Winter wonderland

April 1, 2001 By    

For the sizable majority of propane producers, wholesalers and retailers across the United States, the 2000-01 heating season is proving to be their best in several years, spawning from 10 to 50 percent jumps in demand from residential, commercial and industrial clients.

That certainly was the case for Country Energy, LLC and its 704 affiliate retail members (Cenex Propane Partners). By the end of February, the giant Minnesota-based organization had racked up retail sales of over 600 million gallons (see chart page 40), all since September. The six-months data represents a 30 percent increase in sales compared to its entire September-April 1999-2000 heating season volume.

If March and April sales hold according to norm, Country Energy’s heating season sales will be nearly 50 percent higher than last year’s performance. In fact, it appears that Country Energy’s 2000-01 heating season sales alone will surpass its total sales volume for its past fiscal year.

For its fiscal year ending Aug. 31, Country Energy – via its Cenex Propane Partners, the nation’s third largest propane retailer – sold 651,981,374 gallons of propane. Country Energy serves 737,036 customers from 1,589 outlets in 23 states.

No one could be more pleased with the eye-opening results than the two savvy LP gas and cooperative industry veterans who have been directing the effort: Country Energy President Leon Westbrock and Paul Culver, vice president of propane operations. Both have seen the group of Cenex Propane Partners (which includes 31 corporate-owned plants) struggle at times during the past three winters. As every LP gas marketer in country knows, those winters were downright mild.

“Like most other propane marketers, our co-op members have endured some tough sledding during the past few years,” said Westbrock, a Minnesota native who launched his cooperative system career in 1976, managing three local co-ops.

“One only has to examine our heating season volumes to see the major impact that unseasonably mild winter weather had on us. Much to our delight, and other propane retailers in our 23-state marketing area, we’ve had a lot of degree days this heating season.”

Enough, in fact, that he believes that Country Energy sales will top 800 million gallons for its current fiscal year.

Judging by the industry reports he regularly receives, most propane retailers in the nation have also seen their volumes soar and their margins increase. That is, compared to year-ago results when the country experienced one of its warmest heating seasons in 50 years. In fact, Country Energy’s sales for the eight-month 1999-2000 September-April period slumped by 102 million gallons – nearly 19 percent.

Practically every propane retailer in the country reported similar or worse results. In the Southeast, sales were off up to 40 percent in some states.

“Without question, everyone in the propane business went through some difficult times last year. But, Country Energy and our group of Cenex Propane Partners are doing very well at this time thanks to cold weather and several other factors.”

One of the most important factors, Culver disclosed, was a 1998 decision by its corporate parents, Cenex Harvest States and Farmland Industries, to focus more attention on the needs of co-op members and their customers. To achieve that lofty goal, Country Energy, LLC was formed in September of that year, becoming an agent to market lubricants, propane, refined fuels, etc. for the two cooperative giants.

Another major factor involved reaching an agreement with Williams Energy of Tulsa to purchase their wholesale propane business. Williams Energy is one of the industry’s premier suppliers.

“Historically, as well as today, our Cenex Propane Partners have purchased a large percentage of their propane volumes from us. Most of our sales volume still goes to our members, though we market a sizable volume of gas to other retailers. In the past, we did a high percentage of our supply contracts with a basket of suppliers, namely. major producers, traders and brokers. Williams was in the mix. And we got product from three refineries that we own in Montana and Kansas.”

At times over the years, allocation, pricing, supply and transportation problems surfaced, creating all sorts of turmoil. In 1998, as North America moved to an alarming net short position in propane, Cenex / Farmland executives decided to re-evaluate the organization’s LPG supply policy.

“With dependable supplies being one of the tenets of our mission, we recognized that we needed to closely examine what the requisites would be for us to remain an affordable, dependable supplier over the long-term,” Culver says.

“Two years ago, Leon and I, and others, initiated discussions with a number of industry propane suppliers to determine if we could establish a win-win alliance with one of them. Many had a lot to offer. In the end, we found that Williams Energy would be the best fit for us, physically and/or philosophically. From our perspective – and theirs – we reached the conclusion that it would be an ideal partnership.”

Williams Energy has expertise in distribution, exploration, production and risk management. Country Energy, LLC has the expertise in marketing and sales. It is an alliance that now allows both entities to focus on their strengths.

Generally speaking, propane retailers are afraid to put all of their eggs in one basket, which explains why most have had multiple suppliers since 1990. The number ranges anywhere from three to dozens, depending on the size of the retailer and the market area it serves. On the other hand, Culver believes the Williams Energy decision was a wise one.

