State of the Industry: Exploring engine fuel opportunities

December 19, 2013 By    

When planning the survey questionnaires for our 2011 and 2012 State of the Industry projects, we couldn’t ignore the dismal condition of our country – impacting propane retailers and all other Americans.

Retailer responses were to the point. The economy, congressional performance, presidential leadership and haphazard national energy policy were among critical issues retailers expected to hurt business. And, when looking back, business prosperity felt harder to reach with every passing year – but retailers would trudge on.

In 2012, we broached the topic of autogas as a potential opportunity to stabilize propane sales. Is autogas just an industry pipe dream? Or is it a realistic plan to reclaim growth in gallons for the average propane retailer? This year, we asked retailers to peer deeper into their crystal balls and share what they see in their futures. We think you’ll find this year’s report particularly interesting and worth comparing to your own business prognostications.

Something old, something new
You undoubtedly nodded vigorously when reading retailers’ responses in last year’s State of the Industry report regarding the languishing economic condition of our nation, Washington’s anti-business antics and the proliferation of state and federal anti-fossil fuel regulations.

Now, with the typical household income being 9 percent less than in 2000, the American public is disapproving of all-things-Washington. Pew Research found the president’s job approval rating had dropped to 41 percent by November, and even lower for his handling of the economy at only 31 percent approval. Fifty-one percent of Americans are frustrated and 26 percent are downright angry. We suspect that you feel the same, regarding both your personal and business interests.

We probably shouldn’t be surprised by the American public’s attention being consumed by overwhelming worries about jobs, health and family future. And we shouldn’t be surprised by energy not being at the front of their minds. Still, it’s interesting how confused the public is about energy. An October article in Politico talked about this “disconnect” and the confusion it causes. On one hand, the public likes the idea of more natural gas, but it doesn’t like fracking. In fact, the public turns thumbs down on the oil and gas industry.

Adding to the energy confusion, 58 percent of Americans, another Pew Research study found, support increased offshore oil and gas drilling in U.S. water. Pew also found that 66 percent did not know U.S. oil and gas are the reason for our increasing energy production – not solar and wind power.

Interestingly, when retailers look back on their business prosperity over the last few years, their cumulative rating for 2012 business was 3.0 – better than their rating of 2.6 in last year’s survey while they were in the midst of 2012 business. This was despite the nation’s slow and questionable economic recovery.

What’s more, any decline in prosperity leading up to 2013 they apparently saw as marginal – followed by a surge in “warm, blue flame feelings” about 2013. And the word from West Coast retailers, ardent enthusiasts throughout the recession and muddling-along recovery, upped their average rating of 3.5 for the last four years to 3.7 for 2013.

And lastly, when we asked retailers if they would sell out for a fair price, nearly 65 percent of respondents said probably not. Of the 31 percent who said yes, we can’t help thinking of the old adage, “Anything is for sale at the right price.”

The natural gas vs. propane irony: Lifeblood as growing competitor
In the responses to our survey each year, we hear some angst about what increased exports could do to both availability of propane and wholesale cost. It is true that the Marcellus Shale is a primary reason the U.S. now has more gas supply than it uses, and liquid natural gas (LNG) exports can help cut the trade deficit. The same can be said for export of fractionated natural gas liquids (NGL), such as propane.

Of course, having a best-ever natural gas supply from which to fractionate sufficient propane for domestic use is something to cheer for, but some retailers are worried that world demand for and value of exports will increase the price of propane, as well as bite into our needed domestic supply. In fact, the U.S. Energy Information Administration (EIA) confirms the pricing concern, stating, “The price effects of increased production have been mitigated by increased exports.” What’s more, an abundant propane supply is encouraging propylene dehydrogenation, wherein propane is the feedstock – impacting propane’s U.S. supply-demand balance.

Industry voices are recommending that retailers have a supply strategy, to include multiple supply sources, to minimize supply risks arising from the number of trucks and railcars possibly allocated to shale production transport needs.

This burgeoning domestic supply requires both transportation and infrastructure accommodations. Investments of more than $16 billion are being made in gas processing facilities and NGL fractionators to add 27 million barrels per day capacity. notes an IHS study’s investment projection of $346 billion in pipelines and infrastructure by 2025.

Permitting of pipeline construction has become headline fodder, as the current administration’s review policies are frustrating at best. Earlier this year, the U.S. Environmental Protection Agency announced further red tape with the creation of another nonpartisan body, the Hydraulic Fracturing Research Advisory Panel. This is the kind of red tape that can roll downhill from wells to pipelines to suppliers and eventually to your retailing office door.

