The retail propane business is highly seasonal, with propane sales concentrated during the “heating” season, which runs, basically, from Oct. 1 to March 31. Cash flows for propane distributors is relatively high during reporting periods that correspond with heating season and relatively low–even dipping into negative territory–during the “cooling” season, which runs generally from April 1 to Sept. 30.

About 5 percent of total US households heat with propane, most of them located in the Midwest and the Northeast. In its Feb. 12, 2013, Short-Term Energy Outlook the US Energy Information Administration (EIA) forecast a year-over-year increase in spending by these households, though the increase will vary by region and weather.

The EIA expects Midwest households to see an average increase in both propane consumption and winter propane expenditures of 17 percent and 11 percent, respectively, with residential propane prices 5 percent lower than last winter.

With consumption projected to increase by 16 percent over last winter in the Northeast, households there may see an increase in expenditures of 15 percent with prices lower by an average 1 percent.

Based on National Oceanographic and Atmospheric Administration (NOAA) weather forecasts for January-March 2013, the number of heating degree days for the current winter heating season is tracking toward 3,700, which, though 5 percent warmer than normal, would make it about 15 percent colder than last year.

In the commodity markets, average posted prices for propane of USD0.89 per gallon at Mont Belvieu, Texas, for the first quarter of fiscal 2013 were 38.5 percent lower than the first quarter of fiscal 2012 at USD1.44. High domestic inventories relative to historical norms, combined with the shale gas boom, have started propane prices on a downtrend that’s likely to persist.

Propane is now disconnected from its historical relationship to oil pricing, from a long-term average of 70 percent to 75 percent of the value of crude to a current ratio of about 37 percent. But this can be a positive for propane distributors and for customers.

For the October-to-December 2012 period residential propane prices averaged USD2.40 per gallon, down 14.9 percent from USD2.82 per gallon during the same period of calendar 2011. Lower propane prices have helped distributors expand retail unit margins, as the benefits of lower commodity prices haven’t been completely passed through to customers.

Suburban Propane Partners LP (NYSE: SPH), upon completion of its acquisition of the retail assets of Inergy LP (NSDQ: NRGY), extended its operating footprint into an additional 11 states, bringing the total reached to 41, and basically doubled its customer base from 608,000 to

1,212,000. It’s the third-largest propane distributor in the US based on retail gallons sold.

Significantly, Suburban Propane’s territory additions include several states in US Midwest; most of the propane burned for heating purposes in the US is in the Northeast and Midwest. Management’s forecast is for USD10 million to USD15 million of cost savings in the first full year of the acquisition and a total of USD50 million over the first three years.

The deal provides Suburban Propane with the scale and reach to benefit from lower commodity prices through margin gains, at the same time increasing its exposure to more “heating degree day” intensive regions of the country.

Suburban Propane recently reported results for the first full quarter following the Inergy acquisition. Lower wholesale prices for propane as well as the initial benefits of combining Suburban and Inergy operations offset the impact of unseasonably warm temperatures, particularly during December, on profitability. Overall the combined entity is showing promising signs of long-term success.

The LP declared quarterly distribution by 2.6 percent to USD0.875 per unit, or USD3.50 on an annualized basis, which is up 2.6 percent on a sequential and year-over-year basis.

Fiscal 2013 first-quarter distributable cash flow was USD1.58 per unit, good to cover the payout by a 1.81-to-1 ratio. That’s a significant improvement on the 1-to-1 ratio recorded for the first quarter of fiscal 2012.

First-quarter retail propane volumes sold declined by 3.5 percent on a pro forma basis, which accounts for the Inergy acquisition, to 153.9 million gallons of 159.4 million. During its quarterly conference call management attributed the year-over-year decline to warm weather and a weak economy.

Adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) for the first quarter of fiscal 2013 were USD116.4 million, an increase of approximately 37 percent on a pro forma basis. Net income totaled USD63.4 million, or USD1.11 per unit, compared to USD24.3 million, or USD0.68 per unit, a year ago.

The improvements in adjusted EBITDA and net income compared to the prior year first quarter resulted primarily from the Inergy acquisition as well as solid trends in Suburban’s base business.

As for integration of Inergy, the combined entity has now centralized inventory management, dispatch, fleet and tank management activities and made significant progress in the development of an eventual combined operating footprint and management structure.

