital lease obligations) as of each Quarterly Distribution Date to trailing four quarters consolidated EBITDA, both as adjusted for certain, specified items) is below i 7.25x through May 15, 2022 and i 7.00x thereafter, net of cash, immediately before and after giving effect to such distribution, (iv) the operating partnership has at least $ i 100 million of liquidity, consisting of unrestricted cash on hand and available capacity under the Credit Agreement or any replacement thereof, and (v) the operating partnership is in compliance with the other protective provisions in the OpCo LPA Amendment.
iH. Equity
Reverse Unit Split
On the Effective Date, Ferrellgas Partners effected a 1-for-20 reverse unit split in which holders of its then-outstanding common units received one Class A Unit for every twenty common units held. No fractional Class A Units were issued in connection with the reverse unit split. If, as a result of the reverse unit split, a unitholder would otherwise have been entitled to a fractional Class A Unit, the number of Class A Units such unitholder received was rounded up or down to the nearest whole Class A Unit, with a fraction of one-half or less being rounded down. The reverse unit split resulted in a reduction of our previously outstanding common units from i 97,152,665 common units to i 4,857,605 Class A Units. All references to common units and per unit data for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted to reflect the reverse unit split on a retroactive basis.
Class B Units
On the Effective Date, Ferrellgas Partners issued i 1.3 million Class B Units to the holders of the $ i 357.0 million aggregate principal amount of its i 8.625% senior unsecured notes due June 2020 (the “Ferrellgas Partners Notes”) in exchange for such holders’ contribution of the Ferrellgas Partners Notes to Ferrellgas Partners as a capital contribution and in satisfaction of such holders’ claims in respect of the Ferrellgas Partners Notes. The terms of the Class B Units are set forth in the Sixth Amended and Restated Agreement of Limited Partnership of Ferrellgas Partners, L.P. (the “Amended Ferrellgas Partners LPA”), which the general partner entered into on the Effective Date and which amended and restated in its entirety the Fifth Amended and Restated Agreement of Limited Partnership of Ferrellgas Partners, L.P.
Ferrellgas Partners may, subject to certain conditions, issue additional Class A Units to such parties as determined at the discretion of Ferrellgas Partners, upon consent by the holders of the requisite percentage of Class B Units as specified in the Amended Ferrellgas Partners LPA (the “Requisite Class B Units”), which refers to: (i) if the initial majority holder of Class B Units holds at least 50% of Class B Units, holders of at least i 50% of the outstanding Class B Units, or (ii) if the initial majority holder of Class B Units holds less than 50% of Class B Units, holders of at least one-third of the outstanding Class B Units.
Pursuant to the Amended Ferrellgas Partners LPA, while any Class B Units remain outstanding, any distributions by Ferrellgas Partners to its partners must be made such that the ratio of (i) the amount of distributions made to holders of Class B Units to (ii) the amount of distributions made to holders of Class A Units and the general partner is not less than i 6:1.
/19
Once holders of Class B Units receive distributions in the aggregate amount of $ i 357.0 million (which was the outstanding principal amount of the Ferrellgas Partners Notes), the Class B Units will be (i) convertible into Class A Units at the option of Ferrellgas Partners, if that distribution threshold is reached prior to the fifth anniversary of the Effective Date, or (ii) converted automatically into Class A Units, if the distribution threshold is reached on or after the fifth anniversary of the Effective Date, in each case at the applicable conversion rate set forth in the following table:
i
| |
Year Post-Emergence | Conversion Factor |
Year 1 | i 1.75x |
Year 2 | i 2.00x |
Year 3 | i 3.50x |
Year 4 | i 4.00x |
Year 5 | i 5.00x |
Year 6 | i 6.00x |
Year 7 | i 7.00x |
Year 8 | i 10.00x |
Year 9 | i 12.00x |
Year 10 | i 25.00x |
In the first i five years after the Effective Date, Ferrellgas Partners may redeem the Class B Units, in full, at a price equal to an amount that will result in an internal rate of return with respect to the Class B Units equal to the sum of (i) i 300 basis points and (ii) the internal rate of return for the Preferred Units as specified in the Amended Ferrellgas Partners LPA, subject to the minimum redemption price of $ i 302.08 per unit, less any cash distributed prior to the redemption, if called in the first year after issuance. The total internal rate of return required to redeem the Class B Units is i 15.85%, but that amount increases under certain circumstances, including if the operating partnership paid distributions on the Preferred Units in-kind rather than in cash for a certain number of quarters. There have not been any in-kind distributions through October 31, 2021.
During the first i five years following the Effective Date, after Ferrellgas Partners has distributed $ i 356 million in distributions to holders of the Class B Units, Ferrellgas Partners will have the option to hold cash for i six months at either Ferrellgas Partners or Ferrellgas Partners Finance Corp. for the sole purpose of redeeming the Class B Units. However, if the funds held are not used to redeem the Class B Units, the funds must either be distributed to holders of the Class B Units and, if applicable, holders of the Class A Units and the general partner or returned to the operating partnership.
Ferrellgas Partners will only be able to redeem the Class B Units to the extent it receives sufficient distributions from the operating partnership, and the operating partnership is limited in its ability to make distributions by the indentures that govern the 2026 Notes and the 2029 Notes, the Credit Agreement and the OpCo LPA Amendment governing the Preferred Units.
The holders of Class B Units will have the right to acquire the general partner interests in Ferrellgas Partners and the operating partnership, without the approval of the general partner, Ferrellgas Partners, the holders of the Class A Units or the operating partnership, if the Class B Units are still outstanding and have not been converted to Class A Units by the earlier of (i) a material breach of the covenants in favor of the Class B Units under the Amended Ferrellgas Partners LPA or the Amended OpCo LPA that is not cured within the time period specified therein and (ii) the 10th anniversary of the Effective Date.
Board Rights
The holders of Class B Units will be permitted to designate i one independent director to the Board of the general partner in accordance with a voting agreement among the general partner, Ferrell Companies, Inc. ("FCI"), the sole stockholder of the general partner, and the holders of the Class B Units and the general partner's bylaws.
20
Class A Units
As of October 31, 2021 and July 31, 2021, Class A Units were beneficially owned by the following:
i
| | | | |
|
|
| ||
Public Class A Unitholders (1) |
| i 3,480,621 |
| i 3,480,621 |
Ferrell Companies (2) |
| i 1,126,468 |
| i 1,126,468 |
FCI Trading Corp. (3) |
| i 9,784 |
| i 9,784 |
Ferrell Propane, Inc. (4) |
| i 2,560 |
| i 2,560 |
James E. Ferrell (5) |
| i 238,172 |
| i 238,172 |
| (1) | These Class A Units are traded on the OTC Pink Market under the symbol “FGPR”. |
| (2) | Ferrell Companies is the owner of the general partner and an approximate i 23% direct owner of Ferrellgas Partners’ Class A Units and thus a related party. Ferrell Companies also beneficially owns i 9,784 and i 2,560 Class A Units of Ferrellgas Partners held by FCI Trading Corp. (“FCI Trading”) and Ferrell Propane, Inc. ("Ferrell Propane"), respectively, bringing Ferrell Companies’ total beneficial ownership of Class A Units to i 23.4%. |
| (3) | FCI Trading is an affiliate of the general partner and thus a related party. |
| (4) | Ferrell Propane is controlled by the general partner and thus a related party. |
| (5) | James E. Ferrell is the Chief Executive Officer and President of our general partner; and is the Chairman of the Board of Directors of our general partner and a related party. JEF Capital Management owns i 237,942 of these Class A Units and is owned by the James E. Ferrell Revocable Trust Two and other family trusts, all of which James E. Ferrell and/or his family members are the trustees and beneficiaries. James E. Ferrell holds all voting common stock of JEF Capital Management. The remaining i 230 Class A Units are held by Ferrell Resources Holdings, Inc., which is wholly-owned by the James E. Ferrell Revocable Trust One, for which James E. Ferrell is the trustee and sole beneficiary. |
Together these Class A Units represent (i) a i 99% limited partner economic interest in Ferrellgas Partners, excluding the economic interest attributable to the Class B Units, and (ii) an effective i 98% economic interest in the operating partnership, excluding the economic interests attributable to the Class B Units and the Preferred Units. In liquidation, allocations and distributions will be made in accordance with each Class A Unitholder’s positive capital account.
The Class A Units of Ferrellgas Partners represent limited partner interests in Ferrellgas Partners, which give the holders thereof the right to participate in distributions made by Ferrellgas Partners, subject to the rights of holders of Class B Units, and to exercise the other rights or privileges available to such holders under the Amended Ferrellgas Partners LPA. Under the terms of the Amended Ferrellgas Partners LPA, holders of Class A Units have limited voting rights on matters affecting the business of Ferrellgas Partners. Generally, persons or groups owning i 20% or more of Ferrellgas Partners’ outstanding Class A Units cannot vote any of their Class A Units in excess of the i 20% threshold. However, this limitation does not apply under certain circumstances and does not apply to Class A Units owned by Ferrell Companies, our general partner and its affiliates, and this limitation expires on the later of (a) five years after the Effective Date and (b) the conversion of the Class B Units to Class A Units.
The Amended Ferrellgas Partners LPA allows the general partner to issue an unlimited number of additional general and limited partner interests of Ferrellgas Partners for such consideration and on such terms and conditions as shall be established by the general partner without the approval of any Class A Unitholders.
Partnership distributions
Ferrellgas Partners did not declare or pay any distributions to Class A Unitholders or the general partner for the three months ended October 31, 2021. On October 8, 2021, Ferrellgas Partners made a cash distribution in the aggregate amount of approximately $ i 49.9 million to its Class B Unitholders.
Accumulated other comprehensive income (loss) (“AOCI”)
See Note K – Derivative instruments and hedging activities – for details regarding changes in fair value on risk management financial derivatives recorded within AOCI for the three months ended October 31, 2021 and 2020.
21
General partner’s commitment to maintain its capital account
Ferrellgas’ partnership agreements allow the general partner to have an option to maintain its effective i 2% general partner interest (excluding the interest attributable to the Class B Units and Preferred Units) concurrent with the issuance of other additional equity.
During the three months ended October 31, 2021, the general partner made non-cash contributions of $ i 17.0 thousand to Ferrellgas to maintain its effective i 2% general partner interest.
During the three months ended October 31, 2020, the general partner made non-cash contributions of $ i 14.0 thousand to Ferrellgas to maintain its effective i 2% general partner interest.
iI. Revenue from contracts with customers
Disaggregation of revenue
Ferrellgas disaggregates revenues based upon the type of customer and on the type of revenue. The following table presents retail propane revenues, wholesale propane revenues and other revenues. Retail revenues result from sales to end use customers, wholesale revenues result from sales to or through resellers and all other revenues include sales of appliances and other materials, other fees charged to customers and equipment rental charges.
i
| | | | | | | | |
|
| | For the three months ended October 31, | | ||||
| |
| 2021 |
| 2020 |
| ||
Retail - Sales to End Users | | | $ | i 252,510 | | $ | i 174,645 | |
Wholesale - Sales to Resellers | | |
| i 113,971 | |
| i 102,612 | |
Other Gas Sales | | |
| i 6,223 | |
| i 3,792 | |
Other | | |
| i 21,802 | |
| i 19,845 | |
Propane and related equipment revenues | | | $ | i 394,506 | | $ | i 300,894 | |
Contract assets and liabilities
Ferrellgas’ performance obligations are generally limited to the delivery of propane for our retail and wholesale contracts. Ferrellgas’ performance obligations with respect to sales of appliances and other materials and other revenues are limited to the delivery of the agreed upon good or service. Ferrellgas does not have material performance obligations that are delivered over time, thus all of our revenue is recognized at the time the goods, including propane, are delivered or installed. Ferrellgas offers “even pay” billing programs that can create customer deposits or advances, depending on whether Ferrellgas has delivered more propane than the customer has paid for or whether the customer has paid for more propane than what has been delivered. Revenue is recognized from these customer deposits or advances to customers at the time product is delivered. The advance or deposit is considered to be a contract asset or liability. Additionally, from time to time, we have customers that pay in advance for goods or services, and such amounts result in contract liabilities.
Ferrellgas incurs incremental commissions directly related to the acquisition or renewal of customer contracts. The commissions are calculated and paid based upon the number of gallons sold to the acquired or renewed customer. The total amount of commissions that we incur is not material, and the commissions are expensed commensurate with the deliveries to which they relate; therefore, Ferrellgas does not capitalize these costs.
The following table presents the opening and closing balances of our receivables, contract assets, and contract liabilities:
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| | | | | | |
|
|
| ||||
Accounts receivable | | $ | i 175,871 | | $ | i 138,757 |
Contract assets | | $ | i 5,283 | | $ | i 10,074 |
Contract liabilities | |
| | |
|
|
Deferred revenue (1) | | $ | i 62,365 | | $ | i 49,354 |
| (1) | Of the beginning balance of deferred revenue, $ i 10.5 million was recognized as revenue during the three months ended October 31, 2021. |
22
Remaining performance obligations
Ferrellgas’ remaining performance obligations are generally limited to situations where its customers have remitted payment but have not yet received deliveries of propane. This most commonly occurs in Ferrellgas’ even pay billing programs and Ferrellgas expects that these balances will be recognized within a year or less as the customer takes delivery of propane.
iJ. Fair value measurements
Derivative financial instruments
The following table presents Ferrellgas’ financial assets and financial liabilities that are measured at fair value on a recurring basis for each of the fair value hierarchy levels, including both current and noncurrent portions, as of October 31, 2021 and July 31, 2021:
i
| | | | | | | | | | | | |
| | Asset (Liability) | ||||||||||
| | Quoted Prices in Active |
| | |
| | |
| | | |
| | Markets for Identical | | Significant Other | | | | | | | ||
| | Assets and Liabilities | | Observable Inputs | | Unobservable Inputs | | | | |||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
| |
|
| |
|
| |
|
| |
| |
Assets: |
| |
|
| |
|
| |
|
| |
|
Derivative financial instruments: |
| |
|
| |
|
| |
|
| |
|
Commodity derivatives | | $ | — | | $ | i 148,656 | | $ | — | | $ | i 148,656 |
Liabilities: | |
|
| |
| | |
|
| |
|
|
Derivative financial instruments: | |
|
| |
|
| |
|
| |
|
|
Commodity derivatives | | $ | — | | $ | ( i 8,548) | | $ | — | | $ | ( i 8,548) |
| | | | | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| |
Assets: | |
|
| |
|
| |
|
| |
|
|
Derivative financial instruments: | |
|
| |
|
| |
|
| |
|
|
Commodity derivatives | | $ | — | | $ | i 94,244 | | $ | — | | $ | i 94,244 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Derivative financial instruments: | |
|
| |
|
| |
|
| |
|
|
Commodity derivatives | | $ | — | | $ | ( i 4,458) | | $ | — | | $ | ( i 4,458) |
Methodology
The fair values of Ferrellgas’ non-exchange traded commodity derivative contracts are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators.
Other financial instruments
The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. At October 31, 2021 and July 31, 2021, the estimated fair value of Ferrellgas’ long-term debt instruments was $ i 1,433.2 million and $ i 1,466.4 million, respectively. Ferrellgas estimates the fair value of long-term debt based on quoted market prices. The fair value of Ferrellgas’ consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.
Ferrellgas has other financial instruments such as trade accounts receivable which could expose it to concentrations of credit risk. The credit risk from trade accounts receivable is limited because of a large customer base which extends across many different U.S. markets.
/23
K. Derivative instruments and hedging activities
Ferrellgas is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Of these, the propane commodity derivative instruments are designated as cash flow hedges.
Derivative instruments and hedging activity
During the three months ended October 31, 2021 and 2020, Ferrellgas did not recognize any gain or loss in earnings related to hedge ineffectiveness and did not exclude any component of financial derivative contract gains or losses from the assessment of hedge effectiveness related to commodity cash flow hedges.
The following tables provide a summary of the fair value of derivatives within Ferrellgas’ condensed consolidated balance sheets as of October 31, 2021 and July 31, 2021:
i
| | | | | | | | | | | |
| | Final | |||||||||
| | Maturity | Asset Derivatives | | Liability Derivatives | ||||||
Derivative Instrument |
| Date | Location |
| Fair value |
| Location |
| Fair value | ||
Derivatives designated as hedging instruments | | December 2023 |
|
| |
|
|
|
| |
|
Commodity derivatives-propane |
| | Price risk management asset | | $ | i 129,389 | | Other current liabilities | | $ | i 7,650 |
Commodity derivatives-propane |
| | Other assets, net | |
| i 19,267 |
| Other liabilities | |
| i 898 |
|
| | Total | | $ | i 148,656 |
| Total | | $ | i 8,548 |
| | | | | | | | | | | |
| | Final | |||||||||
| | Maturity | Asset Derivatives | | Liability Derivatives | ||||||
Derivative Instrument |
| Date | Location |
| Fair value |
| Location |
| Fair value | ||
Derivatives designated as hedging instruments |
| December 2021 |
|
| |
|
|
|
| |
|
Commodity derivatives-propane |
| | Price risk management asset | | $ | i 78,001 |
| Other current liabilities | | $ | i 3,429 |
Commodity derivatives-propane |
| | Other assets, net | |
| i 16,243 |
| Other liabilities | |
| i 1,029 |
|
| | Total | | $ | i 94,244 |
| Total | | $ | i 4,458 |
/24
Ferrellgas’ exchange traded commodity derivative contracts require cash margin deposit as collateral for contracts that are in a negative mark-to-market position. These cash margin deposits will be returned if mark-to-market conditions improve or will be applied against cash settlement when the contracts are settled. Liabilities represent cash margin deposits received by Ferrellgas for contracts that are in a positive mark-to-market position. The following tables provide a summary of cash margin balances as of October 31, 2021 and July 31, 2021, respectively:
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| | | | | | | | | | |
| | |||||||||
| | Assets | | Liabilities | ||||||
Description |
| Location |
| Amount |
| Location |
| Amount | ||
Margin Balances |
| Prepaid expense and other current assets | | $ | i 31,129 |
| Other current liabilities | | $ | i 126,325 |
|
| Other assets, net | |
| i 3,511 |
| Other liabilities | |
| i 18,392 |
| | | | $ | i 34,640 |
|
| | $ | i 144,717 |
| | | | | | | | | | |
| | |||||||||
| | Assets | | Liabilities | ||||||
Description |
| Location |
| Amount |
| Location |
| Amount | ||
Margin Balances |
| Prepaid expense and other current assets | | $ | i 21,068 |
| Other current liabilities | | $ | i 79,178 |
|
| Other assets, net | |
| i 3,036 |
| Other liabilities | |
| i 15,489 |
| | | | $ | i 24,104 |
|
| | $ | i 94,667 |
The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income (loss) for the three months ended October 31, 2021 and 2020 due to derivatives designated as cash flow hedging instruments:
i
| | | | | | | | | | | |
| | For the three months ended October 31, 2021 | |||||||||
|
| | |
| |
| Amount of Gain (Loss) | ||||
| | Amount of Gain | | Location of Gain (Loss) | | Reclassified from | |||||
| | (Loss) Recognized in | | Reclassified from | | AOCI into Income | |||||
Derivative Instrument |
| AOCI |
| AOCI into Income |
| Effective portion |
| Ineffective portion | |||
Commodity derivatives | | $ | i 72,932 |
| Cost of product sold- propane and other gas liquids sales | | $ | i 22,610 | | $ | — |
| | $ | i 72,932 | | | | $ | i 22,610 | | $ | — |
| | | | | | | | | | | |
| | For the three months ended October 31, 2020 | |||||||||
| | | | | | Amount of Gain (Loss) | |||||
| | Amount of Gain (Loss) | | Location of Gain (Loss) | | Reclassified from | |||||
| | Recognized in | | Reclassified from | | AOCI into Income | |||||
Derivative Instrument |
| AOCI |
| AOCI into Income |
| Effective portion |
| Ineffective portion | |||
Commodity derivatives | | $ | i 5,767 |
| Cost of product sold- propane and other gas liquids sales | | $ | ( i 2,150) | | $ | — |
| | $ | i 5,767 | | | | $ | ( i 2,150) | | $ | — |
/
25
The changes in derivatives included in AOCI for the three months ended October 31, 2021 and 2020 were as follows:
i
| | | | | | |
| | For the three months ended October 31, | ||||
Gains and losses on derivatives included in AOCI |
| 2021 |
| 2020 | ||
Beginning balance (1) | | $ | i 89,786 | | $ | ( i 2,313) |
Change in value of risk management commodity derivatives | |
| i 72,932 | |
| i 5,767 |
Reclassification of (gains) losses on commodity hedges to cost of sales - propane and other gas liquids sales, net | |
| ( i 22,610) | |
| i 2,150 |
Ending balance (1) | | $ | i 140,108 | | $ | i 5,604 |
| (1) | Beginning balances in the table above include AOCI activity related to non-controlling interest of $ i 0.9 million and $ i 10.0 thousand for fiscal 2022 and 2021, respectively. Ending balances for the three months ended October 31, 2021 and October 31, 2020 include AOCI activity related to non-controlling interest of $ i 1.4 million and $ i 0.1 million, respectively. |
Ferrellgas expects to reclassify net gains of approximately $ i 121.7 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 sale exception.
