For the first year since 2005, propane distributor Amerigas Partners (APU) didn’t raise its quarterly distribution, observes Roger Conrad, editor of Conrad's Utility Investor.
Rather than a sign of weakness, however, management’s decision secures the already generous 9 percent plus yield and may have set the stage for shares to break out of an 8-years plus trading range.
Amerigas’ propane distribution business is about scale. The 2012 acquisition of Heritage Propane from Energy Transfer Partners (ETP) cemented the partnership as the leading distributor of the fuel in the US.
And it’s continued to grow with smaller acquisitions and organic growth opportunities, such as Cylinder Exchange and National Accounts with 15.2 and 18.3 percent fiscal second quarter (end March 31) volume growth, respectively.
Scale has been essential to managing two massive challenges to North American propane distribution: Extreme mild temperatures during the winters of 2015-16 and 2016-17 and volatile wholesale propane prices, which were on average 64 percent higher at the Mont Belvieu hub in the second quarter.
In the past two years, for example, rival propane distributor Ferrellgas Partners LP (FGP) cut its distribution by more than 80 percent. NGL Energy Partners (NGL) reduced by nearly 40 percent and Suburban Propane Partners (SPH) slashed by 32 percent. All three are still highly leveraged and in danger of further cuts.
In contrast, despite forgoing a boost this year, Amerigas’ distribution is higher by nearly 8 percent. Past 12-month operating cash flow covered all capital spending plus distributions. And even the reduced EBITDA forecast for fiscal 2018 (end September 30) is still a 13 percent lift from fiscal 2017.
Looking underneath the hood, tight control on costs boosted unit margins by 18 percent despite wild demand swings directly related to volatile temperatures. The company added 3 million gallons of business in a deal that closed in April.
It also has no maturing bonds until 2024 and $269 million available credit on a line maturing in 2022. Ultimately, what happens at Amerigas is up to its BBB+ rated general partner and 26 percent owner UGI Corp (UGI).
Retaining more capital means less proceeds to the parent short-term but ultimately increases financial flexibility for the kind of transforming acquisition Heritage Propane was, and that UGI has successfully closed in recent years at its global fuels distribution franchise. That’s another reason to buy this partnership up to our new target of 45.
