10-Q: Ferrellgas Q2 Earnings Rise, Class B Units Convert

Ferrellgas Partners reports increased net earnings and operating income for the second fiscal quarter, alongside a planned conversion of all Class B Units to Class A Units.

Summary

• Net earnings attributable to Ferrellgas Partners, L.P. for the three months ended January 31, 2026, increased to $102.2 million from $98.8 million in the prior year.
• Net earnings attributable to Ferrellgas Partners, L.P. for the six months ended January 31, 2026, were $75.3 million, a significant improvement from a net loss of $47.8 million in the prior year, primarily due to a $125.0 million legal accrual recorded in the prior year.
• Operating income for the three months ended January 31, 2026, increased by $8.5 million to $136.2 million.
• Operating income for the six months ended January 31, 2026, increased by $133.3 million to $138.0 million, largely due to the absence of the prior year's $125.0 million legal settlement.
• Adjusted EBITDA for the three months ended January 31, 2026, increased by $9.1 million to $166.1 million.
• Adjusted EBITDA for the six months ended January 31, 2026, increased by $2.6 million to $195.5 million.
• Propane sales volume decreased by 4% for the three months and 5% for the six months, primarily due to warmer weather in the western U.S. and decreased tank exchange sales.
• The board of directors declared a cash distribution of $82.32 per Class B Unit ($107.0 million total) and approved the conversion of all 1.3 million outstanding Class B Units into Class A Units at a 5:1 ratio.

Sentiment

Score: 7

Explanation: StockSavvy.ai views this as a generally positive report, demonstrating improved profitability (especially year-over-year due to the absence of a prior legal settlement), effective debt management through refinancing, and a significant capital structure simplification with the Class B unit conversion, despite challenges from warmer weather and lower propane prices.

Positives

• Net earnings attributable to Ferrellgas Partners, L.P. increased to $102.2 million for the three months and $75.3 million for the six months ended January 31, 2026, compared to $98.8 million and a loss of $47.8 million, respectively, in the prior year.
• Operating income significantly improved, increasing by $8.5 million for the three months and $133.3 million for the six months, largely due to the absence of a prior-year legal settlement.
• Adjusted EBITDA increased by $9.1 million to $166.1 million for the three months and by $2.6 million to $195.5 million for the six months.
• Successfully refinanced debt, extending the Credit Facility maturity date to October 27, 2028, and increasing maximum borrowing capacity to $350.0 million.
• Credit ratings were upgraded by Moody's (corporate rating from B3 to B2, senior unsecured notes from Caa1 to B3) and S&P Global Ratings (senior unsecured notes from CCC to B).
• Operational efficiencies led to a $0.03 (3%) increase in margin per gallon for the three months ended January 31, 2026, compared to the prior year period.
• The planned conversion of all Class B Units to Class A Units will simplify the capital structure.

Negatives

• Total revenues decreased by 4% to $641.4 million for the three months and to $996.6 million for the six months ended January 31, 2026, compared to the prior year periods.
• Propane sales volumes decreased by 4% (11.5 million gallons) for the three months and 5% (20.8 million gallons) for the six months, primarily due to warmer weather in the western U.S. and decreased tank exchange sales.
• Wholesale market prices for propane at major supply points averaged 21.7% to 24.1% less than the prior year period.
• Interest expense increased by $5.3 million for the three months and $5.9 million for the six months due to the October 2025 refinancing.
• Distributable cash flow attributable to equity investors decreased by $3.0 million to $125.6 million for the six months ended January 31, 2026.
• Experienced net mark-to-market losses of approximately $6.6 million on open financial derivative propane purchase commitments.

Risks

• Weather conditions significantly impact the demand for propane for heating purposes, particularly during the winter heating season.
• Volatility in wholesale propane, motor fuel, and crude oil prices can affect profitability.
• Disruptions to the supply of propane could impact operations and sales.
• Competition from other industry participants and alternative energy sources poses a threat to market share.
• Advances in energy efficiency and technology could reduce demand for propane.
• Significant delays in the collection of accounts or notes receivable could impact liquidity.
• Customer, counterparty, supplier, or vendor defaults could lead to financial losses.
• Changes in demand for, and production of, hydrocarbon products can affect the business.
• Increased trucking and rail regulations could raise operating costs.
• Inherent operating and litigation risks are associated with gathering, transporting, handling, and storing combustible liquids like propane.
• Inability to complete acquisitions or successfully integrate acquired operations could hinder growth.
• Costs of complying with, or liabilities imposed under, environmental, health, and safety laws can be substantial.
• The impact of pending and future legal proceedings could adversely affect financial results.
• Interruption, disruption, failure, or malfunction of information technology systems, including due to cyber-attacks, poses operational risks.
• Changes in tax law could adversely affect the tax treatment of Ferrellgas Partners for federal income tax purposes.
• Economic and political instability, particularly in areas tied to the energy industry (e.g., ongoing conflict between Russia and Ukraine, Middle East), can create market uncertainty.
• Disruptions in the capital and credit markets, related to the evolving global tariff environment or otherwise, could limit access to funding.
• Access to available capital to meet operating and debt-service requirements is crucial.
• During periods of high volatility, risk management activities may expose the company to counterparty margin calls in amounts greater than its capacity to fund.
• Counterparties may not be able to fulfill their margin calls or may default on the settlement of positions.
• Restrictive covenants in the indentures governing senior notes, the Credit Agreement, and other debt agreements may reduce operating flexibility and ability to make cash distributions to unitholders.

