Form 10-Q FERRELLGAS PARTNERS L P For: Oct 31 Filed by: FERRELLGAS PARTNERS FINANCE CORP

December 7, 2017 7:05 AM
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 31, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from         to         
 
Commission file numbers: 001-11331, 333-06693, 000-50182 and 000-50183
Ferrellgas Partners, L.P.
Ferrellgas Partners Finance Corp.
Ferrellgas, L.P.
Ferrellgas Finance Corp.
(Exact name of registrants as specified in their charters)
Delaware
Delaware
Delaware
Delaware
 
43-1698480
43-1742520
43-1698481
14-1866671
(States or other jurisdictions of incorporation or organization)
 
(I.R.S. Employer Identification Nos.)
 
 
 
7500 College Boulevard,
Suite 1000, Overland Park, Kansas
 
66210
(Address of principal executive office)
 
(Zip Code)

Registrants’ telephone number, including area code: (913) 661-1500
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x No ¨ 
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Ferrellgas Partners, L.P.:
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
(do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
 
Emerging growth company ☐
 
Ferrellgas Partners Finance Corp, Ferrellgas, L.P. and Ferrellgas Finance Corp.:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
(do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
 
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Ferrellgas Partners, L.P. and Ferrellgas, L.P. ¨
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. ¨
 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
Ferrellgas Partners, L.P. and Ferrellgas, L.P. Yes ¨ No x
Ferrellgas Partners Finance Corp. and Ferrellgas Finance Corp. Yes x No ¨


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At November 30, 2017, the registrants had common units or shares of common stock outstanding as follows:
Ferrellgas Partners, L.P.
 
97,152,665
 
Common Units
Ferrellgas Partners Finance Corp.
 
1,000
 
Common Stock
Ferrellgas, L.P.
 
n/a
 
n/a
Ferrellgas Finance Corp.
 
1,000
 
Common Stock
 
Documents Incorporated by Reference: None


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

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

 TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

    
FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
 
 
October 31, 2017
 
July 31, 2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
7,100

 
$
5,760

 Accounts and notes receivable, net (including $137,244 and $109,407 of accounts receivable pledged as collateral at October 31, 2017 and July 31, 2017, respectively)
 
191,428

 
165,084

Inventories
 
112,338

 
92,552

Prepaid expenses and other current assets
 
68,068

 
33,388

Total current assets
 
378,934

 
296,784

 
 
 
 
 
Property, plant and equipment, net
 
738,729

 
731,923

Goodwill, net
 
256,103

 
256,103

Intangible assets (net of accumulated amortization of $444,447 and $436,428 at October 31, 2017 and July 31, 2017, respectively)
 
250,629

 
251,102

Other assets, net
 
80,559

 
74,057

Total assets
 
$
1,704,954

 
$
1,609,969

 
 
 
 
 
LIABILITIES AND PARTNERS' DEFICIT
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
99,198

 
$
85,561

Short-term borrowings
 
263,200

 
59,781

Collateralized note payable
 
88,000

 
69,000

Other current liabilities
 
200,879

 
126,224

Total current liabilities
 
651,277

 
340,566

 
 
 
 
 
Long-term debt
 
1,812,155

 
1,995,795

Other liabilities
 
34,799

 
31,118

Contingencies and commitments (Note J)
 


 


 
 
 
 
 
Partners' deficit:
 
 

 
 

Common unitholders (97,152,665 units outstanding at October 31, 2017 and July 31, 2017)
 
(754,456
)
 
(701,188
)
General partner unitholder (989,926 units outstanding at October 31, 2017 and July 31, 2017)
 
(67,528
)
 
(66,991
)
Accumulated other comprehensive income
 
32,915

 
14,601

Total Ferrellgas Partners, L.P. partners' deficit
 
(789,069
)
 
(753,578
)
Noncontrolling interest
 
(4,208
)
 
(3,932
)
Total partners' deficit
 
(793,277
)
 
(757,510
)
Total liabilities and partners' deficit
 
$
1,704,954

 
$
1,609,969

See notes to condensed consolidated financial statements.

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FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(in thousands, except unit data)
 
(unaudited)
 
 
 
 
 
 
 
For the three months ended October 31,
 
 
 
2017
 
2016
 
Revenues:
 
 
 
 
 
Propane and other gas liquids sales
 
$
302,758

 
$
242,399

 
Midstream operations
 
120,760

 
108,044

 
Other
 
31,137

 
29,099

 
Total revenues
 
454,655

 
379,542

 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
Cost of sales - propane and other gas liquids sales
 
179,515

 
119,212

 
Cost of sales - midstream operations
 
108,125

 
94,642

 
Cost of sales - other
 
13,702

 
11,746

 
Operating expense
 
110,462

 
105,086

 
Depreciation and amortization expense
 
25,732

 
26,202

 
General and administrative expense
 
13,164

 
14,269

 
Equipment lease expense
 
6,741

 
7,349

 
Non-cash employee stock ownership plan compensation charge
 
3,962

 
3,754

 
Loss on asset sales and disposal
 
895

 
6,423

 
 
 
 
 
 
 
Operating loss
 
(7,643
)
 
(9,141
)
 
 
 
 
 
 
 
Interest expense
 
(40,807
)
 
(35,428
)
 
Other income, net
 
511

 
508

 
 
 
 
 
 
 
Loss before income taxes
 
(47,939
)
 
(44,061
)
 
 
 
 
 
 
 
Income tax (benefit) expense
 
377

 
(590
)
 
 
 
 
 
 
 
Net loss
 
(48,316
)
 
(43,471
)
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
 
(401
)
 
(398
)
 
 
 
 
 
 
 
Net loss attributable to Ferrellgas Partners, L.P.
 
(47,915
)
 
(43,073
)
 
 
 
 
 
 
 
Less: General partner's interest in net loss
 
(479
)
 
(431
)
 
 
 
 
 
 
 
Common unitholders' interest in net loss
 
$
(47,436
)
 
$
(42,642
)
 
 
 
 
 
 
 
Basic and diluted net loss per common unit
 
$
(0.49
)
 
$
(0.44
)
 
 
 
 
 
 
 
Cash distributions declared per common unit
 
$
0.10

 
$
0.10

 
See notes to condensed consolidated financial statements.
 

