Ferrellgas Partners, L.P. (NYSE: FGP), a huge propane distributor, recently reported Nov-Jan results. Propane is still the heating source of choice for several million households. How is it that Ferrellgas saw a drop in gross profits during its winter quarter? Granted, the drop in gross profit was not huge, and revenues for the winter quarter increased 15% to $764 million.

But results like this should cause utility and energy stock investors to take a closer look at just how a utility company actually makes its money, particularly with the ongoing deregulation of many utilities. Does a utility or energy company make its money on sales of a commodity, or on renting out its distribution network? Or is the utility or energy company more of a finance company that makes (or loses) money based on its pricing of a commodity?

Such seems to be the case with Ferrellgas Partners in its recent quarter. It lost money because it priced future delivery of propane without factoring in a steep rise in the cost of propane. There is no way to predict or control winter temperatures and resulting level of demand, but a company should be able to accurately hedge its own price contracts to account for fluctuations in demand in its own industry and price its risk accordingly. Failure to adequately price risk is what has led to the subprime mortgage mess. No one wants to see energy and utility companies, and their customers, suffer the same economic debacle.

Ferrellgas Partners (FGP): Utility investors need to look closer originally appeared on BloggingStocks on Wed, 12 Mar 2008 15:28:00 EST. Please see our terms for use of feeds.