Ferrellgas Partners, L.P.

Stephen L. Wambold - President and CEO James Ryan VanWinkle - EVP and CFO

James Spicer - Wells Fargo & Company Jeremy Tonet - JP Morgan John Tysseland - Citi Group

Thank you, Ashley, and good morning, everyone. Welcome to the Ferrellgas Partners’ fiscal 2013 first quarter earnings conference call.

I’m Ryan Van Winkle, Executive Vice President and Chief Financial Officer, and with me today is Steve Wambold, President and Chief Executive Officer. Before we get started, we would like to remind you that some of the statements made during the call maybe considered forward-looking.

Various risks, uncertainties and other factors could cause actual performance to differ materially from anticipated performance. These factors are discussed in our Form 10-K and other documents filed with the SEC from time to time.

Steve will open the call with comments about the first quarter and then he will turn the call back over to me, which time I will review the financial performance of the Partnership. After that, we will open the call up for questions you may have.

So with that out of the way, I’d like to turn the call over to Steve Wambold, President and Chief Executive Officer.

Okay. Thank you, Ryan.

Ryan will be back in a little bit to discuss the financial details after I provide some perspective on the quarter and talk a little bit about the future. And then, as usual we will be glad to answer any questions that you may have.

FY12 last year for the propane industry anyway was a punishing year, it was a brutal year and I’m glad it’s over. Much of what happened last year was beyond our control, weather was incredibly warm and in fact it was the second warmest in recorded history.

Costs were very high, and even though we were hedged, it put incredible pressure on our margins, our customer budgets and our employees who work hard to provide great service to our customers and the corresponding results were not surprising as we slip backwards in most financial categories. But in most cases there can be a bright side as we saw.

We did make it through that tough time, we did learn some valuable lessons in FY12. And while the industry was certainly bruised and turned inside out during the winter, that was not.

We chose to focus internally. We realized we needed to do a better job of controlling all that we can, if these types of extreme winter temperatures are going to continue to repeat itself in the future and quite frankly I’m proud of the way our folks responded to these challenges.

We began to see the early fruits of our labor late in the third quarter of FY12 and certainly in the fourth quarter of last year. Q3 was in line with prior-year results even though weather was 23% warmer than normal and our Q4 profits were new records for us in terms of adjusted EBITDA and DCF and Blue Rhino location growth and expense controls were impressive in both quarters.

And happily the momentum carried over into the first quarter of FY13 as well. Our adjusted EBITDA grew 93% over the prior-year.

Our operating expenses drop significantly again and once again Blue Rhino continued its industry leading growth trend. Now we continue to take advantage of the lower costs dynamics with much improved gross margin numbers.

We do remain laser focused on adding new customers to our base, both organically and through acquisitions and I’d share with you that the environment is right for both opportunities. Strategically we plan to add 30 million combined gallons this year.

We’ve already secured two deals. We’ve got several more in the pipeline and I hope that we will be able to close at least one more before the new calendar year begins.

As I look forward to the rest of FY13, I’d say that we remain confident that we will continue to enjoy quarter-over-quarter improvements this fiscal year. Our results from November were quite solid and luckily the cold weather has arrived in December finally.

And as such, we’re projecting adjusted EBITDA in the range of $240 million to $260 million for this year. We expect to benefit from improved margins, growth again through acquisition and organic.

Expenses will be held tight as usual, but even tighter. And we also anticipate that winter – this winter it will be cooler than prior-year.

And note that I did not say normal as quite frankly I’m not sure what constitutes normal anymore, but cooler than prior-year certainly seems like a little bar at this point. So wrapping up, again Ryan will share full details now, but I certainly want to close by letting you know that while we’re cautiously optimistic that winter will cooperate, we don’t feel hostage to winter this year.

We’re optimistic that our numbers will greatly improve over the prior-year, regardless of what Mother Nature throws or does not throw at us, but we’re very optimistic that if Mother Nature does indeed cooperate, it could be a banner year. So before I forget to do this in my closing comments, I wanted to wish each of you a joyous season of blessings and good fortune and I hope that you all get to spend some quality time with your loved ones and I want to thank our wonderful employee base who maybe listening to this call, for without you would be feeling much different about our long-term future together.

Okay, with that, I’m going to turn it over to Ryan for the financial details.

All right. Thank you, Steve.

Now our fiscal first quarter is traditionally slow, much of it been accomplished over the last year, materially improving our financial results this quarter, offsetting the stage for improvement throughout the rest of the fiscal year. We did generate record distributable cash flow and posted near record adjusted EBITDA results, while at the same time work through significant cost cutting initiatives and the rebalancing of our routing and scheduling of propane delivery, so to improve delivery efficiencies now and in the future.

