Fair Value Measurements

12 Months Ended

Jul. 31, 2014

Fair Value Measurements

Fair value measurements

Derivative Financial Instruments

The following table presents Ferrellgas’ financial assets and financial liabilities that are measured at fair value on a recurring basis for each of the fair value hierarchy levels, including both current and noncurrent portions, as of July 31, 2014 and 2013:

	Asset (Liability)
	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Unobservable Inputs (Level 3)			Total
July 31, 2014:
Assets:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	2,101		$	—		$	2,101
Propane commodity derivatives	$	—	$	7,006		$	—		$	7,006
Liabilities:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	(5,075	)	$	—		$	(5,075	)
Propane commodity derivatives	$	—	$	(83	)	$	—		$	(83	)
Contingent consideration	$	—	$	—		$	(6,400	)	$	(6,400	)
July 31, 2013:
Assets:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	3,783		$	—		$	3,783
Commodity derivatives propane swaps	$	—	$	2,532		$	—		$	2,532
Liabilities:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	(4,998	)	$	—		$	(4,998	)
Commodity derivatives propane swaps	$	—	$	(907	)	$	—		$	(907	)

The following is a reconciliation of the opening and closing balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period ended July 31, 2014:

	Contingent consideration liability
Balance at July 31, 2013	$	—
Estimated value at acquisition	1,400
Increase in fair value related to accretion	110
Change in fair value included in earnings	4,890
Balance at July 31, 2014	$	6,400

Quantitative Information about Level 3 Fair Value Measurements

	Fair value at July 31, 2014		Valuation technique		Unobservable input	Range	Weighted Average
Contingent consideration liability	$	6,400	Discounted cash flow	A.	Weighted average cost of capital (WACC)	N/A	20	%
				B.	Probability of forecast	10% - 70%	N/A

The valuation of the contingent consideration is based on unobservable inputs such as Ferrellgas' weighted average cost of capital and the likelihood of the acquired company meeting earnings thresholds. As of July 31, 2014, fluctuations in these inputs could have the following effect (in thousands):

	Increase/(decrease)
	5% increase in WACC			5% decrease in WACC		10% increase in best earnings forecast probability		10% decrease in best earnings forecast probability
Change in the fair value of contingent consideration	$	(470	)	$	400	$	840	$	(1,010	)

Methodology

The fair values of Ferrellgas’ non-exchange traded commodity derivative contracts are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators. The fair values of interest rate swap contracts are based upon third-party quotes or indicative values based on recent market transactions.

The fair value of Ferrellgas' contingent consideration for the Sable acquisition is based upon our estimate of the likelihood that the target EBITDA metric will be met and exceeded and the amount by which it could be exceeded then discounting that value at a risk- and inflation-adjusted rate. The inputs to this model are the likelihood of meeting and exceeding the target EBITDA metric and discount rate. Management and the sellers prepared an operating forecast based on Sable's operating capacities, historical performance, and projected oil and water volumes and set a target EBITDA metric. Management then assessed the likelihood of this target EBITDA metric being achieved and exceeded and assigned probabilities to various potential outcomes. To determine the appropriate discount rate, management used observable inputs such as inflation rates, short and long-term yields for U.S. government securities and our nonperformance risk. Due to the significant unobservable inputs required in this measurement, management determined that the fair value measurement of the contingent consideration liability is level 3 in the fair value hierarchy.

Other Financial Instruments

The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. At July 31, 2014 and July 31, 2013, the estimated fair value of Ferrellgas’ long-term debt instruments was $1,408.2 million and $1,186.7 million, respectively. Ferrellgas estimates the fair value of long-term debt based on quoted market prices. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.

Ferrellgas has other financial instruments such as trade accounts receivable which could expose it to concentrations of credit risk. The credit risk from trade accounts receivable is limited because of a large customer base which extends across many different U.S. markets.

