This excerpt taken from the VLG 10-K filed Sep 28, 2006.
Industrial, Medical and Specialty Gases. Gases are an essential component of a broad array of industrial, commercial and medical processes. As the economy has grown and as new applications for gases have developed, the customer base of the industry has significantly broadened to include almost every major industry. These customers have widely varying requirements for type and volume of gases and have effectively caused segmentation of the industrial, medical and specialty gas market based on volume requirements.
The higher volume, or bulk, gas segment of the industrial gas market consists of customers who require large volumes of gases to be delivered by truck using cryogenic containers, by direct pipeline to the customers facility and, in some cases, by producing gas at an on-site production plant. We do not compete in the on-site or large bulk segment of the market. Typically, the major gas producers supply these customers directly.
We compete primarily in the market for industrial, medical and specialty gases delivered in mixed packaged or cylinder form. Participants serving this market segment package, mix and distribute gases to customers with smaller volume needs or requirements for specially blended or purified gases. We believe that this industry, including the related hard goods, generates total annual sales of approximately $9 billion. Large, multi-state
distributors, including Valley, account for approximately 40% of sales in this market. The remaining sales are generated by approximately 900 smaller distributors, many of which we believe to be potential candidates for acquisition by larger distributors or industrial gas producers.
The distribution of packaged industrial, medical and specialty gases is a service-intensive business where competition is based in large part on building customer relationships through frequent emergency or priority service, technical support and assistance in a wide variety of applications and the capacity and flexibility to mix small quantities of custom blended gases. To compete effectively in the packaged gases market, we believe that a distributor must establish a local business presence and offices where customers have ready access to both product and assistance.
The packaged industrial, medical and specialty gas industry is expected to achieve growth consistent with growth in the overall economy. Gas sales tend to be less adversely impacted by a decline in general economic conditions than the sale of welding equipment and supplies. We believe that the industrial gas distribution business is somewhat resistant to downturns in the business cycle due to the following factors:
Propane. We also compete in the propane market in the United States, which consists of the packaging and distribution of propane gas to residential, commercial and industrial customers. Propane competes with other forms of energy in heating applications and the degree of competition from these alternate sources is primarily a function of geography, with the most important factor being the proximity to natural gas pipelines. We believe that the non-pipeline residential, commercial and industrial propane market generates total annual sales of approximately $12 billion, with the 20 largest distributors accounting for approximately 50% of all sales. According to LPGas Magazine, for 2005 we ranked 20th, with approximately 28 million gallons sold annually. Approximately 3,900 independent marketers of propane serve the balance of the market, many of which, we believe, could be suitable acquisition candidates for us in the future.
The majority of propane sold within the industry by distributors is used for residential and commercial heating. Most distributors own the majority of the tanks and containers which dispense propane at a customers location. Unlike the industrial gas market segment, no separate rental fee is generally charged for the container.
We believe that, as in the packaged industrial gases market, service rather than price plays the dominant role in the supplier-customer relationship in the propane market. Customers served both on a will call and on an automatic delivery basis expect timely delivery, especially during the winter months. As a result, customer satisfaction with a particular distributor is often based more on such distributors timely, reliable delivery of propane than on the price which such distributor charges for such propane. Annual account turnover in the propane market is low.
The propane distribution industry is also a mature industry with growth consistent primarily with housing starts, energy consumption and replacement of alternate fuels. The cost of propane per British Thermal Unit, or BTU, compares favorably with heating oil and natural gas but is much less costly than electricity. Although there are commercial and industrial applications for propane, which include forklift motors, agriculture and heat-treating, the majority of distributor propane sales are in support of residential heating. Because the supplier typically owns most of the storage tanks which are used for propane home heating, good service and the inconvenience of changing tanks normally results in minimal account turnover. Home heating propane also typically is resistant to economic downturns but is influenced by seasonal temperature variation or degree days. With new construction resulting in larger houses, there has been a corresponding increase in demand. From area to area, there can be a significant
variation in demand, which is not only dependent on housing growth but also the availability of alternate sources of energy.
The packaged gases industry is fragmented but has been undergoing consolidation. We believe that there are many reasons for this trend, including the following:
We believe that this consolidation trend will continue, providing opportunities for those distributors that have the financial and human resources to acquire and effectively assimilate acquisitions into their base business. We believe that distributors who fail to participate successfully in this consolidation trend and, thereby, achieve a strong or leading position in their market areas may be at a disadvantage in the long term.
In recent years, the propane industry has also been undergoing consolidation for many of the same reasons as the packaged gas industry. We have been taking advantage of this consolidation trend through selective acquisitions. Except for several large companies, the propane distribution industry is also highly fragmented. Industry sources indicate there are approximately 3,900 independent marketers of propane operating 13,500 local distribution centers nationwide. We believe that the 25 largest propane distributors, of which we are one, have a 50% share of the approximately nine billion gallon annual market.