Industry registers suitable heating season

April 17, 2013 By    

As St. Patrick’s Day was easing into a frosty Easter from Denver to Delaware, and Florida’s spring-break revelers were greeted by 46-degree wind chills, many marketers were seeing green as a trend toward diversified supply sources combined with some brisk temperatures to present a relatively smooth and productive overall propane heating season.

Margins appear to have held, and propane was available to serve the accounts. Nasty storms brought short-lived logistical challenges that were overcome with considerable aplomb.

“We were ‘Steady Eddie’ – it was a non-event,” says supplier D.D. Alexander, president of Global Gas Inc. “Last year was a dud; this year was boring, and it just kind of plugged along.”

“‘Steady Eddie’ is about right. I think that would be a good description,” agrees Norm Guerette, general manager of the energy division at the Dead River Co. in Maine, which markets propane, heating oil and electricity throughout northern New England.

“I’d have to give it pretty high marks for normal temperatures, stable prices and no supply disruptions. That’s a pretty good recipe – the rest is up to us,” Guerette adds, referring to the assorted operational challenges that can arise during a winter that had its share of wicked weather.

“The biggest storms seemed to have hit on the weekends this year, so it didn’t interfere with the transports or bobtails getting around,” Alexander reports. “We had some storms, but the weather was so spotty that it didn’t interrupt supply in a meaningful way.”

However, refinery shutdowns, an Enterprise pipeline on allocation and an initial paucity of railcars due to their diversion to the Midwest created a situation where “luck” played a role in keeping the propane flowing to the Northeast, according to Alexander.

“Overall you could get product, but it was tight in a winter that shouldn’t have been tight,” she says, calling for continued infrastructural improvements.

“Households that use propane as their primary space heating fuel ended up spending less than was originally forecast last October,” notes economist Tancred Lidderdale at the U.S. Energy Information Administration (EIA).

Although this winter was colder than last year’s, it wasn’t as cold as forecasted by the National Oceanic and Atmospheric Administration. The average household consumed about 3 to 4 percent less fuel than was expected.

“While the retail propane price in the Northeast ended up about 5 cents per gallon higher than EIA expected last October, total expenditures by the average household in the Northeast were about 2 percent lower than originally forecast,” Lidderdale says. “The average Midwest household saw propane prices that were almost 30 cents per gallon lower than expected last October. Total expenditures were about 17 percent lower than originally forecast, and [it] was the lowest level of expenditure in that region since the winter of 2004-05.”

As Easter approached, 48 percent of the nation had a snow pack on the ground; last year’s figure was 20 percent, and all of it was west of the Mississippi River.

“From the retailers I’ve talked to, it’s been spotty,” says consultant Mark Bailey at Propane Resources, as he sizes up the season. “It’s been a little better than last year, but it hasn’t been super-duper.”

A warm fall meant that there was more of a hangover from last year regarding supply. “The fall fill kind of kicked off the season. The cool spring we have now is setting us up well for next year,” Bailey explains, concurring with Alexander’s “Steady Eddie” designation. “That’s probably about right. There haven’t been any major ups and downs.”

“It’s been a pretty good first quarter for retailers as far as demand goes,” adds Propane Resources’ Reid Simonett. “We’ve had an extended winter for a change. Last year at this time, the farmers were out in their fields planting crops.”

Simonett encourages the industry to start preparations for the 2013-14 winter.

“You should be planning right now,” he advises, “but not a lot of retailers have gone into the marketplace because of the lower prices that we had last year. They’re anticipating that pricing will come down with the excess propane that’s available – but that will go to the export market.”

Getting creative
“Don’t do any buying until you have your customers already lined up. Lock in your customers and your margins,” says consultant Dale Delay, president of Cost Management Solutions LLC.

Speculating can be fraught with risk.

“Most propane retailers are in a ‘buy them and hold them’ strategy,” Delay says. “It’s a very fine-tuned balance. You may get stuck with propane at a price you can’t sell.”

“We’re keeping an eye on the marketplace, but we haven’t started purchasing yet,” says Dead River’s Guerette, also treasurer of the Propane Gas Association of New England (PGANE).

Several cold fronts that brought treacherous conditions buffeted the region.

“We pretty much weathered those storms unscathed,” Guerette says. “We work around the weather. We pull trucks off the roads when it gets nasty and we work weekends to get caught up.”

Having an adequate amount of propane is a prerequisite for successful operations.

“We added to our infrastructure in 2012,” Guerette explains. “Looking at storage is something that we’re always considering.”

