Warmer weather a negative for earnings of propane distributors

2013.02.11 - HDDEnlarge GraphCold winter weather is one of the major drivers of earnings for propane distributors as the fuel is used for home heating in many areas in the US. As a result, warm weather is a negative indicator for propane distributors. Last week’s warmer than average weather is a negative data point for propane companies such as AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane Partners (SPH).

Heating degree days are a measure of how much colder the outside temperature is compared to room temperature. Greater heating degree days represent colder weather. Last week, the average heating degree day figure for the US was 187 compared to the normal heating degree day figure of 196 for corresponding weeks past. Therefore, this week’s weather was warmer than average. The warmer weather this past week implies a weaker demand for propane, which is negative for companies that distribute propane for heating usage.

2013.02.11 - HDDEnlarge Graph

The above graph displays heating degree days thus far this winter compared to normal heating degree days. As aforementioned, this week’s figure was 187 compared to the average of 196, which is a negative point for the week. This year’s winter heating season thus far has also been warmer than normal. The below graph displays the amount of cumulative heating degrees from the beginning of October for this year and also for what is considered a normal year. As one can see, this winter’s heating season is trending below normal.

2013.02.11 - HDD CumuEnlarge Graph

Warmer weather is negative for the margins of propane distributors such as APU, SPH, and FGP. The below graphs display the correlation between heating degree days and EBITDA margins for APU, FGP, and SPH for the past six years of heating seasons.

2013.02.04 - Corr APUEnlarge Graph

2013.02.04 - Corr FGPEnlarge Graph

2013.02.04 - Corr SPHEnlarge Graph

Note: EBITDA margins for companies are for the full fiscal year, not only the heating season.

Propane companies generate the greatest proportion of EBITDA during the heating season.

As shown above, the relationship between weather and EBITDA (earnings before interest, tax, depreciation, and amortization) margins for FGP and SPH appears significant over the past six years. For AmeriGas Partners, the relationship is less significant. However, it seems for the general propane sector, weather and propane distributor margins have a relationship. Additionally, the Energy Information Administration (EIA), a government agency notes, “Propane supply and demand is subject to changes in domestic production, weather, and inventory levels, among other factors.”

Therefore, weather fluctuations (such as this week’s warmer than normal weather) are a notable data point for holders of propane companies such as FGP, SPH, and APU. Additionally, propane companies comprise a portion of the Alerian MLP ETF (AMLP), an ETF that tracks a cap-weighted index of 50 energy MLPs.

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