During the three months ended October 31, 2021 and 2020, Ferrellgas had no reclassifications to operations resulting from the discontinuance of any cash flow hedges arising from the probability of the original forecasted transactions not occurring within the originally specified period of time defined within the hedging relationship.
As of October 31, 2021, Ferrellgas had financial derivative contracts covering i 7.2 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.
Derivative financial instruments credit risk
Ferrellgas is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas’ counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas maintains credit policies with regard to its counterparties that it believes reduce its overall credit risk. These policies include evaluating and monitoring its counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by Ferrellgas in the forms of letters of credit, parent guarantees or cash. Ferrellgas has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties. If these counterparties that make up the concentration failed to perform according to the terms of their contracts at October 31, 2021, the maximum amount of loss due to credit risk that Ferrellgas would incur based upon the gross fair values of the derivative financial instruments is i zero.
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 i no open derivative contracts with credit-risk-related contingent features as of October 31, 2021.
26
L. Transactions with related parties
Ferrellgas has i no employees and is managed and controlled by its general partner. Pursuant to Ferrellgas’ partnership agreements, the general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on behalf of Ferrellgas and all other necessary or appropriate expenses allocable to Ferrellgas or otherwise reasonably incurred by its general partner in connection with operating Ferrellgas’ business. These costs primarily include compensation and benefits paid to employees of the general partner who perform services on Ferrellgas’ behalf and are reported in the condensed consolidated statements of operations as follows:
i
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
Operating expense | | $ | i 64,949 | | $ | i 60,980 | |
| | | | | | | |
General and administrative expense | | $ | i 6,229 | | $ | i 6,719 | |
See additional discussions about transactions with the general partner and related parties in Note H – Equity.
Term loan credit agreement with Ferrellgas Partners, L.P.
On January 8, 2021, Ferrellgas Partners, L.P. entered into a term loan credit agreement with Ferrellgas, L.P., pursuant to which Ferrellgas, L.P. extended to Ferrellgas Partners, L.P. an unsecured, non-amortizing term loan in the aggregate principal amount of $ i 19.9 million. The term loan bears interest at a rate of i 20% per annum, and all interest on the term loan will be added to the outstanding principal amount of the term loan. The term loan will mature on July 1, 2022. During July 2021, Ferrellgas Partners made an optional prepayment of $ i 9.0 million principal amount of the term loan. The outstanding principal and accrued interest at October 31, 2021 was $ i 13.8 million.
/
iM. Contingencies and commitments
Litigation
Ferrellgas’ operations are subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane and, prior to the sales of midstream operations in fiscal 2018, crude oil. As a result, at any given time, Ferrellgas can be threatened with or named as a defendant in various lawsuits arising in the ordinary course of business. Other than as discussed below, Ferrellgas is not a party to any legal proceedings other than various claims and lawsuits arising in the ordinary course of business. It is not possible to determine the ultimate disposition of these matters; however, management is of the opinion that there are no known claims or contingent claims that are reasonably expected to have a material adverse effect on the consolidated financial condition, results of operations and cash flows of Ferrellgas.
27
Ferrellgas has been named as a defendant, along with a competitor, in putative class action lawsuits filed in multiple jurisdictions. The lawsuits, which were consolidated in the Western District of Missouri on October 16, 2014, allege that Ferrellgas and a competitor coordinated in 2008 to reduce the fill level in barbeque cylinders and combined to persuade a common customer to accept that fill reduction, resulting in increased cylinder costs to direct customers and end-user customers in violation of federal and certain state antitrust laws. The lawsuits seek treble damages, attorneys’ fees, injunctive relief and costs on behalf of the putative class. These lawsuits have been coordinated for pretrial purposes by the multidistrict litigation panel. The Federal Court for the Western District of Missouri initially dismissed all claims brought by direct and indirect customers other than state law claims of indirect customers under Wisconsin, Maine and Vermont law. The direct customer plaintiffs filed an appeal, which resulted in a reversal of the district court’s dismissal. We filed a petition for a writ of certiorari which was denied. An appeal by the indirect customer plaintiffs resulted in the court of appeals affirming the dismissal of the federal claims and remanding the case to the district court to decide whether to exercise supplemental jurisdiction over the remaining state law claims. Thereafter, in August 2019, Ferrellgas reached a settlement with the direct customers, pursuant to which it agreed to pay a total of $ i 6.25 million to resolve all claims asserted by the putative direct purchaser class. With respect to the indirect customers, the district court exercised supplemental jurisdiction over the remaining state law claims, but then granted in part Ferrellgas’ pleadings-based motion and dismissed i 11 of the i 24 remaining state law claims. As a result, there were i 13 remaining state law claims brought by a putative class of indirect customers. On September 23, 2021 the court held an oral argument on the indirect purchaser plaintiffs’ motion for class certification. Thereafter, the court denied the indirect purchaser plaintiffs’ motion for class certification, and a final order on the motion was entered by the Court on November 9, 2021. At this point the only remaining claims are the i 13 named plaintiffs’ individual state claims, which has the effect of substantially reducing the Ferrellgas potential liability. Ferrellgas believes it has strong defenses and intends to vigorously defend itself against these remaining claims. Ferrellgas does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuit.
Ferrellgas and Bridger Logistics, LLC (“Bridger”), have been named, along with i two former officers (“Rios and Gamboa”), in a lawsuit filed by Eddystone Rail Company ("Eddystone") on February 2, 2017 in the Eastern District of Pennsylvania (the "EDPA Lawsuit"). Eddystone indicated that it has prevailed in or settled an arbitration against Jamex Transfer Services (“JTS”), previously named Bridger Transfer Services, a former subsidiary of Bridger. The arbitration involved a claim against JTS for money due for deficiency payments under a contract for the use of an Eddystone facility used to offload crude from rail onto barges. Eddystone alleges that Ferrellgas transferred assets out of JTS prior to the sale of the membership interest in JTS to Jamex Transfer Holdings, and that those transfers should be avoided so that the assets can be used to satisfy the amount owed by JTS to Eddystone as a result of the arbitration. Eddystone also alleges that JTS was an “alter ego” of Bridger and Ferrellgas and that Bridger and Ferrellgas breached both an implicit contract as well as fiduciary duties allegedly owed to Eddystone as a creditor of JTS. Ferrellgas believes that Ferrellgas and Bridger have valid defenses to these claims and to Eddystone’s primary claim against JTS for breach of contract. If Eddystone ultimately prevails, however, Ferrellgas believes that the amount of damages awarded could be material to Ferrellgas. Ferrellgas intends to vigorously defend this claim.
On August 24, 2017, Ferrellgas filed a third-party complaint against JTS, Jamex Transfer Holdings, and other related persons and entities (the "Third-Party Defendants"), asserting claims for breach of contract, indemnification of any losses in the EDPA Lawsuit, tortious interference with contract, and contribution. On June 25, 2018, Ferrellgas entered into an agreement with the Third-Party Defendants which, among other things, resulted in a dismissal of the claims against the Third-Party Defendants from the lawsuit.
Virtually all discovery has been completed and the lawsuit is proceeding toward the summary judgment stage. As such, management does not currently believe a loss is probable or reasonably estimable at this time. However, we may enter into settlement discussions at any time.
Long-term debt related commitments
Ferrellgas has long and short-term payment obligations under agreements such as the indentures governing its senior notes. See Note F – Debt – for a description of these debt obligations and a schedule of future maturities.
28
N. Net earnings (loss) per unitholders’ interest
Below is a calculation of the basic and diluted net loss per Class A Unitholders’ interest in the condensed consolidated statements of operations for the periods indicated:
i
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
| | | | | | | |
Class A Unitholders’ interest in net loss | | $ | ( i 25,525) | | $ | ( i 45,601) | |
Weighted average Class A Units outstanding (in thousands) | |
| i 4,857.6 | |
| i 4,857.6 | |
Basic and diluted net loss per Class A Unit | | $ | ( i 5.25) | | $ | ( i 9.39) | |
Class B Units considerations
The Class B Units meet the definition of a participating security and the two-class method is required. For any periods in which earnings are recognized, the earnings will be allocated between the Class B Units and the Class A Units on a i six-to-one basis. For any periods in which losses are recognized, no effect is given to the Class B Units as they do not contractually participate in the losses of Ferrellgas.
In addition, Ferrellgas has the option to redeem all, but not less than all, of the Class B Units outstanding at any time on or prior to the fifth anniversary of the Effective Date for cash. This call option does not impact the dilutive effect of net loss per Class A Unit due to the cash-only redemption provision, which is assumed, and therefore there would be no dilutive effect.
/ iO. Subsequent events
Ferrellgas has evaluated events and transactions occurring after the balance sheet date through the date Ferrellgas’ condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that required recognition or disclosure in its condensed consolidated financial statements.
29
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
CONDENSED BALANCE SHEETS
(unaudited)
| | | | | | |
|
|
| ||||
ASSETS | | | | | | |
Cash | | $ | i 1,000 | | $ | i 1,000 |
Prepaid expenses and other current assets | |
| — | |
| — |
Total assets | | $ | i 1,000 | | $ | i 1,000 |
| | | | | | |
Contingencies and commitments (Note B) | |
|
| |
|
|
| | | | | | |
STOCKHOLDER’S EQUITY | |
| | |
|
|
Common stock, $ i i 1.00 / par value; i i 2,000 / shares authorized; i i 1,000 / shares issued and outstanding | | $ | i 1,000 | | $ | i 1,000 |
Additional paid in capital | |
| i 39,486 | |
| i 39,486 |
Accumulated deficit | |
| ( i 39,486) | |
| ( i 39,486) |
Total stockholder’s equity | | $ | i 1,000 | | $ | i 1,000 |
See notes to condensed financial statements.
30
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
General and administrative expense | | $ | — | | $ | i 1,924 | |
| | | | | | | |
Net loss | | $ | — | | $ | ( i 1,924) | |
See notes to condensed financial statements.
31
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: | | |
| | |
|
Net loss | | $ | — | | $ | ( i 1,924) |
Changes in operating assets and liabilities: | |
|
| |
|
|
Prepaid expenses and other current assets | |
| — | |
| i 1,850 |
Cash used in operating activities | |
| — | |
| ( i 74) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Capital contribution | |
| — | |
| i 74 |
Cash provided by financing activities | |
| — | |
| i 74 |
| | | | | | |
Net change in cash | |
| — | |
| — |
Cash - beginning of period | |
| i 1,000 | |
| i 1,000 |
Cash - end of period | | $ | i 1,000 | | $ | i 1,000 |
See notes to condensed financial statements.
32
FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
(unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS
iA. Formation
Ferrellgas Partners Finance Corp. (the “Finance Corp.”), a Delaware corporation, was formed on March 28, 1996, and is a wholly-owned subsidiary of Ferrellgas Partners, L.P. (“Ferrellgas Partners”).
Ferrellgas Partners contributed $ i 1,000 to the Finance Corp. on April 8, 1996 in exchange for i 1,000 shares of common stock.
The Finance Corp. has nominal assets, does not conduct any operations and has i no employees.
/ iB. Contingencies and commitments
The Finance Corp. serves as co-issuer and co-obligor for debt securities of Ferrellgas Partners. At July 31, 2020, the Finance Corp. was liable as co-issuer and co-obligor for the $ i 357.0 million aggregate principal amount of Ferrellgas Partners’ unsecured senior notes due June 15, 2020 (the “Ferrellgas Partners Notes”), which Ferrellgas Partners failed to repay, and which obligation was only reported on Ferrellgas Partners’ condensed consolidated balance sheet. On March 30, 2021, Ferrellgas Partners issued i 1.3 million of its Class B Units in exchange for the holders’ contribution of the Ferrellgas Partners Notes to Ferrellgas Partners as a capital contribution and in satisfaction of such holders’ claims in respect of the Ferrellgas Partners Notes. As of October 31, 2021, Ferrellgas Partners had no debt securities outstanding, and the Finance Corp. therefore was not liable as co-issuer for any such debt securities.
/ iC. Subsequent events
The Finance Corp. has evaluated events and transactions occurring after the balance sheet date through the date the Finance Corp.’s condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that required recognition or disclosure in its condensed consolidated financial statements.
33
FERRELLGAS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
| | | | | | |
|
|
| ||||
ASSETS | | | | | | |
Current assets: |
| |
|
| |
|
Cash and cash equivalents (including $ i 11,500 of restricted cash at October 31, 2021 and July 31, 2021) | | $ | i 168,611 | | $ | i 281,688 |
Accounts and notes receivable, net | |
| i 163,473 | |
| i 131,574 |
Inventories | |
| i 131,280 | |
| i 88,379 |
Price risk management asset | | | i 129,389 | | | i 78,001 |
Prepaid expenses and other current assets | |
| i 59,579 | |
| i 39,073 |
Total current assets | |
| i 652,332 | |
| i 618,715 |
| | | | | | |
Property, plant and equipment, net | |
| i 585,993 | |
| i 582,118 |
Goodwill, net | |
| i 251,065 | |
| i 246,946 |
Intangible assets (net of accumulated amortization of $ i 434,166 and $ i 432,032 at October 31, 2021 and July 31, 2021, respectively) | |
| i 103,277 | |
| i 100,743 |
Operating lease right-of-use assets | | | i 87,379 | | | i 87,611 |
Loan receivable - Ferrellgas Partners, L.P. | | | i 17,670 | | | i 17,001 |
Other assets, net | |
| i 96,318 | |
| i 93,228 |
Total assets | | $ | i 1,794,034 | | $ | i 1,746,362 |
| | | | | | |
LIABILITIES, MEZZANINE AND EQUITY | |
|
| |
|
|
| | | | | | |
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | i 80,233 | | $ | i 47,913 |
Broker margin deposit liability | | | i 126,325 | | | i 79,178 |
Current portion of long-term debt | | | i 2,079 | | | i 1,670 |
Current operating lease liabilities | | | i 27,207 | | | i 25,363 |
Other current liabilities | |
| i 154,091 | |
| i 166,604 |
Total current liabilities | | | i 389,935 | | | i 320,728 |
| | | | | | |
Long-term debt | |
| i 1,446,895 | |
| i 1,444,890 |
Operating lease liabilities | | | i 72,117 | | | i 74,349 |
Other liabilities | |
| i 63,822 | |
| i 61,189 |
Contingencies and commitments (Note M) | |
| | |
| |
| | | | | | |
Mezzanine equity: | | | | | | |
Senior preferred units, net of issue discount and offering costs ( i i 700,000 / units outstanding at October 31, 2021 and July 31, 2021) | | | i 651,349 | | | i 651,349 |
| | | | | | |
Equity: | |
|
| |
|
|
Limited partners | |
| ( i 961,061) | |
| ( i 887,043) |
General partner | |
| ( i 9,131) | |
| ( i 8,886) |
Accumulated other comprehensive income | |
| i 140,108 | |
| i 89,786 |
Total equity | |
| ( i 830,084) | |
| ( i 806,143) |
Total liabilities, mezzanine and equity | | $ | i 1,794,034 | | $ | i 1,746,362 |
See notes to condensed consolidated financial statements.
34
FERRELLGAS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
| | | | | | | |
Revenues: | | | | | | | |
Propane and other gas liquids sales | | $ | i 372,704 | | $ | i 281,049 | |
Other | |
| i 21,802 | |
| i 19,845 | |
Total revenues | |
| i 394,506 | |
| i 300,894 | |
| | | | | | | |
Costs and expenses: | |
|
| |
|
| |
Cost of sales - propane and other gas liquids sales | |
| i 220,538 | |
| i 137,627 | |
Cost of sales - other | |
| i 3,610 | |
| i 3,667 | |
Operating expense - personnel, vehicle, plant and other | |
| i 117,112 | |
| i 109,027 | |
Operating expense - equipment lease expense | |
| i 5,690 | |
| i 6,830 | |
Depreciation and amortization expense | |
| i 20,295 | |
| i 21,390 | |
General and administrative expense | |
| i 12,575 | |
| i 13,076 | |
Non-cash employee stock ownership plan compensation charge | |
| i 909 | |
| i 708 | |
Loss on asset sales and disposals | |
| i 1,410 | |
| i 813 | |
| | | | | | | |
Operating income | |
| i 12,367 | | | i 7,756 | |
| | | | | | | |
Interest expense | |
| ( i 25,395) | |
| ( i 46,528) | |
Other income, net | |
| i 4,957 | |
| i 108 | |
| | | | | | | |
Loss before income taxes | |
| ( i 8,071) | | | ( i 38,664) | |
| | | | | | | |
Income tax expense | |
| i 96 | |
| i 87 | |
| | | | | | | |
Net loss | | $ | ( i 8,167) | | $ | ( i 38,751) | |
See notes to condensed consolidated financial statements.
35
FERRELLGAS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
| | | | | | | |
Net loss | | $ | ( i 8,167) | | $ | ( i 38,751) | |
Other comprehensive income: | |
|
| |
|
| |
Change in value of risk management derivatives | | | i 72,932 | |
| i 5,767 | |
Reclassification of (gains) losses on derivatives to earnings, net | |
| ( i 22,610) | |
| i 2,150 | |
Other comprehensive income | |
| i 50,322 | |
| i 7,917 | |
Comprehensive income (loss) | | $ | i 42,155 | | $ | ( i 30,834) | |
See notes to condensed consolidated financial statements.
36
FERRELLGAS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ DEFICIT
(in thousands)
(unaudited)
| | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | |
| | | | | | | | other | | Total | ||
| | Limited | | General | | comprehensive | | partners’ | ||||
|
| partner |
| partner |
| income |
| equity | ||||
Balance at July 31, 2021 | | $ | ( i 887,043) | | $ | ( i 8,886) | | $ | i 89,786 | | $ | ( i 806,143) |
Contributions in connection with non-cash ESOP compensation charges | |
| i 900 | |
| i 9 | |
| — | |
| i 909 |
Distributions | | | ( i 50,000) | | | — | | | — | | | ( i 50,000) |
Net earnings allocated to preferred units | |
| ( i 17,005) | | | — | | | — | | | ( i 17,005) |
Net loss | |
| ( i 7,913) | |
| ( i 254) | |
| — | |
| ( i 8,167) |
Other comprehensive income | |
| — | |
| — | |
| i 50,322 | |
| i 50,322 |
Balance at October 31, 2021 | | $ | ( i 961,061) | | $ | ( i 9,131) | | $ | i 140,108 | | $ | ( i 830,084) |
| | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | |
| | | | | | | | other | | Total | ||
| | Limited | | General | | comprehensive | | partners’ | ||||
|
| partner |
| partner |
| income (loss) |
| equity | ||||
Balance at July 31, 2020 | | $ | ( i 821,462) | | $ | ( i 8,216) | | $ | ( i 2,313) | | $ | ( i 831,991) |
Contributions in connection with non-cash ESOP compensation charges | |
| i 701 | |
| i 7 | |
| — | |
| i 708 |
Net loss | |
| ( i 38,360) | |
| ( i 391) | |
| — | |
| ( i 38,751) |
Other comprehensive income | |
| — | |
| — | |
| i 7,917 | |
| i 7,917 |
Balance at October 31, 2020 | | | ( i 859,121) | | | ( i 8,600) | | | i 5,604 | | | ( i 862,117) |
See notes to condensed consolidated financial statements.