Management has also developed and tested system migration plans for the conversion of key operating systems, which will begin in earnest when “heating” transitions to “cooling” season.

Management also noted that it hasn’t experienced an abnormal level of customer attrition since the Inergy acquisition.

For the quarter average temperatures across Suburban Propane’s service territories were 9 percent warmer than normal and 4 percent cooler than the first quarter of fiscal 2012.

The winter of 2011-12 was one of the warmest years on record. Despite a promising start to the 2012-13 heating season–through November average temperatures in Suburban Propane’s service territories were 1 percent warmer than normal–December ended up essentially comparable to the prior year average at 15 percent warmer than normal. This “heat wave” negatively impacted propane volumes sold.

But January 2013 “heating degree days” were 8.3 percent higher than January 2012 in the Northeast 7.3 percent higher in the Midwest. Data for February 2013 are not yet available.

As of Dec. 31, 2012, Suburban Propane had USD149.1 million in cash and USD253.2 million in borrowing capacity under its credit facility, sufficient capacity to fund capital requirements and continuing Inergy integration activities. Long-term debt as a percentage of total capitalization is solid relative to MLPs in the propane/heating oil space at 57 percent.

Management noted that fiscal second-quarter trends suggest Suburban Propane will post similar margins as in the first quarter, which establishes a conservative base line should propane prices continue to decline and weather in February and March help push up margins.

As of this writing the spot propane price at Mont Belvieu was USD0.84 per gallon, lower than the average of USD0.89 for the October-to-December 2012 period, and the Midwest is recovering from a patch of cold, stormy weather that’s currently gripping the Northeast.

Suburban Propane–which is yielding more than 8 percent at current levels–is a buy under USD45.

AmeriGas Partners LP (NYSE: APU), for some time the only buy-rated propane-focused MLP in our coverage universe, also posted solid fiscal 2013 first-quarter results, with distributable cash flow per unit coming in at USD1.48 and covering the USD0.80 per unit quarterly distribution by a 1.85-to-1 margin. The distribution rate was in line with the fiscal 2012 fourth-quarter rate.

AmeriGas also posted higher realized margin and reported lower operating and administrative expenses. Management lowered its adjusted EBITDA forecast by 2 percent due to warmer-than-normal weather year to date in its service territory. At the same time, however, management maintained its projected cost savings related to the integration of the USD2.6 billion Heritage Propane acquisition completed in January 2012.

Management expects to realize “at least” USD60 million in cost savings from the Heritage acquisition, though transition expenses should approximate USD20 million in fiscal 2013. AmeriGas expects to complete the final phase of its integration plan in the summer and noted that the progress and synergies realized to date have been tracking in line with expectations.

Although management held the distribution steady this time around, AmeriGas’ track record strongly suggests an increase when fiscal 2013 second-quarter results are announced in April.

AmeriGas’ fiscal second quarter result–like Suburban Propane’s–will likely benefit from colder weather in the 2012-13 winter compared to 2011-12. Likewise, lower propane prices have helped AmeriGas expand its retail unit margin. And management, during its quarterly conference call, noted that lower prices have improved propane’s competitiveness as a fuel source, a positive for demand.

Weather in its service territory was 9 percent warmer than normal during the fiscal first quarter but 3.4 percent colder than last year. During December weather was 13.1 percent warmer than normal and 1.5 percent warmer than last year.

Retail propane volumes sold were 350.7 million gallons compared with 220.9 million gallons in the first quarter of fiscal 2012, before the Heritage acquisition. Adjusted EBITDA was USD193.3 million, up from USD87.4 million a year ago, the big variance also due to the Heritage acquisition. On a pro forma basis adjusted EBITDA was 22 percent higher.

As of Dec. 31, 2012, AmeriGas had about USD180 million of cash on hand and USD294 million available on its credit lines for more than USD412 million of total liquidity.

Management noted during its conference call that Energy Transfer Partners LP (NYSE: ETP), which was required to hold the units for one year following completion of the Heritage transaction, had exercised its right to request AmeriGas to register 29.6 million units for sale as part of the consideration for the acquisition.

AmeriGas management is “confident” based on its discussions with Energy Transfer management that the latter intends to “exit the position in a coordinated and orderly fashion.” These units were already outstanding, and AmeriGas was already paying distributions on them. The Energy Transfer-related offering won’t result in any dilution or new cash distributions. Their sale on the open market could, however, put a short-term drag on the unit price.

