Industry squeezed by rising winter temperatures

March 1, 2012 By    

When Punxsutawney Phil’s distinguished top-hatted posse proclaimed that the famous prognosticating groundhog had indeed seen his shadow and thus there would be six more weeks of winter, Heather A. Haldeman of the West Virginia Propane Gas Association (WVPGA) declared, “What winter?”

A national TV weatherman observed that it must have been the bright television lights that shaded such an outlandish prediction.

In a year that winter forgot, no doubt there are more than a few propane marketers who are beseeching, “Bottlenecks come back! All is forgiven!” Whatever backups there were came at filled-to-the-brim tank farm intake valves rather than at the terminals’ spouts.

“It’s just the reverse of our normal bottlenecks; the bottlenecks have been too much gas,” says D.D. Alexander, president of industry supplier Global Gas Inc. “It’s putting the squeeze on everyone, and margins are down. The dealers are feeling margin pressure and the wholesalers are feeling margin pressure: When our customers are down, the suppliers are down.”

After being delayed for lack of need, a shipload of propane is set to arrive in port near the end of March, but any actual demand for the vessel’s cargo remains to be seen. “It’s force-feeding right now,” says Mike Tracey, vice president of marketing at Sea-3.

“We contracted for the gallons based on what the customers wanted; hopefully everyone was conservative with their numbers.

“It’s either feast or famine – there’s never a happy medium,” Tracey laments as he assesses the industry’s ongoing volatility. “It’s just crazy.”

As Groundhog Day gave way to Valentine’s Day, a season of record-setting warmth and diminished LP gas consumption was leaving a lot of marketers out in the cold.

“We are still waiting for winter to show up,” notes Haldeman, a WVPGA past president who is also business manager at Berkeley Springs-based Blue Flame Inc., “and as a propane marketer winter is already over. There is no way to recover the lost gallons.”

January’s propane volume figures in the Northeast were down 25 percent to 30 percent, reports Joe Rose, president of the Propane Gas Association of New England. “If you add in the margins, that’s a lot of cash,” he points out, adding that tight finances could drive some marketers to forgo attending industry conventions and other key events. “They may not send employees to training and they may curtail buying new vehicles.

“At my church, we’ve been able to skip two budget payments because the gallons are way down,” Rose continues, echoing a clarion call by numerous other industry executives that propane’s annual usage patterns must be augmented and spread out over the entire year. “This winter will show the marketers that they have to go out and market their business.”

“You don’t want to become as dependent on winter as you had in the past,” concurs Mike Gioffre, vice president at Paraco Gas, which covers a marketing network ranging from New England to Virginia. “We have a good amount of swimming pool accounts and we service a lot of camps” that generate warm-weather loads. “Our whole focus over the last eight to 10 years has been on creating a more equal mix.”

The company’s propane sales used to be 70 percent winter and 30 percent summer; it has now shifted to a 60/40 equation as cylinder exchanges, lawn mowers, country clubs and the prospects of autogas become more prevalent.

“We’re not at a 50/50 ratio yet, but we’re getting there,” Gioffre says. “It’s a year-round business, so it adds summer gallons.”

“We need to look outside the traditional residential market,” says Rose, suggesting that in addition to stepping up the pursuit of whole-house accounts, commercial lawn mowing contractors need to be sold on the benefits of propane-powered equipment. A single mower can burn as much propane as a home heating account.

“These are new markets that they haven’t served before. They need to get out there and start talking to landscapers. We can show them on paper how they can pay that mower off in one year.”

“This winter may galvanize more members to pursue sales in other areas, especially motor fuel,” says Mary Howell, executive director of the Virginia Propane Gas Association (VPGA). “We are offering a commercial mower incentive program to help increase year-round sales, and have offered a successful appliance rebate program in 2008, 2009 and 2011 that has encouraged homeowners to switch to propane water heaters.”

Consultant Dale Delay, president of Cost Management Solutions LLC, is emphatic about the need for significant change directed at maintaining a steady cash flow while easing volatility and the ensuing sticker shock to customers.

“Without budget programs, our industry is going to fail very fast,” Delay says. “The industry is still pricing the way they did 40 to 50 years ago.”

He rails against the unsophisticated marketer who buys a supply of propane and sells it for whatever the market will bear – dropping the price when warm weather strikes and upping it in times of greatest need. “It’s not how many gallons you sell; it’s how much you make on what you sell,” according to Delay.

