Derivative Instruments and Hedging Activities

3 Months Ended

Oct. 31, 2017

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, 2017 and 2016, 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, 2017 and July 31, 2017:  

	October 31, 2017
	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	$	25,938	Other current liabilities	$	1,209
Commodity derivatives-propane	Other assets, net	8,789		Other liabilities	284
Interest rate swap agreements	Prepaid expenses and other current assets	298		Other current liabilities	284
Interest rate swap agreements	Other assets, net	—		Other liabilities	700
Derivatives not designated as hedging instruments
Commodity derivatives-crude oil	Prepaid expenses and other current assets	273		Other current liabilities	1,971
	Total	$	35,298	Total	$	4,448
	July 31, 2017
	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	$	11,061	Other current liabilities	$	415
Commodity derivatives-propane	Other assets, net	4,413		Other liabilities	15
Interest rate swap agreements	Prepaid expenses and other current assets	583		Other current liabilities	595
Interest rate swap agreements	Other assets, net	—		Other liabilities	112
Derivatives not designated as hedging instruments
Commodity derivatives-crude oil	Prepaid expenses and other current assets	738		Other current liabilities	828
	Total	$	16,795	Total	$	1,965

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, 2017 and July 31, 2017, respectively:

	October 31, 2017
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	3,723	Other current liabilities	$	19,696
	Other assets, net	1,461		Other liabilities	5,945
		$	5,184		$	25,641

	July 31, 2017
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	1,778	Other current liabilities	$	7,729
	Other assets, net	1,631		Other liabilities	3,073
		$	3,409		$	10,802

The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months endedOctober 31, 2017 and 2016 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 Amounts Recognized on Derivative	For the three months ended October 31,				For the three months ended October 31,
		2017		2016		2017			2016
Interest rate swap agreements	Interest expense	$	138	$	420	$	(2,275	)	$	(2,275	)

The following tables provide a summary of the effect on Ferrellgas’ condensed consolidated statements of comprehensive income (loss) for the three months endedOctober 31, 2017 and 2016 due to derivatives designated as cash flow hedging instruments:

	For the three months ended October 31, 2017
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	$	22,323	Cost of sales-propane and other gas liquids sales	$	4,132		$	—
Interest rate swap agreements	126		Interest expense	(183		)	—
	$	22,449		$	3,949		$	—
	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	)	$	—

The following tables provide a summary of the effect on Ferrellgas' condensed consolidated statements of operations for the three months endedOctober 31, 2017 and 2016 due to the change in fair value of derivatives not designated as hedging instruments:

	For the three months ended October 31, 2017
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil	$	(1,390	)	Cost of sales - midstream operations
	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

The changes in derivatives included in AOCI for the three months endedOctober 31, 2017 and 2016 were as follows:  

	For the three months ended October 31,
Gains and losses on derivatives included in AOCI	2017			2016
Beginning balance	$	14,648		$	(9,815	)
Change in value of risk management commodity derivatives	22,323			4,873
Reclassification of (gains) and losses on commodity hedges to cost of sales - propane and other gas liquids sales, net	(4,132		)	3,596
Change in value of risk management interest rate derivatives	126			265
Reclassification of (gains) and losses on interest rate hedges to interest expense	183			642
Ending balance	$	33,148		$	(439	)

Ferrellgas expects to reclassify net gains related to the risk management commodity derivatives of approximately $24.7 million to earnings during the next 12 months. These net gains are expected to be offset by decreased 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, 2017, 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, 2017, 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.

As of October 31, 2017, Ferrellgas had financial derivative contracts covering 0.3 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, parent 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, 2017, 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 $33.3 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, 2017.

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, 2017 and 2016, 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, 2017 and July 31, 2017: 

	October 31, 2017
	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	$	25,938	Other current liabilities	$	1,209
Commodity derivatives-propane	Other assets, net	8,789		Other liabilities	284
Interest rate swap agreements	Prepaid expenses and other current assets	298		Other current liabilities	284
Interest rate swap agreements	Other assets, net	—		Other liabilities	700
Derivatives not designated as hedging instruments
Commodity derivatives-crude oil	Prepaid expenses and other current assets	273		Other current liabilities	1,971
	Total	$	35,298	Total	$	4,448
	July 31, 2017
	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	$	11,061	Other current liabilities	$	415
Commodity derivatives	Other assets, net	4,413		Other liabilities	15
Interest rate swap agreements	Prepaid expenses and other current assets	583		Other current liabilities	595
Interest rate swap agreements	Other assets, net	—		Other liabilities	112
Derivatives not designated as hedging instruments
Commodity derivatives-crude oil	Prepaid expenses and other current assets	738		Other current liabilities	828
	Total	$	16,795	Total	$	1,965

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, 2017 and July 31, 2017, respectively:

	October 31, 2017
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	3,723	Other current liabilities	$	19,696
	Other assets, net	1,461		Other liabilities	5,945
		$	5,184		$	25,641

	July 31, 2017
	Assets			Liabilities
Description	Location	Amount		Location	Amount
Margin Balances	Prepaid expenses and other current assets	$	1,778	Other current liabilities	$	7,729
	Other assets, net	1,631		Other liabilities	3,073
		$	3,409		$	10,802

The following table provides a summary of the effect on Ferrellgas, L.P.’s condensed consolidated statements of operations for the three months endedOctober 31, 2017 and 2016 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 Amounts Recognized on Derivative	For the three months ended October 31,				For the three months ended October 31,
		2017		2016		2017			2016
Interest rate swap agreements	Interest expense	$	138	$	420	$	(2,275	)	$	(2,275	)

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 endedOctober 31, 2017 and 2016 due to derivatives designated as cash flow hedging instruments:  

	For the three months ended October 31, 2017
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	$	22,323	Cost of sales-propane and other gas liquids sales	$	4,132		$	—
Interest rate swap agreements	126		Interest expense	(183		)	—
	$	22,449		$	3,949		$	—
	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	)	$	—

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, 2017 and 2016 due to the change in fair value of derivatives not designated as hedging instruments:

	For the three months ended October 31, 2017
Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income
Commodity derivatives - crude oil	$	(1,390	)	Cost of sales - midstream operations
	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

The changes in derivatives included in AOCI for the three months endedOctober 31, 2017 and 2016 were as follows: 

	For the three months ended October 31,
Gains and losses on derivatives included in AOCI	2017			2016
Beginning balance	$	14,648		$	(9,815	)
Change in value of risk management commodity derivatives	22,323			4,873
Reclassification of (gains) and losses on commodity hedges to cost of sales - propane and other gas liquids sales, net	(4,132		)	3,596
Change in value of risk management interest rate derivatives	126			265
Reclassification of (gains) and losses on interest rate hedges to interest expense	183			642
Ending balance	$	33,148		$	(439	)

Ferrellgas, L.P. expects to reclassify net gains related to the risk management commodity derivatives of approximately $24.7 million to earnings during the next 12 months. These net gains are expected to be offset by decreased 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, 2017 and 2016, 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, 2017, 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.

As of October 31, 2017, Ferrellgas, L.P. financial derivative contracts covering 0.3 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, parent 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, 2017, 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 $33.3 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, 2017.