37
FERRELLGAS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: | | | | | | |
Net loss | | $ | ( i 8,167) | | $ | ( i 38,751) |
Reconciliation of net loss to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization expense | |
| i 20,295 | |
| i 21,390 |
Non-cash employee stock ownership plan compensation charge | |
| i 909 | |
| i 708 |
Loss on asset sales and disposals | |
| i 1,410 | |
| i 813 |
Provision for expected credit losses | |
| i 640 | |
| i 678 |
Deferred income tax expense (benefit) | |
| i 3 | |
| ( i 1) |
Other | |
| i 1,901 | |
| i 2,346 |
Changes in operating assets and liabilities, net of effects from business acquisitions: | |
|
| |
|
|
Accounts and notes receivable, net of securitization | |
| ( i 32,539) | |
| ( i 18,728) |
Inventories | |
| ( i 42,901) | |
| ( i 6,316) |
Prepaid expenses and other current assets | |
| ( i 20,506) | |
| ( i 337) |
Accounts payable | |
| i 32,119 | |
| i 10,479 |
Accrued interest expense | |
| ( i 20,627) | |
| i 7,129 |
Other current liabilities | |
| i 52,376 | |
| i 6,154 |
Other assets and liabilities | |
| ( i 148) | |
| i 2,946 |
Net cash used in operating activities | |
| ( i 15,235) | |
| ( i 11,490) |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Business acquisitions, net of cash acquired | |
| ( i 9,758) | |
| — |
Capital expenditures | |
| ( i 20,440) | |
| ( i 19,454) |
Proceeds from sale of assets | |
| i 641 | |
| i 1,407 |
Net cash used in investing activities | |
| ( i 29,557) | |
| ( i 18,047) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Distributions to Ferrellgas Partners | |
| ( i 50,000) | |
| — |
Preferred unit distributions | | | ( i 15,673) | | | — |
Payments on long-term debt | |
| ( i 595) | |
| ( i 696) |
Cash payments for principal portion of finance lease liability | |
| ( i 1,698) | |
| ( i 1,703) |
Cash paid for financing costs and other | |
| ( i 319) | |
| ( i 2,297) |
Net cash used in financing activities | |
| ( i 68,285) | |
| ( i 4,696) |
| | | | | | |
Net change in cash, cash equivalents and restricted cash | |
| ( i 113,077) | | | ( i 34,233) |
Cash, cash equivalents and restricted cash - beginning of period | |
| i 281,688 | |
| i 333,755 |
Cash, cash equivalents and restricted cash - end of period | | $ | i 168,611 | | $ | i 299,522 |
See notes to condensed consolidated financial statements.
38
FERRELLGAS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise designated)
(unaudited)
iA. Partnership organization and formation
Ferrellgas, L.P. (the “operating partnership”) is a limited partnership that owns and operates propane distribution and related assets. Ferrellgas Partners, L.P. (“Ferrellgas Partners”) is a holding entity that conducts no operations and was formed to acquire and hold a limited partner interest in the operating partnership. Ferrellgas Partners and the holders of the Preferred Units (as defined in Note G – Preferred units) are the only limited partners of the operating partnership. Ferrellgas, Inc. (the “general partner”), a Delaware corporation and a wholly-owned subsidiary of Ferrell Companies, is the sole general partner of Ferrellgas Partners and the operating partnership and excluding the economic interests attributable to Ferrellgas Partners’ Class B Units and the operating partnership’s Preferred Units, owns an approximate i 1% general partner economic interest in each and, therefore, an effective i 2% general partner economic interest in the operating partnership.
Excluding the economic interests attributable to the Preferred Units, Ferrellgas Partners owns an approximate i 99% limited partner interest in the operating partnership. Our general partner performs all management functions for us. The operating partnership and Ferrellgas Partners, collectively referred to as “Ferrellgas,” are both Delaware limited partnerships and are governed by their respective partnership agreements. These agreements contain specific provisions for the allocation of net earnings and loss to each of the partners for purposes of maintaining the partner capital accounts.
The operating partnership owns a i 100% equity interest in Ferrellgas Finance Corp., whose only business activity is to act as the co-issuer and co-obligor of debt securities issued by the operating partnership.
The operating partnership is primarily engaged in the retail distribution of propane and related equipment sales. The propane distribution market is seasonal because propane is used primarily for heating in residential and commercial buildings. Ferrellgas serves residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all i 50 states, the District of Columbia, and Puerto Rico.
Due to seasonality, the results of operations for the three months ended October 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year ending July 31, 2022.
The condensed consolidated financial statements of the operating partnership and subsidiaries reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim periods presented. All adjustments to the condensed consolidated financial statements were of a normal recurring nature. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with (i) the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) the consolidated financial statements and accompanying notes included in Ferrellgas, L.P.’s Annual Report on Form 10-K for fiscal 2021.
/39
B. Summary of significant accounting policies
(1) Accounting estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. Significant estimates impacting the condensed consolidated financial statements include accruals that have been established for contingent liabilities, pending claims and legal actions arising in the normal course of business, useful lives of property, plant and equipment, residual values of tanks, capitalization of customer tank installation costs, amortization methods of intangible assets, valuation methods used to value sales returns and allowances, allowance for expected credit losses, fair value of reporting units, recoverability of long-lived assets, assumptions used to value business combinations, determination of incremental borrowing rate used to measure right-of-use asset and lease liability, fair values of derivative contracts and stock-based compensation calculations.
(2) New accounting standards:
iNo new accounting standards were adopted during the current quarter.
/ iC. Leases
The following table provides the operating and financing right-of-use assets and lease liabilities as of October 31, 2021 and July 31, 2021:
i
| | | | | | | | |
Leases | | Classification | | | | | ||
Assets | | | | | | | | |
Operating lease assets | | Operating lease right-of-use assets | | $ | i 87,379 | | $ | i 87,611 |
Financing lease assets | | Other assets, net | | | i 33,814 | | | i 34,858 |
Total leased assets | | | | $ | i 121,193 | | $ | i 122,469 |
| | | | | | | | |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating | | Current operating lease liabilities | | $ | i 27,207 | | $ | i 25,363 |
Financing | | Other current liabilities | | | i 5,811 | | | i 7,479 |
Noncurrent | | | | | | | | |
Operating | | Operating lease liabilities | | | i 72,117 | | | i 74,349 |
Financing | | Other liabilities | | | i 27,801 | | | i 28,029 |
Total leased liabilities | | | | $ | i 132,936 | | $ | i 135,220 |
/40
The following table provides the lease expenses for the three months ended October 31, 2021 and 2020:
i
| | | | | | | | |
| | |
| For the three months ended October 31, | ||||
Leases expense |
| Classification | | 2021 | | 2020 | ||
| | | | | | | | |
Operating lease expense | | Operating expense - personnel, vehicle, plant and other | | $ | i 1,709 | | $ | i 1,783 |
| | Operating expense - equipment lease expense | | | i 5,232 | | | i 6,442 |
| | Cost of sales - propane and other gas liquids sales | | | i 440 | | | i 526 |
| | General and administrative expense | | | i 473 | | | i 282 |
Total operating lease expense | | | | | i 7,854 | | | i 9,033 |
| | | | | | | | |
Short-term expense | | Operating expense - personnel, vehicle, plant and other | | | i 1,808 | | | i 2,033 |
| | General and administrative expense | | | i 86 | | | i 242 |
Total short-term expense | | | | | i 1,894 | | | i 2,275 |
| | | | | | | | |
Variable lease expense | | Operating expense - personnel, vehicle, plant and other | | | i 770 | | | i 746 |
| | Operating expense - equipment lease expense | | | i 458 | | | i 388 |
Total variable lease expense | | | | | i 1,228 | | | i 1,134 |
| | | | | | | | |
Finance lease expense: | | | | | | | | |
Amortization of leased assets | | Depreciation and amortization expense | | | i 851 | | | i 2,165 |
Interest on lease liabilities | | Interest expense | | | i 938 | | | i 945 |
Total finance lease expense | | | | | i 1,789 | | | i 3,110 |
| | | | | | | | |
Total lease expense (a) | | | | $ | i 12,765 | | $ | i 15,552 |
| | | | | | | | |
| (a) | For the three months ended October 31, 2021 and 2020 Ferrellgas, L.P. has also recognized $ i 0.2 million and $ i 0.1 million, respectively, of expense related to the accretion of lease exit costs associated with a crude oil storage agreement that is no longer being utilized, primarily due to the various dispositions and other significant transactions, and for which Ferrellgas, L.P. does not anticipate any future economic benefit. |
/Minimum annual payments under existing operating and finance lease liabilities as of October 31, 2021 are as follows:
i i
| | | | | | | | | |
Maturities of lease liabilities | | | Operating leases | | | Finance leases | | | Total |
2022 | | $ | i 23,351 | | $ | i 6,607 | | $ | i 29,958 |
2023 | | | i 40,085 | | | i 8,095 | | | i 48,180 |
2024 | | | i 20,801 | | | i 7,869 | | | i 28,670 |
2025 | | | i 14,305 | | | i 7,766 | | | i 22,071 |
2026 | | | i 5,663 | | | i 6,913 | | | i 12,576 |
Thereafter | | | i 17,746 | | | i 4,943 | | | i 22,689 |
Total lease payments | | $ | i 121,951 | | $ | i 42,193 | | $ | i 164,144 |
Less: Imputed interest | | | i 22,627 | | | i 8,581 | | | i 31,208 |
Present value of lease liabilities | | $ | i 99,324 | | $ | i 33,612 | | $ | i 132,936 |
/41
The following table represents the weighted-average remaining lease term and discount rate as of October 31, 2021:
i
| | | | |
| | As of October 31, 2021 | ||
Lease type | | Weighted-average remaining lease term (years) | | Weighted-average discount rate |
Operating leases | | i 4.6 | | i 7.9% |
Finance leases | | i 5.2 | | i 8.6% |
Cash flow information is presented below:
i
| | | | | | |
| | For the three months ended October 31, | ||||
| | 2021 |
| 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities for operating leases: | | | | | | |
Operating cash flows | | $ | i 5,579 | | $ | i 8,395 |
| | | | | | |
Cash paid for amounts included in the measurement of lease liabilities for financing leases: | | | | | | |
Operating cash flows | | $ | i 768 | | $ | i 877 |
Financing cash flows | | $ | i 1,698 | | $ | i 1,703 |
iD. Supplemental financial statement information
Inventories consist of the following:
i
| | | | | | |
|
|
| ||||
Propane gas and related products | | $ | i 118,113 | | $ | i 75,848 |
Appliances, parts and supplies, and other | |
| i 13,167 | |
| i 12,531 |
Inventories | | $ | i 131,280 | | $ | i 88,379 |
In addition to inventories on hand, Ferrellgas, L.P. enters into contracts to take delivery of propane for supply procurement purposes with terms that generally do not exceed i 36 months. Most of these contracts call for payment based on market prices at the date of delivery. As of October 31, 2021, Ferrellgas, L.P. had committed, for supply procurement purposes, to take delivery of approximately i 2.5 million gallons of propane at fixed prices.
Prepaid expenses and other current assets consist of the following:
i
| | | | | | |
|
|
| ||||
Broker margin deposit assets | | $ | i 31,129 | | $ | i 21,068 |
Other | |
| i 28,450 | | | i 18,005 |
Prepaid expenses and other current assets | | $ | i 59,579 | | $ | i 39,073 |
Other current liabilities consist of the following:
i
| | | | | | |
|
|
| ||||
Accrued interest | | $ | i 8,468 | | $ | i 29,095 |
Customer deposits and advances | |
| i 48,442 | |
| i 35,734 |
Accrued payroll | |
| i 15,117 | |
| i 11,104 |
Accrued insurance | |
| i 12,698 | |
| i 28,143 |
Accrued senior preferred units distributions | | | i 17,345 | | | i 16,013 |
Other | |
| i 52,021 | |
| i 46,515 |
Other current liabilities | | $ | i 154,091 | | $ | i 166,604 |
/42
Shipping and handling expenses are classified in the following condensed consolidated statements of operations line items:
i
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Operating expense - personnel, vehicle, plant and other | | $ | i 54,447 | | $ | i 47,531 |
Depreciation and amortization expense | |
| i 2,535 | |
| i 4,523 |
Operating expense - equipment lease expense | |
| i 4,535 | |
| i 5,883 |
| | $ | i 61,517 | | $ | i 57,937 |
Cash and cash equivalents consist of the following:
i
| | | | | | |
|
|
| ||||
Cash and cash equivalents | | $ | i 157,111 | | $ | i 270,188 |
Restricted cash (1) | |
| i 11,500 | |
| i 11,500 |
Cash, cash equivalents and restricted cash | | $ | i 168,611 | | $ | i 281,688 |
| (1) | As of October 31, 2021 and July 31, 2021, restricted cash consists of an $ i i 11.5 / million cash deposit made with the administrative agent under the operating partnership’s senior secured credit facility that was terminated in April 2020, which may be used by the administrative agent to pay contingent obligations arising under the financing agreement that governed the terminated senior secured credit facility. |
For purposes of the condensed consolidated statements of cash flows, Ferrellgas, L.P. considers cash equivalents to include all highly liquid debt instruments purchased with an original maturity of three months or less. Certain cash flow and significant non-cash activities are presented below:
i
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Cash paid for: | | | | | | |
Interest | | $ | i 44,152 | | $ | i 36,997 |
Income taxes | | $ | — | | $ | i 35 |
Non-cash investing and financing activities: | |
|
| |
|
|
Liabilities incurred in connection with acquisitions | | $ | i 644 | | $ | — |
Change in accruals for property, plant and equipment additions | | $ | i 65 | | $ | ( i 65) |
Lease liabilities arising from operating right-of-use assets | | $ | i 7,558 | | $ | i 366 |
Lease liabilities arising from finance right-of-use assets | | $ | i 812 | | $ | i 554 |
Accrued senior preferred units distributions | | $ | i 17,005 | | $ | — |
iE. Accounts and notes receivable, net
Accounts and notes receivable, net consist of the following:
i
| | | | | | |
|
|
| ||||
Accounts receivable | | $ | i 167,505 | | $ | i 135,182 |
Note receivable | |
| i 13,648 | |
| i 13,648 |
Less: Allowance for expected credit losses | |
| ( i 17,680) | |
| ( i 17,256) |
Accounts and notes receivable, net | | $ | i 163,473 | | $ | i 131,574 |
/
43
F. Debt
Long-term debt
Long-term debt consists of the following:
i
| | | | | | |
|
|
| ||||
Unsecured senior notes |
| |
|
| |
|
Fixed rate, i i 5.375 / %, due 2026 (1) | | $ | i 650,000 | | $ | i 650,000 |
Fixed rate, i i 5.875 / %, due 2029 (1) | | | i 825,000 | | | i 825,000 |
| | | | | | |
Notes payable | |
|
| |
|
|
i 8.5% and i 8.8% weighted average interest rate at October 31, 2021 and July 31, 2021, respectively, due 2021 to 2029, net of unamortized discount of $ i 648 and $ i 573 at October 31, 2021 and July 31, 2021, respectively | |
| i 5,181 | |
| i 3,882 |
Total debt, excluding unamortized debt issuance and other costs | |
| i 1,480,181 | |
| i 1,478,882 |
Unamortized debt issuance and other costs | |
| ( i 31,207) | |
| ( i 32,322) |
Less: current portion of long-term debt | |
| i 2,079 | |
| i 1,670 |
Long-term debt | | $ | i 1,446,895 | | $ | i 1,444,890 |
| (1) | On March 30, 2021 (the “Effective Date”), i two wholly-owned subsidiaries of the operating partnership (referred to herein as the Escrow Issuers) issued $ i 650.0 million aggregate principal amount of i 5.375% senior notes due 2026 (referred to herein as the “2026 Notes”) and $ i 825.0 million aggregate principal amount of i 5.875% senior notes due 2029 (referred to herein as the “2029 Notes”). On the Effective Date and immediately after the issuance of the 2026 Notes and 2029 Notes by the Escrow Issuers, (i) the Escrow Issuers were merged into the operating partnership and Ferrellgas Finance Corp., respectively, and the operating partnership and Ferrellgas Finance Corp. assumed the obligations of the Escrow Issuers as co-issuers of the 2026 Notes and the 2029 Notes, and (ii) the general partner and certain subsidiaries of the operating partnership guaranteed the 2026 Notes and the 2029 Notes. The 2026 Notes and 2029 Notes bear interest from the date of issuance, payable semi-annually in arrears on October 1 and April 1 of each year. The 2026 Notes will mature on April 1, 2026, and the 2029 Notes will mature on April 1, 2029. See “–Senior unsecured notes” below for additional discussion. |
Senior secured revolving credit facility
On the Effective Date, the operating partnership, the general partner and certain of the operating partnership’s subsidiaries entered into a credit agreement (the “Credit Agreement”), which provides for a four-year revolving credit facility (the “Credit Facility”) in an aggregate principal amount of up to $ i 350.0 million, including a sublimit not to exceed $ i 225.0 million for the issuance of letters of credit for a period of 60 days after March 30, 2021, reducing to $ i 200.0 million thereafter.
All borrowings under the Credit Facility are guaranteed by the general partner and the direct and indirect subsidiaries of the operating partnership (other than Ferrellgas Finance Corp. and Ferrellgas Receivables, LLC) and a limited-recourse guaranty from Ferrellgas Partners (limited to its equity interests in the operating partnership). Additionally, all borrowings are secured, on a first priority basis, by substantially all of the assets of the operating partnership and its subsidiaries and all of the equity interests in the operating partnership held by the general partner and Ferrellgas Partners.
Availability under the Credit Facility is, at any time, an amount equal to (a) the lesser of the revolving commitment (initially $ i 350.0 million) and the Borrowing Base (as defined below) minus (b) the sum of the aggregate outstanding amount of borrowings under the Credit Facility plus the undrawn amount of outstanding letters of credit under the Credit Facility plus unreimbursed drawings in respect of letters of credit (unless otherwise converted into revolving loans). The "Borrowing Base" equals the sum of: (a) $ i 200.0 million, plus (b) i 80% of the eligible accounts receivable of the operating partnership and its subsidiaries, plus (c) i 70% of the eligible propane inventory of the operating partnership and its subsidiaries, valued at weighted average cost, less (d) certain reserves, as determined and subject to certain modifications by the administrative agent in its permitted discretion.
/44
Amounts borrowed under the Credit Facility bear interest, at the operating partnership's option, at either (a) for base rate loans, (i) a base rate determined by reference to the highest of (A) the rate of interest last quoted by The Wall Street Journal in the U.S. as the prime rate in effect, (B) the NYFRB Rate from time to time plus i 0.50% per annum and (C) the Adjusted LIBO Rate for a one-month interest period plus i 1.00% per annum plus (ii) a margin of i 1.50% to i 2.00% per annum depending on total net leverage or (b) for Eurodollar rate loans, (i) a rate determined by reference to the Adjusted LIBO Rate plus (ii) a margin of i 2.50% to i 3.00% per annum depending on total net leverage. The operating partnership will be required to pay an undrawn fee to the lenders on the average daily unused amount of the Credit Facility at a rate of i 0.375% to i 0.50% per annum depending on total net leverage.
The Credit Agreement contains customary representations, warranties, covenants and events of default.
