Derivative Instruments and Hedging Activities

3 Months Ended

Oct. 31, 2020

Derivative Instruments and Hedging Activities

J. 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.

Derivative instruments and hedging activity

During the three months ended October 31, 2020 and 2019, 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 within Ferrellgas’ condensed consolidated balance sheets as of October 31, 2020 and July 31, 2020:


	Final	October 31, 2020
	Maturity	Asset Derivatives			Liability Derivatives
Derivative Instrument	Date	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments	December 2021
Commodity derivatives-propane		Prepaid expenses and other current assets	$	6,656	Other current liabilities	$	1,506
Commodity derivatives-propane		Other assets, net		505	Other liabilities		51
		Total	$	7,161	Total	$	1,557


	Final	July 31, 2020
	Maturity	Asset Derivatives			Liability Derivatives
Derivative Instrument	Date	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments	December 2021
Commodity derivatives-propane		Prepaid expenses and other current assets	$	2,846	Other current liabilities	$	5,029
Commodity derivatives-propane		Other assets, net		266	Other liabilities		396
		Total	$	3,112	Total	$	5,425

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. Liabilities represent cash margin deposits received by Ferrellgas for contracts that are in a positive mark-to-market position. The following tables provide a summary of cash margin balances as of October 31, 2020 and July 31, 2020, respectively:


	October 31, 2020
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expense and other current assets	$	9,381	Other current liabilities	$	5,768
	Other assets, net		544	Other liabilities		483
		$	9,925		$	6,251


	July 31, 2020
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expense and other current assets	$	14,398	Other current liabilities	$	510
	Other assets, net		1,433	Other liabilities		—
		$	15,831		$	510

The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income (loss) for the three months ended October 31, 2020 and 2019 due to derivatives designated as cash flow hedging instruments:


	For the three months ended October 31, 2020
				Amount of Gain (Loss)
	Amount of Gain		Location of Gain (Loss)	Reclassified from
	(Loss) Recognized in		Reclassified from	AOCI into Income
Derivative Instrument	AOCI		AOCI into Income	Effective portion		Ineffective portion
Commodity derivatives	$	5,767	Cost of product sold- propane and other gas liquids sales	$	(2,150)	$	—
	$	5,767		$	(2,150)	$	—


	For the three months ended October 31, 2019
				Amount of Gain (Loss)
	Amount of Gain (Loss)		Location of Gain (Loss)	Reclassified from
	Recognized in		Reclassified from	AOCI into Income
Derivative Instrument	AOCI		AOCI into Income	Effective portion		Ineffective portion
Commodity derivatives	$	(13,627)	Cost of product sold- propane and other gas liquids sales	$	(7,479)	$	—
	$	(13,627)		$	(7,479)	$	—

The changes in derivatives included in AOCI for the three months ended October 31, 2020 and 2019 were as follows:


	For the three months ended October 31,
Gains and losses on derivatives included in AOCI	2020		2019
Beginning balance	$	(2,313)	$	(14,756)
Change in value of risk management commodity derivatives		5,767		(13,627)
Reclassification of losses on commodity hedges to cost of sales - propane and other gas liquids sales, net		2,150		7,479
Ending balance	$	5,604	$	(20,904)

Ferrellgas expects to reclassify net gains of approximately $5.2 million to earnings during the next 12 months. These net gains are expected to be offset by increased margins on propane sales commitments Ferrellgas has with its customers that qualify for the normal purchase normal sale exception.

During the three months ended October 31, 2020 and 2019, Ferrellgas had no reclassifications to operations 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, 2020, Ferrellgas had financial derivative contracts covering 3.6 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 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, 2020, the maximum amount of loss due to credit risk that Ferrellgas would incur based upon the gross fair values of the derivative financial instruments is $3.5 million.

From time to time Ferrellgas enters into derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas’ debt rating. There were no open derivative contracts with credit-risk-related contingent features as of October 31, 2020.