And as Steve mentioned, we announced the acquisitions of Capitol City Propane and Flores Gas, with customers in California and Texas respectively. These along with our continued focus on organic customer growth added many new customers to our business this quarter and we welcome them all to the Ferrell Gas family.

Sales volumes in the quarter were 179.4 million gallons, down 9% from prior-year sales volumes reflecting our focus on improving residential delivery efficiencies. While it’s common to get ahead of winter by making additional smaller residential deliveries in the fall, we elected to stay the course of this year targeting our residential fills 35% of same capacity.

This increased the average delivery size for each residential transaction this quarter, improving the profitability of the sales, while increasing the likelihood of more profitable residential sales in the future. Net sales volumes for most other customer classifications also increased this quarter as compared to last even after the selected termination of certain national accounts due to lack of profitable return.

Through our continued organic growth nearly 100% of these assets used in servicing these accounts had been redeployed to more profitable customer accounts. Gross profits for the quarter rose 9% to our near record $140.1 million from $128.7 million achieved last year.

Improved margins to more historic levels drove these results more than offsetting lesser sales volumes realized in the quarter. Compared to this time last year, wholesale propane has declined 39%, allowing us to both share a significant cost savings with our consumers while at the same time returning our first quarter margins to more historic levels.

In comparison, our first quarter gross profit margin of $0.781 per gallon was in line with our prior seven-year average, while last year’s gross profit of $0.656 per gallon was the lowest experienced in that same time period. We believe that we will continue to see more historic margins in the quarters to follow, that along with the expense savings and maybe even better winter weather, more than drive our improved financial performance this fiscal year.

With pure sales, we manage to and achieved lesser operating expense. Operating expense decreased 3% to $96.4 million, primarily reflecting lower variable delivery costs.

Pro forma for the elimination of the performance based incentives, these operating expenses have decreased 5% from the prior-year quarter. Another positive note, our efforts to reduce our back office spending generated G&A expense reductions of 6% to $8.8 million.

Again, pro forma for the elimination of performance based accruals, G&A expense was down 13% from the prior-year quarter. And equipment lease expense was $3.9 million, up just slightly from $3.5 million last year as we continue to reinvest in our fleet and logistics technology.

Finally, we continue to benefit from lesser interest expense. First quarter interest expense was $22.4 million, down over 4% from $23.4 million in the prior fiscal year.

These results drove both a 93% increase in our adjusted EBITDA performance, while improving our distributable cash flow to a record in $11 million in the quarter. Our seasonal net loss decreased 46% to $17.8 million and our distributable cash flow coverage improved nearly 50% to 0.72 times.

Based on the current market for wholesale propane, the structural changes we’ve made to our business to reduce costs and the continued belief that we really eventually experienced weather conditions cooler than last. As Steve mentioned, we’re targeting adjusted EBITDA in the range of $240 million to $260 million this year, would reestablish both our financial leverage and our distributable cash flow coverage to more historic averages.

This concludes my comments on the financial performance of the Company. And at this time, we would like to open the call for questions.

Hi, guys. Congrats on the strong quarter.

Thank you.

Just a couple of questions here. So, can you give us an idea of the assumptions, what kind of baked into that 240, 260 guidance for fiscal year ’13 just in terms of high sync retail and wholesale margins and overall OpEx margins you’re going to track?

Yeah, as we look at our historical trends and where things are now relative to our residential pricing, other customer pricing, market for wholesale propane, if you simply just take last year’s financial performance and make adjustments to more normal margins, and you look at the expense cuts that we’ve made since that was initiated back in December. We feel like on similar weather pattern as to last year, we can hit that low into that range.

And again a belief that it’s reasonable to expect that weather would be cooler than prior-year, we think we can approach the upper-end of that range with 90% to 95% of normal weather.

Right. And, I mean, assuming that, that 240, 260 guidance does incorporate more normal weather for the whole year.

And we’ve already got one quarter of weather in the books and it’s been slightly warmer than initially expected. So I am assuming that’s already kind of big then?

It is. We had a very strong November.

We did achieve our plan for November which was obviously an increase to the prior-year. So, we still feel good about that guidance even though the start of December is certainly a little warmer and we don’t like.

Okay. And quarter-to-date how are volumes tracking?

This fiscal quarter?

Yes.

So far we’ve just got one month in the books at this point. They will represent the weather outside, slightly warmer than we’d like to see it.

But, again a lot of this has to do with our routing efficiencies we’re targeting filling the tanks about 20% more per delivery than we did this time last year. So, we’re seeing the effects of both weather and the more efficient fills of, especially residential tanks.

Okay. So do you think it would be accurate to say, bounce back, back to 2011 levels?

Yes.

It is possible, okay.

Yeah.

Yeah.

