Utility buys dealers, bleeds $2 million/mo

July 12, 2000
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HALIFAX, N.S., Canada — One of Canada’s largest gas utilities has paid out about $100 million to buy 27 hvac dealers across the country — and now faces losses of $2 million per month.

Within 18 months of its formation, things began to go sour. Westcoast recently announced a loss by Union Energy of $13 million for the first six months of the year, compared with a loss of $6 million for the same period of 1998.

Westcoast attributed the poor performance to “start-up and one-time costs, lower sales and service revenues due to a reduction in the customer base as a result of transitional problems, and increased competition.”

“The problem was,” said one contractor, “many of the Ontario contractors bought up by Union Energy were located in the sales territory of Consumers Gas, which was feeding them referrals.

“Once the dealers were bought up, Consumers Gas stopped feeding them.”

The bold roll-up of dealers, along with Lennox Industries’ purchase of more than 40 of its own dealers here, has made Canada something of a laboratory for the consolidation of contractors.

In addition, Sunoco has enrolled more than a dozen Ontario hvac dealers in its “Home Energy Dealer Network” to provide a “one-stop source” for homeowners. The company offers its brand of natural gas, as well as a hot water heater program and financing programs.

Gets U.S. attention

The fast-changing market has drawn the attention of many in the U.S. industry.

Canada’s residential market of 11.5 million homes is about one-tenth the size of the U.S. market. About one-fifth of those homes have central air conditioning, and another 10% have room units.

The changing texture of Canada’s hvacr contractors was the topic of corridor conversations at the annual meeting of the Heating, Refrigerating, and Air Conditioning Institute of Canada (HRAI), whose divisions represent the country’s manufacturers, wholesalers, and contractors.

“No less than four — or is it five or six? — different contractor consolidation and partnership options are being offered to Canadian contractors,” said HRAI chairman Drew Keirstead.

“Strategic alliances seem to be a baseline approach that all companies in our industry must consider for the future.”

The country’s independent dealers have been edgy since early 1998, when Union Energy, owned by Westcoast Energy, Vancouver, B.C., won the regulators’ approval to separate its retail energy services from the gas distribution services offered by Union Gas at the end of 1998.

As part of the deal, Union Gas transferred ownership of about 875,000 rented water heaters to Union Energy.

In February 1998, Union Energy announced its purchase of five marquee contractors in Ontario and Manitoba, like Bridlewood Heating & Air Conditioning, Toronto’s largest dealer, and Boonstra Heating & Air Conditioning.

Carrier Alliance

At the same time, the utility announced an alliance with Carrier Canada to market its products.

Later acquisitions were made across several of the other provinces, and at mid-year 1998 Union Energy’s stable represented $59 million in aggregate sales.

Today the company has 36 locations in four provinces: Alberta, British Columbia, Manitoba, and Ontario. It also offers equipment sales, rentals, service contracts, financing, and energy management services.

Dubbing itself the nation’s largest hvac contractor, Union Energy last fall announced three new company showrooms in the Toronto area, employing 185 jobs. Customers could browse among furnaces, condensing units, gas fireplaces, and barbecue grills.

By September of last year, the utility affiliate was on its way to $200 million in annual sales, according to president Brian Gabel. Customers could purchase equipment and pay for it in their monthly fuel bills over 10 years.

Also offered are extended (five-year) warranty plans on equipment, and a “protection” maintenance plan for a monthly fee of $19.96 for heating and cooling systems.

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