Derivative Instruments and Hedging Activities

3 Months Ended

Oct. 31, 2012

Derivative Instruments and Hedging Activities

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. 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, 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’ condensed consolidated balance sheets as of October 31, 2012 and 2011:

	October 31, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Commodity derivatives propane swaps	Prepaid expenses and other current assets	$	4,166	Other current liabilities	$	4,469
Interest rate swap agreements, current portion	Prepaid expenses and other current assets		3,350	Other current liabilities		-
Interest rate swap agreements, noncurrent portion	Other assets, net		3,961	Other liabilities		2,028
	Total	$	11,477	Total	$	6,497
	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

The following table provides a summary of the effect on Ferrellgas’ condensed consolidated statements of earnings for the three months ended October 31, 2012 and 2011 of derivatives that were 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 Gain Recognized on Derivative	For the three months ended October 31,				For the three months ended October 31,
		2012		2011		2012		2011
Interest rate swap agreements	Interest expense	$	724	$	-	$	(5,469)	$	(5,469)

The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income for the three months ended October 31, 2012 and 2011 of the effective portion of derivatives that were designated as cash flow hedging instruments:

	For the three months ended October 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	$	6,526	Cost of product sold- propane and other gas liquids sales	$	(4,191)
Interest rate swap agreements		(250)	Interest expense		-
	$	6,276		$	(4,191)

	For the three months ended October 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	$	(2,528)	Cost of product sold- propane and other gas liquids sales	$	1,879
	$	(2,528)		$	1,879

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

	For the three months ended October 31,
Derivative gains (losses) included in AOCL	2012		2011
Beginning balance	$	(12,799)	$	5,161
Change in value on risk management commodity derivatives		6,526		(2,528)
Reclassification of gains and losses of commodity hedges to cost of product sold - propane and other gas liquids sales		4,191		(1,879)
Change in value on risk management interest rate derivatives		(250)		-
Ending balance	$	(2,332)	$	754

Ferrellgas expects to reclassify net losses of approximately $0.2 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 three months ended October 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 October 31, 2012, Ferrellgas had financial derivative contracts covering 1.4 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 $2.8 million at October 31, 2012. 

Ferrellgas holds certain derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon the operating partnership’s debt rating.  As of October 31, 2012, a downgrade in the operating 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 October 31, 2012 is $0.8 million for which Ferrellgas has posted collateral of $0.9 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 October 31, 2012.

Ferrellgas, L.P. [Member]

Derivative Instruments and Hedging Activities

H.  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.

Derivative instruments and hedging activity

During the three months ended October 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 condensed consolidated balance sheets as of October 31, 2012 and July 31, 2012:

	October 31, 2012
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Commodity derivatives propane swaps	Prepaid expenses and other current assets	$	4,166	Other current liabilities	$	4,469
Interest rate swap agreements, current portion	Prepaid expenses and other current assets		3,350	Other current liabilities		-
Interest rate swap agreements, noncurrent portion	Other assets, net		3,961	Other liabilities		2,028
	Total	$	11,477	Total	$	6,497
	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

The following table provides a summary of the effect on Ferrellgas L.P.’s condensed consolidated statements of earnings for the three months ended October 31, 2012 and 2011 of derivatives that were 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 Gain Recognized on Derivative	For the three months ended October 31,				For the three months ended October 31,
		2012		2011		2012		2011
Interest rate swap agreements	Interest expense	$	724	$	-	$	(5,469)	$	(5,469)

The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income for the three months ended October 31, 2012 and 2011 of the effective portion of derivatives that were designated as cash flow hedging instruments:

	For the three months ended October 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	$	6,526	Cost of product sold- propane and other gas liquids sales	$	(4,191)
Interest rate swap agreements		(250)	Interest expense		-
	$	6,276		$	(4,191)

	For the three months ended October 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	$	(2,528)	Cost of product sold- propane and other gas liquids sales	$	1,879
	$	(2,528)		$	1,879

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

	For the three months ended October 31,
Derivative gains (losses) included in AOCL	2012		2011
Beginning balance	$	(12,799)	$	5,161
Change in value on risk management commodity derivatives		6,526		(2,528)
Reclassification of gains and losses of commodity hedges to cost of product sold - propane and other gas liquids sales		4,191		(1,879)
Change in value on risk management interest rate derivatives		(250)		-
Ending balance	$	(2,332)	$	754

Ferrellgas, L.P. expects to reclassify net losses of approximately $0.2 million to earnings during the next 12 months. These net losses 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 three months ended October 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 October 31, 2012, Ferrellgas, L.P. had financial derivative contracts covering 1.4 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, L.P. is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Ferrellgas L.P.’s counterparties principally consist of major energy companies and major U.S. financial institutions. Ferrellgas L.P. maintains credit policies with regard to its counterparties that it believes 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, L.P. in the forms of letters of credit, parental guarantees or cash. Although Ferrellgas, L.P. 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, L.P. would incur if these counterparties that make up the concentration failed to perform according to the terms of their contracts was $2.8 million at October 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 October 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 October 31, 2012 is $0.8 million for which Ferrellgas L.P. has posted collateral of $0.9 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 October 31, 2012.