Ferrellgas, L.P. [Member]

Fair Value Measurements

Fair value measurements

Derivative Financial Instruments

The following table presents Ferrellgas L.P.’s financial assets and financial liabilities that are measured at fair value on a recurring basis for each of the fair value hierarchy levels, including both current and noncurrent portions, as of July 31, 2014 and 2013:

	Asset (Liability)
	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Unobservable Inputs (Level 3)			Total
July 31, 2014:
Assets:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	2,101		$	—		$	2,101
Commodity derivatives propane swaps	$	—	$	7,006		$	—		$	7,006
Liabilities:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	(5,075	)	$	—		$	(5,075	)
Commodity derivatives propane swaps	$	—	$	(83	)	$	—		$	(83	)
Contingent consideration	$	—	$	—		$	(6,400	)	$	(6,400	)
July 31, 2013:
Assets:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	3,783		$	—		$	3,783
Commodity derivatives propane swaps	$	—	$	2,532		$	—		$	2,532
Liabilities:
Derivative financial instruments:
Interest rate swap agreements	$	—	$	(4,998	)	$	—		$	(4,998	)
Commodity derivatives propane swaps	$	—	$	(907	)	$	—		$	(907	)

The following is a reconciliation of the opening and closing balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period ended July 31, 2014:

	Contingent consideration liability
Balance at July 31, 2013	$	—
Estimated value at acquisition	1,400
Increase in fair value related to accretion	110
Change in fair value included in earnings	4,890
Balance at July 31, 2014	$	6,400

Quantitative Information about Level 3 Fair Value Measurements

	Fair value at July 31, 2014		Valuation technique		Unobservable input	Range	Weighted Average
Contingent consideration liability	$	6,400	Discounted cash flow	A.	Weighted average cost of capital (WACC)	N/A	20	%
				B.	Probability of forecast	10% - 70%	N/A

The valuation of the contingent consideration is based on unobservable inputs such as Ferrellgas' weighted average cost of capital and the likelihood of the acquired company meeting earnings thresholds. As of July 31, 2014, fluctuations in these inputs could have the following effect (in thousands):

	Increase/(decrease)
	5% increase in WACC			5% decrease in WACC		10% increase in best earnings forecast probability		10% decrease in best earnings forecast probability
Change in the fair value of contingent consideration	$	(470	)	$	400	$	840	$	(1,010	)

Methodology

The fair values of Ferrellgas L.P.’s non-exchange traded commodity derivative contracts are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators. The fair values of interest rate swap contracts are based upon third-party quotes or indicative values based on recent market transactions.

The fair value of Ferrellgas L.P.'s contingent consideration for the Sable acquisition is based upon our estimate of the likelihood that the target EBITDA metric will be met and exceeded and the amount by which it could be exceeded then discounting that value at a risk- and inflation-adjusted rate. The inputs to this model are the likelihood of meeting and exceeding the target EBITDA metric and discount rate. Management and the sellers prepared an operating forecast based on Sable's operating capacities, historical performance, and projected oil and water volumes and set a target EBITDA metric. Management then assessed the likelihood of this target EBITDA metric being achieved and exceeded and assigned probabilities to various potential outcomes. To determine the appropriate discount rate, management used observable inputs such as inflation rates, short and long-term yields for U.S. government securities and our nonperformance risk. Due to the significant unobservable inputs required in this measurement, management determined that the fair value measurement of the contingent consideration liability is level 3 in the fair value hierarchy.

Other Financial Instruments

The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. At July 31, 2014 and July 31, 2013, the estimated fair value of Ferrellgas L.P.’s long-term debt instruments was $1,215.3 million and $999.2 million, respectively. Ferrellgas estimates the fair value of long-term debt based on quoted market prices. The fair value of our consolidated debt obligations is a Level 2 valuation based on the observable inputs used for similar liabilities.

Ferrellgas L.P.  has other financial instruments such as trade accounts receivable which could expose it to concentrations of credit risk. The credit risk from trade accounts receivable is limited because of a large customer base which extends across many different U.S. markets.