Leases

12 Months Ended

Jul. 31, 2020

Leases

C.        Leases

Ferrellgas determines if an arrangement is a lease or contains a lease at inception. Ferrellgas leases certain transportation and computer equipment and real estate, predominantly through operating leases. Ferrellgas has an immaterial amount of leases in which it is the lessor. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the lease commencement date. Ferrellgas determines the lease term by assuming the exercise of renewal options that are reasonably certain. The lease term is used to determine whether a lease is finance or operating and is used to calculate rent expense. Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term. Operating lease balances are classified as operating lease ROU assets, and current and long-term operating lease liabilities on Ferrellgas’ consolidated balance sheet. Ferrellgas classifies finance leases in “Other assets, net”, “Other current liabilities”, and “Other liabilities” on the consolidated balance sheet.

ROU assets represent Ferrellgas’ right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of Ferrellgas’ leases do not provide an implicit discount rate, Ferrellgas uses its incremental borrowing rate adjusted for the lease term to represent the rate it would have to pay to borrow on a collateralized basis based on the information available at the commencement date in determining the present value of lease payments. Ferrellgas’ lease terms may include options to extend or terminate the lease and it will adjust the life of the lease when it is reasonably certain that it will exercise these options.

Ferrellgas has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. Ferrellgas has variable lease components, including lease payments with payment escalation based on the Consumer Price Index, and other variable items, such as common area maintenance and taxes.

Key assumptions include the discount rate, the impact of purchase options and renewal options on Ferrellgas’ lease term, as well as the assessment of residual value guarantees.

Ferrellgas’ transportation equipment leases generally have purchase options. However, in most circumstances Ferrellgas is not certain if it will exercise the purchase option at lease inception. As circumstances dictate, it may instead return the existing equipment to the lessor and sign a new lease. Ferrellgas’ transportation equipment leases often contain residual value guarantees, but they are not reflected in Ferrellgas’ lease liabilities as its lease rates are such that residual value guarantees are not expected to be owed at the end of its leases.

Ferrellgas’ real estate leases will often have an option to extend the lease, but it is typically not reasonably certain of exercising options to extend. As customer demand changes over time, Ferrellgas typically maintains the ability to move to more advantageous locations, relocate to other leased and owned locations, or discontinue service from particular locations.

The following table provides the operating and financing ROU assets and lease liabilities as of July 31, 2020:

Leases	Classification		July 31, 2020
Assets
Operating lease assets	Operating lease right-of-use assets	$	107,349
Financing lease assets	Other assets, net		41,426
Total leased assets		$	148,775
Liabilities
Current
Operating	Current operating lease liabilities	$	29,345
Financing	Other current liabilities		6,955
Noncurrent
Operating	Operating lease liabilities		89,022
Financing	Other liabilities		33,473
Total leased liabilities		$	158,795

The following table provides the lease expenses for the twelve months ended July 31, 2020:

Leases expense	Classification	For the year ended July 31, 2020
Operating lease expense	Operating expense - personnel, vehicle, plant and other	$	7,450
	Operating expense - equipment lease expense		30,994
	Cost of sales - propane and other gas liquids sales		1,553
	General and administrative expense		1,490
Total operating lease expense		$	41,487
Short-term expense	Operating expense - personnel, vehicle, plant and other	$	7,188
	General and administrative expense		502
Total short-term expense		$	7,690
Variable lease expense	Operating expense - personnel, vehicle, plant and other	$	2,883
	Operating expense - equipment lease expense		1,642
Total variable lease expense		$	4,525
Finance lease expense:
Amortization of leased assets	Depreciation and amortization expense	$	2,613
Interest on lease liabilities	Interest expense		1,060
Total finance lease expense		$	3,673
Total lease expense (a)		$	57,375

(a) As of July 31, 2020 Ferrellgas has also recognized $0.5 million 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 Midstream dispositions described in Note D – Acquisitions, 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 July 31, 2020 are as follows:

