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, warm weather is a negative 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 average heating degree day figure for the US was 169 compared to the normal heating degree day figure of 152 for corresponding weeks past. This week and the prior two weeks have been colder than average. The colder weather over the past few weeks implies a greater demand for propane, 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 169 compared to the average of 152, which is a positive point for the week. Despite last week’s colder than normal weather, 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.
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.
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 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 three weeks’ colder weather was a positive short-term catalyst for propane names. 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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