The financial covenants in the Credit Agreement require the operating partnership to maintain: (1) a minimum interest coverage ratio (defined generally as the ratio of adjusted EBITDA to cash interest expense) of i 2.50 to 1.00, (2) a maximum secured leverage ratio (defined generally as the ratio of total first priority secured indebtedness to adjusted EBITDA) of i 2.50 to 1.00, and (3) a maximum total net leverage ratio (defined generally as the ratio of total indebtedness (net of unrestricted cash, subject to certain limits) to adjusted EBITDA) of i 5.50 to 1.00 initially. The maximum total net leverage ratio adjusts to i 5.25 to 1.00 starting with the quarter ending April 30, 2022, i 5.00 to 1.00 starting with the quarter ending October 31, 2022, and i 4.75 to 1.00 starting with the quarter ending April 30, 2023.
In addition to the financial covenants, the Credit Agreement includes covenants that may (or if not met will) restrict the ability of the operating partnership to, among other things: incur indebtedness or liens; effect certain fundamental changes, including mergers, consolidations, liquidations, dissolutions and changes in line of business; make certain restricted payments, including distributions to holders of Preferred Units, Ferrellgas Partners and the general partner and redemptions of Preferred Units; make investments, loans or advances; dispose of assets; effect sale and leaseback transactions; enter into swap agreements; make optional payments and modifications of subordinated and other debt instruments; enter into transactions with affiliates; agree to negative pledge clauses and burdensome agreements; and effect amendments to organizational documents.
In particular, under these covenants, subject to certain exceptions and additional requirements, the operating partnership is permitted to make cash distributions to holders of Preferred Units, Ferrellgas Partners and the general partner, redemptions of Preferred Units and other restricted payments (i) only in limited amounts specified in the Credit Agreement and (ii) only if availability under the Credit Facility exceeds the greater of $ i 50.0 million and i 15% of the Borrowing Base and the operating partnership’s total net leverage ratio is not greater than i 5.0 to 1.0 (or i 4.75 to 1.0 starting on April 30, 2023). As of October 31, 2021, the operating partnership is in compliance with the availability and total net leverage ratio requirements.
On June 11, 2021, the operating partnership, the general partner and certain of the operating partnership’s subsidiaries entered into a First Amendment to the Credit Agreement (the “Credit Agreement Amendment”), with an effective date of April 30, 2021. Among other matters, the Credit Agreement Amendment amended the minimum-interest-coverage-ratio covenant described above by (i) waiving compliance with the covenant for the trailing four fiscal quarters ended April 30, 2021 and (ii) annualizing the cash interest expense component of the covenant for (a) the fiscal quarter ended on July 31, 2021, (b) the two fiscal quarters ending October 31, 2021, and (c) the three fiscal quarters ending January 31, 2022.
45
Senior unsecured notes
On the Effective Date, (i) the Escrow Issuers issued $ i 650.0 million aggregate principal amount of 2026 Notes and $ i 825.0 million aggregate principal amount of 2029 Notes, and (ii) the operating partnership and Ferrellgas Finance Corp. assumed the obligations of the Escrow Issuers as co-issuers of the 2026 Notes and the 2029 Notes upon the merger of the Escrow Issuers into the operating partnership and Ferrellgas Finance Corp., respectively. The operating partnership received aggregate net proceeds from the issuance and sale of the 2026 Notes and the 2029 Notes of approximately $ i 1,441.2 million, after deducting the initial purchasers’ discount and estimated offering expenses. The operating partnership used such net proceeds, together with the net proceeds of the issuance and sale of the Preferred Units, as discussed in Note G – Preferred units, and cash on hand, (i) to redeem (or satisfy and discharge the indentures governing and subsequently redeem) all of the issued and outstanding i 6.50% senior unsecured notes due 2021 (the “2021 Notes”), i 6.75% senior unsecured notes due 2022 (the “2022 Notes”), i 6.75% senior unsecured notes due 2023 (the “2023 Notes”), and i 10.00% senior secured notes due 2025 (the “2025 Notes”), in the aggregate combined principal amount for all such notes of $ i 2,175.0 million, and (ii) to repay all outstanding obligations under the agreement governing the accounts receivable securitization facility (the “Accounts Receivables Facility”) in connection with the termination of that facility.
The 2026 Notes and 2029 Notes are the senior unsecured obligations of the operating partnership and Ferrellgas Finance Corp. and are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the general partner and all domestic subsidiaries of the operating partnership other than Ferrellgas Finance Corp. and Ferrellgas Receivables, LLC.
The 2026 Notes may be redeemed prior to April 1, 2023 and the 2029 Notes may be redeemed prior to April 1, 2024 at the issuer’s option, in whole or in part, at a redemption price of par plus the applicable make-whole premium and accrued and unpaid interest. On and after April 1, 2023 and April 1, 2024, the 2026 Notes and the 2029 Notes, respectively, may be redeemed at the issuer’s option, in whole or in part, at the redemption prices set forth in the respective indenture governing such notes, plus accrued and unpaid interest. Beginning on April 1, 2025 and April 1, 2026, the 2026 Notes and 2029 Notes, respectively, may be redeemed at par plus accrued and unpaid interest.
The indentures governing the 2026 Notes and 2029 Notes contain customary affirmative and negative covenants restricting, among other things, the ability of the operating partnership and its restricted subsidiaries to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions (including distributions to holders of Preferred Units, Ferrellgas Partners and the general partner) or repurchase or redeem their equity interests (including redemptions of Preferred Units); repurchase or redeem certain debt; make certain other restricted payments or investments; sell assets, incur liens, enter into transactions with affiliates, enter into agreements restricting the operating partnership’s subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of their assets. The indentures also restrict the ability of the general partner to engage in certain activities.
In particular, under these covenants, subject to certain exceptions and additional requirements, the operating partnership is permitted to make cash distributions to holders of Preferred Units, Ferrellgas Partners and the general partner, redemptions of Preferred Units and other restricted payments (i) only in limited amounts specified in the indentures and (ii) only if the operating partnership’s net leverage ratio (defined generally to mean the ratio of consolidated total net debt to trailing i four quarters consolidated EBITDA, both as adjusted for certain, specified items) is not greater than i 5.0 to 1.0, on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events. Further, if the operating partnership’s consolidated fixed charge coverage ratio (defined generally to mean the ratio of trailing i four quarters consolidated EBITDA to consolidated fixed charges, both as adjusted for certain, specified items) is equal to or less than i 1.75 to 1.00 (on a pro forma basis giving effect to the restricted payment and, if applicable, certain other specified events), the amount of distributions and other restricted payments the operating partnership is permitted to make under the indentures is further limited. As of October 31, 2021, the operating partnership is in compliance with the total net leverage ratio and fixed charge coverage ratio requirements.
46
The scheduled annual principal payments on long-term debt are as follows:
i
| | | |
Payment due by fiscal year |
| Scheduled | |
2022 | | $ | i 1,075 |
2023 | |
| i 1,709 |
2024 | |
| i 1,139 |
2025 | |
| i 930 |
2026 | |
| i 650,710 |
Thereafter | |
| i 825,266 |
Total | | $ | i 1,480,829 |
Letters of credit outstanding at October 31, 2021 and July 31, 2021 totaled $ i 97.5 million and $ i 107.7 million, respectively, and were used to secure insurance arrangements, product purchases and commodity hedges. As of October 31, 2021, Ferrellgas, L.P. had available borrowing capacity under its Credit Facility of $ i 252.5 million.
iG. Preferred units
On the Effective Date, pursuant to an Investment Agreement with certain purchasers named therein, the operating partnership issued and sold an aggregate of i 700,000 Preferred Units (the “Preferred Units”), having an aggregate initial liquidation preference of $ i 700.0 million. The purchase price per Preferred Unit was $ i 1,000 less a i 3.0% purchase price discount, for an aggregate purchase price of $ i 679.0 million. The operating partnership received net proceeds from the issuance and sale of the Preferred Units of approximately $ i 651.3 million, after deduction of the purchase price discount and certain expenses.
The operating partnership used such net proceeds, together with the net proceeds of the issuance and sale of the 2026 Notes and the 2029 Notes and cash on hand, (i) to redeem (or satisfy and discharge the indentures governing and subsequently redeem) all of the issued and outstanding 2021 Notes, 2022 Notes, 2023 Notes and 2025 Notes, as described in Note F - Debt, and (ii) to repay all outstanding obligations under the Accounts Receivable Facility in connection with the termination of that facility.
Redemption of the Preferred Units in the near term is not probable because of the high redemption price in the first three to five years. As described in greater detail under “Issuer Redemption Right” below, the Redemption Price for the Preferred Units is based upon the greater of the amount that would result in a i 1.47x MOIC (defined below) and the amount that would result in a i 12.25% internal rate of return. If the Preferred Units were redeemed at any time during the first three to four years after issuance, the i 1.47x MOIC would require a large premium payment and that large premium payment would result in an internal rate of return far in excess of the minimum i 12.25%. Consequently, it is unlikely that Ferrellgas would be able to achieve any savings in its cost of capital by redeeming the Preferred Units during the first three to four years after issuance.
“MOIC” means, with respect to a Preferred Unit, a multiple on invested capital equal to the quotient determined by dividing (A) the sum of (x) the aggregate amount of all distributions made in cash with respect to such Preferred Unit prior to the applicable date of determination, with certain exclusions, plus (y) each Redemption Price paid in cash in respect of such Preferred Unit, on or prior to the applicable date of determination, by (B) the Purchase Price (defined below) of such Preferred Unit.
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On the Effective Date the general partner entered into (i) the Fifth Amended and Restated Agreement of Limited Partnership of Ferrellgas, L.P. (the “Amended OpCo LPA”), which amended and restated in its entirety the Fourth Amended and Restated Agreement of Limited Partnership of Ferrellgas L.P., and (ii) the First Amendment to the Amended OpCo LPA (the “OpCo LPA Amendment”), which sets forth the preferences, rights, privileges and other terms of the Preferred Units.
Issuer Redemption Right
The operating partnership has the right to redeem all or a portion of the Preferred Units for cash, pro rata and at any time and from time to time, including in connection with a Change of Control (as defined in the OpCo LPA Amendment), at an amount per Preferred Unit (the “Redemption Price”) equal to, without duplication, the sum of (a) the greater of (i) the amount necessary to result in a MOIC of i 1.47x in respect of the purchase price, before discount, of such Preferred Unit, which is $ i 1,000 per Preferred Unit (the “Purchase Price”), and (ii) the amount necessary to result in the applicable internal rate of return equal to i 12.25%, which is increased by i 150 basis points if the operating partnership has elected to pay more than four Quarterly Distributions (as defined below) in PIK Units (as defined below) and (b) the accumulated but unpaid Quarterly Distributions to the date of redemption, if any. A partial redemption of the Preferred Units is permitted only in the event the aggregate amount to be paid in respect of all Preferred Units included in such partial redemption is at least $ i 25.0 million.
Investor Redemption Right
In the event that (i) any Class B Units are outstanding, or (ii) (x) i no Class B Units are outstanding and (y) no more than i 233,300 Preferred Units are outstanding, at any time on and after the tenth anniversary of the Effective Date the Required Holders may elect, by delivery of written notice, to have the operating partnership fully redeem each remaining outstanding Preferred Unit for an amount in cash equal to the Redemption Price. “Required Holders” refers to both (i) holders owning at least i 33.3% of the total Preferred Units outstanding at any time and (ii) certain initial affiliated purchasers, for so long as such initial affiliated purchasers collectively own at least i 25% of the Preferred Units outstanding at such time.
In the event that (i) i no Class B Units are outstanding and (ii) more than i 233,300 Preferred Units are outstanding, the Required Holders will have the right to trigger a sale of the operating partnership after the tenth anniversary of the Effective Date. If the operating partnership fails to consummate a sale that would pay the Redemption Price in full within i 180 days of written notice requiring such sale, the Required Holders will have the right to appoint a majority of the members of the Board of Directors of the general partner and initiate a sale of the operating partnership.
Change of Control
Upon a Change of Control (as defined in the OpCo LPA Amendment), the Required Holders will have the option to require the redemption of all or a portion of the Preferred Units in cash in an amount equal to the Redemption Price; provided, that such Redemption Price shall not be payable unless the operating partnership shall have first made any required change of control offer pursuant to the indentures governing the 2026 Notes and the 2029 Notes and purchased all such 2026 Notes and 2029 Notes tendered pursuant to such offer (unless otherwise waived by such noteholders); provided, further that the Redemption Price shall be paid immediately following the purchase of such tendered Notes (if any).
Fair Value of Embedded Derivatives
Ferrellgas identified the investor redemption right and the change in control option as embedded derivatives that require bifurcation as they are not clearly and closely related to the debt host contract and has concluded that the fair values at issuance and at October 31, 2021, are immaterial to the financial statements.
Distributions
Pursuant to the OpCo LPA Amendment, the operating partnership is required to pay to the holders of each Preferred Unit a cumulative, quarterly distribution (the "Quarterly Distribution") at the Distribution Rate (as defined below) on the Purchase Price.
"Distribution Rate" means, for the first five years after March 30, 2021, a rate per annum equal to i 8.956%, with certain increases in the Distribution Rate on each of the 5th, 6th and 7th anniversaries of March 30, 2021, subject to a maximum rate of i 11.125% and certain other adjustments and exceptions.
48
The Quarterly Distribution may be paid in cash or, at the election of the operating partnership "in kind" through the issuance of additional Preferred Units ("PIK Units") at the quarterly Distribution Rate plus an applicable premium that escalates each year from i 75 bps to i 300 bps so long as the Preferred Units remain outstanding. In the event the operating partnership fails to make any Quarterly Distribution in cash, such Quarterly Distribution will automatically be paid in PIK Units.
The Distribution Rate on the Preferred Units will increase upon violation of certain protective provisions for the benefit of Preferred Unit holders notwithstanding the cap mentioned above.
As of October 31, 2021, the Quarterly Distribution accrued was $ i 17.3 million. $ i 15.1 million of the Quarterly Distribution was paid in cash to holders of Preferred Units on November 15, 2021.
Tax Distributions
For any quarter in which the operating partnership makes a Quarterly Distribution in PIK Units in lieu of cash, it will be required to make a subsequent cash tax distribution for such quarter in an amount equal to the (i) the lesser of (x) i i 25 / % and (y) the highest combined federal, state and local tax rate applicable for corporations organized in New York, multiplied by (ii) the excess (if any) of (A) one-fourth (1/4th) of the estimated taxable income to be allocated to the holders of Preferred Units for the year in which the Quarterly Tax Payment Date (which refers to certain specified dates that next follow a Quarterly Distribution date on which PIK Units were issued) occurs, over (B) any cash paid on the Quarterly Distribution date immediately preceding the Quarterly Tax Payment Date on which a quarterly tax amount would otherwise be paid (such amount, the "Tax Distribution"). Tax Distributions are treated as advances against, and reduce, future cash distributions for any reason, including payments in redemption of Preferred Units or PIK Units, or payments to the holders in their capacity as such pursuant to any side letter or other agreement.
Additional Amounts for Certain Purchasers
The operating partnership is required to pay certain additional amounts of cash (the “Additional Amounts”) as necessary to certain holders of Preferred Units that hold their interests through a “blocker,” which is a U.S. entity that is owned and organized by certain original purchasers of Preferred Units who are non-U.S. persons or tax exempt for U.S. tax purposes and is treated as a corporation for U.S. tax purposes. Only certain original purchasers of Preferred Units who hold their Preferred Units through such blockers are, and none of their transferees is, entitled to Additional Amounts. Additional Amounts are capped at the lesser of: (a) the product of i 20% multiplied by taxable income allocated to a “blocker” (as defined) divided by i 0.8, and (b) the actual taxes payable by the “blocker” as a result of holding Senior Preferred Units.
Board Rights
For so long as at least i 140,000 Preferred Units remain outstanding, holders of the Preferred Units have the right to designate i one director to the Board of the general partner, subject to approval by the general partner.
Protective Provisions
The OpCo LPA Amendment and the Sixth Amended and Restated Agreement of Limited Partnership of Ferrellgas Partners, L.P. include, among other things, certain covenants for the benefit of holders of Preferred Units applicable to the operating partnership and, in certain instances, Ferrellgas Partners, for so long as at least $ i 35,000,000 of Preferred Units and PIK Units remain outstanding. These covenants include, among other things, limitations on (i) effecting a Change of Control, (ii) amending organizational documents, (iii) issuing certain equity securities, (iv) issuing Preferred Units, (v) filing for bankruptcy, (vi) non-ordinary course investments, and (vii) incurring certain levels of indebtedness.
Ranking and Liquidation Preference
The Preferred Units rank senior to any other class or series of equity interests of the operating partnership (including the partnership interests held by Ferrellgas Partners and the general partner). Upon a liquidation, dissolution or winding up of the operating partnership, each holder of Preferred Units will be entitled to receive, prior and in preference to any distribution of any assets of the operating partnership to the holders of any other class or series of equity interests in the operating partnership (including Ferrellgas Partners and the general partner), an amount per Preferred Unit equal to the Redemption Price.
49
Restrictions on Cash Distributions to Ferrellgas Partners and the General Partner
The operating partnership is permitted to make distributions of Available Cash (as defined in the Amended OpCo LPA) to Ferrellgas Partners only if (i) the operating partnership has made all required Quarterly Distributions (in cash or PIK Units), Tax Distributions and payments of Additional Amounts, (ii) the operating partnership has redeemed all PIK Units issued, (iii) the operating partnership’s consolidated net leverage (defined generally to mean the ratio of the operating partnership’s consolidated total net debt (including the total redemption price of all outstanding Preferred Units and PIK Units but excluding certain letters of credit and capital lease obligations) as of each Quarterly Distribution Date to trailing four quarters consolidated EBITDA, both as adjusted for certain, specified items) is below i 7.25x through May 15, 2022 and i 7.00x thereafter, net of cash, immediately before and after giving effect to such distribution, (iv) the operating partnership has at least $ i 100 million of liquidity, consisting of unrestricted cash on hand and available capacity under the Credit Agreement or any replacement thereof, and (v) the operating partnership is in compliance with the other protective provisions in the OpCo LPA Amendment.
iH. Equity
Partnership distributions
Ferrellgas, L.P. has recognized the following distributions:
i
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 | | ||
Ferrellgas Partners | | $ | i 50,000 | | $ | — | |
General partner | |
| — | |
| — | |
See additional discussions about transactions with related parties in Note L – Transactions with related parties.
Accumulated other comprehensive income (loss) (“AOCI”)
See Note K – Derivative instruments and hedging activities for details regarding changes in fair value on risk management financial derivatives recorded within AOCI for the three months ended October 31, 2021 and 2020.
General partner’s commitment to maintain its capital account
Ferrellgas, L.P.’s partnership agreement allows the general partner to have an option to maintain its i 1.0101% general partner interest (excluding the interest attributable to the Preferred Units) concurrent with the issuance of other additional equity.
During the three months ended October 31, 2021, the general partner made non-cash contributions of $ i 9.0 thousand to Ferrellgas, L.P. to maintain its i 1.0101% general partner interest.
During the three months ended October 31, 2020, the general partner made non-cash contributions of $ i 7.0 thousand to Ferrellgas, L.P. to maintain its i 1.0101% general partner interest.
