Derivative Instruments and Hedging Activities

12 Months Ended

Jul. 31, 2012

Derivative Instruments and Hedging Activities

K.  Derivative instruments and hedging activities

Ferrellgas is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Ferrellgas also periodically utilizes derivative instruments to manage its exposure to fluctuations in interest rates, which is discussed in Note H - Debt. Additional information related to derivatives is provided in Note B – Summary of significant accounting policies.

Derivative instruments and hedging activity

During the years ended July 31, 2012 and 2011, 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 fair value derivatives that were designated as hedging instruments in Ferrellgas’ consolidated balance sheets as of July 31, 2012 and 2011:  

	July 31, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Commodity derivatives propane swaps	Prepaid expenses and other current assets	$	1,049	Other current liabilities	$	12,069
Interest rate swap agreements, current portion	Prepaid expenses and other current assets		3,346	Other current liabilities		-
Interest rate swap agreements, noncurrent portion	Other assets, net		4,438	Other liabilities		1,778
	Total	$	8,833	Total	$	13,847
	July 31, 2011
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Commodity derivatives propane swaps	Prepaid expenses and other current assets	$	7,637	Other current liabilities	$	2,476
	Total	$	7,637	Total	$	2,476

The following table provides a summary of the effect on Ferrellgas’ consolidated statements of comprehensive income for the years ended July 31, 2012 and 2011 of derivatives accounted for under ASC 815-25, Derivatives and Hedging – Fair Value Hedges,  that were designated as hedging instruments:  

		Amount of Gain Recognized on Derivative				Amount of Interest Expense Recognized on Fixed-Rated Debt (Related Hedged Item)
Derivative Instrument	Location of Gain Recognized on Derivative	For the year ended July 31,				For the year ended July 31,
		2012		2011		2012		2011
Interest rate swap agreements	Interest expense	$	757	$	-	$	(21,875)	$	(21,875)

The following tables provide a summary of the effect on Ferrellgas’ consolidated statements of comprehensive income for the years ended July 31, 2012 and 2011 of the effective portion of derivativesaccounted for under ASC 815-30, Derivatives and Hedging – CashFlow Hedges that were designated as hedging instruments:

	For the year ended July 31, 2012
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCL on Derivative		Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
Commodity derivatives propane swaps	$	(23,290)	Cost of product sold- propane and other gas liquids sales	$	7,108
Interest rate swap agreements		(1,778)	Interest expense		-
	$	(25,068)		$	7,108

	For the year ended July 31, 2011
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCL on Derivative		Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
Commodity derivatives propane swaps	$	22,676	Cost of product sold- propane and other gas liquids sales	$	(17,358)
	$	22,676		$	(17,358)

The changes in derivative gains (losses) included in accumulated other comprehensive loss (“AOCL”) for the years ended July 31, 2012, 2011 and 2010 were as follows:  

	For the year ended July 31,
Derivative gains (losses) included in AOCL	2012		2011		2010
Beginning balance	$	5,161	$	(157)	$	(989)
Net earnings (loss) on risk management commodity derivatives		(23,290)		22,676		12,063
Reclassification of commodity hedges to cost of product sold - propane and other gas liquids sales		7,108		(17,358)		(11,231)
Net loss on risk management interest rate derivatives		(1,778)		-		-
Ending balance	$	(12,799)	$	5,161	$	(157)

Ferrellgas expects to reclassify net losses of approximately $9.6 million to earnings during the next 12 months. These net losses are expected to be offset by margins on propane sales commitments Ferrellgas has with its customers that qualify for the normal purchase normal sales exception.

During the years ended July 31, 2012 and 2011, Ferrellgas had no reclassifications to earnings resulting from 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 July 31, 2012, Ferrellgas had financial derivative contracts covering  1.4million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.

Derivative Financial Instruments Credit Risk

Ferrellgas is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas’ counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas maintains credit policies with regard to its counterparties that it believes reduces its overall credit risk. These policies include evaluating and monitoring its counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by Ferrellgas in the forms of letters of credit, parental guarantees or cash. Although Ferrellgas has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties, the maximum amount of loss due to credit risk that, based upon the gross fair values of the derivative financial instruments, Ferrellgas would incur if these counterparties that make up the concentration failed to perform according to the terms of their contracts was $0.8 million at July 31, 2012.

Ferrellgas holds certain derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon the Partnership’s debt rating.  As of July 31, 2012, a downgrade in the Partnership’s debt rating would not trigger any further reduction in credit limit.  The aggregate fair value of all derivatives with credit-risk-related contingent features that are in a liability position on July 31, 2012 is $4.7 million for which Ferrellgas has posted collateral of $4.3 million in the normal course of business. The credit-risk-related contingent features underlying these agreements will not result in any additional collateral requirements as of July 31, 2012.

