This could have been a great winter for propane distributors, blessed with low wholesale prices and plenty of room to increase margins in an industry whose customers tend not to shop around.

But that was before El Niño reared its head, the higher Pacific Ocean temperatures translating into unseasonably warm weather and reduced heating demand across much of the U.S.

It also hasn’t helped that the three publicly traded distributors are all structured as master limited partnerships. MLPs are a four-letter word these days, tarred by their association with the energy industry and the looming declines in domestic oil production.

But propane distribution profits have little to do with the price or the output of crude. They are shaped by two factors: weather, which drives volumes, and unit margins – the difference between what the distributors pay for propane and the revenue they realize from reselling it, per gallon.

Traditionally, propane distribution profits have proven quite resilient, because when demand lags the cost of distribution tends to fall, and when wholesale prices drop the distributor can lower the retail price by less and increase its margin.

That is in fact how things have played out for leading propane distributor and current #6 Best Buy AmeriGas Partners (NYSE: APU), which despite a very tough 2015 is still showing a positive return over its two-year tenure in the Growth Portfolio.

This survey will stack up its recent performance against those of rivals Ferrellgas Partners (NYSE: FGP) and Suburban Propane Partners (NYSE: SPH).

• Unit price YTD: unit price performance in 2016

• Distribution Yield: annualized, based on last distribution

• Distribution Growth: Year-over-year change, most recent distribution

• Distribution Coverage: Based on reported annual distributable cash flow for Ferrelgas, calculated for AmeriGas and Suburban as net income plus depreciation, amortization and non-cash charges, minus interest expense and maintenance capital spending, divided by distributions for trailing 12 months

• Propane Sales Volume: for latest 12 months, in millions of gallons

• Unit Margin: Total margin divided by gallons sold in most recent quarter, adjusted for changes in value of hedges not associated with reported period for AmeriGas and Ferrelgas

• Weather Effect: Temperature departure from norm for most recent calendar quarter, typically measured in heating degree days for sales territory

• Debt/EBITDA: Total debt divided by adjusted earnings before interest, taxes, depreciation and amortization for trailing 12 months

• EV/EBITDA: Enterprise value (market capitalization plus debt) divided by adjusted earnings before interest, taxes, depreciation and amortization for trailing 12 months

Pennsylvania-headquartered AmeriGas is the largest propane distributor in the U.S. with a 15% share of the fragmented market. It uses 2,000 propane distribution hubs to serve two million customers across all 50 states. AmeriGas, a subsidiary of the gas utility and midstream player UGI (NYSE: UGI), sold almost 1.2 billion gallons of propane over the last year.

Source: AmeriGas Partners presentation

The recently reported fiscal first quarter, which ended Dec. 31, was 20% warmer than normal for AmeriGas customers, and they bought 13% less propane than a year earlier as a result. But adjusted EBITDA dipped just 6% year-over-year, because even as AmeriGas sold less propane its profit margin went up from $1.19 to $1.29.

It helped of course that the benchmark wholesale price of propane at the national Mont Belvieu, Texas hub averaged a miserly 42 cents per gallon during the quarter, vs. 77 cents per gallon a year earlier. That meant AmeriGas could squeeze out extra profit merely by lowering its own retail price a little less.

The partnership also enjoyed lower diesel fuel costs, and saved on overtime by rotating drivers from the balmy East to the busier West. But the drop-off in first-quarter volumes still forced management to withdraw prior guidance for EBITDA growth of at least 8% this year.

Weather clearly worries management less than the suspected contagion from investors’ wholesale disenchantment with MLPs, as this slide from the Feb. 2 earnings presentation shows:

The CEO hammered home the point during the conference call:

“AmeriGas is a bit unique in the MLP space in that lower crude and propane costs are actually good for our company. Our customers receive smaller bills, customer satisfaction usually improves, and price-related conservation wanes. In addition, our working capital needs and collection costs improve, so while many other MLPs are negatively affected by lower commodity prices, we have always welcomed it as good for our customers and therefore good for the business.

