Ferrellgas Prospects Staying Slim

We are reiterating our Hold recommendation, price objective and earnings estimates on Ferrellgas Partners L.P. (FGP - Analyst Report) units. Sales volumes and earnings remain under pressure as the rising cost of propane squeezes gross margins and causes customer conservation. We are decreasing our 2008/2009 earnings estimates from $0.55 and $0.74 per unit to $0.47 and $0.63 per unit. The decrease is due to the negative effects of rising propane prices on gross margins.

We continue to believe that current valuation adequately reflects the partnership's lack of distribution-growth prospects, continued margin pressures and a relatively weak balance sheet. As expected, the partnership kept its quarterly cash distribution unchanged for the third-quarter at $0.50 per unit ($2 per unit annualized).

The retail segment, Blue Rhino, posted a solid performance reaching its volume goals while successfully passing through cost increases to customers. Blue Rhino is poised to have a good fourth quarter with expected adjusted EBITDA increasing year-over-year.

Currently, its outstanding debt balance is more than $1 billion, and given a near-term forecasted distribution coverage ratio of around 1.0, cash flows from operations will not be available for any near-term debt reduction.

Given the relatively high debt load and the fundamental variability in weather and gross margin relationship, FGP will likely need to maintain a higher coverage ratio before even considering any increase in its distributions. More importantly, while recent acquisitions have the potential to generate strong cash flows, we believe that the first priority on excess cash will remain towards debt repayment and not higher distributions. So, while the safety of current distributions is not in doubt, the prospects of future growth are rather slim.

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