AmeriGas Partners is the largest retail propane distributor in the United States. APU’s business can be broadly divided into two categories: National Accounts and AmeriGas Cylinder. National Accounts include large sale customers with multiple locations but a single point of contact with AmeriGas. Sales from this segment account for ~5% of the company’s adjusted EBITDA. AmeriGas’s cylinder exchange business (or ACE) is a counter-season business that accounts for ~10% of the company’s adjusted EBITDA.
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Wholesale propane distribution is a highly competitive low-margin business. While volume in the retail propane industry has been declining for several years, analysts anticipate no or modest growth in total demand in the next several years. So growth within the industry depends on companies’ ability to acquire other retail distributors and achieve internal growth, which includes expansion.
Acquisitions as a growth strategy
One of AmeriGas’s growth strategies is to grow its core business through the acquisition of local, regional, and national propane distributors even as it competes for acquisitions with others engaged in the propane distribution business, like Ferrellgas (FGP), Suburban (SPH), and NGL Energy (NGL). Note that AmeriGas is a component of the Yorkville High Income MLP ETF (YMLP).
On January 12, 2012, APU completed the acquisition of the subsidiaries of Energy Transfer Partners LP (ETP) that operated ETP’s propane distribution business for $3 billion. Heritage Propane had operations in 41 states and was the third-largest retail propane distributor in the United States in 2011. We might take this acquisition as a mid-point in the company’s EBITDA growth.
Prior to the Heritage deal, APU had an average EBITDA in the range of $340 million. For fiscal 2013 (ended September 30), the company delivered an EBITDA of $628 million compared to $384 for the year prior—an increase of 61%. Similarly, distributable cash flow (or DCF) increased from $196 million to $403 million—an increase of ~105%, causing the DCF ratio to increase from 0.7x to 1.2x.
So the Heritage Acquisition is consistent with APU’s growth strategies. During fiscal 2013, APU completed the integration of Heritage Propane and it’s expected to reap the full-year benefits of the integration in fiscal 2014.
However, with most synergies realized from the Heritage deal, AmeriGas will need to find value-accretive acquisitions to support management’s 5% annual distribution growth target while maintaining an average distribution coverage above 1.1 times, which isn’t impossible, as APU has only about 15% of the domestic retail propane market after the Heritage deal, allowing room for acquisition growth.
Other trends in APU
APU believes retail propane consumption in the U.S. is declining at an annual rate of up to 3% based on historical industry data. APU’s retail propane gallons sold have maintained at a 900 million–to–1.3 billion range over the last 12 years, largely through acquisitions.
While volume trends have largely been negative, EBITDA margins have improved in recent years, reflecting cost savings and operating efficiencies achieved through the acquisition.
Past trends show that the distribution has grown to 5.4% since 2006 and the EBITDA growth rate from 2002 to 2012 is ~5%. Gross margins per gallon have increased by roughly 7% annually from 2005 to 2013.
To find out about APU’s recent financial results in detail, continue to the following parts of this series.