Derivative Instruments and Hedging Activities

9 Months Ended

Apr. 30, 2015

Derivative Instruments and Hedging Activities

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 activities

During the nine months endedApril 30, 2015 Ferrellgas recognized a $0.2 million loss related to hedge ineffectiveness. During the nine months endedApril 30, 2014 Ferrellgas did not recognize any gain or loss in earnings related to hedge ineffectiveness.

The following tables provide a summary of the fair value of derivatives in Ferrellgas’ condensed consolidated balance sheets as of April 30, 2015 and July 31, 2014:  

	April 30, 2015
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments
Commodity derivatives	Prepaid expenses and other current assets	$	1,550	Other current liabilities	$	20,709
Commodity derivatives	Other assets, net	1,893		Other liabilities	6,527
Interest rate swap agreements	Prepaid expenses and other current assets	1,950		Other current liabilities	1,660
Interest rate swap agreements	Other assets, net	195		Other liabilities	2,029
Derivatives not designated as hedging instruments
Commodity derivatives	Prepaid expenses and other current assets	734		Other current liabilities	—
Commodity derivatives	Other assets, net	906		Other liabilities	—
	Total	$	7,228	Total	$	30,925
	July 31, 2014
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments
Commodity derivatives	Prepaid expenses and other current assets	$	5,301	Other current liabilities	$	83
Commodity derivatives	Other assets, net	1,705		Other liabilities	—
Interest rate swap agreements	Prepaid expenses and other current assets	2,101		Other current liabilities	—
Interest rate swap agreements	Other assets, net	—		Other liabilities	5,075
	Total	$	9,107	Total	$	5,158

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. The following tables provide a summary of cash margin deposit balances as of April 30, 2015 and July 31, 2014, respectively:

	April 30, 2015
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Deposits	Prepaid expenses and other current assets	$	16,542	Other current liabilities	$	15
	Other assets, net	5,279		Other liabilities	—
		$	21,821		$	15

	July 31, 2014
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Deposits	Prepaid expenses and other current assets	$	156	Other current liabilities	$	—
	Other assets, net	189		Other liabilities	—
		$	345		$	—

The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of earnings for the three and nine months endedApril 30, 2015 and 2014 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 Gain Recognized on Derivative	For the three months ended April 30,				For the three months ended April 30,
		2015		2014		2015			2014
Interest rate swap agreements	Interest expense	$	601	$	627	$	(2,275	)	$	(2,275	)

		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 nine months ended April 30,				For the nine months ended April 30,
		2015		2014		2015			2014
Interest rate swap agreements	Interest expense	$	1,408	$	1,948	$	(6,825	)	$	(9,915	)

The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income for the three and nine months endedApril 30, 2015 and 2014 due to derivatives designated as cash flow hedging instruments:

	For the three months ended April 30, 2015
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	$	7,813	Cost of product sold- propane and other gas liquids sales	$	(10,907	)	$	—
Interest rate swap agreements	106		Interest expense	—			—
	$	7,919		$	(10,907	)	$	—

	For the three months ended April 30, 2014
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	$	(165	)	Cost of product sold- propane and other gas liquids sales	$	(3,885	)	$	—
Interest rate swap agreements	825			Interest expense	—			—
	$	660			$	(3,885	)	$	—

	For the nine months ended April 30, 2015
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	$	(47,855	)	Cost of product sold- propane and other gas liquids sales	$	(17,139	)	$	—
Interest rate swap agreements	(3,250		)	Interest expense	—			(199		)
	$	(51,105	)		$	(17,139	)	$	(199	)

	For the nine months ended April 30, 2014
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	$	17,298		Cost of product sold- propane and other gas liquids sales	$	8,640	$	—
Interest rate swap agreements	(251		)	Interest expense	—		—
	$	17,047			$	8,640	$	—

The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of earnings for the three and nine months endedApril 30, 2015 due to the change in fair value of derivatives not designated as hedging instruments:

	For the three months ended April 30, 2015
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income		Location of Gain (Loss) Recognized in Income
Commodity derivatives	$	1,609	Operating expense

