Consultants consider cost impacts on propane operations

November 8, 2022 By    

LP Gas asked Steven Abbate, managing director at Cetane Associates, and Marty Kirshner, partner at Gray, Gray & Gray, about changes, challenges and opportunities in the tank market.

Abbate: Clients come to us thinking that since propane tank costs have doubled over the last few years, their company value has gone up the same amount. While it’s not a one-for-one increase, we have seen values rise with steel costs.

As a buyer, looking at return on investment, if the earnings don’t change and you now must invest more in tanks to make the same return, you would think that company value would decrease. Yes, the value of real estate, tanks and trucks are higher, but it has been offset by a reduction in the value of the intangibles. A buyer investing $10 million to get a $1 million return is still investing $10 million to get a $1 million return no matter what happens to the price of tanks.

The increases in value we have seen are directly related to depreciating the tanks quicker than the intangibles, borrowing against the hard assets, and the recession- and pandemic-resistant nature of our industry. We also have seen tax advantages for buyers and sellers related to how the purchase price is allocated. When you buy a tank for a customer location, depreciate it and sell it in an acquisition for more than you paid, any amount over the cost basis is treated as capital gains. That is good for a seller.

Kirshner: The most obvious challenge is the price, supply and related lead time of steel. We’ve seen companies resistant to purchasing refurbished tanks go that route to bring in tanks faster and cheaper. It creates the opportunity to bring tank refurb/recertification in-house to cut costs and gain access to capital quicker. Also, I advise clients to assess their tanks in the field and confirm they are all for current customers and, if not, to pull those tanks immediately to repurpose. 

On the tax side, many customers rely on those tanks to come in before year-end to take advantage of accelerated depreciation. I advise them to do their year-end tax planning sooner than later and prepare for a doomsday planning situation in the event expected tanks don’t arrive before year-end.

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