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I. Revenue from contracts with customers
Disaggregation of revenue
Ferrellgas, L.P. disaggregates revenues based upon the type of customer and on the type of revenue. The following table presents retail propane revenues, wholesale propane revenues and other revenues. Retail revenues result from sales to end use customers, wholesale revenues result from sales to or through resellers and all other revenues include sales of appliances and other materials, other fees charged to customers and equipment rental charges.
i
| | | | | | | | |
|
| | For the three months ended October 31, | | ||||
| |
| 2021 |
| 2020 |
| ||
Retail - Sales to End Users | | | $ | i 252,510 | | $ | i 174,645 | |
Wholesale - Sales to Resellers | | |
| i 113,971 | |
| i 102,612 | |
Other Gas Sales | | |
| i 6,223 | |
| i 3,792 | |
Other | | |
| i 21,802 | |
| i 19,845 | |
Propane and related equipment revenues | | | $ | i 394,506 | | $ | i 300,894 | |
Contract assets and liabilities
Ferrellgas, L.P.’s performance obligations are generally limited to the delivery of propane for our retail and wholesale contracts. Ferrellgas, L.P.’s performance obligations with respect to sales of appliances and other materials and other revenues are limited to the delivery of the agreed upon good or service. Ferrellgas, L.P. does not have material performance obligations that are delivered over time, thus all of our revenue is recognized at the time the goods, including propane, are delivered or installed. Ferrellgas, L.P. offers “even pay” billing programs that can create customer deposits or advances, depending on whether Ferrellgas, L.P. has delivered more propane than the customer has paid for or whether the customer has paid for more propane than what has been delivered. Revenue is recognized from these customer deposits or advances to customers at the time product is delivered. The advance or deposit is considered to be a contract asset or liability. Additionally, from time to time, we have customers that pay in advance for goods or services, and such amounts result in contract liabilities.
Ferrellgas, L.P. incurs incremental commissions directly related to the acquisition or renewal of customer contracts. The commissions are calculated and paid based upon the number of gallons sold to the acquired or renewed customer. The total amount of commissions that we incur is not material, and the commissions are expensed commensurate with the deliveries to which they relate; therefore, Ferrellgas, L.P. does not capitalize these costs.
The following table presents the opening and closing balances of our receivables, contract assets, and contract liabilities:
i
| | | | | | |
|
|
| ||||
Accounts receivable | | $ | i 175,871 | | $ | i 138,757 |
Contract assets | | $ | i 5,283 | | $ | i 10,074 |
Contract liabilities | |
| | |
|
|
Deferred revenue (1) | | $ | i 62,365 | | $ | i 49,354 |
| (1) | Of the beginning balance of deferred revenue, $ i 10.5 million was recognized as revenue during the three months ended October 31, 2021. |
Remaining performance obligations
Ferrellgas, L.P.’s remaining performance obligations are generally limited to situations where its customers have remitted payment but have not yet received deliveries of propane. This most commonly occurs in Ferrellgas, L.P.’s even pay billing programs and Ferrellgas expects that these balances will be recognized within a year or less as the customer takes delivery of propane.
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J. Fair value measurements
Derivative financial instruments
The following table presents Ferrellgas, L.P.’s financial assets and financial liabilities that are measured at fair value on a recurring basis for each of the fair value hierarchy levels, including both current and noncurrent portions, as of October 31, 2021 and July 31, 2021:
i
| | | | | | | | | | | | |
| | Asset (Liability) | ||||||||||
| | Quoted Prices in Active | | | | | | | | | | |
| | Markets for Identical | | Significant Other | | | | | | | ||
| | Assets and Liabilities | | Observable Inputs | | Unobservable Inputs | | | | |||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
| | | | | | | | | | | | |
Assets: |
| |
|
| |
|
| |
|
| |
|
Derivative financial instruments: |
| |
|
| |
|
| |
|
| |
|
Commodity derivatives | | $ | — | | $ | i 148,656 | | $ | — | | $ | i 148,656 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Derivative financial instruments: | |
|
| |
|
| |
|
| |
|
|
Commodity derivatives | | $ | — | | $ | ( i 8,548) | | $ | — | | $ | ( i 8,548) |
| | | | | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| |
Assets: | |
|
| |
|
| |
|
| |
|
|
Derivative financial instruments: | |
|
| |
|
| |
|
| |
|
|
Commodity derivatives | | $ | — | | $ | i 94,244 | | $ | — | | $ | i 94,244 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Derivative financial instruments: | |
|
| |
|
| |
|
| |
|
|
Commodity derivatives | | $ | — | | $ | ( i 4,458) | | $ | — | | $ | ( i 4,458) |
Methodology
The fair values of Ferrellgas, L.P.’s non-exchange traded commodity derivative contracts are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators.
Other financial instruments
The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. At October 31, 2021 and July 31, 2021, the estimated fair value of Ferrellgas, L.P.’s long-term debt instruments was $ i 1,433.2 million and $ i 1,466.4 million, respectively. Ferrellgas, L.P. 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, L.P. has other financial instruments such as trade accounts receivable which could expose it to concentrations of credit risk. The credit risk from trade accounts receivable is limited because of a large customer base which extends across many different U.S. markets.
/ | | | | | | | | | | | |
K. Derivative instruments and hedging activities
Ferrellgas, L.P. is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas, L.P. utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Of these, the propane commodity derivative instruments are designated as cash flow hedges.
52
Derivative instruments and hedging activity
During the three months ended October 31, 2021 and 2020, Ferrellgas, L.P. did not recognize any gain or loss in earnings related to hedge ineffectiveness and did not exclude any component of financial derivative contract gains or losses from the assessment of hedge effectiveness related to commodity cash flow hedges.
The following tables provide a summary of the fair value of derivatives within Ferrellgas, L.P.’s condensed consolidated balance sheets as of October 31, 2021 and July 31, 2021:
i
| | | | | | | | | | | |
| | Final | |||||||||
| | Maturity | Asset Derivatives | | Liability Derivatives | ||||||
Derivative Instrument |
| Date | Location |
| Fair value |
| Location |
| Fair value | ||
Derivatives designated as hedging instruments | | December 2023 | | | | | | | | | |
Commodity derivatives-propane |
| | Price risk management asset | | $ | i 129,389 |
| Other current liabilities | | $ | i 7,650 |
Commodity derivatives-propane |
| | Other assets, net | |
| i 19,267 |
| Other liabilities | | | i 898 |
|
| | Total | | $ | i 148,656 |
| Total | | $ | i 8,548 |
| | | | | | | | | | | |
| | Final | |||||||||
| | Maturity | Asset Derivatives | | Liability Derivatives | ||||||
Derivative Instrument |
| Date | Location |
| Fair value |
| Location |
| Fair value | ||
Derivatives designated as hedging instruments | | December 2021 | | | | | | | | | |
Commodity derivatives-propane |
| | Price risk management asset | | $ | i 78,001 |
| Other current liabilities | | $ | i 3,429 |
Commodity derivatives-propane |
| | Other assets, net | |
| i 16,243 |
| Other liabilities | |
| i 1,029 |
|
| | Total | | $ | i 94,244 |
| Total | | $ | i 4,458 |
Ferrellgas, L.P.’s exchange traded commodity derivative contracts require cash margin deposit as collateral for contracts that are in a negative mark-to-market position. These cash margin deposits will be returned if mark-to-market conditions improve or will be applied against cash settlement when the contracts are settled. Liabilities represent cash margin deposits received by Ferrellgas, L.P. for contracts that are in a positive mark-to-market position. The following tables provide a summary of cash margin balances as of October 31, 2021 and July 31, 2021, respectively:
i
| | | | | | | | | | |
| | |||||||||
| | Assets | | Liabilities | ||||||
Description |
| Location |
| Amount |
| Location |
| Amount | ||
Margin Balances |
| Prepaid expense and other current assets | | $ | i 31,129 |
| Other current liabilities | | $ | i 126,325 |
|
| Other assets, net | |
| i 3,511 |
| Other liabilities | |
| i 18,392 |
| | | | $ | i 34,640 |
|
| | $ | i 144,717 |
| | | | | | | | | | |
| | |||||||||
| | Assets | | Liabilities | ||||||
Description |
| Location |
| Amount |
| Location |
| Amount | ||
Margin Balances |
| Prepaid expense and other current assets | | $ | i 21,068 | | Other current liabilities | | $ | i 79,178 |
|
| Other assets, net | |
| i 3,036 | | Other liabilities | |
| i 15,489 |
| | | | $ | i 24,104 | |
| | $ | i 94,667 |
53
The following tables provide a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of comprehensive income (loss) for the three months ended October 31, 2021 and 2020 due to derivatives designated as cash flow hedging instruments:
i
| | | | | | | | | | | |
| | For the three months ended October 31, 2021 | |||||||||
| | | | | | | Amount of Gain (Loss) | ||||
| | | | | Location of Gain (Loss) | | Reclassified from | ||||
| | Amount of Gain (Loss) | | Reclassified from AOCI | | AOCI into Income | |||||
Derivative Instrument |
| Recognized in AOCI |
| into Income |
| Effective portion |
| Ineffective portion | |||
Commodity derivatives | | $ | i 72,932 |
| Cost of product sold- propane and other gas liquids sales | | $ | i 22,610 | | $ | — |
| | $ | i 72,932 |
|
| | $ | i 22,610 | | $ | — |
| | | | | | | | | | | |
| | For the three months ended October 31, 2020 | |||||||||
| | | | | | | Amount of Gain (Loss) | ||||
| | | | | Location of Gain (Loss) | | Reclassified from | ||||
| | Amount of Gain (Loss) | | Reclassified from AOCI | | AOCI into Income | |||||
Derivative Instrument |
| Recognized in AOCI |
| into Income |
| Effective portion |
| Ineffective portion | |||
Commodity derivatives | | $ | i 5,767 |
| Cost of product sold- propane and other gas liquids sales | | $ | ( i 2,150) | | $ | — |
| | $ | i 5,767 | | | | $ | ( i 2,150) | | $ | — |
The changes in derivatives included in AOCI for the three months ended October 31, 2021 and 2020 were as follows:
i
| | | | | | |
| | For the three months ended October 31, | ||||
Gains and losses on derivatives included in AOCI |
| 2021 |
| 2020 | ||
Beginning balance | | $ | i 89,786 | | $ | ( i 2,313) |
Change in value of risk management commodity derivatives | |
| i 72,932 | |
| i 5,767 |
Reclassification of (gains) losses on commodity hedges to cost of sales - propane and other gas liquids sales, net | |
| ( i 22,610) | |
| i 2,150 |
Ending balance | | $ | i 140,108 | | $ | i 5,604 |
Ferrellgas, L.P. expects to reclassify net gains of approximately $ i 121.7 million to earnings during the next 12 months. These net gains are expected to be offset by decreased margins on propane sales commitments Ferrellgas, L.P. has with its customers that qualify for the normal purchase normal sale exception.
During the three months ended October 31, 2021 and 2020, Ferrellgas, L.P. had no reclassifications to operations resulting from the discontinuance of any cash flow hedges arising from the probability of the original forecasted transactions not occurring within the originally specified period of time defined within the hedging relationship.
As of October 31, 2021, Ferrellgas, L.P. had financial derivative contracts covering i 7.2 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.
Derivative financial instruments credit risk
Ferrellgas, L.P. is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas, L.P.’s counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas, L.P. maintains credit policies with regard to its counterparties that it believes reduce its overall credit risk. These policies include evaluating and monitoring its counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by Ferrellgas, L.P. in the forms of letters of credit, parent guarantees or cash. Ferrellgas, L.P. has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties. If these counterparties that make up the concentration failed to perform according to the terms of their contracts at October 31, 2021, the maximum amount of loss due to credit risk that Ferrellgas, L.P. would incur based upon the gross fair values of the derivative financial instruments is i zero.
54
From time to time Ferrellgas, L.P. enters into derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas, L.P.’s debt rating. There were i no open derivative contracts with credit-risk-related contingent features as of October 31, 2021.
iL. Transactions with related parties
Ferrellgas, L.P. has i no employees and is managed and controlled by its general partner. Pursuant to Ferrellgas, L.P.’s partnership agreement, the general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on behalf of Ferrellgas, L.P. and all other necessary or appropriate expenses allocable to Ferrellgas, L.P. or otherwise reasonably incurred by its general partner in connection with operating Ferrellgas, L.P.’s business. These costs primarily include compensation and benefits paid to employees of the general partner who perform services on Ferrellgas, L.P.’s behalf and are reported in the condensed consolidated statements of operations as follows:
i
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
Operating expense | | $ | i 64,949 | | $ | i 60,980 | |
| | | | | | | |
General and administrative expense | | $ | i 6,229 | | $ | i 6,719 | |
See additional discussions about transactions with the general partner and related parties in Note H – Equity.
Term loan credit agreement with Ferrellgas Partners, L.P.
On January 8, 2021, Ferrellgas, L.P. entered into a term loan credit agreement pursuant to which Ferrellgas, L.P. extended to Ferrellgas Partners, L.P. an unsecured, non-amortizing term loan in the aggregate principal amount of $ i 19.9 million. The term loan bears interest at a rate of i 20% per annum, and all interest on the term loan will be added to the outstanding principal amount of the term loan. The term loan will mature on July 1, 2022. During July 2021, Ferrellgas Partners made an optional prepayment of $ i 9.0 million principal amount of the term loan. The outstanding principal and accrued interest at October 31, 2021 was $ i 13.8 million.
/
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M. Contingencies and commitments
Litigation
Ferrellgas, L.P.’s operations are subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane and, prior to the sales of midstream operations in fiscal 2018, crude oil. As a result, at any given time, Ferrellgas, L.P. can be threatened with or named as a defendant in various lawsuits arising in the ordinary course of business. Other than as discussed below, Ferrellgas, L.P. is not a party to any legal proceedings other than various claims and lawsuits arising in the ordinary course of business. It is not possible to determine the ultimate disposition of these matters; however, management is of the opinion that there are no known claims or contingent claims that are reasonably expected to have a material adverse effect on the consolidated financial condition, results of operations and cash flows of Ferrellgas, L.P.
Ferrellgas, L.P. has been named as a defendant, along with a competitor, in putative class action lawsuits filed in multiple jurisdictions. The lawsuits, which were consolidated in the Western District of Missouri on October 16, 2014, allege that Ferrellgas and a competitor coordinated in 2008 to reduce the fill level in barbeque cylinders and combined to persuade a common customer to accept that fill reduction, resulting in increased cylinder costs to direct customers and end-user customers in violation of federal and certain state antitrust laws. The lawsuits seek treble damages, attorneys’ fees, injunctive relief and costs on behalf of the putative class. These lawsuits have been coordinated for pretrial purposes by the multidistrict litigation panel. The Federal Court for the Western District of Missouri initially dismissed all claims brought by direct and indirect customers other than state law claims of indirect customers under Wisconsin, Maine and Vermont law. The direct customer plaintiffs filed an appeal, which resulted in a reversal of the district court’s dismissal. We filed a petition for a writ of certiorari which was denied. An appeal by the indirect customer plaintiffs resulted in the court of appeals affirming the dismissal of the federal claims and remanding the case to the district court to decide whether to exercise supplemental jurisdiction over the remaining state law claims. Thereafter, in August 2019, Ferrellgas, L.P. reached a settlement with the direct customers, pursuant to which it agreed to pay a total of $ i 6.25 million to resolve all claims asserted by the putative direct purchaser class. With respect to the indirect customers, the district court exercised supplemental jurisdiction over the remaining state law claims, but then granted in part Ferrellgas’ pleadings-based motion and dismissed i 11 of the i 24 remaining state law claims. As a result, there were i 13 remaining state law claims brought by a putative class of indirect customers. On September 23, 2021 the court held an oral argument on the indirect purchaser plaintiffs’ motion for class certification. Thereafter, the court denied the indirect purchaser plaintiffs’ motion for class certification, and a final order on the motion was entered by the Court on November 9, 2021. At this point the only remaining claims are the i 13 named plaintiffs’ individual state claims, which has the effect of substantially reducing the Ferrellgas, L.P. potential liability. Ferrellgas, L.P. believes it has strong defenses and intends to vigorously defend itself against these remaining claims. Ferrellgas, L.P. does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuit.
Ferrellgas, L.P. and Bridger Logistics, LLC (“Bridger”), have been named, along with i two former officers (“Rios and Gamboa”), in a lawsuit filed by Eddystone Rail Company ("Eddystone") on February 2, 2017 in the Eastern District of Pennsylvania (the "EDPA Lawsuit"). Eddystone indicated that it has prevailed in or settled an arbitration against Jamex Transfer Services (“JTS”), previously named Bridger Transfer Services, a former subsidiary of Bridger. The arbitration involved a claim against JTS for money due for deficiency payments under a contract for the use of an Eddystone facility used to offload crude from rail onto barges. Eddystone alleges that Ferrellgas transferred assets out of JTS prior to the sale of the membership interest in JTS to Jamex Transfer Holdings, and that those transfers should be avoided so that the assets can be used to satisfy the amount owed by JTS to Eddystone as a result of the arbitration. Eddystone also alleges that JTS was an “alter ego” of Bridger and Ferrellgas and that Bridger and Ferrellgas breached both an implicit contract as well as fiduciary duties allegedly owed to Eddystone as a creditor of JTS. Ferrellgas believes that Ferrellgas and Bridger have valid defenses to these claims and to Eddystone’s primary claim against JTS for breach of contract. If Eddystone ultimately prevails, however, Ferrellgas believes that the amount of damages awarded, could be material to Ferrellgas. Ferrellgas intends to vigorously defend this claim.
On August 24, 2017, Ferrellgas filed a third-party complaint against JTS, Jamex Transfer Holdings, and other related persons and entities (the "Third-Party Defendants"), asserting claims for breach of contract, indemnification of any losses in the EDPA Lawsuit, tortious interference with contract, and contribution. On June 25, 2018, Ferrellgas entered into an agreement with the Third-Party Defendants which, among other things, resulted in a dismissal of the claims against the Third-Party Defendants from the lawsuit.
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Virtually all discovery has been completed and the lawsuit is proceeding toward the summary judgment stage. As such, management does not currently believe a loss is probable or reasonably estimable at this time. However, we may enter into settlement discussions at any time.
Long-term debt-related commitments
Ferrellgas, L.P. has long and short-term payment obligations under agreements such as the indentures governing its senior notes. See Note F – Debt – for a description of these debt obligations and a schedule of future maturities.
iN. Subsequent events
Ferrellgas, L.P. has evaluated events and transactions occurring after the balance sheet date through the date Ferrellgas, L.P.’s condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that required recognition or disclosure in its condensed consolidated financial statements.
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FERRELLGAS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas, L.P.)
CONDENSED BALANCE SHEETS
(unaudited)
| | | | | | |
| | | ||||
ASSETS |
| |
|
| |
|
Cash | | $ | i 1,100 | | $ | i 1,100 |
Prepaid expenses and other current assets | |
| — | |
| — |
Total assets | | $ | i 1,100 | | $ | i 1,100 |
| | | | | | |
Contingencies and commitments (Note B) | |
|
| |
|
|
| | | | | | |
STOCKHOLDER'S EQUITY | |
|
| |
|
|
Common stock, $ i i 1.00 / par value; i i 2,000 / shares authorized; i i 1,000 / shares issued and outstanding | | $ | i 1,000 | | $ | i 1,000 |
Additional paid in capital | |
| i 102,628 | |
| i 102,628 |
Accumulated deficit | |
| ( i 102,528) | |
| ( i 102,528) |
Total stockholder's equity | | $ | i 1,100 | | $ | i 1,100 |
See notes to condensed financial statements.
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FERRELLGAS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas, L.P.)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
| | | | | | | |
| | For the three months ended October 31, | | ||||
|
| 2021 |
| 2020 |
| ||
General and administrative expense | | $ | — | | $ | i 1,553 | |
| | | | | | | |
Net loss | | $ | — | | $ | ( i 1,553) | |
See notes to condensed financial statements.
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FERRELLGAS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas, L.P.)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| | | | | | |
| | For the three months ended October 31, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: | | | | | | |
Net loss | | $ | — | | $ | ( i 1,553) |
Changes in operating assets and liabilities: | | | | | | |
Prepaid expenses and other current assets | |
| — | |
| i 1,500 |
Cash used in operating activities | |
| — | |
| ( i 53) |
| | | | | | |
Cash flows from financing activities: | | | | | | |
Capital contribution | |
| — | |
| i 53 |
Cash provided by financing activities | |
| — | |
| i 53 |
| | | | | | |
Net change in cash | |
| — | |
| — |
Cash - beginning of period | |
| i 1,100 | |
| i 1,100 |
Cash - end of period | | $ | i 1,100 | | $ | i 1,100 |
See notes to condensed financial statements.
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FERRELLGAS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas, L.P.)
(unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS
iA. Formation
Ferrellgas Finance Corp. (the “Finance Corp.”), a Delaware corporation, was formed on January 16, 2003, and is a wholly-owned subsidiary of Ferrellgas, L.P. (the “Partnership”).
The Partnership contributed $ i 1,000 to the Finance Corp. on January 24, 2003 in exchange for i 1,000 shares of common stock.
The Finance Corp. has nominal assets, does not conduct any operations and has i no employees.
/
iB. Contingencies and commitments
The Finance Corp. serves as co-issuer and co-obligor for debt securities of the operating partnership. At July 31, 2020, the Finance Corp. was liable as co-issuer and co-obligor for the operating partnership’s (i) $ i 500 million aggregate principal amount of unsecured senior notes due 2021, (ii) $ i 475 million aggregate principal amount of unsecured senior notes due 2022, (iii) $ i 500 million aggregate principal amount of unsecured senior notes due 2023, and (iv) $ i 700 million aggregate principal amount of senior secured notes due 2025, which obligations were only reported on the operating partnership’s condensed consolidated balance sheet. The senior notes due 2021, senior notes due 2022 and senior notes due 2023 were redeemed on April 5, 2021, and the senior secured notes due 2025 were redeemed on March 30, 2021. As of October 31, 2021, the Finance Corp. was liable as co-issuer and co-obligor for the operating partnership’s (i) $ i 650 million aggregate principal amount of unsecured senior notes due 2026 and (ii) $ i 825 million aggregate principal amount of unsecured senior notes due 2029, each of which were issued on March 30, 2021 and which obligations are only reported on the operating partnership’s condensed consolidated balance sheet.
/ iC. Subsequent events
The Finance Corp. has evaluated events and transactions occurring after the balance sheet date through the date the Finance Corp.’s condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that required recognition or disclosure in its condensed consolidated financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References and Defined Terms
In this Item 2 of this Quarterly Report on Form 10-Q, unless the context indicates otherwise:
| ● | “us,” “we,” “our,” “ours,” “consolidated,” or “Ferrellgas” are references 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 “Class A Units” or “Class B 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 (except where the context indicates otherwise) 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; |
| ● | “Board of Directors” or “Board” refers to the board of directors of our general partner; |
| ● | "GAAP" refers to accounting principles generally accepted in the United States; |
| ● | “retail sales” refers to Propane and other gas liquid sales: Retail - Sales to End Users or the volume of propane sold primarily to our residential, industrial/commercial and agricultural customers; |
| ● | “wholesale sales” refers to Propane and other gas liquid sales: Wholesale - Sales to Resellers or the volume of propane sold primarily to our portable tank exchange customers and bulk propane sold to wholesale customers; |
| ● | “other gas sales” refers to Propane and other gas liquid sales: Other Gas Sales or the volume of bulk propane sold to other third-party propane distributors or marketers and the volume of refined fuel sold; |
| ● | “propane sales volume” refers to the volume of propane sold to our retail sales and wholesale sales customers; |
| ● | “Class A Units” refers to the Class A Units of Ferrellgas Partners, one of which was issued for every twenty of Ferrellgas Partners’ then-outstanding common units in a 1-for-20 reverse unit split effected on March 30, 2021; |
| ● | “Class B Units” refers to the Class B Units of Ferrellgas Partners; |
| ● | “Preferred Units” refers to the Senior Preferred Units of the operating partnership; |
| ● | “Unitholders” or “unitholders” refers to holders of Class A Units, holders of Class B Units or holders of Preferred Units, as indicated or as the context requires for each such reference; and |
| ● | references to any fiscal year are to the fiscal year ended or ending on July 31 of the applicable year. |
Also, the following terms are defined in this Item 2 of this Quarterly Report on Form 10-Q:
| ● | Amended Ferrellgas Partners LPA |
| ● | Credit Agreement |
| ● | Credit Facility |
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| ● | Effective Date |
| ● | Ferrellgas Partners Notes |
| ● | OpCo LPA Amendment |
Cautionary Note Regarding Forward-looking Statements
Statements included in this report include forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. These statements often use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” “will,” or the negative of those terms or other variations of them or comparable terminology. These statements often discuss plans, strategies, events or developments that we expect or anticipate will or may occur in the future and are based upon the beliefs and assumptions of our management and on the information currently available to them. In particular, statements, express or implied, concerning our future operating results or financial position or our ability to generate sales, income or cash flow are forward-looking statements.
Forward-looking statements are not guarantees of performance. You should not put undue reliance on any forward-looking statements. All forward-looking statements are subject to risks, uncertainties and assumptions that could cause our actual results to differ materially from those expressed in or implied by these forward-looking statements. Many of the factors that will affect our future results are beyond our ability to control or predict. Some of the risk factors that may affect our business, financial condition or results of operations include:
| ● | the effect of weather conditions on the demand for propane; |
| ● | the prices of wholesale propane, motor fuel and crude oil; |
| ● | disruptions to the supply of propane; |
| ● | competition from other industry participants and other energy sources; |
| ● | energy efficiency and technology advances; |
| ● | adverse changes in our relationships with our national tank exchange customers; |
| ● | significant delays in the collection of accounts or notes receivable; |
| ● | customer, counterparty, supplier or vendor defaults; |
| ● | changes in demand for, and production of, hydrocarbon products; |
| ● | disruptions to railroad operations on the railroads we use; |
| ● | increased trucking and rail regulations; |
| ● | inherent operating and litigation risks in gathering, transporting, handling and storing propane; |
| ● | our inability to complete acquisitions or to successfully integrate acquired operations; |
| ● | costs of complying with, or liabilities imposed under, environmental, health and safety laws; |
| ● | the impact of pending and future legal proceedings; |
| ● | the interruption, disruption, failure or malfunction of our information technology systems including due to cyber-attack; |
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| ● | the impact of changes in tax law that could adversely affect the tax treatment of Ferrellgas Partners for federal income tax purposes; |
| ● | economic and political instability, particularly in areas of the world tied to the energy industry; |
| ● | disruptions in the capital and credit markets; and |
| ● | access to available capital to meet our operating and debt-service requirements. |
When considering any forward-looking statement, you should also keep in mind the risk factors set forth in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for fiscal 2021 and in any more recent filings with the SEC. Any of these risks could impair our business, financial condition or results of operations. Any such impairment may affect our ability to make distributions to our unitholders or pay interest on the principal of any of our debt securities. In addition, the trading price of our securities could decline as a result of any such impairment.
Except for our ongoing obligations to disclose material information as required by federal securities laws, we undertake no obligation to update any forward-looking statements or risk factors after the date of this Quarterly Report on Form 10-Q.
Overview
Our management’s discussion and analysis of financial condition and results of operations relates to Ferrellgas Partners and the operating partnership.
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 Finance Corp. and Ferrellgas Finance Corp. have nominal assets, do not conduct any operations and have no employees other than officers. Our activities are primarily conducted through the operating partnership. Ferrellgas Partners Finance Corp. has served as co-issuer and co-obligor for debt securities of Ferrellgas Partners, while Ferrellgas Finance Corp., a subsidiary of the operating partnership, 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.
Ferrellgas Partners and the Preferred Unitholders are the only limited partners of the operating partnership. Ferrellgas, Inc. is the sole general partner of Ferrellgas Partners and the operating partnership and, excluding the economic interests attributable to the Class B Units and the Preferred Units, owns an approximate 1% general partner economic interest in each, and, therefore, an effective 2% general partner economic interest in the operating partnership. Excluding the economic interests attributable to the Preferred Units, Ferrellgas Partners owns an approximate 99% limited partner interest in the operating partnership. For information regarding the economic and other terms of the Class B Units and the Preferred Units, see Note H – Equity and Note G – Preferred units – to our condensed consolidated financial statements included elsewhere herein.
Our Class A Units of Ferrellgas Partners are traded on the OTC Pink Market under the symbol “FGPR”.
Our general partner performs all management functions for us. The parent of our general partner, Ferrell Companies, currently beneficially owns approximately 23.4% of our outstanding Class A units. Ferrell Companies is owned 100% by an employee stock ownership trust.
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 $357.0 million aggregate principal amount of Ferrellgas Partners’ unsecured senior notes due June 15, 2020 (the “Ferrellgas Partners Notes”) during the relevant historical periods.
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We file annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and download our SEC filings over the Internet from several commercial document retrieval services as well as at the SEC’s website at www.sec.gov. Our SEC filings are also available on our website at www.ferrellgas.com at no cost as soon as reasonably practicable after our electronic filing or furnishing thereof with the SEC. Please note that any Internet addresses provided in this Quarterly Report on Form 10-Q are for informational purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such Internet addresses is intended or deemed to be incorporated by reference herein.
The following is a discussion of our historical financial condition and results of operations and should be read in conjunction with our audited historical consolidated financial statements and accompanying Notes thereto included in our Annual Report on Form 10-K for fiscal 2021 and in our unaudited historical condensed consolidated financial statements and accompanying Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
The discussions set forth in the “Results of Operations” and “Liquidity and Capital Resources” sections generally refer to Ferrellgas Partners and its consolidated subsidiaries. However, in these discussions there exists one material difference between Ferrellgas Partners and the operating partnership:
| ● | Ferrellgas Partners entered into a term loan credit agreement with the operating partnership, pursuant to which the operating partnership extended to Ferrellgas Partners an unsecured, non-amortizing term loan in the aggregate principal amount of $19.9 million. The term loan bears interest at a rate of 20% per annum, and all interest on the term loan will be added to the outstanding principal amount of the term loan. The term loan will mature on July 1, 2022. During July 2021, Ferrellgas Partners made an optional prepayment of $9.0 million principal amount of the term loan. The outstanding principal and accrued interest at October 31, 2021 was $13.8 million. As of October 31, 2021, the operating partnership had additional intercompany receivables from Ferrellgas Partners not related to the term loan totaling $3.9 million. |
Recent developments
COVID-19
The coronavirus disease 2019 (COVID-19), which has been declared by the World Health Organization as a “Public Health Emergency of International Concern,” continues to impact the economy of the United States and other countries around the world. COVID-19 poses the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from or limited in conducting business activities for an indefinite period of time. The outbreak of COVID-19 has already resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, manufacturing restrictions, declarations of national emergency and states of emergency, business shutdowns and restrictions on the movement of people throughout the United States and the world. While some of our business operations and support systems are deemed essential in many jurisdictions, we are continuing to assess the impact that COVID-19 may have on our results of operations and financial condition and cannot at this time accurately predict what effects these conditions will have on our operations and sales due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak and the length of the travel restrictions and business closures imposed by governments in different jurisdictions. Additionally, initiatives we have implemented or may implement to slow and/or reduce the impact of COVID-19, such as using staggered start times for drivers, may increase our operating expenses and reduce the efficiency of our operations.
How We Evaluate Our Operations
We evaluate our overall business performance based primarily on a metric we refer to as “Adjusted EBITDA”, which is not defined by GAAP and should not be considered an alternative to earnings measures defined by GAAP. We do not utilize depreciation, depletion and amortization expense in our key measures because we focus our performance management on cash flow generation and our revenue generating assets have long useful lives. For the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss attributable to Ferrellgas Partners, L.P., the most directly comparable GAAP measure, see the subheading “Non-GAAP Financial Measures” below.
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Based on our propane sales volumes in fiscal 2021, we believe that we are the second largest retail marketer of propane in the United States and a leading national provider of propane by portable tank exchange. We serve residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia and Puerto Rico. Our operations primarily include the retail distribution and sale of propane and related equipment and supplies with concentrations in the Midwest, Southeast, Southwest and Northwest regions of the United States.
We use information on temperatures to understand how our results of operations are affected by temperatures that are warmer or colder than normal. Normal temperatures computed by us are the average of the last 10 years of information published by the National Oceanic and Atmospheric Administration. Based on this information we calculate a ratio of actual heating degree days to normal heating degree days. Heating degree days are a general indicator of weather impacting propane usage.
Weather conditions have a significant impact on demand for propane for heating purposes primarily during the months of November through March (the “winter heating season”). Accordingly, the volume of propane used by our customers for this purpose is directly affected by the severity of the winter weather in the regions we serve and can vary substantially from year to year. In any given region, sustained warmer-than-normal temperatures will tend to result in reduced propane usage, while sustained colder-than-normal temperatures will tend to result in greater usage. Although there is a strong correlation between weather and customer usage, general economic conditions in the United States and the wholesale price of propane can have a significant impact on this correlation. Additionally, there is a natural time lag between the onset of cold weather and increased sales to customers. If the United States were to experience a cooling trend we could expect nationwide demand for propane to increase which could lead to greater sales, income and liquidity availability. Conversely, if the United States were to experience a continued warming trend, we could expect nationwide demand for propane for heating purposes to decrease which could lead to a reduction in our sales, income and liquidity availability as well as impact our ability to maintain compliance with our debt covenants.
We employ risk management activities that attempt to mitigate price risks related to the purchase, storage, transport and sale of propane generally in the contract and spot markets from major domestic energy companies. We attempt to mitigate these price risks through the use of financial derivative instruments and forward propane purchase and sales contracts. We enter into propane sales commitments with a portion of our customers that provide for a contracted price agreement for a specified period of time. These commitments can expose us to product price risk if not immediately hedged with an offsetting propane purchase commitment.
Our open financial derivative propane purchase commitments are designated as hedges primarily for fiscal 2022 and 2023 sales commitments and, as of October 31, 2021, we have experienced net mark-to-market gains of approximately $140.1 million. Because these financial derivative purchase commitments qualify for hedge accounting treatment, the resulting asset, liability and related mark-to-market gains or losses are recorded on the condensed consolidated balance sheets as “Prepaid expenses and other current assets,” “Other assets, net,” “Other current liabilities,” "Other liabilities" and “Accumulated other comprehensive loss,” respectively, until settled. Upon settlement, realized gains or losses on these contracts will be reclassified to “Cost of sales-propane and other gas liquid sales” in the condensed consolidated statements of operations as the underlying inventory is sold. These financial derivative purchase commitment net gains are expected to be offset by decreased margins on propane sales commitments that qualify for the normal purchase normal sale exception. At October 31, 2021, we estimate 77% 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.
Summary Discussion of Results of Operations:
Executive Overview
For the three months ended October 31, 2021 and 2020
During the three months ended October 31, 2021, we recognized net loss attributable to Ferrellgas Partners, L.P. of $8.6 million, compared to net loss attributable to Ferrellgas Partners, L.P. of $46.1 million during the three months ended October 31, 2020. This decreased loss primarily reflects an $8.7 million increase in “Gross margin – Propane and other gas liquid sales” and a $28.8 million decrease in “Interest expense.”
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“Interest expense” for Ferrellgas Partners decreased $28.8 million primarily due to (i) a decrease in interest on the Ferrellgas Partners Notes and (ii) lower interest expense in 2021 as a result of the March 30, 2021 refinancing transactions.
Distributable cash flow attributable to equity investors increased to $15.3 million for the three months ended October 31, 2021 compared to $(22.4) million for the prior year period, primarily due to a $32.6 million decrease in net cash interest expense and a $3.5 million increase in Adjusted EBITDA.
Distributable cash flow excess increased to $(2.4) million in the current period from $(21.8) million in the prior year period, primarily due to a $32.6 million decrease in our net cash interest expense and a $3.5 million increase in Adjusted EBITDA, partially offset by a $17.0 million increase in distributions accrued or paid to preferred unitholders.
Consolidated Results of Operations
| | | | | | | |
| | Three months ended October 31, | | ||||
(amounts in thousands) |
| 2021 |
| 2020 |
| ||
Total revenues | | $ | 394,506 | | $ | 300,894 | |
| | | | | | | |
Total cost of sales | |
| 224,148 | |
| 141,294 | |
| | | | | | | |
Operating expense - personnel, vehicle, plant and other | |
| 117,112 | |
| 109,027 | |
Depreciation and amortization expense | |
| 20,295 | |
| 21,390 | |
General and administrative expense | |
| 12,575 | |
| 13,080 | |
Operating expense - equipment lease expense | |
| 5,690 | |
| 6,830 | |
Non-cash employee stock ownership plan compensation charge | |
| 909 | |
| 708 | |
Loss on asset sales and disposals | |
| 1,410 | |
| 813 | |
Operating income | |
| 12,367 | |
| 7,752 | |
Interest expense | |
| (25,395) | |
| (54,226) | |
Other income, net | |
| 4,264 | |
| 108 | |
Loss before income taxes | |
| (8,764) | |
| (46,366) | |
Income tax expense | |
| 96 | |
| 87 | |
Net loss | |
| (8,860) | |
| (46,453) | |
Net loss attributable to noncontrolling interest | |
| (254) | |
| (391) | |
Net loss attributable to Ferrellgas Partners, L.P. | |
| (8,606) | |
| (46,062) | |
Distribution to preferred unitholders | | | 17,005 | | | — | |
Less: General partner's interest in net loss | |
| (86) | |
| (461) | |
Class A Unitholders' interest in net loss | | $ | (25,525) | | $ | (45,601) | |
Non-GAAP Financial Measures
In this Quarterly Report we present the following Non-GAAP financial measures: Adjusted EBITDA, Distributable cash flow attributable to equity investors, Distributable cash flow attributable to Class A and B Unitholders, and Distributable cash flow excess.
Adjusted EBITDA. Adjusted EBITDA for Ferrellgas Partners is calculated as net loss attributable to Ferrellgas Partners, L.P., plus the sum of the following: income tax expense, interest expense, depreciation and amortization expense, non-cash employee stock ownership plan compensation charge, loss on asset sales and disposals, other income, net, severance costs, legal fees and settlements related to non-core businesses, and net loss attributable to noncontrolling interest. Management believes the presentation of this measure is relevant and useful because it allows investors to view the partnership’s performance in a manner similar to the method management uses, adjusted for items management believes make it easier to compare its results with other companies that have different financing and capital structures. Adjusted EBITDA, as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of Adjusted EBITDA that will not occur on a continuing basis may have associated cash payments. This method of calculating Adjusted EBITDA should be viewed in conjunction with measurements that are computed in accordance with GAAP.
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Distributable Cash Flow Attributable to Equity Investors. Distributable cash flow attributable to equity investors is calculated as Adjusted EBITDA minus net cash interest expense, maintenance capital expenditures and cash paid for income taxes, plus proceeds from certain asset sales. Management considers distributable cash flow attributable to equity investors a meaningful measure of Ferrellgas’ ability to declare and pay quarterly distributions to equity investors, including holders of the operating partnership’s Preferred Units. Distributable cash flow attributable to equity investors, as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of distributable cash flow attributable to equity investors that will not occur on a continuing basis may have associated cash payments. Distributable cash flow attributable to equity investors should be viewed in conjunction with measurements that are computed in accordance with GAAP.
Distributable Cash Flow Attributable to Class A and B Unitholders. Distributable cash flow attributable to Class A and B Unitholders is calculated as Distributable cash flow attributable to equity investors minus distributions accrued or paid to Preferred Unitholders and distributable cash flow attributable to general partner and noncontrolling interest. Management considers Distributable cash flow attributable to Class A and B Unitholders a meaningful measure of the partnership’s ability to declare and pay quarterly distributions to Class A and B Unitholders. Distributable cash flow attributable to Class A and B Unitholders, as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of distributable cash flow attributable to Class A and B Unitholders that will not occur on a continuing basis may have associated cash payments. Distributable cash flow attributable to Class A and B Unitholders should be viewed in conjunction with measurements that are computed in accordance with GAAP.
Distributable Cash Flow Excess. Distributable cash flow excess is calculated as Distributable cash flow attributable to Class A and B Unitholders minus Distributions paid to Class A and B Unitholders. Distributable cash flow excess, if any, is retained to establish reserves, to reduce debt, to fund capital expenditures and for other partnership purposes and any shortage is funded from previously established reserves, cash on hand or borrowings under our Credit Facility or, previously, under our terminated accounts receivable securitization facility. Management considers Distributable cash flow excess a meaningful measure of the partnership’s ability to effectuate those purposes. Distributable cash flow excess, as management defines it, may not be comparable to similarly titled measurements used by other companies. Items added into our calculation of distributable cash flow excess that will not occur on a continuing basis may have associated cash payments. Distributable cash flow excess should be viewed in conjunction with measurements that are computed in accordance with GAAP.