All right. And just one last question, did you outline kind of where you guys stand in terms of your debt covenants?

From a debt covenant standpoint, we’re in good shape. We have sufficient liquidity to get us through winter obviously, we built inventories for kind of at that peak period of borrowing for inventory before sales and sales collections come in for the winter, but we’re in good shape in the full compliance with all debt covenants.

Okay.

You’ll see no issues.

All right, great. Yeah, those were all my questions.

Thank you.

Thank you.

Hi, good morning. A couple of questions, you guys have done a good job on the cost control side.

Can you – how much more room do you think you have to go there and specifically what other costs are you targeting?

Well, James we’re kind of in new territory with where we’re targeting our inventory fills in our residential tanks. We have modeled out some additional savings that will transpire as a result of the efficiencies going from that.

If I had to put a percent number on it, I think there’s an opportunity to potentially cut out another 3% to 5% on an annualized basis over the next couple of years just from an efficiency standpoint, and then we’ll see what happens as those things kind of unfold for us.

Okay, great. The second question I had was, the improved margin that you’re seeing, some of that is due to lower propane costs.

I’m wondering how sticky that is and over what time period did those eventually get pass free to the customer?

Yeah, I mean, I think it’s important to note that while they’re a significant increase to the prior-year, they’re literally within 1/10 of a cent of our seven year average. So, there are a lot of things happening last year that caused margins to come down, in addition to just simply the wholesale price of propane going up.

We had bought forward propane that we weren’t going to end up selling directly to the residential customer that we wholesaled off, to provide space for inventory, and then there are other things impacting margin last year. So, we believe that the current margins are sticky for the foreseeable future.

We feel good about that especially for fiscal 2013. We’ll be more concerned that this was a significant impact of the consumer or was above our, kind of historical averages but, they’re in line.

Okay, great. And one final one for me, can you just provide a little bit more detail on the national accounts that you spoke to – that you spoke about that you terminated due to lack of profitable relationship?

Well, we're – we went through a series of negotiations with some of our national accounts where the profit levels weren’t meeting our expectations. And we’ve just – we’re not going to be everything to everyone that we can, that we tried to be in the past in regards to national accounts, we love our national accounts, but we’re in business to make money.

So, we continue to be focused on profitable accounts and that’s about all the detail I can really give you at this point.

Do you have an estimate as to what the volumes were for those accounts?

I would tell you that early one-for-one those volumes will come back through new sets, I mean I think its important to note that part of that evaluation came from organic growth in the need to purchase assets for those accounts and evaluating our current base and the profitability of some of those customers. Basically we simply chose to re-deploy those thinks to more profitable customers.

And James surprisingly, a lot of the national accounts gallon losses that are offset by auto gas gain, which has been a nice part of our business this year. We’ve been planting those seeds for years and we have really started to see some progress in that segment.

So, perhaps it’s a one-for-one offset. At this point, I would say its not, but it looks like it could be in the next 24 months.

Okay, great. That’s it for me.

Thank you.

Thank you.

Good morning.

Good morning.

Thanks for taking my question this morning. I was just curious about the cost cuts and the sustainability around them.

Do you see that this is one-time things or how long-term in nature do you see these cost saving measures stuck out?

Sure. I mean, I think what we we’ve achieved to-date is very sustainable.

I mean, I can kind of give you the high side of what they were. We did undergo the full integration of our Blue Rhino operations back, started in February of this year.

That alone made up somewhere between 25% and 35% of the cost savings. We made further adjustments to our healthcare plan going with a bit stronger provider which made up about 15% of the savings.

We’ve changed our marketing strategy and some of the dollars that we spent around print marketing. And we also changed as we talked about last quarter, we changed our financial order which pick us up $1 million a year, over a five-year commitments of 5% million over five year or so.

A lot of these things were done by evaluating everything internally, externally, vendors, but the biggest part of the full integration of our Blue Rhino operations, which is obviously not something that we’re going to undo.

Got you. Thanks for the color.

I was just wondering if it would be possible – I was just trying to walk down on my model from the adjusted EBITDA to DCF and how you see coverage shaking out this year. Would you be able to provide any color on that?

Sure. As we progress throughout the fiscal year, we do think that obviously one times coverage is somewhere near the middle of that 240 to 260 range.

Most of that’s going to come in adjusted EBITDA. I think we’ve got continued opportunity a little bit in the maintenance CapEx, maybe even a little bit in the interest expense category as well.

From a proceeds on the sale of the assets, I think we’ll be kind of in our normal historic range for that as well. So I think most of which you’re going to see is going to come through adjusted EBITDA.

As you’ve seen in the last two quarters, much of that has come from expense savings and as we view it going forward a lot of it is going to come now on the margin side, as we did into the more heavy residential sales time of the year.

