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This excerpt taken from the VLG 10-K filed Sep 28, 2006. Markets
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 customer’s 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
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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 customer’s 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
distributor’s 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
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variation in demand, which is not only dependent on housing
growth but also the availability of alternate sources of energy.
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