“The consumer does not like the price going every which way,” he says. “You don’t win in that game,” particularly when a sky-high bill is left at the customer’s door. “They freak out. It’s a jaw-dropping experience, and consumers are going to shop around” for a more stable and economical energy source.

Unpleasant ramifications
Most of the country has been balmy rather than blustery, creating a brutal economic climate. Businesses are left to cope with a 10.4 percent slash in the nation’s average heating-degree days compared to last year’s temperatures, according to Neil Gamson, an economist with the Energy Information Administration.

According to numerous industry participants, this winter’s chilling performance is likely to further motivate a wavering business owner to finally sell to a larger company and start concentrating on achieving fewer strokes on the golf course. Yet an enterprise teetering with a diminished bottom line could be stuck with the prospect of accepting a fire-sale price – assuming that there are acquisition-minded investors available.

Accounts differ on this aspect. Some say these types of dollars are exceptionally tough to come by, while others contend that potential buyers are eagerly out there on the hunt for bargains.

Industry layoffs have been a persistent repercussion of this year’s downturn in LP gas sales, although specific numbers elude quantification.

Consultant Marty Lerum, managing partner at Propane Resources, points out that some independent retailers may have been better served in an economic sense by reducing the workforce, but taking this step is something they simply won’t do. “They’re a little more benevolent [than a larger company], so they don’t,” he says. “They have an investment in these people, and a lot of them are like family.”

Some of the industry’s major players are reeling from decreased values, forcing reductions in force and other unpleasant ramifications.

As January came to a close, Inergy’s stock price sank to a 52-week low of $17.01 per share, down from a high of $42.75 posted nearly a year ago. President and CEO John Sherman cites “a challenging operating environment in the quarter, particularly impacting our propane operations.”

“The industry continues to face significant challenges resulting from high commodity prices, limited new housing opportunities, weakness in the economy and customer conservation in general,” stated Michael J. Dunn Jr., president and CEO of Suburban Propane, in a press release. “However, the fiscal 2012 first-quarter results were most affected by the significantly warmer-than-normal weather experienced across much of our service territories, which contributed to lower volumes and margins.”

A net income of $23.2 million dwarfs the $43.1 million Suburban took in during the same period last year.

With his prearranged retirement occurring in March, Eugene V.N. Bissell, CEO of AmeriGas, reflected on a reduced quarterly net income figure of $42.5 million versus last year’s $74.9 million by noting in a press release that “the heating season got off to an exceptionally slow start, primarily due to weather during the month of December that was nearly 12 percent warmer than normal and 16 percent warmer than last year.”

Bissell adds that “although our operations team is accustomed to managing the business through a variety of weather challenges, it is impossible to fully offset the lack of demand brought about by such significantly warm weather.”

According to Lerum at Propane Resources, “The average independent is actually growing; they’re adding more customers, and the multi-state marketers are losing customers. They’re getting hit harder than the average independent.”

With the independent segment accounting for 54 percent of the industry, “It’s a great time to be an independent marketer,” he says. “The bad news is that there’s 65 percent of demand in the eastern portion of the U.S. The good news is that the retailers are realizing that they have to have more gross margin to offset a 35 percent sales loss.”

Emphasizing budget plans, “Balance your fixed amount of buys with your fixed amount of purchases,” Lerum urges. “We’ve been a big proponent of that for the past 15 years. If they don’t get it after this year, they won’t ever get it. They should be planning with their customers for next year.”

Marketing to the commercial mowing trade and seeking other prospective year-round accounts has become a necessity. “The propane industry isn’t very good at marketing itself,” he observes. “Some dealers look at marketing as an expense. Other dealers look at marketing as an investment, and they’re sitting back and smiling right now.

“It’s there,” Lerum says of the available opportunities, “but you have to make an investment into making this happen. Most of these guys don’t do that, and these are the guys who will be left behind.”

Oscillating situations
Meteorologists attribute this year’s warmth to a phenomenon called “arctic oscillation,” which, when combined with a La Niña ocean current, kept winter’s typical frigidness hovering over Alaska and Canada rather than moving down into the lower 48.

On Jan. 5, Rapid City, S.D., logged a record temperature of 71 degrees, as Miami saw a high of 69 degrees, and so it went.

A freak band of persistent lake-effect snow buried a six-mile-square portion of the Fulton, N.Y., area under nearly 3 feet of snow in just a matter of hours, yet instead of a flurry of gallons burned, “It warmed up to 50 degrees the next day and it all started melting,” recounts Barb Chatman, a partner at Johnston’s Propane in Fulton.

