Derivative Instruments and Hedging Activities

3 Months Ended

Oct. 31, 2016

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 activity

During the three months endedOctober 31, 2016 and 2015, 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 the fair value of derivatives in Ferrellgas’ condensed consolidated balance sheets as of October 31, 2016 and July 31, 2016:  

	October 31, 2016
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments
Commodity derivatives-propane	Prepaid expenses and other current assets	$	2,458	Other current liabilities	$	3,820
Commodity derivatives-propane	Other assets, net	3,738		Other liabilities	370
Interest rate swap agreements	Prepaid expenses and other current assets	1,467		Other current liabilities	1,919
Interest rate swap agreements	Other assets, net	2,666		Other liabilities	726
Derivatives not designated as hedging instruments
Commodity derivatives-vehicle fuel	Prepaid expenses and other current assets	—		Other current liabilities	2,119
Commodity derivatives- crude oil	Prepaid expenses and other current assets	476		Other current liabilities	173
	Total	$	10,805	Total	$	9,127
	July 31, 2016
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments
Commodity derivatives-propane	Prepaid expenses and other current assets	$	2,263	Other current liabilities	$	10,184
Commodity derivatives-propane	Other assets, net	3,056		Other liabilities	1,597
Interest rate swap agreements	Prepaid expenses and other current assets	1,654		Other current liabilities	2,309
Interest rate swap agreements	Other assets, net	4,176		Other liabilities	1,244
Derivatives not designated as hedging instruments
Commodity derivatives-vehicle fuel	Prepaid expenses and other current assets	—		Other current liabilities	3,996
Commodity derivatives-crude oil	Prepaid expenses and other current assets	2,922		Other current liabilities	1,912
	Total	$	14,071	Total	$	21,242

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 balances as of October 31, 2016 and July 31, 2016, respectively:

	October 31, 2016
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	3,298	Other current liabilities	$	747
	Other assets, net	1,287		Other liabilities	2,696
		$	4,585		$	3,443

	July 31, 2016
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	8,252	Other current liabilities	$	—
	Other assets, net	1,275		Other liabilities	—
		$	9,527		$	—

The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months endedOctober 31, 2016 and 2015 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 October 31,				For the three months ended October 31,
		2016		2015		2016			2015
Interest rate swap agreements	Interest expense	$	420	$	537	$	(2,275	)	$	(2,275	)

The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive loss for the three months endedOctober 31, 2016 and 2015 due to derivatives designated as cash flow hedging instruments:

	For the three months ended October 31, 2016
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	$	4,873		Cost of sales-propane and other gas liquids sales	$	(3,596	)	$	—
Interest rate swap agreements	265			Interest expense	(642		)	—
	$	5,138			$	(4,238	)	$	—
	For the three months ended October 31, 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	$	1,585		Cost of sales-propane and other gas liquids sales	$	(7,449	)	$	—
Interest rate swap agreements	(1,201		)	Interest expense	(777		)	—
	$	384			$	(8,226	)	$	—

The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months endedOctober 31, 2016 and 2015 due to the change in fair value of derivatives not designated as hedging instruments:

	For the three months ended October 31, 2016
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil	$	(1,241	)	Cost of sales - midstream operations
Commodity derivatives - vehicle fuel	$	1,027		Operating expense
	For the three months ended October 31, 2015
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income
Commodity derivatives - vehicle fuel	$	(1,038	)	Operating expense

The changes in derivatives included in AOCI for the three months endedOctober 31, 2016 and 2015 were as follows:  

	For the three months ended October 31,
Gains and losses on derivatives included in AOCI	2016			2015
Beginning balance	$	(9,815	)	$	(38,906	)
Change in value of risk management commodity derivatives	4,873			1,585
Reclassification of gains and losses on commodity hedges to cost of sales - propane and other gas liquids sales, net	3,596			7,449
Change in value of risk management interest rate derivatives	265			(1,201		)
Reclassification of gains and losses on interest rate hedges to interest expense	642			777
Ending balance	$	(439	)	$	(30,296	)

Ferrellgas expects to reclassify net losses related to the risk management commodity derivatives of approximately $1.4 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 three months endedOctober 31, 2016, 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 October 31, 2016, Ferrellgas had financial derivative contracts covering 2.4 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.

As of October 31, 2016, Ferrellgas had financial derivative contracts covering 0.1 million barrels of diesel and 21 thousand barrels of unleaded gasoline related to fuel hedges in transportation of propane.

As of October 31, 2016, Ferrellgas had financial derivative contracts covering 0.2 million barrels of crude oil related to the hedging of crude oil line fill and inventory.

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 reduce 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. Ferrellgas has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties. If these counterparties that make up the concentration failed to perform according to the terms of their contracts at October 31, 2016, the maximum amount of loss due to credit risk that, based upon the gross fair values of the derivative financial instruments, Ferrellgas would incur is $2.7 million.

Ferrellgas holds certain derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas' debt rating. As of October 31, 2016, a downgrade in Ferrellgas' debt rating could trigger a reduction in credit limit and would result in an additional collateral requirement of zero. There were no derivatives with credit-risk-related contingent features in a liability position on October 31, 2016 and Ferrellgas had posted no collateral 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 three months endedOctober 31, 2016 and 2015, 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 commodity cash flow hedges.

