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Why cold weather affects names like AmeriGas and Suburban Propane

Ingrid Pan, CFA

Weather is a major driver of propane distributors’ 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 U.S. As a result, cold weather is a positive indicator for propane distributors. Last week had milder-than-average weather, a negative for propane companies like AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane Partners (SPH).

Heating degree days are one temperature indicator

Heating degree days measure how much colder the outside temperature is compared to room temperature. Greater heating degree days represent colder weather. Last week, the average U.S. heating degree day figure was 123 compared to the normal heating degree day figure of 136 for corresponding weeks past. The milder weather over the past week implies weaker demand for propane over that period, which is negative for companies that distribute propane for heating.

Weather affects propane companies’ margins

Colder weather is positive for propane distributors’ margins, including APU, SPH, and FGP. The below graphs display the correlation between heating degree days and EBITDA (earnings before interest, tax, depreciation, and amortization) 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 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 are related. Also, the Energy Information Administration (the EIA), a government agency, notes, “Propane supply and demand is subject to changes in domestic production, weather, and inventory levels, among other factors.”

So weather fluctuations are a notable data point for investors holding propane companies, like FGP, SPH, and APU. The past several weeks of colder-than-normal weather were a positive medium-term catalyst for propane names. Plus, propane companies are part of the Yorkville High Income MLP ETF, an ETF that tracks the Solactive High Income Index, which in turn tracks select MLPs.

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