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FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
(in thousands)
 
(unaudited)
 
 
 
 
 
 
 
For the three months ended October 31,
 
 
 
2017
 
2016
 
 
 
 
 
 
 
Net loss
 
$
(48,316
)
 
$
(43,471
)
 
Other comprehensive income:
 
 
 
 
 
Change in value of risk management derivatives
 
22,449

 
5,138

 
Reclassification of (gains) losses on derivatives to earnings, net
 
(3,949
)
 
4,238

 
Other comprehensive income
 
18,500

 
9,376

 
Comprehensive loss
 
(29,816
)
 
(34,095
)
 
Less: Comprehensive loss attributable to noncontrolling interest
 
(215
)
 
(304
)
 
Comprehensive loss attributable to Ferrellgas Partners, L.P.
 
$
(29,601
)
 
$
(33,791
)
 
See notes to condensed consolidated financial statements.
 

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

 
 

 
 

 
 

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

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

 
989.9

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

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

 

 
3,883

 
40

 

 
3,923

 
39

 
3,962

Distributions

 

 
(9,715
)
 
(98
)
 

 
(9,813
)
 
(100
)
 
(9,913
)
Net loss

 

 
(47,436
)
 
(479
)
 

 
(47,915
)
 
(401
)
 
(48,316
)
Other comprehensive income

 

 

 

 
18,314

 
18,314

 
186

 
18,500

Balance at October 31, 2017
97,152.7

 
989.9

 
$
(754,456
)
 
$
(67,528
)
 
$
32,915

 
$
(789,069
)
 
$
(4,208
)
 
$
(793,277
)
See notes to condensed consolidated financial statements.


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FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
For the three months ended October 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(48,316
)
 
$
(43,471
)
Reconciliation of net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
25,732

 
26,202

Non-cash employee stock ownership plan compensation charge
3,962

 
3,754

Non-cash stock-based compensation charge

 
1,881

Loss on asset sales and disposal
895

 
6,423

Unrealized gain on derivative instruments
1,607

 

Provision for doubtful accounts
693

 
9

Deferred income tax expense
364

 
143

Other
2,238

 
1,302

Changes in operating assets and liabilities, net of effects from business acquisitions:
 
 
 
Accounts and notes receivable, net of securitization
(23,862
)
 
1,310

Inventories
(33,160
)
 
(9,702
)
Prepaid expenses and other current assets
(6,936
)
 
8,032

Accounts payable
13,496

 
7,049

Accrued interest expense
32,438

 
28,495

Other current liabilities
39,550

 
21,251

Other assets and liabilities
(768
)
 
1,872

Net cash provided by operating activities
7,933

 
54,550

 
 
 
 
Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(13,867
)
 

Capital expenditures
(20,154
)
 
(10,005
)
Proceeds from sale of assets
1,208

 
2,279

Net cash used in investing activities
(32,813
)
 
(7,726
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Distributions
(9,813
)
 
(50,294
)
Proceeds from issuance of long-term debt
23,580

 
25,626

Payments on long-term debt
(281
)
 
(2,261
)
Net reductions in short-term borrowings
(5,879
)
 
(4,467
)
Net additions to collateralized short-term borrowings
19,000

 
10,000

Cash paid for financing costs
(287
)
 
(1,390
)
Noncontrolling interest activity
(100
)
 
(513
)
Repurchase of common units

 
(15,851
)
Net cash provided by (used in) financing activities
26,220

 
(39,150
)
 
 
 
 
Net change in cash and cash equivalents
1,340

 
7,674

Cash and cash equivalents - beginning of period
5,760

 
4,965

Cash and cash equivalents - end of period
$
7,100

 
$
12,639

See notes to condensed consolidated financial statements.

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FERRELLGAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data, unless otherwise designated)
 (unaudited)
A.  Partnership organization and formation
 
Ferrellgas Partners, L.P. (“Ferrellgas Partners”) was formed April 19, 1994, and is a publicly traded limited partnership, owning an approximate 99% limited partner interest in Ferrellgas, L.P. (the "operating partnership"). Ferrellgas Partners and the operating partnership, collectively referred to as “Ferrellgas,” are both Delaware limited partnerships and are governed by their respective partnership agreements. Ferrellgas Partners was formed to acquire and hold a limited partner interest in the operating partnership. As of October 31, 2017, Ferrell Companies, Inc. ("Ferrell Companies") beneficially owns 22.8 million Ferrellgas Partners common units. Ferrellgas, Inc. (the "general partner"), a wholly-owned subsidiary of Ferrell Companies, has retained an approximate 1% general partner interest in Ferrellgas Partners and also holds an approximate 1% general partner interest in the operating partnership, representing an effective 2% general partner interest in Ferrellgas on a combined basis. As general partner, it performs all management functions required by Ferrellgas. Unless contractually provided for, creditors of the operating partnership have no recourse with regards to Ferrellgas Partners.
 
Ferrellgas Partners is a holding entity that conducts no operations and has two subsidiaries, Ferrellgas Partners Finance Corp. and the operating partnership. Ferrellgas Partners owns a 100% equity interest in Ferrellgas Partners Finance Corp., whose only business activity is to act as the co-issuer and co-obligor of debt issued by Ferrellgas Partners. The operating partnership is the only operating subsidiary of Ferrellgas Partners.

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

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

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


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(2) New accounting standards:

FASB Accounting Standard Update No. 2014-09
In May 2014, the Financial Accounting Standards Board, ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers. The issuance is part of a joint effort by the FASB and the International Accounting Standards Board ("IASB") to enhance financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards ("IFRS") and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The new standard will supersede much of the existing authoritative literature for revenue recognition. The standard and related amendments will be effective for Ferrellgas for its annual reporting period beginning August 1, 2018, including interim periods within that reporting period. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. Ferrellgas is currently evaluating the newly issued guidance, including which transition approach will be applied and the estimated impact it will have on the consolidated financial statements. Ferrellgas has formed an implementation team, completed training on the new standard, prepared an initial assessment and is continuing to review its contracts with customers.