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The following table reconciles Adjusted EBITDA, Distributable cash flow attributable to equity investors, Distributable cash flow attributable to Class A and B Unitholders and Distributable cash flow excess to Net loss attributable to Ferrellgas Partners, L.P., the most directly comparable GAAP measure, for the three months ended October 31, 2021 and 2020:
| | | | | | | |
| | Three months ended October 31, | | ||||
(amounts in thousands) | | 2021 | | 2020 | | ||
Net loss attributable to Ferrellgas Partners, L.P. | | $ | (8,606) | | $ | (46,062) | |
Income tax expense | |
| 96 | |
| 87 | |
Interest expense | |
| 25,395 | |
| 54,226 | |
Depreciation and amortization expense | |
| 20,295 | |
| 21,390 | |
EBITDA | |
| 37,180 | |
| 29,641 | |
Non-cash employee stock ownership plan compensation charge | |
| 909 | |
| 708 | |
Loss on asset sales and disposals | |
| 1,410 | |
| 813 | |
Other income, net | |
| (4,264) | |
| (108) | |
Severance costs | | | 216 | | | 684 | |
Legal fees and settlements related to non-core businesses | | | 2,131 | | | 2,508 | |
Net loss attributable to noncontrolling interest | |
| (254) | |
| (391) | |
Adjusted EBITDA | |
| 37,328 | |
| 33,855 | |
Net cash interest expense (a) | |
| (19,119) | |
| (51,716) | |
Maintenance capital expenditures (b) | |
| (3,579) | |
| (5,177) | |
Cash paid for income taxes | |
| — | |
| (35) | |
Proceeds from certain asset sales | |
| 641 | |
| 700 | |
Distributable cash flow attributable to equity investors | |
| 15,271 | |
| (22,373) | |
Less: Distributions accrued or paid to preferred unitholders | | | 17,345 | | | — | |
Distributable cash flow attributable to general partner and non-controlling interest | |
| (340) | |
| 575 | |
Distributable cash flow attributable to Class A and B Unitholders | |
| (2,414) | |
| (21,798) | |
Less: Distributions paid to Class A and B Unitholders | |
| — | |
| — | |
Distributable cash flow excess | | $ | (2,414) | | $ | (21,798) | |
| (a) | Net cash interest expense is the sum of interest expense less non-cash interest expense and other income, net. This amount includes interest expense related to the terminated accounts receivable securitization facility. |
| (b) | Maintenance capital expenditures include capitalized expenditures for betterment and replacement of property, plant and equipment, and may from time to time include the purchase of assets that are typically leased. |
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Operating Results for the three months ended October 31, 2021 and 2020
The following table summarizes propane sales volumes and Adjusted EBITDA results for the periods indicated:
| | | | | | | | | | | | |
| | 2021 | | 2020 | | Increase (Decrease) | | |||||
As of October 31, | | | | | | | | | | | | |
Retail customers | | | 686,752 | | | 706,718 | | | (19,966) |
| (3) | % |
Tank exchange selling locations | | | 60,945 | | | 62,226 | | | (1,281) |
| (2) | % |
| | | | | | | | | | | | |
(amounts in thousands) | | | | | | | | | | | |
|
Three months ended October 31, | | | | | | | | | | | | |
Propane sales volumes (gallons): |
| |
|
| |
|
| |
|
|
| |
Retail - Sales to End Users |
| | 115,825 |
| | 118,018 |
| | (2,193) |
| (2) | % |
Wholesale - Sales to Resellers |
| | 44,055 |
| | 49,590 |
| | (5,535) |
| (11) | % |
|
| | 159,880 |
| | 167,608 |
| | (7,728) |
| (5) | % |
Revenues - |
| |
|
| |
|
| |
|
|
| |
Propane and other gas liquids sales: |
| |
|
| |
|
| |
|
|
| |
Retail - Sales to End Users | | $ | 252,510 |
| $ | 174,645 | | $ | 77,865 |
| 45 | % |
Wholesale - Sales to Resellers | |
| 113,971 |
| | 102,612 | |
| 11,359 |
| 11 | % |
Other Gas Sales (a) | |
| 6,223 |
| | 3,792 | |
| 2,431 |
| 64 | % |
Other (b) | |
| 21,802 |
| | 19,845 | |
| 1,957 |
| 10 | % |
Propane and related equipment revenues | | $ | 394,506 | | $ | 300,894 | | $ | 93,612 |
| 31 | % |
| |
|
| |
|
| |
|
|
|
| |
Gross Margin - | |
|
| |
|
| |
|
|
|
| |
Propane and other gas liquids sales gross margin: (c) | |
|
| |
|
| |
|
|
|
| |
Retail - Sales to End Users (a) | | $ | 100,282 | | $ | 90,734 | | $ | 9,548 |
| 11 | % |
Wholesale - Sales to Resellers (a) | |
| 51,884 | |
| 52,688 | |
| (804) |
| (2) | % |
Other (b) | |
| 18,192 | |
| 16,178 | |
| 2,014 |
| 12 | % |
Propane and related equipment gross profit | | $ | 170,358 | | $ | 159,600 | | $ | 10,758 |
| 7 | % |
| |
|
| |
|
| |
|
|
|
| |
Operating, general and administrative expense (d) | | $ | 129,687 | | $ | 122,107 | | $ | 7,580 |
| 6 | % |
Operating expense - equipment lease expense | |
| 5,690 | |
| 6,830 | |
| (1,140) |
| (17) | % |
| |
|
| |
|
| |
|
|
|
| |
Operating income | | $ | 12,367 | | $ | 7,752 | | $ | 4,615 |
| 60 | % |
| | | | | | | | | | | | |
Depreciation and amortization expense | |
| 20,295 | |
| 21,390 | |
| (1,095) |
| (5) | % |
Non-cash employee stock ownership plan compensation charge | |
| 909 | |
| 708 | |
| 201 |
| 28 | % |
Loss on asset sales and disposals | |
| 1,410 | |
| 813 | |
| 597 |
| 73 | % |
Legal fees and settlements related to non-core businesses | |
| 2,131 | |
| 2,508 | |
| (377) |
| (15) | % |
Severance costs | |
| 216 | |
| 684 | |
| (468) |
| NM | |
Adjusted EBITDA | | $ | 37,328 | | $ | 33,855 | | $ | 3,473 |
| 10 | % |
NM – Not meaningful
| (a) | Gross margin for Other Gas Sales is allocated to Gross margin "Retail - Sales to End Users" and "Wholesale - Sales to Resellers" based on the volumes in each respective category. |
| (b) | Other primarily includes various customer fee income and to a lesser extent appliance and material sales. |
| (c) | Gross margin from "Propane and other gas liquids sales" represents "Revenues - Propane and other gas liquids sales" less "Cost of sales - Propane and other gas liquids sales" and does not include depreciation and amortization. |
| (d) | “Operating, general and administrative expense” above includes both the “Operating expense – personnel, vehicle, plant and other” and the “General and administrative expense” captions in the condensed consolidated statement of operations. |
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Propane sales volumes during the three months ended October 31, 2021 decreased 5%, or 7.7 million gallons, from the prior year period due to decreased sales volumes to retail customers and to decreased sales volumes to tank exchange customers.
Our wholesale sales price per gallon partially correlates to the change in the wholesale market price of propane. The wholesale market price at major supply points in Mt. Belvieu, Texas during the three months ended October 31, 2021 averaged 151% more than the prior year period, while at the Conway, Kansas major supply point prices averaged 169% more than the prior year period. The wholesale market price at Mt. Belvieu, Texas averaged $1.28 and $0.51 per gallon during the three months ended October 31, 2021 and 2020, respectively, while the wholesale market price at Conway, Kansas averaged $1.29 and $0.48 per gallon during the three months ended October 31, 2021 and 2020, respectively. This increase in the wholesale cost of propane contributed to our increase in sales price per gallon and therefore revenues.
Revenues
Retail sales increased $77.9 million compared to the prior year period due to continued focus on the management of the sales lifecycle, from asset utilization through final mile optimization.
Wholesale sales increased $11.4 million compared to the prior year period as a result of an increase in volume in non-retail opportunities.
Other gas sales increased $2.4 million and other revenues increased $2.0 million compared to the prior year period, respectively. Both of these increases are primarily due to revenue from services to customers provided in support of final mile operations.
Gross margin - Propane and other gas liquids sales
Gross margin increased $8.7 million primarily due to a $91.6 million increase in revenue, as discussed above, offset by an $82.9 million increase in related cost of sales as a result of increases in price per gallon.
Gross margin - other
Gross margin increased $2.0 million compared to the prior year period primarily due to increased miscellaneous fees billed to customers and increased tank rental income.
Operating income
Operating income increased $4.6 million primarily due to an $8.7 million increase in "Gross margin - Propane and other gas liquid sales" and a $2.0 million increase in “Gross margin – other,” both as discussed above, and a $1.1 million decrease in “Operating expense – equipment lease expense”, which is partially offset by a $7.6 million increase in “Operating, general and administrative expense”. The decrease in “Operating expense – equipment lease expense” was due to our entering into more finance leases instead of operating leases, resulting in less lease expense and greater interest expense and amortization expense. “Operating, general and administrative expense” increased due to an $8.1 million increase in “Operating expense – personnel, vehicle, plant and other”, partially offset by a $0.5 million decrease in “General and administrative expense”. “Operating expense – personnel, vehicle, plant and other” increased primarily due to planned increases for workforce .
Adjusted EBITDA
Adjusted EBITDA increased $3.5 million primarily due to an $8.7 million increase in "Gross margin - Propane and other gas liquid sales", a $2.0 million increase in “Gross margin – other,” and a $1.1 million decrease in “Operating expense – equipment lease expense”, each as discussed above, which is partially offset by a $7.6 million increase in “Operating, general and administrative expense”. “Operating, general and administrative expense” increased due to an $8.1 million increase in “Operating expense – personnel, vehicle, plant and other”, partially offset by a $0.5 million decrease in “General and administrative expense”. “Operating expense – personnel, vehicle, plant and other” increased primarily due to planned increases for workforce.
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Liquidity and Capital Resources
General
Our primary sources of liquidity and capital resources are cash flows from operating activities, our Credit Facility and funds received from sales of debt and equity securities. As of October 31, 2021, our total liquidity was $409.9 million, which was comprised of $157.4 million in unrestricted cash and $252.5 million of availability under our Credit Facility. These sources of liquidity and short-term capital resources are intended to fund our working capital requirements, acquisitions and capital expenditures. As of October 31, 2021, letters of credit outstanding totaled $97.5 million. Our access to long-term capital resources, to the extent needed to refinance debt or for other purposes, may be affected by our ability to access the capital markets, covenants in our debt agreements and other financial obligations, unforeseen demands on cash, or other events beyond our control.
As of October 31, 2021, we had $11.5 million of restricted cash consisting of a cash deposit made with the administrative agent under our prior senior secured credit facility that was terminated in April 2020.
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 material known cash requirements continue to be our long-term debt, including current portion, and fixed rate interest obligations. These obligations reflect the operating partnership’s issuance of the $650.0 million aggregate principal amount of 2026 Notes and the $825.0 million aggregate principal amount of 2029 Notes and the other transactions effected on the Effective Date.
Our ability to satisfy our obligations is dependent upon our future performance, which will be subject to prevailing weather, economic, financial and business 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 propane operations and related products cash flows 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 propane operations and related equipment sales operations.
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.
We believe that the liquidity available from cash flows from operating activities, unrestricted cash and the Credit Facility will be sufficient to meet our capital expenditure, working capital and letter of credit requirements for the foreseeable future.
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Distributable Cash Flow
Distributable cash flow attributable to equity investors is reconciled to net loss attributable to Ferrellgas Partners, L.P., the most directly comparable GAAP measure, in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the subheading "Non-GAAP Financial Measures" above. A comparison of distributable cash flow attributable to equity investors to cash distributions accrued or paid to equity investors for the twelve months ended October 31, 2021 to the twelve months ended July 31, 2021 is as follows (in thousands):
| | | | | | | | | | | |
|
| Distributable |
| Cash reserves |
| Cash distributions |
| | |||
| | cash flow attributable | | (deficiency) approved | | accrued or paid to | | DCF ratio | |||
| | to equity investors | | by our General Partner | | equity investors | | (a) (b) | |||
Three months ended October 31, 2021 | | $ | 15,271 | | $ | (2,074) | | $ | 17,345 | | 0.9 |
Fiscal 2021 | | | 135,654 | | | 111,630 | | | 24,024 | | |
Less: Three months ended October 31, 2020 | | | (22,373) | | | (22,373) | | | — | | |
Twelve months ended October 31, 2021 | | $ | 173,298 | | $ | 131,929 | | $ | 41,369 | | 4.2 |
| | | | | | | | | | | |
Twelve months ended July 31, 2021 | | | 135,654 | | | 111,630 | | | 24,024 | | 5.6 |
Change | | $ | 37,644 | | $ | 20,299 | | $ | 17,345 |
| 2.2 |
| (a) | DCF ratio is calculated as Distributable cash flow attributable to equity investors divided by Cash distributions accrued or paid to equity investors. |
| (b) | NM – Not Meaningful. |
For the twelve months ended October 31, 2021, distributable cash flow attributable to equity investors increased $37.6 million compared to the twelve months ended July 31, 2021. As of October 31, 2021, the accrued quarterly distribution to Preferred Unitholders was $17.3 million. We paid $15.1 million of this distribution in November 2021. The remaining $2.2 million remains accrued as Tax Distributions as defined below under “Financing Activities – Distributions – Preferred unit distribution”. No cash distributions have been paid to our Class A Unitholders since the three months ended October 31, 2018. Thus, cash reserves, which we utilize to meet future anticipated expenditures, increased to $131.9 million during the twelve months ended October 31, 2021, compared to $111.6 million in the twelve months ended July 31, 2021.
Operating Activities
Ferrellgas Partners
Net cash used in operating activities was $15.3 million for the three months ended October 31, 2021, compared to net cash used in operating activities of $11.5 million for the three months ended October 31, 2020. This increase in cash used by operating activities was primarily due to a $38.2 million increase in working capital requirements and a $2.4 million outflow associated with other assets and other liabilities, partially offset by a $36.8 million increase in cash flow from operations.
The increase in working capital requirements for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 was primarily due to a $36.6 million increase in requirements for inventory partially due to rising propane prices in the current period, a $35.5 million increase in accrued interest expense related to the timing and nature of the restructuring transactions in March 2021 and the debt refinancing in April 2020, a $20.2 million increase in requirements for prepaid expenses and other current assets and a $13.8 million increase in requirements for accounts and notes receivable due to rising propane prices in the quarter that was partially offset by slight decreases in volume of propane sold. These increases were partially offset by a $46.2 million decrease in requirements for other current liabilities and a $21.6 million decrease in accounts payable.
The increase in cash flow from operations was primarily due to a $28.8 million decrease in "Interest expense", a $10.8 million increase in gross profit, and an increase of $4.2 million in “Other income, net”, partially offset by a net increase in “Operating expense – personnel, vehicle, plant and other” and “Operating expense – equipment lease expense” of $6.9 million.
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The operating partnership
Net cash used in operating activities was $15.2 million for the three months ended October 31, 2021, compared to net cash used in operating activities of $11.5 million for the three months ended October 31, 2020. This increase in cash used by operating activities was primarily due to a $30.5 million increase in working capital requirements and a $3.1 million outflow associated with other assets and other liabilities, partially offset by a $29.8 million increase in cash flow from operations.
The increase in working capital requirements for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 was primarily due to a $36.6 million increase in requirements for inventory partially due to rising propane prices in the current period, a $27.8 million increase in accrued interest expense related to the timing and nature of the restructuring transactions in March 2021 and the debt refinancing in April 2020, a $20.2 million increase in requirements for prepaid expenses and other current assets, and a $13.8 million increase in requirements for accounts and notes receivable due to rising propane prices in the quarter that was partially offset by slight decreases in volume of propane sold. These increases were partially offset by a $46.2 million decrease in requirements for other current liabilities and a $21.6 million decrease in accounts payable.
The increase in cash flow from operations was primarily due to a $21.1 million decrease in "Interest expense", a $10.8 million increase in gross profit, and an increase of $4.8 million in “Other income, net”, partially offset by a net increase in “Operating expense – personnel, vehicle, plant and other” and “Operating expense – equipment lease expense” of $6.9 million.
Investing Activities
Ferrellgas Partners
Capital Requirements
Our business requires continual investments to upgrade or enhance existing operations and to ensure compliance with safety and environmental regulations. Capital expenditures for our business consist primarily of:
| ● | Maintenance capital expenditures. These capital expenditures include expenditures for betterment and replacement of property, plant and equipment, and may from time to time include the purchase of assets that are typically leased, rather than to generate incremental distributable cash flow. Examples of maintenance capital expenditures include a routine replacement of a worn-out asset or replacement of major vehicle components; and |
| ● | Growth capital expenditures. These expenditures are undertaken primarily to generate incremental distributable cash flow. Examples include expenditures for purchases of both bulk and portable propane tanks and other equipment to facilitate expansion of our customer base and operating capacity. |
Net cash used in investing activities was $29.6 million for the three months ended October 31, 2021, compared to net cash used in investing activities of $18.0 million for the three months ended October 31, 2020. This increase in net cash used in investing activities was primarily due to a $9.8 million increase in “Business acquisitions, net of cash acquired” and a $1.0 million increase in “Capital expenditures”.
Due to the mature nature of our operations we do not anticipate significant fluctuations in maintenance capital expenditures, with the exception of future decisions regarding lease versus buy financing options. However, future fluctuations in growth capital expenditures could occur due to the opportunistic nature of these projects.
The operating partnership
The investing activities discussed above also apply to the operating partnership, other than the net activity of the term loan credit agreement with Ferrellgas Partners, L.P. See “Disclosures about Effects of Transactions with Related Parties” below for further discussion.
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Financing Activities
Ferrellgas Partners
Net cash used in financing activities was $68.3 million for the three months ended October 31, 2021, compared to net cash used in financing activities of $4.7 million for the three months ended October 31, 2020. This increase in cash flow used in financing activities was primarily due to $15.7 million in preferred unit distributions and $50.0 million in distributions to Class B unitholders, both of which occurred in the three months ended October 31, 2021.
Letters of credit outstanding at October 31, 2021 and July 31, 2021 totaled $97.5 million and $107.7 million, respectively, and were used to secure insurance arrangements, product purchases and commodity hedges. As of October 31, 2021, we had available borrowing capacity under our Credit Facility of $252.5 million.
The operating partnership
The financing activities discussed above also apply to the operating partnership except for cash flows related to distributions paid, as discussed below.
Distributions
Partnership distributions
The Sixth Amended and Restated Agreement of Limited Partnership of Ferrellgas Partners, L.P. (the “Amended Ferrellgas Partners LPA”) requires Ferrellgas Partners to make quarterly cash distributions of all of its “available cash”. Available cash is defined in the Amended Ferrellgas Partners LPA as, generally, the sum of Ferrellgas’ Partners cash receipts less consolidated cash disbursements and net changes in reserves established by our general partner for future requirements. In general, the amount of Ferrellgas Partners’ available cash depends primarily on whether and the extent to which Ferrellgas Partners receives cash distributions from the operating partnership, as such distributions generally would be Ferrellgas Partners’ only significant cash receipts.