In its 2013 Propane Market Outlook for the Propane Education & Research Council, ICF International reported that propane from natural gas fractionating increased from 7.7 billion gallons in 2005 (when more than 20 percent of U.S. consumption had to be imported) to nearly 11 billion gallons in 2012. Despite propane data still being included in EIA’s Petroleum and Other Liquids data collection, ICF says that 70 percent of U.S. propane now is fractionated from natural gas.

On average, surveyed retailers say they each source from 2.3 suppliers during a typical year. Nearly 20 percent reported having changed suppliers in the last 12 months, the prevailing reason (37 percent) being pricing, the second being supply availability (29 percent).

However, as you might expect, looking only at national sourcing averages doesn’t tell the full story. Pricing along the Pacific coast drove 50 percent of retailers to change suppliers, while most changes in the Mountain states were due to delivery options.

Keeping the flame burning
You probably wish you could turn a deaf ear to all of the times you’ve been reminded about the 2.5 billion gallons of propane sales the industry has lost over the past decade. Wondering, you ask, “Who lost all of that?”

One thing we think about as we publish the State of the Industry report each year is that behind every survey is a real propane retailer who has worked year in and year out to light blue flames. And merely publishing national trends in gains and losses doesn’t tell the whole story. So we try to give you not only the “how much” and “how many,” but also the “where,” “when” and “why.” We think that how other retailers in your specific region are feeling about the propane business is something you want to know, too.

Let’s take the Northeast as an example – a region where the predicted cold December and January months could create welcomed sales for propane, but more importantly for long-term business, a region where the continuing comparatively high price of fuel oil has been providing propane a distinct advantage. Northeast propane retailers report having each gained on average 49 new customers from fuel oil conversions. EIA’s November Outlook translates that into the number of Northeast homes using propane heat this heating season – an additional 9,000 – bringing the total to 795,000 in that region. Natural gas, however, is making headway in the Northeast as well, costing each propane retailer an average of 38 customers.

How do retailers see their prospects in that region? In the Northeast states of New York, Connecticut, New Jersey and Pennsylvania, 11.1 percent expect to acquire other retailers in the next four years; 5.6 percent expect to add operational locations.

Running against the wind
We think we’d be right to assume that you’ve been in the propane industry long enough to have seen a number of business ups and downs. Respondents to this year’s survey have nearly 28 years in the business on average, and their operation has been in business, on average, even longer – 37 years.

Across the country, that dedication to an industry was again made evident when we asked propane retailers what they foresaw the future holding for them.

Nearly 85 percent expect to either keep their business intact or expand it. And with 43.2 percent saying they’ll be keeping the business in the family, that, too, reflects the kind of hometown business propane retailing has been and continues to be.

For those saying they anticipated being acquired in the near future, our survey didn’t ask why, but we can’t help thinking that it’s in response to them seeing the number of owner-operator operations being acquired by multi-state marketers, especially if they have a particularly desirable geographic territory and customers.

And despite the sad unemployment situation in our country, more than 15 percent of responding retailers added employees to their operation in 2013 – and more than 21 percent plan to add staff in the coming year.

Perhaps their successes in geographic territory expansion are one reason retailers rated 2013 better in business prosperity than previous years, as well as how they felt about keeping their businesses humming in coming years.

On average nationwide, 27.9 percent of retailers responding to our survey reported having expanded their marketing area, and that new territory on average yielded 132 new customers. The highest gains were in the West South Central region – Texas, Oklahoma, Arkansas and Louisiana, where more than 36 percent of retailers broadened their geography and each averaged 241 new customers.

A business of product delivered
While some retailers did increase their gallons sold with new customers, industry data shows that propane gallons sold continue to decrease year after year. So we asked retailers about their losses during the last 12 months. Specific to natural gas, nationwide average gallons lost by each retailer totaled more than 49,400 gallons.

The two regions that were hit the hardest with gallons lost to natural gas were the South Atlantic and Pacific Coast, where each retailer lost on average between 165,000 and 170,000 gallons.

But new natural gas pipelines are a nationwide worry:

■ From Michigan we heard, “Natural gas expansion is the biggest threat today.”
■ From Indiana, “Most of my time as an owner is battling natural gas.”
■ From Missouri, “Natural gas will take about one-third of my business this year and next.”

Using the Midwest as an example, from the market penetration that natural gas has in much of this region, we can realistically assume that natural gas’ ease of access and lower price to homeowners are both highly competitive factors to propane retailers and their efforts in keeping customers and gallons.

In the Northeast, where retailers report the strength of natural gas to be significant, the American Gas Association is touting that 500,000 homes in that region were converted from fuel oil to natural gas between 2000 and 2010.