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

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

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

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

 
 
C. Supplemental financial statement information
 
Inventories consist of the following:
 
 
October 31, 2017
 
July 31, 2017
Propane gas and related products
 
$
79,196

 
$
67,049

Crude oil
 
7,921

 
724

Appliances, parts and supplies
 
25,221

 
24,779

Inventories
 
$
112,338

 
$
92,552


In addition to inventories on hand, Ferrellgas enters into contracts primarily to buy propane for supply procurement purposes with terms up to 36 months. Most of these contracts call for payment based on market prices at the date of delivery. As of October 31, 2017, Ferrellgas had committed, for supply procurement purposes, to take delivery of approximately 119.3 million gallons of propane at fixed prices.

Other assets, net consist of the following:

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October 31, 2017
 
July 31, 2017
Note receivable - Jamex, less current portion
 
$
30,000

 
$
32,500

Other
 
50,559

 
41,557

  Other assets, net
 
$
80,559

 
$
74,057


Other current liabilities consist of the following:
 
 
October 31, 2017
 
July 31, 2017
Accrued interest

$
51,109

 
$
18,671

Customer deposits and advances
 
42,599

 
25,541

Other
 
107,171

 
82,012

Other current liabilities
 
$
200,879

 
$
126,224


Shipping and handling expenses are classified in the following condensed consolidated statements of operations line items:
 
 
For the three months ended October 31,
 
 
2017
 
2016
Operating expense
 
$
43,314

 
$
41,810

Depreciation and amortization expense
 
1,112

 
1,026

Equipment lease expense
 
6,069

 
6,666

   Total shipping and handling expenses
 
$
50,495

 
$
49,502


Certain cash flow and significant non-cash activities are presented below:
 
 
For the three months ended October 31,
 
 
2017
 
2016
Cash paid for:
 
 
 
 
Interest
 
$
6,129

 
$
5,631

Income taxes
 
$
6

 
$
1

Non-cash investing and financing activities:
 
 
 
 
Liabilities incurred in connection with acquisitions
 
$
1,232

 
$

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

 
$
(189
)


D. Accounts and notes receivable, net and accounts receivable securitization
 
Accounts and notes receivable, net consist of the following:
 
 
October 31, 2017
 
July 31, 2017
Accounts receivable pledged as collateral
 
$
137,244

 
$
109,407

Accounts receivable
 
46,318

 
47,346

Note receivable - Jamex, current portion
 
10,000

 
10,000

Other
 
294

 
307

Less: Allowance for doubtful accounts
 
(2,428
)
 
(1,976
)
Accounts and notes receivable, net
 
$
191,428

 
$
165,084


On April 28, 2017, Ferrellgas entered into a fifth amendment to its accounts receivable securitization facility to modify the maximum consolidated leverage ratio covenant and the consolidated interest coverage ratio covenant.

Consolidated leverage ratio

The consolidated leverage ratio is defined as the ratio of total debt of the operating partnership to trailing four quarters earnings before interest expense, income tax expense, depreciation and amortization expense ("EBITDA") (both as adjusted for certain, specified items) of the operating partnership, as detailed in Ferrellgas' secured credit facility and accounts receivable securitization facility.

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The current maximum consolidated leverage covenant ratios are as follows:

Date
 
Maximum leverage ratio
October 31, 2017
 
7.75

January 31, 2018
 
7.75

April 30, 2018
 
7.75

July 31, 2018 & thereafter
 
5.50


Ferrellgas' consolidated leverage ratio was 7.57x as of October 31, 2017. See additional disclosure about Ferrellgas' financial covenants in Note E - Debt.

Consolidated interest coverage ratio

The consolidated interest coverage ratio is defined as the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of the operating partnership, as detailed in Ferrellgas' secured credit facility and accounts receivable securitization facility.

The current minimum consolidated interest coverage ratios are as follows:

Date
 
Minimum consolidated interest coverage ratio
October 31, 2017
 
1.75

January 31, 2018
 
1.75

April 30, 2018
 
1.75

July 31, 2018 & thereafter
 
2.50


Ferrellgas' consolidated interest coverage ratio was 1.93x as of October 31, 2017; the margin allows for approximately $12.1 million of additional interest expense or approximately $21.1 million less EBITDA. See additional disclosure about Ferrellgas' financial covenants in Note E - Debt.

At October 31, 2017, $137.2 million of trade accounts receivable were pledged as collateral against $88.0 million of collateralized notes payable due to the commercial paper conduit. At July 31, 2017, $109.4 million of trade accounts receivable were pledged as collateral against $69.0 million of collateralized notes payable due to the commercial paper conduit. These accounts receivable pledged as collateral are bankruptcy remote from the operating partnership. The operating partnership does not provide any guarantee or similar support to the collectability of these accounts receivable pledged as collateral. 
 
As of October 31, 2017, Ferrellgas had received cash proceeds of $88.0 million from trade accounts receivables securitized, with no remaining capacity to receive additional proceeds. As of July 31, 2017, Ferrellgas had received cash proceeds of $69.0 million from trade accounts receivables securitized, with no remaining capacity to receive additional proceeds. Borrowings under the accounts receivable securitization facility had a weighted average interest rate of 3.7% and 4.0% as of October 31, 2017 and July 31, 2017, respectively.

E.    Debt
 
Short-term borrowings
 
As of October 31, 2017, Ferrellgas classified all of its secured credit facility borrowings as short-term because the facility matures in October 2018. Prior to October 31, 2017, Ferrellgas classified as short-term the portion of its secured credit facility borrowings that were used to fund working capital needs that management intended to pay down within the 12 month period following the balance sheet date. As of October 31, 2017 and July 31, 2017, $263.2 million and $59.8 million, respectively, were classified as short-term borrowings. For further discussion see the secured credit facility section below.

Financial covenants


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

Before a restricted payment (as defined in the secured credit facility and the operating partnership indentures) can be made by the operating partnership, the operating partnership must be in compliance with the consolidated leverage ratio and consolidated interest coverage ratio covenants under the secured credit facility and accounts receivable securitization facility and in compliance with the covenants under the operating partnership's indentures. If the operating partnership is unable to make restricted payments, Ferrellgas Partners will not have the ability to make semi-annual interest payments on its $357.0 million 8.625% unsecured senior notes due 2020 or distributions to Ferrellgas Partners common unitholders. If Ferrellgas Partners does not make interest payments on its unsecured notes, that would constitute an event of default which would permit the acceleration of the obligations underlying the Ferrellgas Partners indenture, including all outstanding principal owed. The accelerated obligations would become immediately due and payable, which would in turn trigger cross acceleration of other debt. If Ferrellgas' debt obligations are accelerated, Ferrellgas may be unable to borrow sufficient funds to refinance debt in which case unitholders and investors in our debt instruments could experience a partial or total loss of their investment.