Pursuant to the Amended Ferrellgas Partners LPA, while any Class B Units remain outstanding, any distributions by Ferrellgas Partners to its partners must be made such that the ratio of (i) the amount of distributions made to holders of Class B Units to (ii) the amount of distributions made to holders of Class A Units and the general partner is not less than 6:1. The Amended Ferrellgas Partners LPA permits Ferrellgas Partners, in the general partner’s discretion, to make distributions to the Class B Unitholders in a greater proportion than the minimum 6:1 ratio, including paying 100% of any such distribution Class B Unitholders. The Class B Units will not be convertible into Class A Units until Class B Unitholders receive distributions in the aggregate amount of $357.0 million (which was the outstanding principal amount of the Ferrellgas Partners Notes), and the rate at which Class B Units will convert into Class A Units increases annually. Additionally, the price at which Ferrellgas Partners may redeem the Class B Units during the first five years after March 30, 2021 (the “Effective Date”) is based on the Class B Unitholders’ receipt of a specified internal rate of return in respect of their Class B Units. This specified internal rate of return in respect of the Class B Units is 15.85%, but that amount increases under certain circumstances, including if the operating partnership paid distributions on the Preferred Units in-kind rather than in cash for a certain number of quarters. Accordingly, distributing cash to the Class B Unitholders in a greater proportion than the minimum 6:1 ratio could result in the Class B Units becoming convertible into Class A Units more quickly or at a lower conversion rate or reduce the redemption price for the Class B Units. For additional discussion of the terms of the Class B Units, see Note H – Equity in the notes to our condensed consolidated financial statements.
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For these reasons, although the general partner has not made any decisions or adopted any policy with respect to the allocation of future distributions by Ferrellgas Partners to its partners, the general partner may determine that it is advisable to pay more than the minimum amount of any distribution, up to 100% of the amount of such distribution, to Class B Unitholders. In fact, on October 8, 2021, Ferrellgas Partners made a cash distribution in the aggregate amount of approximately $49.9 million entirely to the Class B Unitholders, without making any distribution to Class A Unitholders and the general partner. In our Annual Report on Form 10-K for fiscal 2021, see “Risk Factors—Risks Inherent in an Investment in our Class A or Class B Units or our Debt Securities and Other Risks Related to Our Capital Structure and Financing Arrangements—If Ferrellgas Partners is permitted to make and makes distributions to its partners, while any Class B Units remain outstanding, Class B Unitholders collectively will receive at least approximately 85.7% of the aggregate amount of each such distribution and may receive up to 100% of any such distribution. Accordingly, while any Class B Units remain outstanding, Class A Unitholders may not receive any distributions and, in any case, will not receive collectively more than approximately 14.1% of any distribution.”
Ferrellgas Partners does not intend to pay any distributions to Class A Unitholders or the general partner for the three months ended October 31, 2021.
The ability of Ferrellgas Partners to make cash distributions to its Class A Unitholders and Class B Unitholders is dependent on the receipt by Ferrellgas Partners of cash distributions from the operating partnership. For so long as any Preferred Units remain outstanding, the amount of cash that otherwise would be available for distribution by the operating partnership to Ferrellgas Partners and the general partner will be reduced by the amount of cash distributions and other payments made by the operating partnership in respect of the Preferred Units, including payments to redeem Preferred Units. Further, the indentures governing the 2026 Notes and 2029 Notes, the credit agreement (the “Credit Agreement”) that provides for a four-year revolving credit facility (the “Credit Facility”) in an aggregate principal amount of up to $350.0 million, and the First Amendment to the Amended OpCo LPA which sets forth the preferences, rights, privileges and other terms governing the Preferred Units (the “OpCo LPA Amendment”) contain covenants that limit the ability of the operating partnership to make distributions to Ferrellgas Partners and therefore effectively limit the ability of Ferrellgas Partners to make distributions to its Class A Unitholders and Class B Unitholders. See Note F – Debt and Note G – Preferred units for a discussion of these limitations. In our Annual Report on Form 10-K for fiscal 2021, see “Risk Factors—Risks Inherent in an Investment in our Class A or Class B Units or our Debt Securities and Other Risks Related to Our Capital Structure and Financing Arrangements—Our ability to make cash distributions to holders of Class A Units and Class B Units is dependent on the receipt by Ferrellgas Partners of cash distributions from the operating partnership, which are limited by our obligations under the Indentures, the Credit Agreement and the OpCo LPA Amendment and may be limited by a variety of other factors. Accordingly, we may be unable to make cash distributions to holders of Class A Units and Class B Units.”
Preferred unit distributions
Pursuant to the OpCo LPA Amendment, the operating partnership is required to pay to the holders of each Preferred Unit a cumulative, quarterly distribution (the "Quarterly Distribution") at the Distribution Rate (as defined below) on the unit purchase price of such Preferred Unit, which is $1,000 per unit.
"Distribution Rate" means, for the first five years after March 30, 2021, a rate per annum equal to 8.956%, with certain increases in the Distribution Rate on each of the 5th, 6th and 7th anniversaries of March 30, 2021, subject to a maximum rate of 11.125% and certain other adjustments and exceptions.
The Quarterly Distribution may be paid in cash or, at the election of the operating partnership “in kind” through the issuance of additional Preferred Units (“PIK Units”) at the quarterly Distribution Rate plus an applicable premium that escalates each year from 75 bps to 300 bps so long as the Preferred Units remain outstanding. In the event the operating partnership fails to make any Quarterly Distribution in cash, such Quarterly Distribution will automatically be paid in PIK Units.
The Distribution Rate on the Preferred Units will increase upon violation of certain protective provisions for the benefit of Preferred Unit holders notwithstanding the cap mentioned above.
As of October 31, 2021, the Quarterly Distribution accrued was $17.3 million. On November 15, 2021, $15.1 million of the Quarterly Distribution was paid in cash to holders of Preferred Units. The remaining $2.2 million represents Tax Distributions accrued as defined below.
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Preferred unit tax distributions
For any quarter in which the operating partnership makes a Quarterly Distribution in PIK Units in lieu of cash, it shall make a subsequent cash tax distribution for such quarter in an amount equal to the (i) the lesser of (x) 25% and (y) the highest combined federal, state and local tax rate applicable for corporations organized in New York, multiplied by (ii) the excess (if any) of (A) one-fourth (1/4th) of the estimated taxable income to be allocated to the holders of Preferred Units for the year in which the Quarterly Tax Payment Date (which refers to certain specified dates that next follow a Quarterly Distribution date on which PIK Units were issued) occurs, over (B) any cash paid on the Quarterly Distribution date immediately preceding the Quarterly Tax Payment Date on which a quarterly tax amount would otherwise be paid (such amount, the "Tax Distribution"). Tax Distributions are treated as advances against, and reduce, future cash distributions for any reason, including payments in redemption of Preferred Units or PIK Units, or payments to the holders in their capacity as such pursuant to any side letter or other agreement.
Cash distributions paid
Ferrellgas Partners did not pay any cash distributions to its Class A Unitholders during the quarter ended October 31, 2021. On October 8, 2021, Ferrellgas Partners paid a cash distribution to holders of the Class B Units in the amount of $38.46 per Class B Unit or approximately $49.9 million in the aggregate. As permitted by the Amended Ferrellgas LPA as described above, Ferrellgas Partners made this distribution solely to Class B Unitholders without any contemporaneous distribution to Class A Unitholders and the general partner.
On September 14, 2021, the operating partnership paid a cash distribution to Ferrellgas Partners in the amount of approximately $49.9 million, which Ferrellgas Partners used to pay the October 8, 2021 distribution to its Class B Unitholders described above. The operating partnership also paid a cash distribution during the quarter ended October 31, 2021 in respect of its Preferred Units as discussed above under “—Preferred unit distributions.”
Cash distributions paid
The operating partnership paid cash distributions during the three months ended October 31, 2021 to Ferrellgas Partners and to holders of the Preferred Units as described above. The operating partnership did not pay any cash distributions of during the three months ended October 31, 2020.
Disclosures about Effects of Transactions with Related Parties
We have no employees and are managed and controlled by our general partner. Pursuant to our partnership agreements, our general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on our behalf, and all other necessary or appropriate expenses allocable to us or otherwise reasonably incurred by our general partner in connection with operating our business. These reimbursable costs, which totaled $71.2 million for the three months ended October 31, 2021, include operating expenses such as compensation and benefits paid to employees of our general partner who perform services on our behalf as well as related general and administrative expenses.
During the three months ended October 31, 2021, the operating partnership paid distributions to Ferrellgas Partners as described above.
Term loan credit agreement between Ferrellgas Partners and the operating partnership
As discussed in Note L – Transactions with related parties in the notes to the condensed consolidated financial statements of the operating partnership, on January 8, 2021 Ferrellgas Partners entered into a term loan credit agreement with the operating partnership, pursuant to which the operating partnership extended to Ferrellgas Partners an unsecured, non-amortizing term loan in the aggregate principal amount of $19.9 million. The term loan bears interest at a rate of 20% per annum, and all interest on the term loan will be added to the outstanding principal amount of the term loan. The term loan will mature on July 1, 2022. During July 2021, Ferrellgas Partners made an optional prepayment of $9.0 million principal amount of the term loan. The outstanding principal and accrued interest at October 31, 2021 was $13.8 million.
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Contractual Obligations
As of October 31, 2021, there have been no material changes to our contractual obligations and commitments from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report on Form 10-K for fiscal 2021. For additional information regarding our debt obligations, see Note F – Debt to our condensed consolidated financial statements.
The operating partnership
The contractual obligations discussed above also apply to the operating partnership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We did not enter into any risk management trading activities during the three months ended October 31, 2021. Our remaining market risk sensitive instruments and positions have been determined to be “other than trading.”
Commodity price risk management
Our risk management activities primarily 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.
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. Our propane related financial derivatives are designated as cash flow hedges.
Our risk management activities include the use of financial derivative instruments including, but not limited to, futures, swaps, and options to seek protection from adverse price movements and to minimize potential losses. We enter into these financial derivative instruments with brokers who are clearing members with the Intercontinental Exchange or the Chicago Mercantile Exchange and, to a lesser extent, directly with third parties in the over-the-counter market. We also enter into forward propane purchase and sales contracts with counterparties. These forward contracts qualify for the normal purchase normal sales exception within GAAP guidance and are therefore not recorded on our financial statements until settled.
Transportation Fuel Price Risk
From time to time, our risk management activities also attempt to mitigate price risks related to the purchase of gasoline and diesel fuel for use in the transport of propane from supply or storage locations and from retail fueling stations. When employed, we attempt to mitigate these price risks through the use of financial derivative instruments.
When employed, our risk management strategy involves taking positions in the financial markets that are not more than the forecasted purchases of fuel for our internal use in supply and retail propane delivery fleet in order to minimize the risk of decreased earnings from an adverse price change. This risk management strategy locks in our purchase price and is successful when our gains or losses in the physical product markets are offset by our losses or gains in the financial markets. Our transport fuel financial derivatives are not designated as cash flow hedges.
Risk Policy and Sensitivity Analysis
Market risks associated with energy commodities are monitored daily by senior management for compliance with our commodity risk management policy. This policy includes an aggregate dollar loss limit and limits on the term of various contracts. We also utilize volume limits for various energy commodities and review our positions daily where we remain exposed to market risk, so as to manage exposures to changing market prices.
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We have prepared a sensitivity analysis to estimate the exposure to market risk of our energy commodity positions. Forward contracts, futures, swaps and options outstanding as of October 31, 2021 and July 31, 2021, that were used in our risk management activities were analyzed assuming a hypothetical 10% adverse change in prices for the delivery month for all energy commodities. The potential loss in future earnings from these positions due to a 10% adverse movement in market prices of the underlying energy commodities was estimated at $35.6 million and $30.1 million as of October 31, 2021 and July 31, 2021, respectively. The preceding hypothetical analysis is limited because changes in prices may or may not equal 10%, thus actual results may differ. Our sensitivity analysis does not include the anticipated transactions associated with these transactions, which we anticipate will be 100% effective.
Credit risk
We maintain credit policies with regard to our counterparties that we believe significantly reduce overall credit risk. These policies include evaluating and monitoring of counterparties’ financial condition (including credit ratings), and entering into agreements with counterparties that govern credit guidelines.
Our other counterparties principally consist of major energy companies that are suppliers, marketers, wholesalers, retailers and end users; and major U.S. financial institutions. The overall impact due to certain changes in economic, regulatory and other events may impact our overall exposure to credit risk, either positively or negatively in that counterparties may be similarly impacted. Based on our policies, exposures, credit and other reserves, management does not anticipate a material adverse effect on financial position or results of operations as a result of counterparty performance.
Interest rate risk
We had variable rate indebtedness outstanding related to our letters of credit under our Credit Facility of $97.5 million and $107.7 million as of October 31, 2021 and July 31, 2021, respectively. We had no collateralized note payable borrowings, as we terminated our accounts receivable securitization facility on the Effective Date. Our results of operations, cash flows and financial condition could be materially adversely affected by significant increases in interest rates to the extent that we have variable rate indebtedness (including any disbursements or payments related to letters of credit) outstanding under our Credit Facility.
Critical accounting estimates
Our critical accounting estimates are disclosed under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Form 10-K for fiscal 2021. During the three months ended October 31, 2021 no modifications were made to these critical accounting estimates.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed by the management of Ferrellgas Partners, L.P., Ferrellgas Partners Finance Corp., Ferrellgas, L.P., and Ferrellgas Finance Corp., with the participation of the principal executive officer and principal financial officer of our general partner, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act, were effective as of October 31, 2021.
The management of Ferrellgas Partners, L.P., Ferrellgas Partners Finance Corp., Ferrellgas, L.P., and Ferrellgas Finance Corp. does not expect that our disclosure controls and procedures will prevent all errors and all fraud. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Based on the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the above mentioned partnerships and corporations have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events. Therefore, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are
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designed to provide such reasonable assurances of achieving our desired control objectives, and the principal executive officer and principal financial officer of our general partner have concluded, as of October 31, 2021, that our disclosure controls and procedures are effective in achieving that level of reasonable assurance.
During the most recent fiscal quarter ended October 31, 2021, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) of the Exchange Act) during the fiscal quarter ended October 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Note M “Contingencies and commitments” in our condensed consolidated financial statements included in Item 1. “Financial Statements.”
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for fiscal 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Wendel Parks assumed the principal financial officer responsibilities for the registrants effective December 15, 2021. Mr. Parks joined Ferrellgas as Corporate Controller in November 2021. Before joining Ferrellgas, Mr. Parks served as Controller and Director of Finance at Hubbell Incorporated for approximately three years, and prior to that he served as Division Controller at Danaher Corporation for approximately five years. Mr. Parks earned an MBA in Finance and a Bachelor’s in Accounting from the University of North Carolina at Charlotte. Mr. Parks did not assume the principal financial officer responsibilities pursuant to any arrangement or understanding between Mr. Parks and any other person. There are no family relationships between Mr. Parks and any previous or current executive officers or directors of the registrants or our general partner. There has not been any transaction, nor is there any currently proposed transaction, that requires disclosure under Item 404(a) of Regulation S-K in connection with the foregoing. No changes to Mr. Parks’ compensation arrangements have been made or are contemplated in connection with the foregoing.
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ITEM 6. EXHIBITS
The exhibits listed below are furnished as part of this Quarterly Report on Form 10-Q. Exhibits required by Item 601 of Regulation S-K of the Securities Act, which are not listed, are not applicable.
| | |
Exhibit
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| Description |
2.1 | | |
2.2 | | |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
3.5 | | |
3.6 | | |
3.7 | | |
3.8 | | |
3.9 | | |
3.10 | | |
3.11 | | |
3.12 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | |
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4.5 | | |
4.6 | | |
4.7 | | |
4.8 | | |
10.1 | | |
10.2 | | |
# 10.3 | | |
# 10.4 | | |
# 10.5 | | |
# 10.6 | | |
# 10.7 | | |
# 10.8 | | |
# 10.9 | | |
# 10.10 | | |
# 10.11 | | |
# 10.12 | | |
# 10.13 | | |
10.14 | | |
# 10.15 | |
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# 10.16 | | |
# 10.17 | | |
*# 10.18 | | |
* 31.1 | | |
* 31.2 | | |
* 31.3 | | Certification of Ferrellgas, L.P. pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
* 31.4 | | |
* 32.1 | | Certification of Ferrellgas Partners, L.P. pursuant to 18 U.S.C. Section 1350. |
* 32.2 | | Certification of Ferrellgas Partners Finance Corp. pursuant to 18 U.S.C. Section 1350. |
* 32.3 | | Certification of Ferrellgas, L.P. pursuant to 18 U.S.C. Section 1350. |
* 32.4 | | Certification of Ferrellgas Finance Corp. pursuant to 18 U.S.C. Section 1350. |
* 101.INS | | XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
* 101.SCH | | XBRL Taxonomy Extension Schema Document. |
* 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
* 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
* 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
* 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
* 104 | | The cover page from Ferrellgas Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2021, formatted in Inline XBRL and contained in Exhibit 101. |
* |
# | Management contracts or compensatory plans. |
+ | Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
| | | | |
| | FERRELLGAS PARTNERS, L.P. | ||
| | By Ferrellgas, Inc., its general partner | ||
| | | | |
Date: | By | /s/ James E. Ferrell | ||
| | | ||
| | | Chief Executive Officer and President; | |
| | | Chairman of the Board of Directors | |
| | | | |
| | By | /s/ Wendel Parks | |
| | | ||
| | | Corporate Controller (Principal Financial and Accounting Officer) | |
| | | | |
| | FERRELLGAS PARTNERS FINANCE CORP. | ||
| | | | |
Date: | By | /s/ James E. Ferrell | ||
| | | ||
| | | Chief Executive Officer, President, and Sole Director | |
| | | | |
| | By | /s/ Wendel Parks | |
| | | ||
| | | Corporate Controller (Principal Financial and Accounting Officer) | |
| | | | |
| | FERRELLGAS, L.P. | ||
| | By Ferrellgas, Inc., its general partner | ||
| | | | |
Date: | By | /s/ James E. Ferrell | ||
| | | ||
| | | Chief Executive Officer and President; Chairman of the Board of Directors | |
| | | | |
| | By | /s/ Wendel Parks | |
| | | ||
| | | Corporate Controller (Principal Financial and Accounting Officer) | |
| | | | |
| | FERRELLGAS FINANCE CORP. | ||
| | | | |
Date: | By | /s/ James E. Ferrell | ||
| | | ||
| | | Chief Executive Officer, President, and Sole Director | |
| | | | |
| | By | /s/ Wendel Parks | |
| | | ||
| | | Corporate Controller (Principal Financial and Accounting Officer) | |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 4/1/29 | ||||
| 4/1/26 | ||||
| 4/1/25 | ||||
| 4/1/24 | ||||
| 4/30/23 | ||||
| 4/1/23 | ||||
| 10/31/22 | ||||
| 7/31/22 | ||||
| 7/1/22 | ||||
| 5/15/22 | ||||
| 4/30/22 | 10-Q | |||
| 1/31/22 | 10-Q | |||
| Filed on: | 12/15/21 | 8-K | ||
| 11/30/21 | ||||
| 11/15/21 | ||||
| 11/9/21 | ||||
| For Period end: | 10/31/21 | |||
| 10/8/21 | ||||
| 9/23/21 | ||||
| 9/14/21 | ||||
| 7/31/21 | 10-K | |||
| 6/11/21 | ||||
| 4/30/21 | 10-Q | |||
| 4/5/21 | 8-K | |||
| 3/30/21 | 8-K | |||
| 1/8/21 | 8-K | |||
| 10/31/20 | 10-Q | |||
| 7/31/20 | 10-K | |||
| 6/15/20 | ||||
| 10/31/18 | 10-Q | |||
| 6/25/18 | 8-K | |||
| 8/24/17 | ||||
| 2/2/17 | ||||
| 10/16/14 | ||||
| 1/24/03 | ||||
| 1/16/03 | ||||
| 4/8/96 | ||||
| 3/28/96 | ||||
| 4/22/94 | ||||
| 4/19/94 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 6/10/22 Ferrellgas Partners LP 10-Q 4/30/22 94:16M Toppan Merrill Bridge/FA 3/11/22 Ferrellgas Partners LP 10-Q 1/31/22 94:16M Toppan Merrill Bridge/FA |