With natural gas heating 50 percent of America’s homes – about 58.6 million – it feels like the proverbial elephant in the room of residential heat. But what about electricity?

The EIA’s data history of residences heating with primary fuels by region shows nearly steady infiltration by electricity into the housing market – again this current winter. ICF reports, “In more than 71 percent of the 2,012 counties where propane lost market share between 2009 and 2011, electricity was the fastest growing residential space heating fuel.”

Since the 2008-09 heating season, electricity has added more than 6 million homes across the country for a total of nearly 46.3 million heating with electricity.

Average propane gallons lost by each retailer nationwide to electricity totaled about 8,800 gallons. Though far fewer gallons are being lost to electricity than to natural gas, electricity does impact retailers throughout the South – more than other geographical regions – each losing on average from 9,800 to 11,900 gallons.

The competitive strength of electricity in the South is evidenced by the 28.8 million homes fueled by electricity – more than twice as many as natural gas and comprising half of U.S. homes heated by electricity.

A business of customers served
Propane retailing being a business not only of gallons but also of customers, we asked retailers to tell us their gains and losses in “people” as well as “product.”

Altogether, retailers on average began servicing 10 new delivered-propane customers in the past 12 months that converted from natural gas, 14 from electricity. That was counterbalanced with lost customers – 20 per retailer to natural gas and 24 to electricity.

However, as in all of the data that our survey compiled from retailers this year, we can’t ignore the fact that national averages miss the highs and lows of customer gains and losses of geographical regions. Retailers in the Southern region of Texas, Oklahoma, Arkansas and Louisiana converted the most households from natural gas – an average of 41 per retailer, far more than the national average of 10. Another Southern region, the South Atlantic states extending from Delaware to Florida, averaged 23 households converted to propane from electricity.

The largest losses of propane customers to natural gas were in the Middle Atlantic states of New York, Connecticut, New Jersey and Pennsylvania – an average of 39 customers per retailer. Retailers in the Midwest’s East North Central region of Wisconsin, Illinois, Michigan, Indiana and Ohio lost hugely to electricity – an average of 60 customers per retailer.

Protecting your back
On average, propane retailers share their delivery territory with three owner-operators, two farm co-ops and four multi-state-retailer operations.

What’s more, 33 percent of responding retailers reported having at least one new retailing operation open in their territory to compete for business in the last 12 months.

Keeping margins from diminishing in bad economic times due to late homeowner payments and extra delivery trips due to customers changing from keep full to will call is understandably difficult for retailers, particularly owner-operators. The good news this year is that more than 43 percent of retailers report improved accounts receivables.

In addition, more than 30 percent report that will-call sales are fewer and keep-full accounts are now in the 60 percent range. However, only 38 percent of customers nationwide are on annual or long-term contracts – potentially leaving doors open for other retailers to walk in with undercutting offers.

Retailers, on average across the country, say 89 percent of their delivered propane customers are residential, the longtime mainstay of the industry. More than 47 percent of their residential customers use propane only for home heating. When asked how much potential there was in upselling residences to add propane water heating and/or appliances, the average nationwide rating was only 2.4 on a scale of 1 to 5, though retailers in New England, Middle Atlantic and South Atlantic states saw greater opportunity in selling homeowners on the advantages of looking beyond propane heat.

The most recent Residential Energy Consumption Survey of the EIA reports that 48 percent of residential energy is consumed by space heating and cooling. Moreover, water heating consumes about an additional 18 percent – appliances even more.

Despite what would appear to be opportunity for upselling current heat-only customers, of retailers marketing propane-related products or services in addition to delivered propane, only 26 percent offer appliances to customers; 40 percent offer water heaters.

The number of respected manufacturers and their array of propane-fueled water heaters, kitchen appliances and clothes dryers are impressive. The 59 propane kitchen appliance models include upscale Viking, Wolf, Thermadore and Jenn-Air brands. The 87 models of propane-fueled water heaters include high-efficiency tankless models.

On the other side of heat-only residential propane customers are those who use propane only for non-heating applications – 25 percent, retailers tell us. Retailers can market with great pride the high-efficiency, best-in-class propane furnace models available.

The ICF in its Market Outlook says that more than 2.5 million current propane-using households could be converted to propane heating, 4 million propane customers could be converted to propane water heating and another 4 million to cooking with propane.

If the number of households in the U.S. increases 32 percent by 2040, as the EIA forecasts, homebuilders could become a prime target market for retailers. Forty-six percent of retailers are already promoting the new-home Propane Energy Pod to homebuilders and architects, and survey respondents rank new residential construction and remodeling the highest residential sales opportunity.

