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Propane distributors should see earnings boost from recent sustained cold weather

2013.04.01 - Propane HDDEnlarge Graph

  • Temperatures have been colder than normal in the past five out of six weeks resulting in a positive medium-term driver for propane distributors, as propane is a major fuel for home heating.
  • Propane distributors should theoretically sell larger volumes of the heating fuel in cold weather, which could translate into improved earnings.

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 US. As a result, cold weather is a positive indicator for propane distributors. Last week’s colder than average weather, and colder than normal weather for the past five of six weeks, are positive catalysts 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 US was 139 compared to the normal heating degree day figure of 114 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 aforementioned, this week’s figure was 139 compared to the average of 114, which is a positive point for the week. Additionally, the weather for the past five of six weeks has been colder than normal. The sum of the heating degree days for the past six weeks was 967, compared to the normal figure of 870. During the beginning of the winter, weather had been significantly warmer than normal, however, the recent cold weather has caused this winter’s heating degree days to trend almost towards what is considered a normal year

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2013.04.01 - Propane HDD CumEnlarge Graph

Colder weather is positive 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 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 several weeks’ colder than normal weather was a positive medium-term catalyst for propane names. Additionally, propane companies comprise a portion of the Yorkville High Income MLP ETF, an ETF which tracks the Solactive High Income Index, an index which tracks select MLPs.

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