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S&P Lowers Outlook on Ferrellgas Partners (FGP) to Negative; Ratings Affirmed

May 27, 2016 11:33 AM EDT

S&P Global Ratings affirmed its 'B+' corporate credit rating on Ferrellgas Partners L.P. (NYSE: FGP) and revised the outlook to negative from stable. We also affirmed our 'B-' rating on the company's senior unsecured debt. The '6' recovery rating on this debt is unchanged, and indicates expectations for negligible recovery (0%-10%) if a payment default occurs.

At the same time, affirmed our 'B+' corporate credit rating on Ferrellgas L.P. and revised the outlook to negative from stable. We also affirmed the 'B+' rating on Ferrellgas L.P.'s senior unsecured debt. The '4' recovery rating on this debt is unchanged and indicates that lenders can expect average (30%-50%; lower half of the range) recovery if a payment default occurs.

"The rating action reflects our view that the partnership's high financial leverage will persist throughout the next 12 months," said S&P Global Ratings credit analyst Mike Llanos. The partnership has experienced reduced propane volume sales resulting from the warmer-than-normal winter weather. We believe retail gallons sold will decline between 7%-10% for the 2016 fiscal year due to the warm winter weather. Offsetting the decline in gallons sold is the partnership's ability to maintain strong profit margins. In our view, if the price of retail propane were to increase significantly at a rate that would be difficult to pass on the cost to the customer, then we would expect margins to decline. As a result of the weaker volumes, we project consolidated financial leverage of about 6x over the next 12 months absent a materially improved winter heating season.

The negative outlook on Ferrellgas Partners L.P. reflects our expectation that consolidated adjusted debt-to-EBITDA will exceed 6x over the next 12 months. Though we expect the distribution coverage ratio to exceed 1x, we note that the warm winter has resulted in weaker credit measures.

We could lower the rating if the midstream business underperforms or if the upcoming winter is warmer than normal, which would likely result in total adjusted-debt-to-EBITDA exceeding 6x. This could also occur if retail margins decline to below the historical average or if volumes do not improve year-over-year.

We would revise the outlook to stable if total retail propane volumes grow over 7% and if margins remain at or above historical averages. We could also revise the outlook to stable if the midstream business performs better than expected resulting in distribution coverage above 1x and leverage below 5x.



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