AmeriGas Partners–yielding more than 7 percent–remains a buy under USD45.

Ferrellgas Partners LP (NYSE: FGP) reports results for the second quarter of its fiscal 2013 on March 7, 2013. The MLP is yielding 10.2 percent as of this writing, having suffered a 7.4 percent decline over the three days leading into its earnings announcement.

Ferrellgas has paid the same USD0.50 per unit quarterly distribution since March 2003. But the company has established a disturbing track record of failing to cover this distribution with cash flow. Management has been issuing new equity and borrowing to cover the payout.

Guidance for fiscal 2013 is for improved cash flow, but this relatively brighter picture still leads to a distributable cash flow shortage. The company has cut costs, and management has pushed out maturities via refinancing activity.

The major question is its continued access to debt markets to support the distribution, particularly during warmer-than-normal, low-demand winter heating seasons.

Wall Street is certainly skeptical of Ferrellgas’ prospects. Zero analysts rate the stock a “buy,” while one rates it a “hold.”

ix of the seven houses that cover the MLP rate Ferrellgas a “sell.” Only two provide a 12-month target price–one forecasts USD12, the other USD16, both well below the USD19.65 market price as of this writing.

Ferrellgas earns two points on the MLP Profits Safety Rating System because it has no significant maturities until 2016 and it hasn’t cut its distribution during the past five years.

It’s looking increasingly likely, however, that it will lose the latter point in the very near future. Ferrellgas Partners is a sell.

NGL Energy Partners LP (NYSE: NGL) completed its initial public offering (IPO) in May 2011. In January 2013 the MLP announced the sixth consecutive increase in its quarterly distribution, bringing the per-unit payout to USD0.4625 from initial regular installment of USD0.3375 made in November 2011.

The MLP was created by the October 2012 merger of the retail propane business of Hicksgas and the natural gas liquids midstream and whole sale propane operations of NGL Supply. In October 2011 NGL Energy Partners added E. Osterman Propane’s retail assets, expanding into the US Northeast and adding 124,000 customers in 11 states as well as an estimated 5.7 million gallons of storage capacity.

Management reported adjusted EBITDA of USD73.2 million for the three months ended December 31, 2012, better than guidance. Net income per unit was USD0.75. The company completed several acquisitions during the quarter, including crude oil purchasing and logistics businesses in Texas and New Mexico; a barge transportation business; two retail propane businesses; and three water services and crude oil logistics businesses.

Management noted that its strategy also includes internal growth projects, “many of which have been initiated in fiscal 2013 and will contribute to results in fiscal 2014.”

NGL has established an impressive early track record of distribution growth. But what started less than two years ago as a propane storage and distribution business has already expanded into transportation and water and crude oil services. We’d like to have a firmer handle on how the parts fit as well as a deeper look at financial and operating results for a few more quarters before recommending the stock. NGL Energy Partners is a hold.   

Star Gas Partners LP (NYSE: SGU), which specializes in heating oil, reported that adjusted EBITDA increased by USD10.5 million to USD29.8 million due to colder temperatures, acquisitions and storm-driven increases in motor-fuel sales and service and installation revenue. These factors offset a volume decline in the base home heating oil business due to net customer attrition and other factors.

Home heating oil and propane volumes for the first quarter of fiscal 2013 increased by 6 million gallons to 97.1 million gallons. Temperatures in Star’s service territories were 15.8 percent colder than the fiscal 2012 first quarter but 7.4 percent warmer than normal.

Star isn’t benefitting from the same commodity-price factors as the propane-focused home heating MLPs. Oil prices are actually trending higher: The spot price for the first quarter of fiscal 2013 was up 3 percent, or USD0.09 per gallon. And during the past three fiscal years the first quarter’s average spot price for heating oil has increased by a total of USD1.08 per gallon, or 55 percent.

As CEO Dan Donovan noted during management’s quarterly conference call, “A gallon of heating oil that costs us USD1.97 in 2010 cost USD3.05 a gallon at the end of the quarter, and today it’s even higher at USD3.20 a gallon.”

Management was also circumspect on the topic of distribution increases during its discussion of recent results.  And management hasn’t raised the distribution since January 2010. With commodity-price trends working against the company and better opportunities available in the home heating space, Star Gas is best avoided.