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

A breach of the consolidated leverage ratio covenant or the consolidated interest coverage ratio covenant under the secured credit facility and the accounts receivable securitization facility would result in an event of default under those facilities resulting in the operating partnership’s inability to obtain funds under those facilities and would give the lenders and receivables purchasers the right to accelerate the operating partnership's obligations under those facilities and to exercise remedies to collect the outstanding amounts under those facilities. If the lenders and receivables purchasers accelerated the operating partnership's obligations, that would constitute an event of default which would permit the acceleration of the obligations underlying the Ferrellgas Partners indenture, including all outstanding principal owed. The accelerated obligations would become immediately due and payable, which would in turn trigger cross acceleration of other debt. If Ferrellgas' debt obligations are accelerated, Ferrellgas may be unable to borrow sufficient funds to refinance debt in which case unitholders and investors in our debt instruments could experience a partial or total loss of their investment.

Consolidated leverage ratio

The consolidated leverage ratio is defined as the ratio of total debt of the operating partnership to trailing four quarters EBITDA (both as adjusted for certain, defined items) of the operating partnership, as detailed in Ferrellgas' secured credit facility and accounts receivable securitization facility.

The current maximum consolidated leverage covenant ratios are as follows:

Date
 
Maximum leverage ratio
October 31, 2017
 
7.75

January 31, 2018
 
7.75

April 30, 2018
 
7.75

July 31, 2018 & thereafter
 
5.50


Ferrellgas' consolidated leverage ratio was 7.57x as of October 31, 2017; the margin allows for approximately $40.6 million of additional borrowing capacity or approximately $5.2 million less EBITDA. This covenant also restricts Ferrellgas' ability to make distribution payments as discussed above.

Consolidated interest coverage ratio

The consolidated interest coverage ratio is defined as the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of the operating partnership, as detailed in Ferrellgas' secured credit facility and accounts receivable securitization facility.

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The current minimum consolidated interest coverage ratios are as follows:

Date
 
Minimum consolidated interest coverage ratio
October 31, 2017
 
1.75

January 31, 2018
 
1.75

April 30, 2018
 
1.75

July 31, 2018 & thereafter
 
2.50


Ferrellgas' consolidated interest coverage ratio was 1.93x at October 31, 2017; the margin allows for approximately $12.1 million of additional interest expense or approximately $21.1 million less EBITDA.

Consolidated fixed charge coverage ratio

The indenture governing the outstanding notes of Ferrellgas Partners includes a consolidated fixed charge coverage ratio test for the incurrence of debt and the making of restricted payments. This covenant requires that the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of Ferrellgas Partners be at least 1.75x before a restricted payment (as defined in the indenture) can be made by Ferrellgas Partners. If this ratio were to drop below 1.75x, the indenture allows Ferrellgas Partners to make restricted payments of up to $50.0 million in total over a 16 quarter period while below this ratio. As of October 31, 2017, the ratio was 1.44x. As a result, the $9.8 million distribution to be paid to common unitholders on December 15, 2017 will be taken from the $50.0 million restricted payment limitation, which after considering the $9.8 million deduction taken as a result of the distribution paid in September 2017, leaves $30.4 million for future restricted payments. Unless the indenture governing the outstanding notes is amended or refinanced, if our consolidated fixed charge coverage ratio does not improve to at least 1.75x and we continue our current quarterly distribution rate of $0.10 per common unit, this covenant will not allow us to make common unit distributions for our quarter ending October 31, 2018 and beyond.

Debt and interest expense reduction strategy

Ferrellgas continues to execute on a strategy to reduce its debt and interest expense. This strategy may include issuance of equity, amending existing debt agreements, asset sales or a further reduction in Ferrellgas Partners' annual distribution, which was reduced during the quarter ended October 31, 2016 from an annualized rate of $2.05 to $0.40 per common unit. Ferrellgas believes any debt and interest expense reduction strategies would remain in effect until Ferrellgas' consolidated leverage ratio reaches 4.5x or a level Ferrellgas deems appropriate for its business.

If Ferrellgas is unsuccessful with its strategy to reduce debt and interest expense, is unsuccessful in renegotiating its secured credit facility, which matures in October 2018, or is unable to secure alternative liquidity sources, it may not have the liquidity to fund its operations after that maturity date.

Failure to maintain compliance with these and other covenants in our agreements or failure to renew or replace liquidity available under the secured credit facility could have a material, adverse effect on Ferrellgas' operating capacity and cash flows and could further restrict Ferrellgas' ability to incur debt, pay interest on the notes or to make cash distributions to unitholders. An inability to pay interest on the notes could result in an event of default that would permit the acceleration of all of Ferrellgas' indebtedness. The accelerated debt would become immediately due and payable, which would in turn trigger cross-acceleration under other debt. If the payment of Ferrellgas' debt is accelerated, Ferrellgas' assets may be insufficient to repay such debt in full and Ferrellgas may be unable to borrow sufficient funds to refinance debt, in which case investors in common units and our debt instruments could experience a partial or total loss of their investment.

As a result of the October 2018 maturity date of Ferrellgas' secured credit facility, the entire balance outstanding at October 31, 2017 has been classified as a current liability in the condensed consolidated balance sheet as of October 31, 2017. The absence of a plan to renew or refinance this debt would raise substantial doubt about Ferrellgas' ability to continue as a going concern. Ferrellgas is working to renew or replace the secured credit facility. Potential options may include extending the current secured credit facility, entering into a new secured credit facility or securing alternative financing from a different source. Ferrellgas believes it is probable that it will be able to obtain sufficient capital to meet anticipated liquidity demands and, therefore, does not believe there is substantial doubt about our ability to continue as a going concern.

