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Going with the cash flow
June 1, 2009 By: James E. Guyette LPGas
With a record-setting winter heating season in the books – or maybe still on the books where collection difficulties remain in play – the margins of 2008-09 apparently provided a much-needed elixir to the industry’s ills.
While propane retailers in some regions are still reeling over the fallout from the nation’s ailing economy and rising unemployment among the customer base, a lot of marketers are feeling flush with cash.
“If you didn’t make money this winter, you’d better get out of the business and get another job,” quips Ken Campbell, president of Campbell’s Bottled Gas in Manassas, Va.
“I’ve been doing this since 1962, and it’s the best winter we’ve ever seen. For the last three years we’ve all taken a beating,” he recounts, exhorting his industry colleagues to hold those margins as 2009-10 approaches.
“We had an excellent winter and came out cash-fat, and we want to hang on to some of our cash,” notes Campbell, describing some of the lease-purchases and other financing transactions he’s been exploring, including an expansion of the company’s 20-pound exchange business.
“People are throwing money at me,” reports Campbell, referring to the solicitations he’s been fielding from financiers wishing to cut deals. “What we’ve seen happening on the news is not happening with my business.”
Southeastern Energy Partners is gearing up to add three bobtails to its fleet, shifting existing barrels onto new chassis to the tune of $80,000 apiece.
“I don’t know if we’re going to pay cash or finance them,” says Paul Norris, the Beaufort, S.C.-based company’s president. “We’ve been paying cash for tanks and cash for our gas.”
Norris, who ran for Congress in 2008, views the lending atmosphere as an iffy prospect.
“Banks are so finicky right now; you have to jump through a lot of hoops,” he says. “I talked to the bank, and they wanted 25 percent down. And we’ve been a great customer of theirs for years – never a late payment.
“My catchphrase is, ‘What a difference a year makes!’” he says. “It has been a complete 180-degree shift from where we were a year ago. We’re in better shape than we’ve been in the past five years of the business.”
Dodging a national credit crisis
Last winter’s profitability has enabled propane marketers to dodge a credit crisis for thousands of mostly smaller companies that rely on bank lending. Nationwide, banks have reined in credit to rebuild their capital bases, tightening their standards for commercial and industrial loans and raising interest rates on credit lines.
Advanta, which had issued credit cards to nearly a million small businesses, announced it will shut down all customer accounts to new activity on June 10 because of growing losses and uncollectible debt; media reports doubt the firm’s ability to survive.
In March, JPMorgan Chase suspended the credit lines of thousands of businesses. In many cases the companies had not missed a payment, but Chase enacted a provision allowing it to cut credit if the credit rating of borrowers drops and significantly raise the monthly payments of those who haven’t paid off their loans.
In response, the Small Business Administration announced plans to begin dispersing funds in mid-June for a new, highly anticipated emergency lending program for businesses burdened by debt. Created as part of the stimulus bill, the initiative aims to bring temporary relief to established small business suffering through the recession.
Many lenders remain on the sidelines, waiting for more details from the SBA before they decide whether to participate. As of late May, the SBA had not yet said precisely which businesses and what kinds of debt will qualify for ARC loan relief, though it has begun filling in the outlines of its plan.
In propane’s favor
According to consultant Mark Bailey at Propane Resources, bankers are resuming the pursuit of industry lending. “It’s starting to free up a bit; the cash is starting to flow through the system again,” he notes.
“There’s a lot more competition out there for those loans,” Bailey says. Earlier in the year, maybe one or two banks in a given market were seeking some propane action; now three or four institutions may be entering the arena, providing your company has a solid performance record. “There’s still cherry picking to some extent. A banker wants to loan to propane retailers who are doing well,” he explains.
“We certainly want to grow our portfolio, but we want to do it prudently,” says Steve Morris, vice president at Core First Bank and Trust, headquartered in Topeka, Kan.
“I think the market’s reasonable. I look at propane like I do electricity and water; it’s needed.”
Another factor in propane’s favor is readily confirmable collateral. “The assets that you borrow against are in the field in the form of tanks, and they have a long lifetime,” Morris says. “The tanks have value and they don’t depreciate that much.”
If you are seeking a loan, he suggests approaching financial institutions based in your immediate marketing area. “A community bank is more likely to take care of their customers,” he says. “You’ve got local decision-makers.”
Being prepared to intelligently discuss the details of your company’s finances and sales strategy is critical, Morris says. “You want to make sure you have some credibility when you sit down to talk to a banker about this. You have to be comfortable with what you are doing,” he stresses.
“We’ve gone back to the pre-1995 days of checking people’s credit,” says Credentrust Vice President Thomas Markel III. “You’ve got to have good documentation, you need a business plan and a good credit rating.”
Bailey is quick to issue caveats concerning the financial volatility of each region, market and individual business operation. “There are some pockets that are much better than others,” he says. Parts of the Midwest may have reaped a strong farm season last fall, yet places such as Michigan and the punishing job losses emitting from a sputtering automotive industry are still likely to be running on empty.