	For the nine months ended April 30, 2015
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income		Location of Gain (Loss) Recognized in Income
Commodity derivatives	$	1,609	Operating expense

The changes in derivatives included in AOCI for the nine months endedApril 30, 2015 and 2014 were as follows:  

	For the nine months ended April 30,
Gains and losses on derivatives included in AOCI	2015			2014
Beginning balance	$	6,483		$	2,066
Change in value of risk management commodity derivatives	(47,855		)	17,298
Reclassification of gains and losses on commodity hedges to cost of product sold - propane and other gas liquids sales, net	17,139			(8,640		)
Change in value of risk management interest rate derivatives	(3,250		)	(251		)
Reclassification of gains and losses on interest rate hedges to interest expense	$	199		$	—
Ending balance	$	(27,284	)	$	10,473

Ferrellgas expects to reclassify net losses of approximately $19.2 million to earnings during the next 12 months. These net losses are expected to be offset by increased margins on propane sales commitments Ferrellgas has with its customers that qualify for the normal purchase normal sales exception.

During the nine months endedApril 30, 2015 and 2014, Ferrellgas had no reclassifications to earnings 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 April 30, 2015, 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.

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, 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 would incur if these counterparties that make up the concentration failed to perform according to the terms of their contracts was $1.5 million at April 30, 2015.  

Ferrellgas holds certain derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon the operating partnership’s debt rating. At April 30, 2015, there were $0.4 million of derivatives with credit-risk-related contingent features in a liability position for which Ferrellgas had no collateral posted in the normal course of business related to such derivatives.

Ferrellgas, L.P. [Member]

Derivative Instruments and Hedging Activities

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. 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, L.P. also periodically utilizes derivative instruments to manage its exposure to fluctuations in interest rates.

Derivative instruments and hedging activities

During the nine months endedApril 30, 2015 Ferrellgas, L.P. recognized a $0.2 million loss related to hedge ineffectiveness. During the nine months endedApril 30, 2014 Ferrellgas, L.P. did not recognize any gain or loss in earnings related to hedge ineffectiveness.

The following tables provide a summary of the fair value of derivatives in Ferrellgas, L.P.’s condensed consolidated balance sheets as of April 30, 2015 and July 31, 2014: 

	April 30, 2015
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments
Commodity derivatives	Prepaid expenses and other current assets	$	1,550	Other current liabilities	$	20,709
Commodity derivatives	Other assets, net	1,893		Other liabilities	6,527
Interest rate swap agreements	Prepaid expenses and other current assets	1,950		Other current liabilities	1,660
Interest rate swap agreements	Other assets, net	195		Other liabilities	2,029
Derivatives not designated as hedging instruments
Commodity derivatives	Prepaid expenses and other current assets	734		Other current liabilities	—
Commodity derivatives	Other assets, net	906		Other liabilities	—
	Total	$	7,228	Total	$	30,925
	July 31, 2014
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments
Commodity derivatives	Prepaid expenses and other current assets	$	5,301	Other current liabilities	$	83
Commodity derivatives	Other assets, net	1,705		Other liabilities	—
Interest rate swap agreements	Prepaid expenses and other current assets	2,101		Other current liabilities	—
Interest rate swap agreements	Other assets, net	—		Other liabilities	5,075
	Total	$	9,107	Total	$	5,158

Ferrellgas, L.P.'s 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. The following tables provide a summary of cash margin deposit balances as of April 30, 2015 and July 31, 2014, respectively:

	April 30, 2015
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Deposits	Prepaid expenses and other current assets	$	16,542	Other current liabilities	$	15
	Other assets, net	5,279		Other liabilities	—
		$	21,821		$	15

	July 31, 2014
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Deposits	Prepaid expenses and other current assets	$	156	Other current liabilities	$	—
	Other assets, net	189		Other liabilities	—
		$	345		$	—