Secured credit facility


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Table of Contents

On April 28, 2017, Ferrellgas entered into a sixth amendment to its secured credit facility to modify the maximum consolidated leverage ratio covenant and the consolidated interest coverage ratio covenant. The amendment to our secured credit facility also (1) reduces the amounts available to be borrowed from $700 million to $575 million, (2) increases the pricing of loans when our leverage ratio is greater than or equal to 6.00x from LIBOR plus 3.50% to LIBOR plus 3.75% and when our leverage ratio is greater than or equal to 7.00x from LIBOR plus 3.50% to LIBOR plus 4.00%, (3) limits the amount of distributions (other than distributions to Ferrellgas Partners for payments of interest payable on its unsecured notes) that the operating partnership may make to Ferrellgas Partners to $10 million per quarter (Ferrellgas Partners' current distribution rate is $9.8 million per quarter) until the leverage ratio is less than 5.50x, (4) reduces the amount of investments we can make when our leverage ratio is greater than 5.50x from $200 million to $50 million, and (5) requires us to reduce our secured credit facility with 50% of the net cash proceeds received from any equity sale.

As of October 31, 2017, Ferrellgas had total borrowings outstanding under its secured credit facility of $263.2 million, all of which was classified as short-term. Ferrellgas had $139.8 million of capacity under the secured credit facility as of October 31, 2017. However, the consolidated leverage ratio covenant under this facility limited additional borrowings to$40.6 million as of October 31, 2017. As of July 31, 2017, Ferrellgas had total borrowings outstanding under its secured credit facility of $245.5 million, of which $185.7 million was classified as long-term debt. Ferrellgas had $190.3 million of capacity under the secured credit facility as of July 31, 2017. However, the consolidated leverage ratio covenant under this facility limited additional borrowings to $67.5 million as of July 31, 2017. Borrowings outstanding at October 31, 2017 and July 31, 2017 under the secured credit facility had weighted average interest rates of 5.9% and 6.0%, respectively.
  
The obligations under this credit facility are secured by substantially all assets of Ferrellgas, the general partner and certain subsidiaries of Ferrellgas but specifically excluding (a) assets that are subject to Ferrellgas’ accounts receivable securitization facility, (b) the general partner’s equity interest in Ferrellgas Partners and (c) equity interests in certain unrestricted subsidiaries. Such obligations are also guaranteed by the general partner and certain subsidiaries of Ferrellgas.
 
Letters of credit outstanding at October 31, 2017 totaled $172.0 million and were used to secure commodity hedges, product purchases, and insurance arrangements. Letters of credit outstanding at July 31, 2017 totaled $139.2 million and were used to secure commodity hedges, product purchases, and insurance arrangements. At October 31, 2017, Ferrellgas had remaining letter of credit capacity of $28.0 million. At July 31, 2017, Ferrellgas had remaining letter of credit capacity of $60.8 million.

F.  Partners' deficit

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

 
 
October 31, 2017
 
July 31, 2017
Public common unitholders
 
69,612,939

 
69,612,939

Ferrell Companies (1)
 
22,529,361

 
22,529,361

FCI Trading Corp. (2)
 
195,686

 
195,686

Ferrell Propane, Inc. (3)
 
51,204

 
51,204

James E. Ferrell (4)
 
4,763,475

 
4,763,475


(1) Ferrell Companies is the owner of the general partner and is an approximate 23% direct owner of Ferrellgas Partners' common units and thus a related party. Ferrell Companies also beneficially owns 195,686 and 51,204 common units of Ferrellgas Partners held by FCI Trading Corp. ("FCI Trading") and Ferrell Propane, Inc. ("Ferrell Propane"), respectively, bringing Ferrell Companies' beneficial ownership to 23.4% at October 31, 2017.
(2) FCI Trading is an affiliate of the general partner and thus a related party.
(3) Ferrell Propane is controlled by the general partner and thus a related party.
(4) James E. Ferrell is the Interim Chief Executive Officer and President of the general partner; and is Chairman of the Board of Directors of the general partner and thus a related party. JEF Capital Management owns 4,758,859 of these common units and is wholly-owned by the James E. Ferrell Revocable Trust Two for which James E. Ferrell is the trustee and sole beneficiary. The remaining 4,616 common units are held by Ferrell Resources Holding, Inc., which is wholly-owned by the James E. Ferrell Revocable Trust One, for which James E. Ferrell is the trustee and sole beneficiary.

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Table of Contents


Partnership distributions paid
 
Ferrellgas Partners has paid the following distributions:
 
 
For the three months ended October 31,
 
 
2017
 
2016
Public common unitholders
 
$
6,961

 
$
35,678

Ferrell Companies
 
2,253

 
11,546

FCI Trading Corp.
 
20

 
100

Ferrell Propane, Inc.
 
5

 
26

James E. Ferrell
 
476

 
2,441

General partner
 
98

 
503

 
 
$
9,813

 
$
50,294


On November 16, 2017, Ferrellgas Partners declared a cash distribution of $0.10 per common unit for the three months ended October 31, 2017, which is expected to be paid on December 15, 2017. Included in this cash distribution are the following amounts to be paid to related parties:
Ferrell Companies
 
$
2,253

FCI Trading Corp.
 
20

Ferrell Propane, Inc.
 
5

James E. Ferrell
 
476

General partner
 
98


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

Accumulated other comprehensive income (loss) (“AOCI”)
 
See Note H – Derivative instruments and hedging activities – for details regarding changes in the fair value of risk management financial derivatives recorded within AOCI for the three months ended October 31, 2017 and 2016.
 
General partner’s commitment to maintain its capital account
 
Ferrellgas’ partnership agreements allow the general partner to have an option to maintain its effective 2% general partner interest concurrent with the issuance of other additional equity.

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

During the three months ended October 31, 2016, the general partner made non-cash contributions of $0.1 million to Ferrellgas to maintain its effective 2% general partner interest.