“Banks are really, really tight with their money right now,” says industry leasing agent Becky Zigmond, marketing manager at Vision Financial Group in Pittsburgh. Even banks that have had a relationship with a propane retailer dating back 20 years are balking at fronting cash. “A lot of times they’re simply cutting [the requested amount] in half, if they’re lending at all.
“If the receivables slow down, it makes the banks uncomfortable,” Zigmond points out. They wonder: “Is the marketplace ever going to collect that money?”
Harvesting the bounty
Many marketers are still having trouble with accounts receivable, Bailey says. While “the low-hanging fruit” may be safely ensconced in your coffers, he suggests that “now is the time to collect the harder-to-get money.”
Officials at Liberty Propane, which covers 38 markets in 11 states, knew things were going to be tough when it came to collections, according to Boyd McGathey, chief operating officer.
“We’ve seen an increased number of bankruptcies on both the residential and commercial side,” he says.
With gallons down but margins up, Liberty has more dollars past due today than it did last year at this time, and bad debt is consistent with what it was over the past three years, McGathey says.
“They’re trying to digest their economic situation, and we’re trying to work with them. They’re slower to pay, but they’re going to pay because they need the service,” he observes. “We have a receivable that we want to collect, but we don’t want to kill off the customer.”
Especially with the still-sputtering new home construction market, Liberty also is mindful of other factors influencing the industry. “The windfall performance that we’ve seen this year will most likely not repeat itself next year,” McGathey cautions.
David Cameron, president of Yavapai Bottled Gas in Dewey, Ariz., has taken laggards to court and enlisted the services of collection agencies. He finds both options unattractive.
“Obviously you want to do everything you can before you send them to collections,” Cameron says. “It seems like we’re having more trouble collecting from our end users – more bad checks and things like that. You work with your customers and eventually they pay.”
Yavapai has leasing agreements in place to obtain customer tanks and other necessary equipment. “Banks are pretty tight right now,” says Cameron. “There are not many banks that specialize in propane accounts, and they don’t want to lend any money until interest rates go up.”
One particular drawback keeping the cash drawer closed is the seasonal nature of the business. A propane marketer “will be eating peanut butter in the summer, but the money starts flying in during the winter. A lot of banks don’t understand that; banks want to be very cookie cutter,” says Zigmond, adding that a leasing agreement can be structured to shuffle payment schedules and otherwise accommodate a retailer’s needs.
Singing a cheerful tune
On the plus side, according to Zigmond, is propane’s propensity for paying its bills. “We’ve found that in the propane industry when someone shakes your hand and says, ‘I want that bobtail and I’ll pay you back,’ they’ll do it.”
Lou Brill, Vision’s senior vice president of credit, agrees. “Our experience in the propane industry has been fantastic,” he says. “You are blessed with people who still have good values. At the local mom and pop level, we’ve had tremendous success.”
Zigmond recalls that when attending propane trade shows earlier in the decade, “debt was a four-letter word” among marketers. “They’d say, ‘If I can’t afford that truck, I won’t buy it,’ and we’d say, ‘If you had a second truck…’”
Now, Zigmond reports, the industry’s leasing activity is on the rise as propane companies, especially those with heightened business management expertise, see the value of these transactions for growing the enterprise.
On the wholesale side, “we haven’t had a problem with receivables from our propane customers – none more than usual,” says James K. Renaldo, director of sales and marketing for Niagara Energy LLC in New York.
“The propane marketers have had a pretty good year. Our equipment sales are pretty much where we want them to be,” he reports. “The propane industry as a whole is a cash cow. Of course, there is huge debt along with it. There’s a lot of cash churn; it’s flowing out the door as fast as it’s flowing in the door.”
Atlantic Energy is experiencing a similar situation, according to Harry Hanger, manager of supply, risk management and marketing. “Everyone is paying their propane bills on time – at least to me – and they’re not singing the blues,” he says.
Hanger observes, “Last spring I was picking up on a lot of anxiety; this year I haven’t picked up any. If it’s dramatic, I’d be hearing about it.”
At a recent industry trade show, “everybody was busy buying equipment and everyone was cheerful,” Hanger recounts. “The dealers are flush with cash and they’re trying to spend it. They’re spending the money because there are some tax advantages.”
From where Hanger sits, any banker who makes a loan to a propane marketer is laying down a good bet. “Because the propane industry is so heavy in capital investment, if they go belly-up, the banks know there’s equipment in the field as collateral. The banks like that,” he says.
Lest anyone get too giddy – “most of the retailers are out on the golf course this time of year” – Norris dispenses a reminder that colder temperatures will be arriving soon enough. “The real stressful time will come in September when you have to go out and buy your gas,” he says. “You have to make that pile of cash last until the winter.”
Looking toward the 2009-2010 heating season, “We suggest that you lock in the margins and go ahead and buy the propane,” says Bailey at Propane Resources. “We’re seeing many of the people doing it in layers this year rather than playing the market.”
The price could come down a bit, yet it can go up just as easily, Bailey points out. “Not many people can guess the market 100 percent of the time,” he advises. “There is no exact plan. Every year is different, and every retailer’s individual situation is different.”
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