As Easter approached and daffodils bloomed, the winter of 2015-16 was seemingly destined for the record books, to be filed as the warmest ever.
Throughout the heating season, temperatures hovered at 4.6 degrees above the 20th century average. February was the warmest on the planet since the onset of temperature tracking, with mercury readings also soaring to unprecedented highs in November, December and January.
“What heating season? It was the year that never came,” says Andy Ronald, vice president of commercial development and national accounts at Crestwood Equity Partners. “Supply was as smooth as all get-out. There was more-than-adequate supply, so pricing was not stressed or impacted by having to move product from sources farther away” to regions burning additional gallons.
In some cases, Ronald says, “it took our customers longer than normal to meet their obligations,” regarding the flow of incoming contracted propane shipments.
“They had to find other outlets for the product that they had,” he says, with some loads rolling westward to California, where El Niño-induced steady rainfalls sparked increased propane use.
“The lack of winter in the East allowed them to move product to the West,” adds Ronald, noting that the warm weather along the Atlantic freed up railcars to make the cross-country trek toward the Pacific. “In this case, it was desirable to move product from the East to the West.”
A win for the West
If there was a bright spot of sorts for LP gas consumption this season, the Golden State appears to have clinched that honor.
At Delta Liquid Energy, based in Paso Robles, Calif., margins were about equal to 2014-15 levels, while volumes climbed at an accelerated pace.
“It was better than average; it was better than the previous few years,” says vice president Robert Jacobs.
Rainy conditions drive propane loads among Californians, and the situation was further exacerbated by maintenance procedures being simultaneously conducted at two refineries serving the state, which is not fed by pipelines.
“When two refineries go down, it’s a big deal. The prices really bounced up there for a while,” says D.D. Alexander, president at Global Gas, a wholesale propane supplier. “They had to wait for railcars to get moved and for the refineries to come back online.”
Adds George Koloroutis, chairman of the Propane Supply and Logistics Committee at the National Propane Gas Association and executive vice president and COO at ThompsonGas: “They had periods of higher demand and lower days of supply, and they had to scramble to find alternatives.”
For propane retailers elsewhere in the country, “margins were not up enough to make up for the decrease in gallons because of the warm winter,” according to Alexander. “Almost every customer had a very difficult time taking their contract. We rolled their earlier volumes into later months so they could catch up, and most of them have at this point.”
Mark Rachal, director of research and publications at Cost Management Solutions, says volumes were generally lower and margins were generally higher across most of the U.S.
Volumes dipped 13 to 14 percent, while margins were up 13 to 14 percent, he says. Some companies might have seen even better margins than that.
“Everyone would have liked to have seen higher volumes in a year with a lower pricing structure,” Rachal says. “It comes down to revenue, and I think most of them came out OK revenue-wise. We’re probably moving toward a price trend that’s going upward. I think we’ll be on an upward price trend for a while.”
The industry’s experience with excess gas this heating season should not dictate a reduced buying pattern going into 2016-17, Alexander stresses.
“We’re concerned that when retailers make their supply plans they’ll remember this past winter and maybe not contract what they should, and that could cause some supply shortages next year,” Alexander says.
“Maybe next winter,” she adds, “they won’t be able to get spot gas, so we recommend that you use a three-year average in making your purchase plans.”
Wimpy winter woes
The winter was awful for retail and wholesale propane companies, especially those in the Midwest, Southeast and Northeast, Koloroutis says.
“The lack of degree-days has made running the business very challenging, even for the most seasoned propane marketing professional,” he says. “And yes, many will be looking to sell their companies.”
For businesses that have been rocked particularly hard, “cutting operating expenses is your only path to prosperity under these circumstances,” Koloroutis adds. “Hours were cut and, in some cases, positions were eliminated. The companies that did best are those that have a well-planned flex staffing model in place.”
Norm Guerette, general manager at the Dead River Co. in Maine and past chairman of the Propane Gas Association of New England (PGANE), reports the heating season never really materialized in his region.