“We have about a dozen supply locations that we lift from, so it minimized any allocation impact,” reports Charlie Ermer, supply and pricing manager at New Hampshire-based Palmer Gas/Ermer Oil. Propane procurement avenues include pipeline, rail and ship.

When the ice and snow flew, “we got creative” with allocating the company’s resources, says Ermer, who chairs PGANE’s outreach committee. “We added shifts on the weekends – that was our workaround, and that helped us stay on track with our customers’ needs.”

The heating season “started out on the mild side, so we eased into it and then it caught up with the degree-days,” he adds.

Generating business
Propane-powered generators have become an important element of the business as New England’s residents see the value of securing an alternate source of electricity.

“Each time we get a storm, it generates a lot of calls into the office,” Ermer says. “That’s become a very strong market for us.”

More people are also opting to switch from fuel oil to propane as their primary heating source when their older systems require upgrades, according to Joe Trefethen, Palmer/Ermer’s general manager. Offering budget plans with a year-round fixed payment schedule has proven to be popular as well.

Looking ahead to next year, “we’ve been watching the market quite closely for the right opportunities,” Trefethen says. “We start our programs in April or May, depending on market conditions. We typically try to buy as we get accounts from our customers.”

The ravages brought by Hurricanes Sandy and Irene, plus an assortment of other climatic calamities, have significantly heightened demand for propane electrical generators, which in turn attract off-season load, says PGANE board of directors member T. Michael Morrissey at Morrissey Consulting.

“We’re experiencing a record number of new installations supporting standby electrical generators,” Morrissey says. “The propane industry has an amazing ability to step in and help people when the power goes out.”

Morrissey is based in Connecticut, and he is especially pleased with how the Nutmeg State’s propane providers have been working together to overcome the impact of several ferocious weather systems, including a winter blast that dumped 40 inches of snow.

“Connecticut has been one of the consistently hard-hit states in these incidents,” he says. “We’ve had our infrastructural challenges, but we’ve adapted to those. We’re a resourceful bunch of professionals; we’re adapting and learning as we go. The resilience of the industry has just been wonderful.”

Morrissey, who is also a state director for the National Propane Gas Association, praised an increased presence of tanker cars.

“We saw the rail lines perform much more strongly than they’ve ever performed in the past,” he says. “The rail lines are finally seeing the opportunities that the shale plays are offering.”

Game-changing tankers
The five North American makers of tankers have backorders through 2014 for 48,000 new railcars, according to Rail Theory Forecasts LLC, a consulting firm that tracks train manufacturing levels.

The tanker trend is expected to continue as petroleum prospecting proliferates. Building more pipelines – assuming that regulatory permission is granted amid a contentious political and environmental atmosphere ­– is a lengthy process.

“We’ve seen so much more railcar gas coming into the Northeast, so we aren’t as dependent on the pipeline as we used to be – it’s a huge game-changer,” says Mike Taylor, co-owner of Combined Energy Services in Monticello, N.Y.

Business was up 20 percent this season.

“It is 24 degrees and snowing right now on March 18. Last year we were walking around in T-shirts and crying,” Taylor says.

The company recently added 60,000 gallons of storage, and it plans to further augment its capacity by 120,000 gallons in 2013.

“I can’t stress enough the importance of having enough local storage,” Taylor says. “Just-in-time inventory doesn’t work in the Northeast in the propane business. You have to fight what you learned in business school – that model doesn’t work. A lot of retailers have added storage, which is great.”

The region’s overall pace of construction projects is picking up after a four-year period of decline, and Taylor suggests that providing temporary heating systems for contractors on the job is yet another moneymaker for retailers.

Smooth operations
Sales at the Schagrin Gas Co. in Middletown, Del., rose nearly 20 percent over last year’s numbers.

“I’ve been able to move some gallons this year,” says Andrew Levinson, who also serves as president of the Mid-Atlantic Propane Gas Association. “We’ll take it. It’s been one of the smoothest winters as far as logistics.”

“It’s nice to have a normal winter,” says John Jessup, executive director of the North Carolina Propane Gas Association. “We had a little bit of snow, but it didn’t stay a long time – the ability to deliver was good this year. There was plenty of product.”

As the West Virginia Propane Gas Association (WVPGA) wrapped up its membership meeting, “folks said it was a little better than last year’s winter. They were pleased,” reports Tom Osina, the organization’s executive director.

A delay in the daffodils brought a welcome bouquet to the industry.

“It’s suddenly gotten cold again,” Osina says. “The beginning of spring is colder than parts of the winter were.”

The WVPGA is accelerating a push toward autogas opportunities, as the Mountain State’s governor is onboard with promoting propane-powered school buses. Pursuing off-season load is an attractive route to take, according to Osina.