Got you. So would it be fair to assume cash interest in maintenance equal to or less than last year, is that a fair way of thinking about things?

Yeah, and I think interest expense will probably be a little bit less and I think maintenance will be at/or slightly less than last year.

Great. Thank you very much.

That’s it for me.

Thank you.

Thank you.

Hi, guys. Good morning.

Good morning, John.

What do you expect the capital outlay to be to acquire the 30 million gallons that you mentioned in your comments?

I’ll answer the first part of that because we got to split that down in the middle, so we’re going to try to acquire 15 million gallons John, and I’ll let Ryan give you the number on that. Organically we think we can grow the other half of it.

Okay.

On the acquisition side, you know I don’t want to give away too much, it depends on exactly what you’re buying. But I would anticipate probably to acquire 15 million gallons, you may be looked in a 25 million for growth CapEx.

I wouldn’t say that that’s historically too far out of the norm.

Okay. And then when you look at your current liquidity levels in terms of being able to make acquisitions, what do you think your range is that you or your comfort level is for acquisitions in any given year from what to what?

At this point in time, the markets are especially warm on the debt side, on the equity side we certainly would like a better price. I think it’s worth our while to wait that out and continue to prove up these financial results which we think will yield us at one times coverage how to drive a yield something below 10% on the equity side, maybe something that’s better than 9%.

But the capital markets are open from a liquidity standpoint today. We’re in a very good position.

We have materially more liquidity today than we had this time last year on our revolver. So we don’t feel like access to capital is an impairment at this point towards our growth plans that we’ve laid out.

But is there an actual number that you’re comfortable with kind of letting us know kind of what a range is that you could potentially acquire assets for?

Again, I think 15 million gallons probably come in a price tag of around $25 million, which we would probably try to finance somewhere on the three times leverage range with debt and beyond that with equity. We continue to try to manage our business that are about three and half times of royalty leverage ratio.

Now on any given transaction that may all be with equity or may all be with debt, but kind of long-term that’s what we targeted.

Okay, fair enough. And then – did the national account gallon loss show up both in retail and wholesale or was that just primarily in the wholesale businesses?

That would actually primarily be in the retail downside.

Okay.

And it was really immaterial, I think its – I pointed out only because of the organic growth that we’re seeing and that continued reevaluation everywhere of not only cost, margins but individual customer profitability and if we’ve got enough opportunity to grow more profitably than some of the accounts we have today and we don’t have excess assets in that category, we’re going to make moves that increased the profitability better.

So it that the same thing that we’re kind of seeing going on in the wholesale businesses just with that decline year-over-year that you’re just more or less allocating operating capital towards your retail higher margin business?

In part but also in part and you’ll see that in the quarters to come. Last year we were in a position where we had peak [procurity] that physically and in contract more propane that we were going to see on the retail side, and we had an increased wholesale sales volume last year as it relates to that.

Okay, got you. So then, when you look at your margin business, you said that you built inventories earlier this year, propane prices remain extraordinarily volatile declining here as if late again, do you think how does that impact that – the most recent propane volume or price decline.

How does that impact volumes that you’ve secured earlier from a margin perspective; is that going to tighten margins or do you think this volatility provides kind of an opportunity for you the rest of the year?

Yeah, I think it provides opportunity for the rest of the year. Inventories are still as you know John, there’s still at record high levels from last winter and increased production from liquid rich shale regions continue.

So, I don’t understand the volatility, but I certainly think it benefits us.

So if there is, I guess if you secured, let me ask you this way. How much of your seasonal volume gallon or seasonal volumes have you already secured and locked in a price versus how much are you kind of buying and selling at the same time as we move throughout the year?

Well. I mean some of that we’re not, want to disclose; but what I will say it we have contracted as much or more of our fixed price sales as we have in prior years and that’s the margin that does not float for gas station price, that’s where we’ve gotten a fixed price commitment to our consumer.

From a physical standpoint or liquid standpoint to have it ready, we sit today with pretty consistent inventory levels as we had this time last year, although be at – we had more of that kind of in the summer early fall time period versus more traditionally building that in that October-November time period. So, many of those physical gallons that we have ready for early winter delivery were bought, back to the summer at very attractive prices.

Okay. That helps.

And then lastly, are there any other low margin businesses that you’re looking at exiting at this point or its most of that behind us?

I mean, we’re always going to valuate it, but to the most part we like the markets we’re in. And the areas that we’re acquiring customers into the markets we want to expand in, but certainly we continue to look at all of those categories.

Okay. Thanks, guys.

Thanks, John.

Thank you.

Okay. Thanks for joining us today.

Thanks for your questions and your interest in Ferrell Gas. And we look forward to speaking you – with you again in about 90 days or so.