“It’s been a very different winter compared to the last two, very mild and not much snow,” he says. “It was great for delivery conditions, though. It made it easier from that perspective, but the volumes were down. Our volume runs right in tandem with degree-days, and in 2016 so far our volume has been down 10 percent.”
With an abundance of unused propane, the supply chain was backed up, Guerette notes. Railcars lingered on tracks a little longer than normal. The cars don’t turn over as quickly, he says.
“Margins held up pretty well and the cost of gas was less than last year, which was certainly beneficial to customers,” Guerette says. With fewer dollars coming to fill marketers’ coffers, “some of the resulting problems may come later because people won’t have the [monetary] reserves to make it to a normal heating season if it happens next winter.”
New Hampshire experienced 50-degree temperatures with no snow, wrote Joe Rose, PGANE president, in a membership newsletter Feb. 29.
“I watched in amazement and a bit of horror yesterday afternoon as ice fishermen were on lakes that had open water within 20 feet of them trying to catch the Big One to win a tournament prize,” he wrote. “This winter has clearly been warmer than the last two, which were both blockbusters. We knew those couldn’t last forever.”
Harkening back to a previously off-year winter, Rose highlighted the importance of diversification while emphasizing that “we all survived 2012 and we will survive this winter too. Get out early and start marketing new uses of propane so we build a bigger market share overcoming some weather-related anomalies.”
Roger Leider, executive director of the Minnesota Propane Association, adds: “We’re having a very wimpy winter, and it looks like we’re not going to recover any degree-days. We had a very, very moderate winter, and it’s continuing into the spring.”
Volumes in Minnesota were 10 to 15 percent lower than normal, Leider says.
“It hasn’t been a horrible winter, but it’s enough to concern people,” he says. “The volumes just aren’t there this time around.”
“Most marketers have been able to use up what they’ve purchased,” he adds. “They will try to move as much as possible. Some are carrying the gallons over to next year and some are turning funds back to the consumer” to account for unburned purchases. “Everything went pretty smooth this year” regarding logistics and supply. “We’re hoping for a normal season next year, and we’ll take it from there.”
“Winter didn’t come until January and it left in February. This was a pretty dismal winter compared to the previous season,” says Tom Osina, executive director of the West Virginia Propane Gas Association.
Retailer margins held, and members weren’t getting complaints from customers over high prices, Osina says. However, less money coming in could create cash-flow issues. Companies are “tightening their belts,” he adds, by not hiring new employees and delaying purchases of new trucks and other equipment.
“Some have set money aside for rainy days,” Osina says, “and some will decide to either sell [the business] or diversify by moving on to something else,” such as focusing on autogas or further pushing into propane’s poultry marketplace.
Having spent 33 years in the propane industry, Osina says the marketers’ perseverance impresses him. They roll with the bad years and know that good ones are on tap for the future.
Mike Vanstory, co-owner at Wilder LP Gas Co. of Mason, Tenn., says gallons were off about 8 percent in November and December.
“We were off for the year about 8 percent to 10 percent, and if I depended on those two months I would have been off 30 percent,” he says. “We were able to pick up some new customers and we had a robust crop drying season.”
Yet the fall crop drying demand was less than fertile in other agricultural regions of the country.
“It’s about the third year in a row that we didn’t have a cold winter, and this year we didn’t have a lot of crop drying,” says Reid Simonett, a consultant at Propane Resources, reviewing the overall national market.
The business environment is motivating some propane retailers to evaluate whether they should exit the industry.
“They’re looking at that case, and we’re very busy right now – looking at sellers, banks and evaluations,” Simonett says.
“The positive thing is that the price of propane has gone down, so they haven’t had to go to their bank to get a loan to buy that propane to bridge that time” between customer payments coming in and propane deliveries going out along the routes, he adds.
At CHS Inc., it’s all about perspective. Margins are typical, but volumes are atypical, with an 80 percent drop in degree-days, says Drew Combs, vice president of propane.
“From a supply standpoint, it’s gone just fine, but volumes are down in relation to heating degree-days,” he says. “I think everyone’s in the same boat.”