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Propane: The Price of Entry

Many a fuel oil dealer has diversified into the propane business, and more are doing so all the time. But there are hurdles to launching a propane operation, industry experts said, and the biggest is the entry ticket: the initial outlay. This and other requirements must be weighed carefully before deciding to go forward.



‘No question, it is capital intensive,” Rob Stenger said.”You need a solid lending relationship and good cash flow management practices.” Stenger and Kinson Craft launched Simple Energy in 2006, delivering fuel oil, kerosene and diesel fuel. Their business plan included expansion into propane, a move they made in October 2010.


‘It must be properly planned, financed and executed,” Stenger said. ‘It’s going to cost more than you think. But if you’re going to market yourself as a full-service company in the home energy space, propane is a must.”


Simple Energy is based in West Lebanon, N.H. Half of its customers are in New Hampshire and half in Vermont. Stenger said he and Craft benefited from broad experience in fuels, including propane. Stenger held operations and management positions with Dead River Company, South Portland, Me., Irving Oil Corp., St. John, New Brunswick, Canada, and Johnson & Dix Fuel Corp., Lebanon, N.H.; Craft worked in marketing for Wyatt Energy, New Haven, Conn., and in sales for Johnson & Dix.


To prepare for the propane business, Simple Energy sent oil service technicians for propane training, and also hired one person who was a propane specialist, Stenger said. A heavy duty pickup serves as the company’s propane service truck. The company purchased two propane delivery trucks and one crane truck.


To begin with, Simple Energy approached its fuel oil customers who had ancillary uses for propane. ‘For the first six months we didn’t advertise it to the public at large,” Stenger said. But they did build a list of prospects during that time, and have been building the business since.


Fuel oil dealers can familiarize themselves with the propane market they are contemplating entering, and evaluate its competitiveness, sometimes, with information available from trade associations. The Vermont Fuel Dealers Association (VFDA), for instance, reports that 70 of 120 fuel oil dealers in the state are in the propane business. The trend of fuel oil dealers venturing into the propane business started about 10 years ago, and ‘really accelerated in the last five years,” said Matt Cota, executive director of the VFDA.


The majority of households in Vermont today ‘ some 54 percent ‘ still heat with fuel oil; propane accounts for 15 percent; and natural gas for 14 percent, according to the association, based on its research of U.S. Census data. The remainder ‘ 17 percent of households ‘ heats with wood and electricity, according to the data. Developers of ski resorts in Vermont tend to choose propane for heat, Cota added.


Fuel oil dealers in Vermont and other states who haven’t ventured into the propane business might be daunted by the investment it requires to get started. ‘The propane business has much more overhead,” Cota said, than the fuel oil business where, with ‘one truck, one cell phone, and an ad in the Pennysaver, you’re in business.”


Chris Ouellette, a partner in Liberty Oil Equipment Co., East Hartford, Conn., said, ‘I believe it’s a five-year process to get established in the propane business.” A longtime builder of fuel oil trucks, Liberty began building propane delivery trucks about four years ago. The company often builds propane delivery trucks on spec, Ouellette said, and recently sold a truck to a fuel oil dealer in Utica, N.Y.


A ‘3499″ is the typical tank size for a propane delivery truck, the number referring to the number of gallons of propane the tank ostensibly can hold, but Ouellette said that such tanks are filled only to 85 percent capacity to allow for expansion of the propane gas.


 


Based on what a number of industry veterans said, here is a breakdown of some major costs: a delivery truck, approximately $125,000 to $150,000; a crane truck, with a price tag of about $100,000, to set tanks on customers’ property; and a service truck, such as a Ford F-450 or F-350 with a small utility body, for roughly $75,000. ‘You need those three vehicles at a minimum,” an industry expert said.


Once a newcomer has found a place to buy propane, a storage facility must be established. For a bulk plant with a 30,000-gallon tank on land you already own: $250,000. That includes the cost of site work such as piping, concrete, fencing, electricity lighting and security.


‘You’ve already spent about $600,000 and you haven’t even bought a tank yet,” the industry expert said, referring to the tanks that go on customers’ property. It’s a peculiarity of the propane business that the distributor owns the tanks that go on customers’ property. Tanks that hold 100 gallons typically cost about $400.


‘Buy one hundred of those for a hundred customers and you’ve spent $40,000,” the industry expert said. ‘When you finish putting those hundred tanks in the field, you’re going to have to spend another $40,000 to buy another hundred,” he said. Larger tanks, which hold 1,000 gallons, cost about $2,000, he said.


Fuel oil dealers are going into the propane business ‘for customer retention and margin enhancement,” the expert said.


The propane business must operate on a higher margin than a fuel oil business the expert added. ‘If you run your fuel oil business on margin X ‘ whatever X is ‘ you had better run your propane business on margin 2X,” he said, ‘because of those tanks. You’ve got to pay back that capital investment ‘ that $40,000 to buy a hundred tanks.”


Among other outlays are liability insurance, and training and licensing technicians. ‘There’s an expensive training process to get a license in any New England state, and it can be lengthy,” the expert said. Massachusetts, for example, requires two years of classroom training and field experience, and every state requires classroom education and on-the-job experience.


Joe Rose of the Propane Gas Association of New England, Epsom, N.H., said, ‘Once any new company enters the propane market, I would strongly encourage them to belong to the association so that they have the benefits of the training and information that we provide on a regular basis.” To get an idea of the benefits of association membership, visit the group’s website at pgane.org. The group has nearly 500 member companies throughout the six-state region.


 


In Maine, seven out of 10 fuel oil dealers are in the propane business, possibly more, David Martin a regional vice president for Webber Energy Fuels in Bangor, Me., said in an interview in January, days before Webber agreed to sell its propane and fuel oil business to Dead River Co., South Portland, Me.


 


Many family-owned businesses with one to three fuel oil trucks have diversified into propane to help grow their business, Martin said. If a dealer is selling fuel oil in a rural area, Martin observed, ‘he’s got a customer list that’s ready-made. He’s got a relationship that’s already established and that’s pretty critical to this migration into the propane business.”


 


There are also markets for propane that are not exploited well enough, such as agriculture, Martin said. ‘Propane has a big place in agriculture,” he said. ‘Out in the Midwest, it’s used all the time for everything from drying the grain to burning the weeds.”


 


Similarities between the fuel oil and propane businesses can help a fuel oil dealer make the move into propane. ‘A heating oil dealer is used to filling up at the rack, delivering house to house, having receivables and collecting them and billing,” Martin said.


 


But the differences between the fuel oil and propane businesses should be carefully considered before deciding to go into propane, Martin said. For example, in the propane market, it is possible to buy futures, but not to hedge in the conventional way, Martin said.


 


Propane delivery requires more than just a commercial driver’s license with a hazardous materials endorsement, Martin noted, and propane regulations are more extensive and complicated than those for fuel oil.

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