Maturities of lease liabilities		Operating leases		Finance leases		Total
2021	$	34,686	$	10,205	$	44,891
2022		27,006		9,580		36,586
2023		35,712		7,646		43,358
2024		17,999		7,076		25,075
2025		12,701		7,085		19,786
Thereafter		21,396		10,453		31,849
Total lease payments	$	149,500	$	52,045	$	201,545
Less: Imputed interest		31,133		11,617		42,750
Present value of lease liabilities	$	118,367	$	40,428	$	158,795

The following table represents the weighted-average remaining lease term and discount rate as of July 31, 2020:

	As of July 31, 2020
Lease type	Weighted-average remaining lease term (years)	Weighted-average discount rate
Operating leases	5.2	8.2%
Finance leases	5.9	8.7%

Cash flow information is presented below:

	For the year ended July 31, 2020
Cash paid for amounts included in the measurement of lease liabilities for operating leases:
Operating cash flows	$	41,636
Cash paid for amounts included in the measurement of lease liabilities for financing leases:
Operating cash flows	$	1,060
Financing cash flows	$	2,116

Prior to the adoption of ASC 842 – Leases, the following was disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019. Ferrellgas’ contractual operating lease commitments and buyout obligations were as follows:

	Future minimum rental and buyout amounts by fiscal year
	2020		2021		2022		2023		2024		Thereafter
Operating lease obligations	$	44,392	$	36,134	$	26,312	$	20,432	$	17,196	$	17,414
Operating lease buyouts	$	3,073	$	4,371	$	6,421	$	3,527	$	1,238	$	14,433

Rental expense under these leases totaled $53.8 million and $50.7 million for fiscal 2019 and 2018, respectively.

Prior to the adoption of ASC 842 – Leases, the following was disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.This cease use liability was reported under ASC 420 –  Exit or disposal cost obligations previously and is now reported under ASC 842 – Leases. The prior year table is included below for comparative purposes:

	Contract exit
	costs
July 31, 2018	$	11,804
Accretion		448
Cash payments and other		(802)
July 31, 2019	$	11,450

Ferrellgas, L.P. [Member]

Leases

C.        Leases

Ferrellgas, L.P. determines if an arrangement is a lease or contains a lease at inception. Ferrellgas, L.P. leases certain transportation and computer equipment and real estate, predominantly through operating leases. Ferrellgas, L.P. has an immaterial amount of leases in which it is the lessor. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the lease commencement date. Ferrellgas, L.P. determines the lease term by assuming the exercise of renewal options that are reasonably certain. The lease term is used to determine whether a lease is finance or operating and is used to calculate rent expense. Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term. Operating lease balances are classified as operating lease ROU assets, and current and long-term operating lease liabilities on Ferrellgas, L.P.’s consolidated balance sheet. Ferrellgas, L.P. classifies finance leases in “Other assets, net”, “Other current liabilities”, and “Other liabilities” on its consolidated balance sheet.

ROU assets represent Ferrellgas, L.P.’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of Ferrellgas, L.P.’s leases do not provide an implicit discount rate, Ferrellgas, L.P. uses its incremental borrowing rate adjusted for the lease term to represent the rate it would have to pay to borrow on a collateralized basis based on the information available at the commencement date in determining the present value of lease payments. Ferrellgas, L.P.’s lease terms may include options to extend or terminate the lease and it will adjust the life of the lease when it is reasonably certain that it will exercise these options.

Ferrellgas, L.P. has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. Ferrellgas, L.P. has variable lease components, including lease payments with payment escalation based on the Consumer Price Index, and other variable items, such as common area maintenance and taxes.

Key assumptions include the discount rate, the impact of purchase options and renewal options on Ferrellgas, L.P.’s lease term, as well as the assessment of residual value guarantees.

Ferrellgas, L.P.’s transportation equipment leases generally have purchase options. However, in most circumstances Ferrellgas, L.P. is not certain if it will exercise the purchase option at lease inception. As circumstances dictate, it may instead return the existing equipment to the lessor and sign a new lease. Ferrellgas, L.P.’s transportation equipment leases often contain residual value guarantees, but they are not reflected in Ferrellgas, L.P.’s lease liabilities as its lease rates are such that residual value guarantees are not expected to be owed at the end of its leases.