Future Outlook

The company expects net losses from financial derivative purchase commitments to be offset by increased margins on propane sales commitments, with 94% of currently open financial derivative purchase commitments and related gross margin anticipated to be realized into earnings within the next twelve months. Management believes that the liquidity available from cash flows from operating activities, unrestricted cash, and the Credit Facility will be sufficient to meet capital expenditure, working capital, and letter of credit requirements for the foreseeable future.

Management Comments

• The $3.4 million increase [in net earnings for three months] was primarily due to an increase of $8.5 million in Operating income, which was partially offset by a $5.3 million increase in Interest expense.
• The $123.1 million increase [in net earnings for six months] was primarily due to a $125.0 million legal accrual recorded in the prior year.
• Our national footprint allowed us to reposition drivers and equipment from west to east to meet increased demand from Winter Storm Fern.
• Margin per gallon for the quarter increased by $0.03 or 3%, compared to the prior year period as we continue to benefit from operational efficiencies as we reduced unproductive deliveries and skipped stops.
• The decrease in general and administrative expense was driven by personnel cost adjustments and lower legal costs.
• The decrease in operating lease expense arose as we refinanced several operating leases as finance leases during the second quarter of fiscal 2026.

Industry Context

StockSavvy.ai notes that the propane distribution market is highly seasonal, with demand heavily influenced by winter weather. The report highlights warmer-than-normal temperatures in the western U.S. impacting sales volumes, while cold weather in the east partially offset this. The company's national footprint allowed for strategic repositioning of resources to manage regional demand fluctuations. Wholesale propane prices also saw significant decreases, impacting revenues, which is a common challenge in commodity-driven sectors.

Management Changes

Corporate Governance

Legal Proceedings

• No known claims or contingent claims are reasonably expected to have a material adverse effect on consolidated financial condition, results of operations, and cash flows.
• A final $37.5 million settlement payment was made on January 15, 2026, completing the remaining settlement payments due under a previous agreement.

Related Party Transactions

• Ferrellgas has no employees and is managed by its general partner, Ferrellgas, Inc., which is reimbursed for all direct and indirect expenses incurred on behalf of Ferrellgas, totaling $179.8 million for the six months ended January 31, 2026.
• Ferrell Companies, Inc., the parent company of the general partner, beneficially owns approximately 23.4% of Ferrellgas Partners' outstanding Class A Units.
• James E. Ferrell, Chairman of the Board of Directors of the general partner, is a related party, with entities he controls (JEF Capital Management and Ferrell Resources Holdings, Inc.) owning Class A Units.
• FCI Trading Corp. and Ferrell Propane, Inc., affiliates of the general partner, also hold Class A Units.
• The operating partnership guaranteed the issuance of a $37.5 million letter of credit related to a settlement agreement, with the final payment made on January 15, 2026.

Stakeholder Impact

• Shareholders (Class A Unitholders): Will benefit from the conversion of Class B Units to Class A Units, simplifying the capital structure and potentially increasing their proportional ownership over time. No distributions were paid to Class A Unitholders during the period.
• Class B Unitholders: Will receive a $107.0 million cash distribution and then have their units converted to Class A Units, achieving the conversion threshold and transitioning their investment.
• Preferred Unitholders: Received $15.4 million in cash distributions, with an accrued $18.2 million (net of tax) as of January 31, 2026. Their protective provisions and redemption rights remain in place.
• Employees: The general partner's employees perform services for Ferrellgas, with compensation and benefits expenses reimbursed. The employee stock ownership trust owns 100% of Ferrell Companies, linking employee interests to company performance.
• Creditors: Debt refinancing extended maturities and increased borrowing capacity, and credit ratings were upgraded, indicating improved creditworthiness. Compliance with all debt covenants was maintained, enhancing security for creditors.
• Customers: Impacted by propane prices and weather conditions, which affect sales volumes. Operational efficiencies aim to benefit customers through reduced unproductive deliveries and skipped stops.

Next Steps

• A cash distribution of $107.0 million to Class B Unitholders is payable on or about March 13, 2026.
• All 1.3 million outstanding Class B Units will be converted into Class A Units at a 5:1 ratio shortly after the distribution payment.
• Interest payments on the 9.250% senior notes due 2031 will commence semi-annually on July 15, 2026.
• The 2029 Notes may be redeemed at par plus accrued and unpaid interest beginning April 1, 2026.
• The company plans to adopt ASU 2025-05 as of August 1, 2026.
• The company plans to adopt ASU 2024-03 starting with its Form 10-K for the year ended July 31, 2028, and quarterly reports on Form 10-Q starting with the quarter ended October 31, 2028.

Key Dates

Recommendation

The company shows improved profitability and a strengthened financial position through debt refinancing and credit rating upgrades. The upcoming conversion of Class B Units to Class A Units simplifies the capital structure, which is a positive. However, declining sales volumes due to warmer weather and lower wholesale prices present ongoing challenges. While the financial health appears stable, significant growth drivers are not immediately apparent, suggesting a 'hold' position for investors awaiting clearer signs of sustained operational expansion beyond weather-dependent factors.

Keywords

Propane distribution, SEC 10-Q, Ferrellgas Partners, Financial results, Adjusted EBITDA, Debt refinancing, Class B Unit conversion, Energy industry, Quarterly report, OTC Market, FGPR