After introducing autogas into our survey last year, we inquired further this year into how retailers saw autogas as a gallon-growing opportunity for their specific operation. And because propane is an exceptional engine fuel beyond vehicles, we also asked retailers to rate their gallon-growth prospects from mowers, power generators and forklifts, as well as farm irrigation systems and grain drying.

Notwithstanding a retailer’s primary focus being on increasing sales of propane, marketing of power generators and mowers can also add to revenue. The 41 models of propane power generators now available can fit any residential or commercial purpose. Propane-powered mowers are available from well-recognized brands, such as Cub Cadet, Snapper and Bobcat, well suited for golf courses, city parks, municipal landscaping, school campuses and commercial landscape maintenance services. When asked in our survey whether they had attended a demonstration of propane-powered commercial mowers, 28 percent indicated they had.

Of engine fuel opportunities, retailers nationwide ranked power generators highest. The Middle Atlantic retailers, in particular, saw notable potential in power generators – undoubtedly due to public interest in standby protection following horrendous recent storms that left people without power for weeks or even months.

It’s apparent from their lukewarm survey responses that retailers are still mulling over how they feel about autogas. If industry-wide sales of propane continue to decline, will their own operation join the downhill slide? Will autogas sales really be sufficient to make their operation less dependent on the winter heating season? Can autogas truly be realistic for a traditional retail operation with traditional customers to succeed in fueling vehicles? Is there really enough interest among fleet owners to make retailers marketing autogas a good use of their time?

With the relatively recent drive for clean and efficient alternative motor fuels, propane autogas has been proving itself viable to compete on a large scale and is fast becoming a recognized and well-published alternative fuel with state and federal entities (such as the Clean Cities and Alternative Fuels Data Center), fuel news sources and fleet management associations. Police departments, school bus fleets, private and public shuttle-bus fleets, taxi services, senior community convenience vans, security patrol fleets, local delivery fleets, state and national park services, airport shuttles and public utility service fleets are all within the potential marketing opportunity for retailers.

When asked in our survey whether they had attended demonstrations of autogas-powered trucks, buses or cars (new or conversions), 37 percent said yes. Twenty-seven percent reported having seen an onsite autogas fueling site in operation.

Retailer ratings of fleet fueling opportunities they see in autogas for their operations appear to be somewhat contradicted by percentages of retailers who say they are looking to pursue school, delivery or government fleet potential. From those responses together, we might assume that a typical propane retailer is willing to consider the possibility, but won’t count on it.

White gold
This just happens to be a perfect day for writing about the heating season. Snow is falling, tickling the windowpanes. The county plow is clearing a path for cars, creating roadside mountains for happy kids and dogs. It’s a good day for a warm house, cozy fireplace and steaming pot of soup on the stove. For a just-in-case-we-get-snowed-in generator, too. Thank goodness for that full tank of propane.

If you could send a product order to Mother Nature for this winter, we expect it would read:

■ Send duplicate of 2010-11 order.
■ Product description: 3,883 heating degree-days.
■ Special directions: Ignore 2013-14 forecast of 3,643 heating degree-days.
■ Ship ASAP.

One great winter every three years isn’t too much to ask of her, is it?

On average, 77 percent of a retailer’s propane gallons are delivered in the heating season. By now you’ve undoubtedly checked and rechecked the winter weather prognostications for your own marketing territory.

There probably aren’t many folks who could appreciate your joy when TV news coverage features a whopping snowstorm tracking in your direction. Well, a real propane retailer is a bit different that way.

How does the EIA outlook stack up for residential spending on heat this winter? The nationwide average cost of heating a home with natural gas this winter will be about $680; with electricity, just more than $900; with heating oil, more than $2,000; with propane, about $1,670.

What does that add up to? By EIA’s calculations, 90 percent of U.S. homes will be paying more this winter to heat their homes.

Of course, you know those are only averages and you’ll need to sharpen your pencil to calculate how much your customers could be spending this winter. Here are the high and low residential propane prices for just a few representative states so far this heating season:

■ Massachusetts    $3.09 – 3.16
■ New Jersey    $3.47 – 3.62
■ Pennsylvania    $2.89 – 3.06
■ North Carolina    $2.87 – 2.97
■ Iowa    $1.53 – 1.66
■ Michigan    $2.02 – 2.20
■ Missouri    $1.74 – 1.92

Best wishes for a not-just-winter business
As we do each year when wrapping up another end-of-year State of the Industry report, we think of the longtime service – literally years of their lives – that so many retailers have given the propane industry and, most of all, their communities.

Our hope is that you will have a wonderfully cold winter, but also a coming summer of gallon-growing opportunities.

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