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Table of Contents

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

 
$
298

 
$

 
$
298

Commodity derivatives
 
$

 
$
35,000

 
$

 
$
35,000

Liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$
(984
)
 
$

 
$
(984
)
Commodity derivatives
 
$

 
$
(3,464
)
 
$

 
$
(3,464
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 31, 2017:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$
583

 
$

 
$
583

Commodity derivatives
 
$

 
$
16,212

 
$

 
$
16,212

Liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$

 
$
(707
)
 
$

 
$
(707
)
Commodity derivatives
 
$

 
$
(1,258
)
 
$

 
$
(1,258
)

Methodology

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

Other financial instruments
 
The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. The estimated fair value of the Jamex note receivable, a financial instrument classified in "Other assets, net" on the condensed consolidated balance sheet, is approximately $36.4 million, or $3.8 million less than its carrying amount as of October 31, 2017. The estimated fair value of the Jamex note receivable was calculated using a discounted cash flow method which relied on significant unobservable inputs. At October 31, 2017 and July 31, 2017, the estimated fair value of Ferrellgas’ long-term debt instruments was $1,704.4 million and $1,966.6 million, respectively. Ferrellgas estimates the fair value of long-term debt based on quoted market prices. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.

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



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Table of Contents

H.  Derivative instruments and hedging activities
 
Ferrellgas is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Of these, the propane commodity derivative instruments are designated as cash flow hedges. All other commodity derivative instruments do not qualify or are not designated as cash flow hedges, therefore, the change in their fair value are recorded currently in earnings. Ferrellgas also periodically utilizes derivative instruments to manage its exposure to fluctuations in interest rates.
 
Derivative instruments and hedging activity
 
During the three months ended October 31, 2017 and 2016, Ferrellgas did not recognize any gain or loss in earnings related to hedge ineffectiveness and did not exclude any component of financial derivative contract gains or losses from the assessment of hedge effectiveness related to commodity cash flow hedges.

The following tables provide a summary of the fair value of derivatives in Ferrellgas’ condensed consolidated balance sheets as of October 31, 2017 and July 31, 2017:  
 
 
October 31, 2017
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Location
 
 Fair value
 
Location
 
 Fair value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
  Commodity derivatives-propane
 
Prepaid expenses and other current assets
 
$
25,938

 
Other current liabilities
 
$
1,209

  Commodity derivatives-propane
 
Other assets, net
 
8,789

 
Other liabilities
 
284

  Interest rate swap agreements
 
Prepaid expenses and other current assets
 
298

 
Other current liabilities
 
284

  Interest rate swap agreements
 
Other assets, net
 

 
Other liabilities
 
700

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
  Commodity derivatives-crude oil
 
Prepaid expenses and other current assets
 
273

 
Other current liabilities
 
1,971

 
 
Total
 
$
35,298

 
Total
 
$
4,448

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

 
Other current liabilities
 
$
415

  Commodity derivatives-propane
 
Other assets, net
 
4,413

 
Other liabilities
 
15

  Interest rate swap agreements
 
Prepaid expenses and other current assets
 
583

 
Other current liabilities
 
595

  Interest rate swap agreements
 
Other assets, net
 

 
Other liabilities
 
112

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

 
Other current liabilities
 
828


 
Total
 
$
16,795

 
Total
 
$
1,965



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Table of Contents

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, 2017 and July 31, 2017, respectively:

 
 
October 31, 2017
 
 
Assets
 
Liabilities
Description
 
Location
 
Amount
 
Location
 
Amount
Margin Balances
 
Prepaid expenses and other current assets
 
$
3,723

 
Other current liabilities
 
$
19,696

 
 
Other assets, net
 
1,461

 
Other liabilities
 
5,945

 
 
 
 
$
5,184

 
 
 
$
25,641

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

 
Other current liabilities
 
$
7,729

 
 
Other assets, net
 
1,631

 
Other liabilities
 
3,073

 
 
 
 
$
3,409

 
 
 
$
10,802


The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months ended October 31, 2017 and 2016 due to derivatives designated as fair value hedging instruments:  
 
 
 
 
Amount of Gain Recognized on Derivative
 
Amount of Interest Expense Recognized on Fixed-Rated Debt (Related Hedged Item)
Derivative Instrument
 
Location of Amounts Recognized on Derivative
 
For the three months ended October 31,
 
For the three months ended October 31,
 
 
 
 
2017
 
2016
 
2017
 
2016
Interest rate swap agreements
 
Interest expense
 
$
138

 
$
420

 
$
(2,275
)
 
$
(2,275
)
 
 
 
 
 
 
 
 
 
 
 



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Table of Contents

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, 2017 and 2016 due to derivatives designated as cash flow hedging instruments:
 
 
For the three months ended October 31, 2017
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
22,323

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

 
$

Interest rate swap agreements
 
126

 
Interest expense
 
(183
)
 

 
 
$
22,449

 
 
 
$
3,949

 
$

 
 
 
 
 
 
 
 
 
 
 
For the three months ended October 31, 2016
 
 
Derivative Instrument
 
Amount of Gain (Loss) Recognized in AOCI
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income
 
 
 
Effective portion
 
Ineffective portion
Commodity derivatives
 
$
4,873

 
Cost of sales-propane and other gas liquids sales
 
$
(3,596
)
 
$

Interest rate swap agreements
 
265

 
Interest expense
 
(642
)
 

 
 
$
5,138

 
 
 
$
(4,238
)
 
$

 
 
 
 
 
 
 
 
 

The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months ended October 31, 2017 and 2016 due to the change in fair value of derivatives not designated as hedging instruments:

 
 
For the three months ended October 31, 2017
Derivatives Not Designated as Hedging Instruments
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil
 
$
(1,390
)
 
Cost of sales - midstream operations
 
 
 
 
 
 
 
For the three months ended October 31, 2016
Derivatives Not Designated as Hedging Instruments
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil
 
$
(1,241
)
 
Cost of sales - midstream operations
Commodity derivatives - vehicle fuel
 
$
1,027

 
Operating expense
 
 
 
 
 


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Table of Contents

The changes in derivatives included in AOCI for the three months ended October 31, 2017 and 2016 were as follows:  

 
 
For the three months ended October 31,
Gains and losses on derivatives included in AOCI
 
2017
 
2016
Beginning balance
 
$
14,648

 
$
(9,815
)
Change in value of risk management commodity derivatives
 
22,323

 
4,873

Reclassification of (gains) and losses on commodity hedges to cost of sales - propane and other gas liquids sales, net
 
(4,132
)
 
3,596

Change in value of risk management interest rate derivatives
 
126

 
265

Reclassification of (gains) and losses on interest rate hedges to interest expense
 
183

 
642

Ending balance
 
$
33,148

 
$
(439
)

Ferrellgas expects to reclassify net gains related to the risk management commodity derivatives of approximately $24.7 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 sales exception.
 
