Utility looks for greater profits

June 1, 2000
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TORONTO, ON, Canada — As U.S. utilities continue their buyouts of dealers in city after city; as the big, multibillion dollar consolidators form alliances with utilities; and as Lennox continues its bold transformation into North America’s largest residential hvac dealer, the texture of contracting is undergoing a titanic change.

In the future, hvac contracting in many U.S. markets may look a lot like Toronto, where Union Energy, the new unit of Westcoast Energy in Vancouver, BC, has established a beachhead.

Union Energy made headlines last year as it rolled up 30 key hvac dealers across the country. It makes the spin-off from Union Gas the largest residential hvac operation in the country.

It was an abrupt start, going from zero to $200 million in sales — half from former Union Gas operations, and half from the hvac dealers it acquired for about $30 million. This coincided roughly with Lennox’s roll up of about 40 of its Canadian dealers.

What makes the development more interesting is that Union Energy plucked five Toronto dealers — with marquee names like Bridlewood Heating, 21 Degrees, and Campbell Heating — out of the franchise territory of its competitor, Consumers Gas, which is getting into the hvac business itself under the Embridge name.

This is a story now in its first chapter, says Paul Paolatto, vice president of operations for Union Energy. Even though the unit currently bleeds $2 million a month, Paolatto says, “We’re not going away.”

In hot water

Paolatto acknowledges that the five Toronto buyouts were bumpy, with all of the former owners opting out of continuing as managers with the new owner. Four of the five separations were amicable; “the other was not,” he says. Much of these departures stemmed from cultural differences between owners and corporate executives, he says.

Nonetheless, “The acquisitions have been successful,” he emphasizes.

Paolatto says its current losses do not stem from its hvac operations, which are in the black, but from the 900,000 rental water heaters across Ontario the company inherited as part of the spin-off deal.

These heaters require free service, and the rental fees, which range from $6 to $9 per month, do not pay for this cost. Union Energy has no alternative but to continue servicing these critical products, profit or no profit. The company plans to correct this, says Paolatto.

“The losses come from getting the cost structure of a regulated market to fit into a competitive, deregulated market,” he says.

When the formation of Union Energy took effect last New Year’s Day, with responsibility for the nearly 1 million water heaters, it was the coldest winter since 1873, says president Vaughn Goettler. It was a rough two months.

He candidly admits that in the early days, the callback rate was 50%. This has been pared down to less than 5%.

The water heater problem was compounded with computer glitches in the early weeks, and customer confusion at getting two different bills instead of one from Union Gas.

The new company also inherited about 3,000 employees (service, administrative, sales, and the like). The challenge is to get them thinking in the entrepreneurial spirit rather than in the protected regulated monopoly mode, he says.

From the ranks of thousands of water heater service techs may come tomorrow’s hvac technicians, Paolatto says. The Ontario Energy Board must certify techs in Ontario.

On the flip side, Union Energy has a direct-mail entrÈe into those 900,000 homes as it services their water heaters — an impressive asset.

Looking Ahead

The utility currently has no plans to drop its traditional supplier relationship. Carrier is Union Energy’s primary supplier of furnaces and condensing units, although for some of its markets — most importantly Ontario — the hvac units are private labeled. Equipment is purchased through the local Carrier distributor.

This year the company will buy “tens of thousands” of furnaces and air conditioners, Paolatto says. The company buys parts and pieces from local wholesalers, including Carrier’s Totaline outlet.

Paolatto knows independent hvac dealers have gloated at Union Energy’s early stumble, too.

“We’ve taken our lumps,” says Paolatto. “They [independent hvac dealers] may wish we’d go away, but that’s wishful thinking. We are very committed to making this work."

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