Country Energy, in which its co-op members are shareholders, now acquires product through the Tulsa operation, then resells the gas to its army of Cenex Propane Partners branded dealers and other clients. With the exception of propane produced by the company’s three refineries in Kansas and Montana, all of its gas is supplied by Williams Energy.

“From a supply standpoint, this is the best thing we’ve ever done,” he says. “Thanks to the assets Williams Energy has at its disposal, we now have access to Williams’ nine terminals located in Rosemont (Minnesota), Green Bay, Memphis, Janesville (Wisconsin), and the state of Arkansas (Kingsland, Light and Rixie) as well as 180 terminals in 44 states and five Canadian provinces. This past winter, for example, when a few of our Cenex Propane Partners were in short supply, we shipped product from Mont Belvieu to the Puget Sound area in the Pacific Northwest, which was a first for us.”

“In general, I think consumers are more concerned about the consistency of prices than they are about the level of pricing,” Culver says.

Volatility in the wholesale price of gas has given both retailers and residential customers painful headaches over the years.

This was particularly true this heating season when spot prices rose from the mid 50s to $1 or more per gallon. In turn, retail prices soared to $1.50 and $2.00 a gallon in some parts of the country. By late February, wholesale prices began to soften a bit. Some experts project spot prices in the low 60s or high 50s this spring.

Volatility in the marketplace has prompted a lot of buyers to review their propane acquisition strategy.

“Buying gas in the summer and holding it until winter hasn’t worked until lately. A few years ago, 20 to 25 percent of our contracts were pre-buys. Today, it runs between 45-47 percent. We think savings from pre-buys should be passed along to clients. Industry-wide, physical contracts are decreasing. Financials are now the trend,” Culver says.

Along with its Williams Energy partnership, Country Energy has structured additional alliances with other co-ops, rural electric cooperatives, investor-owned utilities, and a number of independent propane retailers. “Instead of being so competitive price-wise, the majority of our Cenex Propane Partners look at things differently today. Most co-ops now recognize that we face the same challenges as LP-gas retailers. We have common problems and should work together to deal with issues that could pose a danger to the survival of the retail market.”

That’s why Cenex and Farmland have been long-standing members of the National Propane Gas Association, working hand-in-glove with other members of the group to try and find ways to best cope with the multitude of challenges that propane retailers have to deal with on a day-to-day basis.

“Every propane retail company is trying to develop the perfect supply, distribution and marketing strategy,” Culver points out. “We’re no different. We’ve embarked on a mission to find innovative solutions that will enable our staff to help our Cenex Propane Partners – and those with whom we have energy alliances – to prosper in these trying times.”

Such assistance includes interpretation of safety regulatory data, transportation, retail sales and marketing support, propane installations, technical services, risk management, evaluation of operational costs and efficiencies, acquisition support and more.

“In short, we provide professionally produced programs that help our retailers bring more value to their customers. And, as our retailers move more and more toward service, we’re transitioning away from pricing. For example, we are eliminating the trauma of price spikes by providing our domestic customers ways to simplify and stabilize their cost.”

Last summer, Cenex Propane Partners began offering residential accounts the choice of a “SecureComfort” budget plan or a plan with “Value Assurance.”

Like most budget plans, the SecureComfort plan is based on historical usage, keeps monthly payments equal all year long, reducing expenses in the winter. By opting for the Value Assurance plan, customers can lock in the ceiling price they pay while benefitting if propane prices should drop. It’s left to the Cenex Propane Partner to determine if they want to charge the customer a cap premium.

“Again, it’s a win-win situation,” explains Culver. “For the homeowner, if propane prices go up, they don’t have to worry. If prices drop, they pay less. That’s value. That’s peace of mind. It adds stability to the household budget. At the same time, statistics indicate that retailers save $30 in delivery costs for every customer they sign up to a budget plan. Our Cenex Propane Partners, I believe, are the first to convert the Financial Cap Option into a branded retail program.’

What about the future? Are new trends in sight? Culver says he sees a few changes on the horizon.

“What was considered normal for the past 10 years won’t be normal for the next 10 years. I believe we will have fewer degree days, but more than we’ve had during the past three years. New growth is going to stress the infrastructure. And a few people believe higher wholesale prices will be the norm.

“Competition will force retailers to structure programs that will bring more value to their customers. They will have to make a stronger commitment to safety, make it a priority, and establish policies and procedures that promote safety,” he says.

“For the past few months, our industry has been the beneficiary of a winter wonderland. But, let’s not forget that good relationships with customers is the key to success.”

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