The following tables provide a summary of the fair value of derivatives in Ferrellgas, L.P.’s condensed consolidated balance sheets as of October 31, 2016 and July 31, 2016: 

	October 31, 2016
	Asset Derivatives			Liability Derivatives
Derivative Instrument	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments
Commodity derivatives-propane	Prepaid expenses and other current assets	$	2,458	Other current liabilities	$	3,820
Commodity derivatives-propane	Other assets, net	3,738		Other liabilities	370
Interest rate swap agreements	Prepaid expenses and other current assets	1,467		Other current liabilities	1,919
Interest rate swap agreements	Other assets, net	2,666		Other liabilities	726
Derivatives not designated as hedging instruments
Commodity derivatives-vehicle fuel	Prepaid expenses and other current assets	—		Other current liabilities	2,119
Commodity derivatives- crude oil	Prepaid expenses and other current assets	476		Other current liabilities	173
	Total	$	10,805	Total	$	9,127
	July 31, 2016
	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	$	2,263	Other current liabilities	$	10,184
Commodity derivatives	Other assets, net	3,056		Other liabilities	1,597
Interest rate swap agreements	Prepaid expenses and other current assets	1,654		Other current liabilities	2,309
Interest rate swap agreements	Other assets, net	4,176		Other liabilities	1,244
Derivatives not designated as hedging instruments
Commodity derivatives - vehicle fuel	Prepaid expenses and other current assets	—		Other current liabilities	3,996
Commodity derivatives-crude oil	Prepaid expenses and other current assets	2,922		Other current liabilities	1,912
	Total	$	14,071	Total	$	21,242

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 balances as of October 31, 2016 and July 31, 2016, respectively:

	October 31, 2016
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	3,298	Other current liabilities	$	747
	Other assets, net	1,287		Other liabilities	2,696
		$	4,585		$	3,443

	July 31, 2016
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	8,252	Other current liabilities	$	—
	Other assets, net	1,275		Other liabilities	—
		$	9,527		$	—

The following table provides a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of operations for the three and three months endedOctober 31, 2016 and 2015 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 October 31,				For the three months ended October 31,
		2016		2015		2016			2015
Interest rate swap agreements	Interest expense	$	420	$	537	$	(2,275	)	$	(2,275	)

The following tables provide a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of comprehensive loss for the three months endedOctober 31, 2016 and 2015 due to derivatives designated as cash flow hedging instruments:  

	For the three months ended October 31, 2016
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	$	4,873	Cost of sales-propane and other gas liquids sales	$	(3,596	)	$	—
Interest rate swap agreements	265		Interest expense	(642		)	—
	$	5,138		$	(4,238	)	$	—

	For the three months ended October 31, 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	$	1,585		Cost of sales-propane and other gas liquids sales	$	(7,449	)	$	—
Interest rate swap agreements	(1,201		)	Interest expense	(777		)	—
	$	384			$	(8,226	)	$	—

The following tables provide a summary of the effect on Ferrellgas, L.P.'s condensed consolidated statements of operations for the three months endedOctober 31, 2016 and 2015 due to the change in fair value of derivatives not designated as hedging instruments:

	For the three months ended October 31, 2016
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil	$	(1,241	)	Cost of sales - midstream operations
Commodity derivatives - vehicle fuel	$	1,027		Operating expense
	For the three months ended October 31, 2015
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income
Commodity derivatives - vehicle fuel	$	(1,038	)	Operating expense

The changes in derivatives included in AOCI for the three months endedOctober 31, 2016 and 2015 were as follows: 

	For the three months ended October 31,
Gains and losses on derivatives included in AOCI	2016			2015
Beginning balance	$	(9,815	)	$	(38,906	)
Change in value of risk management commodity derivatives	4,873			1,585
Reclassification of gains and losses on commodity hedges to cost of sales - propane and other gas liquids sales, net	3,596			7,449
Change in value of risk management interest rate derivatives	265			(1,201		)
Reclassification of gains and losses on interest rate hedges to interest expense	642			777
Ending balance	$	(439	)	$	(30,296	)

Ferrellgas, L.P. expects to reclassify net losses related to the risk management commodity derivatives of approximately $1.4 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 three months endedOctober 31, 2016 and 2015, 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 October 31, 2016, Ferrellgas, L.P. had financial derivative contracts covering 2.4 million barrels of propane that were entered into as cash flow hedges of forward and forecasted purchases of propane.

As of October 31, 2016, Ferrellgas, L.P. had financial derivative contracts covering 0.1 million barrels of diesel and 21 thousand barrels of unleaded gasoline related to fuel hedges in transportation of propane.

As of October 31, 2016, Ferrellgas, L.P. financial derivative contracts covering 0.2 million barrels of crude oil related to the hedging of crude oil line fill and inventory.

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. Ferrellgas, L.P. has concentrations of credit risk associated with derivative financial instruments held by certain derivative financial instrument counterparties. If these counterparties that make up the concentration failed to perform according to the terms of their contracts at October 31, 2016, 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 is $2.7 million.  

Ferrellgas, L.P. holds certain derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas, L.P.’s debt rating. As of October 31, 2016, a downgrade in Ferrellgas, L.P.'s debt rating could trigger a reduction in credit limit and would result in an additional collateral requirement of zero. There were no derivatives with credit-risk-related contingent features in a liability position on October 31, 2016 and Ferrellgas, L.P. had posted no collateral in the normal course of business related to such derivatives.