During the three months ended October 31, 2017, Ferrellgas had no reclassifications to operations resulting from the discontinuance of any cash flow hedges arising from the probability of the original forecasted transactions not occurring within the originally specified period of time defined within the hedging relationship.
 
As of October 31, 2017, Ferrellgas had financial derivative contracts covering 3.2 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.

As of October 31, 2017, Ferrellgas had financial derivative contracts covering 0.3 million barrels of crude oil related to the hedging of crude oil line fill and inventory.

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, 2017, the maximum amount of loss due to credit risk that, based upon the gross fair values of the derivative financial instruments, Ferrellgas would incur is $33.3 million.
 
From time to time Ferrellgas enters into derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas' debt rating. There were no open derivative contracts with credit-risk-related contingent features as of October 31, 2017.

I.    Transactions with related parties
 
Ferrellgas has no employees and is managed and controlled by its general partner. Pursuant to Ferrellgas’ partnership agreements, the general partner is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on behalf of Ferrellgas and all other necessary or appropriate expenses allocable to Ferrellgas or otherwise reasonably incurred by 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:

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Table of Contents

 
 
For the three months ended October 31,
 
 
2017
 
2016
Operating expense
 
$
57,351

 
$
55,714

 
 
 
 
 
General and administrative expense
 
$
7,508

 
$
8,583

 
 

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

J.    Contingencies and commitments

Litigation

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

Ferrellgas has been named, along with several current and former officers, in several class action lawsuits alleging violations of certain securities laws based on alleged materially false and misleading statements in certain of our public disclosures. The lawsuits, the first of which was filed on October 6, 2016 in the Southern District of New York, seek unspecified compensatory damages. Derivative lawsuits with similar allegations have been filed naming Ferrellgas and several current and former officers and directors as defendants. Ferrellgas believes that it has defenses and will vigorously defend these cases. Ferrellgas does not believe loss is probable or reasonably estimable at this time related to the putative class action lawsuits or the derivative action.

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



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

There was no dilutive effect resulting from this method based on basic and diluted net earnings (loss) per common unitholders' interest for the three months ended October 31, 2017 or 2016.
 
In periods with net losses, the allocation of the net losses to the limited partners and the general partner will be determined based on the same allocation basis specified in Ferrellgas Partners’ partnership agreement that would apply to periods in which there were no undistributed earnings. Additionally, there are no dilutive securities in periods with net losses.
 
 
For the three months ended October 31,
 
 
2017
 
2016
 
 
(in thousands, except per unitholders' interest amounts)
Common unitholders’ interest in net loss
 
$
(47,436
)
 
$
(42,642
)
 
 
 
 
 
Weighted average common units outstanding - basic and diluted
 
97,152.7

 
97,457.6

 
 
 
 
 
Basic and diluted net loss per common unitholders’ interest
 
$
(0.49
)
 
$
(0.44
)


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L.    Segment reporting

Ferrellgas has two primary operations that result in two reportable operating segments: propane operations and related equipment sales and midstream operations.

Until April 2017, Ferrellgas utilized a structure that included two reportable segments which included propane operations and related equipment sales segment and the midstream operations - crude oil logistics segment. The results from midstream operations - water solutions segment were reported within Corporate and other. As a result of a change in the way management is evaluating results and allocating resources, results of the water solutions business are now included in the Midstream operations segment for all periods presented.

Following is a summary of segment information for the three months ended October 31, 2017 and 2016:

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

 
$
120,760

 
$

 
$
454,655

Direct costs (1)
 
303,329

 
113,901

 
11,209

 
428,439

Adjusted EBITDA
 
$
30,566

 
$
6,859

 
$
(11,209
)
 
$
26,216

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended October 31, 2016
 
 
Propane operations and related equipment sales
 
Midstream operations
 
Corporate
 
Total
Segment revenues
 
$
271,498

 
$
108,044

 
$

 
$
379,542

Direct costs (1)
 
237,014

 
102,773

 
10,736

 
350,523

Adjusted EBITDA
 
$
34,484

 
$
5,271

 
$
(10,736
)
 
$
29,019

 
 
 
 
 
 
 
 
 

(1) Direct costs are comprised of "cost of products sold-propane and other gas liquids sales", "cost of products sold-midstream operations", "cost of products sold-other", "operating expense", "general and administrative expense", and "equipment lease expense" less "non-cash stock-based compensation charge", "change in fair value of contingent consideration", "severance charge", "litigation accrual and related legal fees associated with a class action lawsuit", "unrealized (non-cash) loss (gain) on changes in fair value of derivatives not designated as hedging instruments" and "acquisition and transition expenses".


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Table of Contents

Following is a reconciliation of Ferrellgas' total segment performance measure to condensed consolidated net earnings (loss):
 
 
Three months ended October 31,
 
 
2017
 
2016
Net loss attributable to Ferrellgas Partners, L.P.
 
$
(47,915
)
 
$
(43,073
)
Income tax expense (benefit)
 
377

 
(590
)
Interest expense
 
40,807

 
35,428

Depreciation and amortization expense
 
25,732

 
26,202

EBITDA
 
19,001

 
17,967

Non-cash employee stock ownership plan compensation charge
 
3,962

 
3,754

Non-cash stock-based compensation charge
 

 
1,881

Loss on asset sales and disposal
 
895

 
6,423

Other income, net
 
(511
)
 
(508
)
Severance costs
 
1,663

 
1,469

Unrealized (non-cash) loss (gain) on changes in fair value of derivatives not designated as hedging instruments
 
1,607

 
(1,569
)
Net loss attributable to noncontrolling interest
 
(401
)
 
(398
)
Adjusted EBITDA
 
$
26,216

 
$
29,019


Following are total assets by segment:
Assets
 
October 31, 2017
 
July 31, 2017
Propane operations and related equipment sales
 
$
1,292,686

 
$
1,194,905

Midstream operations
 
397,653

 
399,356

Corporate and unallocated
 
14,615

 
15,708

Total consolidated assets
 
$
1,704,954

 
$
1,609,969


Following are capital expenditures by segment:
 
