Must-know: An analysis of AmeriGas' second quarter earnings (Part 2 of 2)
The fiscal year for APU is calculated from October 1 through September 30. On May 7, APU reported its second quarter earnings for the three months ending on March 31, 2014. Revenue for the quarter was $1.49 billion, which beat the consensus estimate of $1.29 billion. Compared to the previous quarter, this was an increase of 43%. APU reported earnings per share of $1.71, which missed the consensus estimate of $2.23 by $0.52. Adjusted EBITDA for the quarter amounted to ~$331 million—approximately 50% higher than the previous quarter EBITDA and 7% higher on a year-over-year (or YoY) basis.
The increase in 2Q14 earnings was attributed to colder-than-normal weather during the quarter. Weather conditions have a significant impact on the demand for propane because cold weather results in higher usage. (To learn how weather impacts the propane distribution industry, read Why weather plays such an important role in propane demand).In the report, APU noted that the weather for the quarter was 8.1% colder than normal and 9.7% colder than in the same period the previous year, according to the National Oceanic and Atmospheric Administration (or NOAA).
During the quarter, the company also benefited from significant volatility across the natural gas and electricity sectors in the Mid-Atlantic and northeast parts of the United States. Natural gas and electricity are major competitors of propane. Electricity, even though it’s more expensive than propane, competes with propane because of the convenience it offers to its customers. Natural gas, on the other hand, competes because of its competitive price. Propane serves as an easy alternative in areas where natural gas is unavailable or portability is difficult. As a result, increased volatility in these industries helps propane distributors like AmeriGas (APU).
APU’s acquisition strategy aided quarterly growth
On January 12, 2012, APU completed the acquisition of the subsidiaries of Energy Transfer Partners L.P. (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 (ending September 30), the company delivered an EBITDA of $628 million compared to $384 for the year prior—an increase of 61%.
Volume for the quarter was 475 million gallons—~16% higher than the previous quarter volumes. The AmeriGas cylinder exchange program, increased volume by 16% in the quarter, while the national accounts segment added over 20 new accounts this year, representing over $2 million additional gallons annually. Both of these segments benefited from the Heritage acquisition. Heritage Propane, prior to acquisition, was a residential heavy segment, compared to AmeriGas, which is a more industrial- and commercial-heavy segment. APU’s operating margins have profited from the strategic acquisition, giving APU a broader customer base and enabling APU to achieve its target goal of a 5% increase in distribution. As APU exits the winter season, APU mentioned that it will be reviewing opportunities for growth as it enters the “acquisition season.”
Note that both ETP and APU are a part of the Global X MLP ETF (MLPA) while UGI is a part of the First Trust North American Energy Infrastructure Fund (EMLP). ETP is also a part of the largest MLP ETF (AMLP).
APU increased its quarterly distribution to $0.88 per unit. This is the tenth consecutive year that AmeriGas has increased the distribution and the eighth consecutive year the distribution has increased 5% or greater. This is in line with management’s 5% annual distribution growth target. On an annualized basis, the above distribution amounts to $3.52 and represents a yield of 7.50%.
Because of the strong quarterly performance, APU revised its EBITDA guidance and increased the lower end of the range of $645–$675 million to $660–$675 million EBITDA for the year. The company also provided an EPS guidance of $2.95–$3.05.
Propane distribution is a seasonal business. To learn more about the propane distribution industry, read the article An investor’s key guide to the propane distribution industry from the Market Realist series A must-know overview of AmeriGas Partners and its 1Q14 earnings.
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