Ferrellgas, L.P.’s real estate leases will often have an option to extend the lease, but it is typically not reasonably certain of exercising options to extend. As customer demand changes over time, Ferrellgas, L.P. typically maintains the ability to move to more advantageous locations, relocate to other leased and owned locations, or discontinue service from particular locations.

The following table provides the operating and financing ROU assets and lease liabilities as of July 31, 2020:

Leases	Classification		July 31, 2020
Assets
Operating lease assets	Operating lease right-of-use assets	$	107,349
Financing lease assets	Other assets, net		41,426
Total leased assets		$	148,775
Liabilities
Current
Operating	Current operating lease liabilities	$	29,345
Financing	Other current liabilities		6,955
Noncurrent
Operating	Operating lease liabilities		89,022
Financing	Other liabilities		33,473
Total leased liabilities		$	158,795

The following table provides the lease expenses for the twelve months ended July 31, 2020:

Leases expense	Classification	For the year ended July 31, 2020
Operating lease expense	Operating expense - personnel, vehicle, plant and other	$	7,450
	Operating expense - equipment lease expense		30,994
	Cost of sales - propane and other gas liquids sales		1,553
	General and administrative expense		1,490
Total operating lease expense		$	41,487
Short-term expense	Operating expense - personnel, vehicle, plant and other	$	7,188
	General and administrative expense		502
Total short-term expense		$	7,690
Variable lease expense	Operating expense - personnel, vehicle, plant and other	$	2,883
	Operating expense - equipment lease expense		1,642
Total variable lease expense		$	4,525
Finance lease expense:
Amortization of leased assets	Depreciation and amortization expense	$	2,613
Interest on lease liabilities	Interest expense		1,060
Total finance lease expense		$	3,673
Total lease expense (a)		$	57,375

(a) As of July 31, 2020 Ferrellgas, L.P. has also recognized $0.5 million 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 Midstream dispositions described in Note D – Acquisitions, 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 July 31, 2020 are as follows:

Maturities of lease liabilities		Operating leases		Finance leases		Total
2021	$	34,686	$	10,205	$	44,891
2022		27,006		9,580		36,586
2023		35,712		7,646		43,358
2024		17,999		7,076		25,075
2025		12,701		7,085		19,786
Thereafter		21,396		10,453		31,849
Total lease payments	$	149,500	$	52,045	$	201,545
Less: Imputed interest		31,133		11,617		42,750
Present value of lease liabilities	$	118,367	$	40,428	$	158,795

The following table represents the weighted-average remaining lease term and discount rate as of July 31, 2020:

	As of July 31, 2020
Lease type	Weighted-average remaining lease term (years)	Weighted-average discount rate
Operating leases	5.2	8.2%
Finance leases	5.9	8.7%

Cash flow information is presented below:

	For the year ended July 31, 2020
Cash paid for amounts included in the measurement of lease liabilities for operating leases:
Operating cash flows	$	41,636
Cash paid for amounts included in the measurement of lease liabilities for financing leases:
Operating cash flows	$	1,060
Financing cash flows	$	2,116

Prior to the adoption of ASC 842 – Leases, the following was disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019. Ferrellgas, L.P.’s contractual operating lease commitments and buyout obligations were as follows:

	Future minimum rental and buyout amounts by fiscal year
	2020		2021		2022		2023		2024		Thereafter
Operating lease obligations	$	44,392	$	36,134	$	26,312	$	20,432	$	17,196	$	17,414
Operating lease buyouts	$	3,073	$	4,371	$	6,421	$	3,527	$	1,238	$	14,433

Rental expense under these leases totaled $53.8 million and $50.7 million for fiscal 2019 and 2018, respectively.

Prior to the adoption of ASC 842 – Leases, the following was disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.This cease use liability was reported under ASC 420 –  Exit or disposal cost obligations previously and is now reported under ASC 842 – Leases. The prior year table is included below for comparative purposes:

	Contract exit
	costs
July 31, 2018	$	11,804
Accretion		448
Cash payments and other		(802)
July 31, 2019	$	11,450