Paraco’s sales were down 20 percent in December and off 15 percent in January. “It’s been a very, very warm winter for us,” Gioffre says. A wicked October/November storm in New England knocked out electrical power for about a week, and the company’s line of generators that run for eight to 10 hours on a barbecue cylinder proved to be a good seller. A coinciding uptick in cylinder sales included residents resorting to outside grilling to meet their culinary needs.

“Degree-days, revenue and gallons are off from anywhere between 25 percent to 40 percent for our members,” says J.D. Stem, president of the New Jersey Propane Gas Association. “Sales are down across the board due to the unseasonably warm winter and an economy that still continues to struggle with new construction start-ups.”

At the VPGA’s annual winter meeting, an attendee commented that this is the first winter in years that the Dixie Pipeline has not gone on allocation. It is also the first winter in years that Virginia has not requested any hours of service or weight exemptions. Supply has been more than adequate for demand.

“Even without warm weather impacting sales, the high cost of motor fuel, food and other commodities has consumers trying to further reduce heating costs by turning down thermostats and using ‘free’ sources of heating like wood, which is plentiful in our region,” explains Howell, the VPGA’s executive director.

In West Virginia, “customers are looking to heat spaces, instead of their entire home. Wood/pellet stoves are making a comeback. With the temperatures off 20 percent, it’s the perfect storm to cause significant damage to traditional propane businesses and put some of us out of business,” according to Haldeman at the WVPGA.

The members have been dutifully trying to further minimize their costs and devise better service efficiencies.

“The problem is that after three years of a bad economy most waste has been taken out of the system,” she says. “To cut costs at this point means looking at things and people that are vital to our business. And as gallons have shrunk, our compliance requirements and costs continue to climb,” Haldeman adds.

“We are in an environment where there are very few new customers. Slashing prices and stealing customers is common,” she reports. “Margin destruction” is cited as another issue of concern. “On top of a poor winter, there will be cheap summer gas that will encourage more and more customers to shop prices with devastating impact on the stability of a company’s customer base.”

“This industry has been faced with cash flow problems for the past 15 years. It is nothing new, but there comes a point when it is more than a small company can take,” notes Lisa Fountain, executive director of the Alabama Propane Gas Association. “It has been many years since Alabama had a winter to brag about. My members are lucky to get any sales right now. Customers are already trying to make it without any more fill-ups.”

With a lack of cold weather, “It doesn’t matter if you are giving it away; customers don’t need it,” Fountain points out.

A similar scenario was unfolding in the Hawkeye State.

“There has not been a winter in 134 years of weather records that the temperature in Des Moines has not fallen to zero or below,” says Scott Vreeman, president of the Iowa Propane Gas Association. “The average temperature so far this winter has not been this warm since 1918-19. With that said, marketers and suppliers have seen a sharp decline in gallon sales this winter.”

Sales have been off by as much as 40 percent. Most marketers in Iowa offer summer fill programs that have been widely accepted by the customer base.

“Fortunately, margins around the state have been holding. This is due mostly to the fact that dealers are carrying unused gallons from the lack of crop drying and the warm weather,” Vreeman says.

Other factors driving lower usage include heightened attention to individual conservation efforts, the increased efficiencies of new appliances as old ones are replaced, government weatherization programs that result in enhanced home insulation properties and tougher competition from electric and natural gas utilities.

“One positive note is that many farmers have been putting up shops and storage buildings,” Vreeman says. “Many dealers are taking advantage of this by installing heaters in the buildings, which in turn increases propane gallons.”

This season’s onslaught of unwelcome warmth is being felt in the West as well. “It’s pretty slow,” says David Fuson, president of the Nevada Propane Gas Association. Degree-days have lacked and the overall financial situation remains grim.

“Nevada’s economy is just not good at all,” Fuson says. The unemployment rate is at record highs and one in 10 homes has been foreclosed upon. Nowadays, instead of two cars in a given driveway, you’ll see eight cars and an RV parked out front. “People have lost their homes and they’re moving in with family.”

Patio heaters, industrial consumption and residential accounts result in considerable load in Las Vegas – the Mirage’s volcano is even propane powered – but the overall resort market remains in a slump.

“If you go up to Tahoe, the hotels are empty – there’s no snow and the locals just aren’t going,” Fuson says. Usually by Groundhog Day, Fuson has gone skiing 15 to 20 times. This year he hit the slopes just twice: “I figure why go up there and dodge rocks.”

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