Ferrellgas, L.P. [Member]

Derivative [Line Items]

Derivative Instruments and Hedging Activities

J. 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.

Derivative instruments and hedging activity

During the three months ended October 31, 2020 and 2019, 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 within Ferrellgas, L.P.’s condensed consolidated balance sheets as of October 31, 2020 and July 31, 2020:


	Final	October 31, 2020
	Maturity	Asset Derivatives			Liability Derivatives
Derivative Instrument	Date	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments	December 2021
Commodity derivatives-propane		Prepaid expenses and other current assets	$	6,656	Other current liabilities	$	1,506
Commodity derivatives-propane		Other assets, net		505	Other liabilities		51
		Total	$	7,161	Total	$	1,557


	Final	July 31, 2020
	Maturity	Asset Derivatives			Liability Derivatives
Derivative Instrument	Date	Location	Fair value		Location	Fair value
Derivatives designated as hedging instruments	December 2021
Commodity derivatives-propane		Prepaid expenses and other current assets	$	2,846	Other current liabilities	$	5,029
Commodity derivatives-propane		Other assets, net		266	Other liabilities		396
		Total	$	3,112	Total	$	5,425

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. Liabilities represent cash margin deposits received by Ferrellgas, L.P. for contracts that are in a positive mark-to-market position. The following tables provide a summary of cash margin balances as of October 31, 2020 and July 31, 2020, respectively:


	October 31, 2020
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expense and other current assets	$	9,381	Other current liabilities	$	5,768
	Other assets, net		544	Other liabilities		483
		$	9,925		$	6,251


	July 31, 2020
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expense and other current assets	$	14,398	Other current liabilities	$	510
	Other assets, net		1,433	Other liabilities		—
		$	15,831		$	510

The following tables provide a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of comprehensive income (loss) for the three months ended October 31, 2020 and 2019 due to derivatives designated as cash flow hedging instruments:


	For the three months ended October 31, 2020
				Amount of Gain (Loss)
			Location of Gain (Loss)	Reclassified from
	Amount of Gain (Loss)		Reclassified from AOCI	AOCI into Income
Derivative Instrument	Recognized in AOCI		into Income	Effective portion		Ineffective portion
Commodity derivatives	$	5,767	Cost of product sold- propane and other gas liquids sales	$	(2,150)	$	—
	$	5,767		$	(2,150)	$	—


	For the three months ended October 31, 2019
				Amount of Gain (Loss)
			Location of Gain (Loss)	Reclassified from
	Amount of Gain (Loss)		Reclassified from AOCI	AOCI into Income
Derivative Instrument	Recognized in AOCI		into Income	Effective portion		Ineffective portion
Commodity derivatives	$	(13,627)	Cost of product sold- propane and other gas liquids sales	$	(7,479)	$	—
	$	(13,627)		$	(7,479)	$	—

The changes in derivatives included in AOCI for the three months ended October 31, 2020 and 2019 were as follows:


	For the three months ended October 31,
Gains and losses on derivatives included in AOCI	2020		2019
Beginning balance	$	(2,313)	$	(14,756)
Change in value of risk management commodity derivatives		5,767		(13,627)
Reclassification of losses on commodity hedges to cost of sales - propane and other gas liquids sales, net		2,150		7,479
Ending balance	$	5,604	$	(20,904)

Ferrellgas, L.P. expects to reclassify net gains of approximately $5.2 million to earnings during the next 12 months. These net gains 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 sale exception.

During the three months ended October 31, 2020 and 2019, Ferrellgas, L.P. had no reclassifications to operations 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, 2020, Ferrellgas, L.P. had financial derivative contracts covering 3.6 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 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, 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, 2020, the maximum amount of loss due to credit risk that Ferrellgas, L.P. would incur based upon the gross fair values of the derivative financial instruments is $3.5 million.

From time to time Ferrellgas, L.P. enters into derivative contracts that have credit-risk-related contingent features which dictate credit limits based upon Ferrellgas, L.P.’s debt rating. There were no open derivative contracts with credit-risk-related contingent features as of October 31, 2020.