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Icy temps last week helped propane names

2013.03.19 - HDD PropaneEnlarge Graph

  • Last week’s temperatures were colder than normal resulting in a positive short-term driver for propane distributors, as propane is a major fuel for home heating.
  • Despite last week’s colder than normal weather, the 2012-2013 winter has trended warmer than average as a whole.

Cold 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 U.S. As a result, cold weather is a positive indicator for propane distributors. Last week’s colder than average weather is a positive 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 heating degree day figure for the average of the U.S. was 159 compared to the normal heating degree day figure of 126 for corresponding weeks past. The colder weather over the past week implies stronger demand for propane on the week, which is positive for companies that distribute propane for heating usage.

The top graph displays heating degree days thus far this winter compared to normal heating degree days. As mentioned, this week’s figure was 159 compared to the average of 126, which is a negative point for the week. Despite this week’s colder than normal weather, this year’s winter heating season has 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.

2013.03.19 - HDD Propane CumEnlarge 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.

2013.03.04 - Weather vs APUEnlarge Graph  
2013.03.04 - Weather vs FGPEnlarge Graph
2013.03.04 - Weather vs SPHEnlarge Graph

Note: EBITDA margins for companies are for the full fiscal year, not just 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 APU, 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 are a notable data point for holders of propane companies, such as FGP, SPH, and APU, and the past week’s colder than normal weather was a positive short-term catalyst for propane names. Additionally, propane companies comprise a portion of the Yorkville High Income MLP ETF (YMLP), an ETF which tracks the Solactive High Income Index, which is an index that tracks select MLPs.