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Tickers in this Article: APU, SPH, FGP, UGI
Propane is often overlooked by consumers and investors alike as an energy source - except when we fire up our grills. A byproduct of natural gas production and oil refining, the gas has many uses including vehicle fuel and electricity generation. In 2007, propane accounted for nearly 4% of United States energy usage, according to the Propane Education and Research Council. Today, nearly 80% of American farms use the fuel to power equipment, sanitize the soil from weeds and pests, and dry crops. More than 10 million buses, cars and trucks worldwide run on the liquefied gas. (Learn how to hedge against energy prices and diversify your portfolio in ETFs Provide Easy Access To Energy Commodities.)

Environmentally Speaking
From an environmental standpoint, propane is listed as a clean alternative fuel under both the Clean Air Act of 1990 and National Energy Policy Act of 1992/2005. Per pound of fuel consumed, propane emits half as much carbon dioxide as coal and produces less hydrocarbons and particulate matter than gasoline or diesel fuels. New vehicles that use propane as their primary fuel source can qualify for Ultra Low Emissions Vehicle (ULEV) standards. From an ecological safety view, propane does not pool when spilled, but instead vaporizes into the air. It is not harmful to water or soil, and the Environmental Protection Agency does not regulate storage, above or below ground, for propane tanks as it does with other petro-fuels.

Propane As An Investment
As we move toward cleaner fuels and a more diverse energy mix, propane will play a greater role. As investors, we can help tap into this increase of consumption by placing our money with direct propane suppliers. Set up as master limited partnerships (MLPs), these suppliers offer greater distribution yields than regular corporations. Due to the recent market turmoil, they offer some nice capital gains as well.

The propane MLPs also have a few aces up their sleeves in the way of a Buffett-style economic moat. The suppliers, not the end consumers, own the tanks stored on the customers' property. This allows only the owner/supplier to fill the tank. The switching costs and property/infrastructure damage to remove the storage tank outweigh the few dollars of savings. In addition, propane distributors are not regulated like a utility or certain pipeline assets. Suppliers charge a fixed markup on each gallon sold. Revenue fluctuates; however, gross profits hold steady.

Three Propane Picks
AmeriGas Partners (NYSE:APU) is the country's largest propane distributor with more than 1.3 million customers in 46 states. For fiscal year 2008, the company reported a 7% increase in EBITDA over 2007 at $313 million and has increased net income per unit by 14% annualized over the last five years. The partnership sold nearly 993 million gallons of propane fuel during the past year and has been aggressive with acquisitions, adding 20 million more gallons annually in 2008. The units currently yield $2.56 or 8.7%. This represents a 5% increase over 2007. Management expects 3-5% increases going forward. AmeriGas's general partner is controlled by diversified utility UGI Corporation (NYSE:UGI).

Odds are that if you own a gas grill, you're a customer of Ferrellgas Partners (NYSE:FGP). Its Blue Rhino Tank subsidiary is the largest tank exchange network in the country. In addition to Blue Rhino, the company services nearly 1 million customers across all 50 states and has assets in Puerto Rico. Ferrellgas recently reported a narrower than expected 23 cents per share loss for its first fiscal quarter 2009 ending October 31. Adjusted EBITDA increased more than 50% over this time last year. The partnership had a 10% increase in total gallons sold to 172 million. The company also recently announced its 57th consecutive dividend. The units currently yield around 13%, which helps compensate investors for the company's higher-leveraged balance sheet. (For more on reading a company's reports, check out our Financial Statements Tutorial.)

In addition to its propane assets, Suburban Propane Partners (NYSE:SPH) distributes kerosene and other fuel oils. The partnership also serves as an electricity and natural gas marketer in deregulated utility markets. Net income per unit for fiscal 2008 increased 21.7% to $154.9 million or $4.72 per share. The company ended 2008 with $137.6 million in cash on its balance, providing a nice buffer of liquidity given current credit conditions. Suburban did sell 46 million fewer gallons of propane in 2008; however, high commodity prices helped offset the loss. The company announced its 19th distribution increase and its 10th consecutive one in late October. The partnership's units yield 8.4% or $3.22.

Bottom Line

While not glamorous, propane distribution does fit into a steady-eddy niche. With a greater future emphasis on cleaner and more diverse energy, propane will serve a bigger role. In the meantime, the above-mentioned partnerships can provide investors with some much-needed steady income.

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