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Propane, a by-product of natural gas processing
and petroleum refining, is a clean-burning energy
source recognized for its transportability and ease
of use relative to alternative stand-alone energy
sources.
The retail propane business consists principally of transporting propane to a
company’s customer service centers and other distribution areas, and then
to tanks located on its customers’ premises. Retail propane falls into
four broad categories: residential, industrial, commercial, and agricultural.
- Residential customers use propane primarily for
space and water heating.
- Industrial customers use propane primarily for
forklifts and stationary engines, to fire furnaces,
as a cutting gas, in mining operations and in other
process applications.
- Commercial customers, such as restaurants, motels
laundries and commercial buildings, use propane
in a variety of ways including cooking, heating
and drying.
- Agricultural customers use propane primarily
for tobacco curing, crop drying, poultry brooding
and weed control.
Propane is extracted from natural gas or oil wellhead
gas at processing plants or separated from crude
oil during the refining process. Propane is normally
transported and stored in a liquid state under moderate
pressure or refrigeration for ease of handling in
shipping and distribution. When the pressure is released
or the temperature is increased, it is usable as
a flammable gas. Propane is colorless and odorless;
an odorant is added to allow its detection. Propane
is clean-burning, producing negligible amounts of
pollutants when consumed.
The retail market for propane is seasonal because
it is used primarily for heating in residential and
commercial buildings. Approximately 70% of our retail
propane volume is sold during the peak heating season
from October through March. Consequently, sales and
operating profits are generated mostly in the first
and fourth calendar quarters of each calendar year
Propane competes primarily with natural gas, electricity
and fuel oil as an energy source, principally on
the basis of price, availability and portability.
Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural
gas, but serves as an alternative to natural gas
in rural and suburban areas where natural gas is
unavailable or portability of product is required.
Historically, the expansion of natural gas into traditional
propane markets has been inhibited by the capital
costs required to expand pipeline and retail distribution
systems. Although the extension of natural gas pipelines
tends to displace propane distribution in areas affected,
we believe that new opportunities for propane sales
arise as more geographically remote neighborhoods
are developed.
Propane is generally less expensive
to use than electricity for space heating, water
heating, clothes drying and cooking. Although propane
is similar to fuel oil in certain applications
and market demand, propane and fuel oil compete
to a lesser extent than propane and natural gas,
primarily because of the cost of converting to
fuel oil. The costs associated with switching from
appliances that use fuel oil to appliances that
use propane are a significant barrier to switching.
By contrast, natural gas can generally be substituted
for propane in appliances designed to use propane
as a principal fuel source.
The wholesale propane business is highly competitive.
Our competitors in the wholesale business include
producers and independent regional wholesalers. We
believe that our wholesale supply, risk management
and distribution expertise provides us with a unique
set of capabilities as well as a secure, efficient
supply base from which we serve our wholesale customers.
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