“Despite the warmer weather, our liquidity and leverage statistics are strong and our cost structure is clearly built to flex in these times of warm weather. In addition, we want to be clear with the investment community that AmeriGas has no intention of raising equity, securing new debt, or reducing our distribution, again a somewhat unique set of facts among MLPs. Our capital requirements are relatively modest by MLP standards, and we’re confident that we can self-fund growth projects, even given the impact of warmer weather. This is not something new to us but something we have done for many years.”

These assertions are backed by a multi-year trend of rising margins in a variety of commodity environments. But investors seemed mostly relieved to learn over the last two months that winter wasn’t canceled altogether. The unit price is up 18% since Dec. 21, though it remains down 27% from the record hit just over a year ago.

The annualized yield is at almost 10% and the distribution has grown roughly 5% a year for the last decade. That should continue given the solid coverage and leverage metrics that will look even better when the weather reverts back to normal. Buy APU below $51.

The second largest propane merchant, Ferrellgas, has grander ambitions. In June, it committed $837 million in cash and stock to buy Bridger Logistics, a crude gatherer with more than 600 trucks crisscrossing all the major shale plays, but concentrated primarily in the Permian Basin.

With oil still fetching $60 a barrel when the deal was announced the acquisition multiple was pegged at 8.4x forward EBITDA. Those profit expectations hadn’t changed with crude at $37 by the time Ferrellgas reported in December. Approximately 60% of Bridger’s cash flow is backed by long-term take-or-pay agreements, though these can be broken if a customer files for bankruptcy.

Building on a saltwater business acquired a year earlier, Bridger is expected to help Ferrellgas derive 25% of its earnings from its midstream segment this year and more longer-term, though the current crude slump will very likely have something to say about that.

Source: Ferrellgas Partners presentation

Ferrellgas units are down 34% since the Bridger deal was announced and 19% since Dec. 1, at least in part because the crude logistics business isn’t looking like a hot diversification opportunity just now.

The risk and potential earnings volatility of the midstream segment Ferrellgas has acquired make its 1.08x distribution coverage look slight and its 12% yield not all that tempting. The partnership increased its quarterly payout for the first time in at least 15 years in September, by 2.5%.   

New Jersey-based Suburban Propane Partners is the third largest U.S. propane distributor and the one most exposed to the warm fall and delayed winter in the Northeast given its concentration in the region.

Source: Suburban Propane Partners annual report

“Record warm temperatures throughout most of our service territories clearly impacted customer demand in the first quarter of fiscal 2016,” the CEO said as the partnership reported a 33% year-over-year drop in EBITDA on Feb. 4.  “Overall, average temperatures for the first quarter of fiscal 2016 [ended Dec. 26] were 25% warmer than normal and 17% warmer than the prior year first quarter.”

Retail propane volume dropped 18% year-over-year, while unit margin held steady at a lofty $1.50 a gallon.

Suburban’s $1.9 billion acquisition of Inergy Propane in  2012 effectively doubled the size of the business and gave it Midwest presence. The partnership uses 700 distribution locations in 411 states to serve its 1.1 million customers.

In contrast with AmeriGas and Ferrellgas, Suburban does not pay its general partner incentive distribution rights, though these aren’t particularly onerous in the slow-growth propane sector.

With an annualized yield approaching 16%, Suburban also looks like a relative bargain thanks to its relatively low leverage. But its high per-gallon margin and concentration in the east pose a long-term risk given the continued development of low-cost natural gas supplies from the nearby Marcellus shale.

Still, 16% is a lot of yield from a propane merchant more than covering its distribution in a quarter that featured 70-degree Northeast highs on multiple days in November and December. We’re adding Suburban to our Growth Portfolio. Buy SPH below $26.

In conclusion

Distribution is hardly the only way to profit from propane. Enterprise Products Partners (NYSE: EPD), Targa Resources (NYSE: TRGP) and Sunoco Logistics (NYSE: SXL) are all shipping propane to coastal terminals for export, while NGL Energy Partners (NYSE: NGL) conducts some distribution alongside much larger logistics operations.

But these are all businesses more exposed to energy industry turmoil than the listed pure distributors, of whom just two remain following the push into crude logistics by Ferrellgas.

AmeriGas and Suburban continue to deliver attractive yields given their limited risk, leverage and volatility.