 
Three months ended October 31, 2017
 
 
Propane operations and related equipment sales
 
Midstream operations
 
Corporate
 
Total
Capital expenditures:
 
 
 
 
 
 
 
 
Maintenance
 
$
8,351

 
$
3

 
$
239

 
$
8,593

Growth
 
9,688

 
664

 

 
10,352

Total
 
$
18,039

 
$
667

 
$
239

 
$
18,945

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended October 31, 2016
 
 
Propane operations and related equipment sales
 
Midstream operations
 
Corporate
 
Total
Capital expenditures:
 
 
 
 
 
 
 
 
Maintenance
 
$
1,831

 
$
127

 
$
1,306

 
$
3,264

Growth
 
5,414

 

 

 
5,414

Total
 
$
7,245

 
$
127

 
$
1,306

 
$
8,678



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Table of Contents

M. Subsequent events
 
Ferrellgas evaluated events and transactions occurring after the balance sheet date through the date Ferrellgas' condensed consolidated financial statements were issued and concluded that there were no events or transactions occurring during this period that require recognition or disclosure in its condensed consolidated financial statements.




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Table of Contents


FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
CONDENSED BALANCE SHEETS
(unaudited)
 
October 31, 2017
 
July 31, 2017
ASSETS


 


Cash
$
1,000

 
$
1,000

Total assets
$
1,000

 
$
1,000

 
 
 
 
Contingencies and commitments (Note B)

 

 
 
 
 
STOCKHOLDER'S EQUITY
 
 
 
Common stock, $1.00 par value; 2,000 shares authorized; 1,000 shares issued and outstanding
$
1,000

 
$
1,000

Additional paid in capital
25,105

 
25,055

Accumulated deficit
(25,105
)
 
(25,055
)
Total stockholder's equity
$
1,000

 
$
1,000

See notes to condensed financial statements.


FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
 
 
 
 
For the three months ended October 31,
 
 
2017
 
2016
 
 
 
 
 
 
General and administrative expense
$
50

 
$
92

 
 
 
 
 
 
Net loss
$
(50
)
 
$
(92
)
 
See notes to condensed financial statements.

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Table of Contents

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,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(50
)
 
$
(92
)
Cash used in operating activities
(50
)
 
(92
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Capital contribution
50

 
92

Cash provided by financing activities
50

 
92

 
 
 
 
Net change in cash

 

Cash - beginning of period
1,000

 
1,000

Cash - end of period
$
1,000

 
$
1,000

See notes to condensed financial statements.

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Table of Contents

FERRELLGAS PARTNERS FINANCE CORP.
(a wholly-owned subsidiary of Ferrellgas Partners, L.P.)
 (unaudited)
 
NOTES TO CONDENSED FINANCIAL STATEMENTS

A.    Formation
 
Ferrellgas Partners Finance Corp. (the “Finance Corp.”), a Delaware corporation, was formed on March 28, 1996 and is a wholly-owned subsidiary of Ferrellgas Partners, L.P. (the “Partnership”).
 
The condensed financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim periods presented. All adjustments to the condensed financial statements were of a normal recurring nature.

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

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

The indenture governing the senior unsecured notes contains various restrictive covenants applicable to the Partnership and its subsidiaries, the most restrictive relating to additional indebtedness and restricted payments. As of October 31, 2017, the Partnership is in compliance with all requirements, tests, limitations and covenants related to this debt agreement, except for the consolidated fixed charge coverage ratio.

The indenture governing the outstanding notes of the Partnership includes a consolidated fixed charge coverage ratio test for the incurrence of debt and the making of restricted payments. This covenant requires that the ratio of trailing four quarters EBITDA to interest expense (both as adjusted for certain, specified items) of the Partnership be at least 1.75x before a restricted payment (as defined in the indenture) can be made by the Partnership. If this ratio were to drop below 1.75x, the indenture allows the Partnership to make restricted payments of up to $50.0 million in total over a 16 quarter period while below this ratio. As of October 31, 2017, the ratio was 1.44x. As a result, the $9.8 million distribution to be paid to common unitholders on December 15, 2017 will be taken from the $50.0 million restricted payment limitation, which after considering the $9.8 million deduction taken as a result of the distribution paid in September 2017, leaves $30.4 million for future restricted payments. Unless the indenture governing the outstanding notes is amended or refinanced, if our consolidated fixed charge coverage ratio does not improve to at least 1.75x and we continue our current quarterly distribution rate of $0.10 per common unit, this covenant will not allow us to make common unit distributions for our quarter ending October 31, 2018 and beyond.
 


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Table of Contents

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

October 31, 2017
 
July 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,098

 
$
5,701

 Accounts and notes receivable, net (including $137,244 and $109,407 of accounts receivable pledged as collateral at October 31, 2017 and July 31, 2017, respectively)
191,428

 
165,084

Inventories
112,338

 
92,552

Prepaid expenses and other current assets
68,055

 
33,426

Total current assets
378,919

 
296,763

 
 
 
 
Property, plant and equipment, net
738,729

 
731,923

Goodwill, net
256,103

 
256,103

Intangible assets (net of accumulated amortization of $444,447 and $436,428 at October 31, 2017 and July 31, 2017, respectively)
250,629

 
251,102

Other assets, net
80,559

 
74,057

Total assets
$
1,704,939

 
$
1,609,948

 
 
 
 
LIABILITIES AND PARTNERS' DEFICIT
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
99,198

 
$
85,561

Short-term borrowings
263,200

 
59,781

Collateralized note payable
88,000

 
69,000

Other current liabilities
189,261

 
122,016

Total current liabilities
639,659

 
336,358

 
 
 
 
Long-term debt
1,464,429

 
1,649,270

Other liabilities
34,799

 
31,118

Contingencies and commitments (Note J)


 


 
 
 
 
Partners' deficit:
 

 
 

Limited partner
(462,655
)
 
(417,467
)
General partner
(4,557
)
 
(4,095
)
Accumulated other comprehensive income
33,264

 
14,764

Total partners' deficit
(433,948
)
 
(406,798
)
Total liabilities and partners' deficit
$
1,704,939