Ferrellgas, L.P. [Member]

Derivative Instruments and Hedging Activities

K.  Derivative instruments and hedging activities

Ferrellgas, L.P. is exposed to certain market risks related to its ongoing business operations. These risks include exposure to changing commodity prices as well as fluctuations in interest rates. Ferrellgas, L.P. utilizes derivative instruments to manage its exposure to fluctuations in commodity prices. Ferrellgas, L.P. also periodically utilizes derivative instruments to manage its exposure to fluctuations in interest rates, which is discussed in Note H - Debt. Additional information related to derivatives is provided in Note B – Summary of significant accounting policies.

Derivative instruments and hedging activity

During the years ended July 31, 2012 and 2011, Ferrellgas, L.P. did not recognize any gain or loss in earnings related to hedge ineffectiveness and did not exclude any component of financial derivative contract gains or losses from the assessment of hedge effectiveness related to cash flow hedges.

The following tables provide a summary of the fair value derivatives that were designated as hedging instruments in Ferrellgas, L.P.’s consolidated balance sheets as of July 31, 2012 and 2011:

	July 31, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Commodity derivatives propane swaps	Prepaid expenses and other current assets	$	1,049	Other current liabilities	$	12,069
Interest rate swap agreements, current portion	Prepaid expenses and other current assets		3,346	Other current liabilities		-
Interest rate swap agreements, noncurrent portion	Other assets, net		4,438	Other liabilities		1,778
	Total	$	8,833	Total	$	13,847
	July 31, 2011
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Commodity derivatives propane swaps	Prepaid expenses and other current assets	$	7,637	Other current liabilities	$	2,476
	Total	$	7,637	Total	$	2,476

The following table provides a summary of the effect on Ferrellgas L.P.’s consolidated statements of comprehensive income for the years ended July 31, 2012 and 2011 of derivatives accounted for under ASC 815-25, Derivatives and Hedging – Fair Value Hedges, that were designated as hedging instruments:  

		Amount of Gain Recognized on Derivative				Amount of Interest Expense Recognized on Fixed-Rated Debt (Related Hedged Item)
Derivative Instrument	Location of Gain Recognized on Derivative	For the year ended July 31,				For the year ended July 31,
		2012		2011		2012		2011
Interest rate swap agreements	Interest expense	$	757	$	-	$	(21,875)	$	(21,875)

The following tables provide a summary of the effect on Ferrellgas’ consolidated statements of comprehensive income for the years ended July 31, 2012 and 2011 of the effective portion of derivativesaccounted for under ASC 815-30, Derivatives and Hedging – Cash Flow Hedges that were designated as hedging instruments:  

	For the year ended July 31, 2012
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCL on Derivative		Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
Commodity derivatives propane swaps	$	(23,290)	Cost of product sold- propane and other gas liquids sales	$	7,108
Interest rate swap agreements		(1,778)	Interest expense		-
	$	(25,068)		$	7,108
	For the year ended July 31, 2011
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCL on Derivative		Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
Commodity derivatives propane swaps	$	22,676	Cost of product sold- propane and other gas liquids sales	$	(17,358)
	$	22,676		$	(17,358)

The changes in derivative gains (losses) included in accumulated other comprehensive loss (“AOCL”) for the years ended July 31, 2012, 2011and 2010 were as follows:

	For the year ended July 31,
Derivative gains (losses) included in AOCL	2012		2011		2010
Beginning balance	$	5,161	$	(157)	$	(989)
Net earnings (loss) on risk management commodity derivatives		(23,290)		22,676		12,063
Reclassification of commodity hedges to cost of product sold - propane and other gas liquids sales		7,108		(17,358)		(11,231)
Net loss on risk management interest rate derivatives		(1,778)		-		-
Ending balance	$	(12,799)	$	5,161	$	(157)

Ferrellgas, L.P. expects to reclassify net losses of approximately $9.6  million to earnings during the next 12 months. These net gains are expected to be offset by margins on propane sales commitments Ferrellgas, L.P. has with its customers that qualify for the normal purchase normal sales exception.

During the years ended July 31, 2012 and 2011, Ferrellgas, L.P. had no reclassifications to earnings resulting from 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 July 31, 2012, Ferrellgas, L.P. had financial derivative contracts covering1.4  million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.

Derivative Financial Instruments Credit Risk

Ferrellgas is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas’ counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas maintains credit policies with regard to its counterparties that it believes reduces its overall credit risk. These policies include evaluating and monitoring its counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by Ferrellgas in the forms of letters of credit, parental guarantees or cash. Although Ferrellgas has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties, the maximum amount of loss due to credit risk that, based upon the gross fair values of the derivative financial instruments, Ferrellgas would incur if these counterparties that make up the concentration failed to perform according to the terms of their contracts was $0.8 million at July 31, 2012.

Ferrellgas L.P. holds certain derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon the Partnership’s debt rating.  As of July 31, 2012, a downgrade in the Partnership’s debt rating would not trigger any further reduction in credit limit.  The aggregate fair value of all derivatives with credit-risk-related contingent features that are in a liability position on July 31, 2012 is $4.7 million for which Ferrellgas L.P. has posted collateral of $4.3 million in the normal course of business. The credit-risk-related contingent features underlying these agreements will not result in any additional collateral requirements as of July 31, 2012.