“You don’t have to necessarily worry about what the winter is like,” he says.

Autogas is also being adopted in the Southeast, along with increasing the number of inroads in the farming segment and residential appliance sales. The concept appears to be attracting investors.

“We’ve had more people expressing interest in getting into the business than we’ve had in the past 10 years,” says Randy Hayden of the Louisiana Propane Gas Association.

In addition to autogas, the association’s members “are working hard on rebates, and some of them are looking in the agricultural arena,” Hayden notes. “We gave out $50,000 in rebates in January,” covering propane-burning furnaces, water heaters, lights, fireplace logs and lawn mowers.

“We bumped up our advertising in the winter so that people would come on with furnaces and plan for spring and summer – especially new construction,” Hayden says.

The heating season left some of the membership out in the cold. In the southern portion of the state, “we had the fewest freeze days in the month of January in the past 20 years, and that is not a good thing for the propane industry,” he says. “For the most part, our members thought they had good prices. They just weren’t burning enough gallons.”

In Georgia, “it was 100 percent better than last year,” says Jenni McKeen, executive director of the Georgia Propane Gas Association.

“It wasn’t great; it was okay; it is what it is,” she explains, adding that the lack of supply issues or logistical challenges was appreciated. “It’s been quiet here, and that’s the way we like it.”

“Last year at this time, we were golfing; this year, we have snow on the ground,” reports Debra Grooms, executive director at the Iowa Propane Gas Association. “It’s been better than the past two years. We didn’t have a lot of extreme cold, but we did have cold. We had plenty of supply going in and we have plenty now.

“Earlier in the season, we had a lot of transports taking propane out of state,” Grooms says. “We were taking propane down to the Southwest.”

Dialing in supply
Up in Minnesota, “we actually had winter this year, and it’s gone really well for the members,” says Roger W. Leider, executive director of the Minnesota Propane Gas Association. “The margins have been holding very well, and they’ve dialed in their supply very well this year.”

About half of Minnesota’s propane customers are on budget plans, according to Leider.

“We wish more people would do it because it makes sense for everybody,” he says.

“It’s been an extended winter, and our marketers are pleased with the returns they’ve been receiving,” says Mike Rud, executive director at the North Dakota Propane Gas Association. “We’re a tick higher than we were a year ago.”

Big snow and wind were sweeping through Kansas, creating delivery difficulties.

“The weather was a challenge,” says Greg Noll, executive vice president at the Propane Marketers Association of Kansas. “The ability to maneuver and get from driveway to driveway was made difficult by the closed roads and the blowing and drifting snow.”

Such conditions “just put us back a few days, that’s all,” recounts Joel Woodall, manager of Schreiner Propane in Hays, Kan., where 17 inches of snow fell during a February blizzard. “The cold is good for us and the snow is good for the farmers.”

In the Texas panhandle, Amarillo’s airport recorded a hurricane-like gust of 75 mph as nearby Fritch was buried under 16 inches of snow.

“We had a 4-foot drift in front of our office, almost every road was closed and we lost electricity,” says Amber Satterwhite at Fritch’s Custom Propane Services.

“We’ve been buried under work, and that’s a good thing,” she notes. “We had the best January we’ve ever had, and we’re having a good March. We’re still trying to catch up for people who wanted to make sure their tanks were filled.”

California’s avocado and orange crops were under fire as on-and-off cold temperatures persisted for weeks on end.

“Our customers weathered the storm quite well,” says Robert Jacobs, vice president of retail operations for Delta Liquid Energy. “There was a lot of wind machine gas that went out. We kept up with the demand; there were many weekends where we had to go out and make deliveries.”

A Los Angeles refinery that was on turnaround status complicated the situation.

“Our wholesale supply department did a good job of having railcars bring product in,” Jacobs says.

States of emergencies were declared and hours-of-service (HOS) exemptions granted in some form in California, Arizona, Colorado, Nevada, New Mexico and Utah, as severely cold temperatures enveloped the region, according to Baron Glassgow, who serves as executive director for several western propane associations. A domino effect unfolded as refineries were unable to provide adequate supply.

“We were going much farther east in the beginning of the year than marketers were used to,” he says.

Obtaining the HOS designations was a struggle.

“I talked to a couple of government officers, and they didn’t understand,” Glassgow recounts. “Drivers were trying to get into their state, and they were burning their hours just waiting in line at the terminals.”

In the end, however, end users were still able to get their propane in a timely manner, Glassgow says.

“The marketers went the extra [mile] to take care of their customers.”

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