The following table provides a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of earnings for the nine months endedApril 30, 2015 and 2014 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 Gain Recognized on Derivative	For the three months ended April 30,				For the three months ended April 30,
		2015		2014		2015			2014
Interest rate swap agreements	Interest expense	$	601	$	627	$	(2,275	)	$	(2,275	)

		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 nine months ended April 30,				For the nine months ended April 30,
		2015		2014		2015			2014
Interest rate swap agreements	Interest expense	$	1,408	$	1,948	$	(6,825	)	$	(9,915	)

The following tables provide a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of comprehensive income for the nine months endedApril 30, 2015 and 2014 due to derivatives designated as cash flow hedging instruments:  

	For the three months ended April 30, 2015
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCL		Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
				Effective portion			Ineffective portion
Commodity derivatives	$	7,813	Cost of product sold- propane and other gas liquids sales	$	(10,907	)	$	—
Interest rate swap agreements	106		Interest expense	—			—
	$	7,919		$	(10,907	)	$	—

	For the three months ended April 30, 2014
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCI			Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
					Effective portion			Ineffective portion
Commodity derivatives	$	(165	)	Cost of product sold- propane and other gas liquids sales	$	(3,885	)	$	—
Interest rate swap agreements	825			Interest expense	—			—
	$	660			$	(3,885	)	$	—

	For the nine months ended April 30, 2015
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCI			Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
					Effective portion			Ineffective portion
Commodity derivatives	$	(47,855	)	Cost of product sold- propane and other gas liquids sales	$	(17,139	)	$	—
Interest rate swap agreements	(3,250		)	Interest expense	—			(199		)
	$	(51,105	)		$	(17,139	)	$	(199	)
	For the nine months ended April 30, 2014
Derivative Instrument	Amount of Gain (Loss) Recognized in AOCI			Location of Gain (Loss) Reclassified from AOCL into Income	Amount of Gain (Loss) Reclassified from AOCL into Income
					Effective portion			Ineffective portion
Commodity derivatives	$	17,298		Cost of product sold- propane and other gas liquids sales	$	8,640		$	—
Interest rate swap agreements	(251		)	Interest expense	—			—
	$	17,047			$	8,640		$	—

The following tables provide a summary of the effect on Ferrellgas, L.P.'s condensed consolidated statements of earnings for the three and nine months endedApril 30, 2015 due to the change in fair value of derivatives not designated as hedging instruments:

	For the three months ended April 30, 2015
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income		Location of Gain (Loss) Recognized in Income
Commodity derivatives	$	1,609	Operating expense

	For the nine months ended April 30, 2015
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income		Location of Gain (Loss) Recognized in Income
Commodity derivatives	$	1,609	Operating expense

The changes in derivatives included in AOCI for the nine months endedApril 30, 2015 and 2014 were as follows: 

	For the nine months ended April 30,
Gains and losses on derivatives included in AOCI	2015			2014
Beginning balance	$	6,483		$	2,066
Change in value of risk management commodity derivatives	(47,855		)	17,298
Reclassification of gains and losses on commodity hedges to cost of product sold - propane and other gas liquids sales, net	17,139			(8,640		)
Change in value of risk management interest rate derivatives	(3,250		)	(251		)
Reclassification of gains and losses on interest rate hedges to interest expense	$	199		$	—
Ending balance	$	(27,284	)	$	10,473

Ferrellgas, L.P. expects to reclassify net losses of approximately $19.2 million to earnings during the next 12 months. These net losses are expected to be offset by increased margins on propane sales commitments Ferrellgas, L.P. has with its customers that qualify for the normal purchase normal sales exception.

During the nine months endedApril 30, 2015 and 2014, Ferrellgas, L.P. had no reclassifications to earnings 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 April 30, 2015, Ferrellgas, L.P. 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.

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 $1.5 million at April 30, 2015.  

Ferrellgas, L.P. holds certain derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon the Ferrellgas, L.P.’s debt rating. At April 30, 2015, there were $0.4 million of derivatives with credit-risk-related contingent features in a liability position for which Ferrellgas, L.P. had no posted collateral in the normal course of business related to such derivatives.