Petrobanc Finance Blog

A major roadblock to transitioning to alternate fuels is the infrastructure that will supply them — namely, the extensive pipelines and network of refueling stations to dispense them. Typically referred to as the “chicken and egg” problem, conventional wisdom is that we won’t see widepread adoption of alternate fuels and new vehicles until the infrastructure exists to support them. This article in Car and Driver summarizes the dilemma.

But it’s definitely possible that the existing gas station infrastructure could evolve into the refueling infrastructure of the future. Already there has been considerable work in how to convert gas stations to hydrogen refueling stations, for example. The oil and gas industry is making significant investments in the technologies to make this transition possible, and a number of hydrogen stations have been constructed. (To learn more about where the industry is investing for our energy future, read America’s Oil and Natural Gas Industry -Putting Earnings into Perspective, 2009.) As the major energy companies own only about 10 percent of the gas stations in the U.S., there will be many small businesses that will be involved in this transition.

Initially, the demand for hydrogen fuel can probably be addressed by a few hydrogen producers that transport fuel by truck to a small network of refueling stations. In fact, there are several suppliers delivering now to a reasonably broad geographic coverage. The National Renewable Energy Laboratory (NREL) has an excellent interactive map of the U.S. showing hydrogen and alternative fuel locations in the U.S. Unfortunately, the current cost of delivering hydrogen fuel ranges from 5 to 10 times that of gasoline, and quantities are limited.

So the challenge going forward will be to expand production and distribution, while reducing cost. The “desired state” would be for small networks of refueling stations to be supplied by pipeline. Eventually larger production facilities would be built to service urban areas. This transition may occur over 25 years, says industry expert Carl Nemanich, in The Transition to Hydrogen as a Fuel, from the proceedings of a workshop sponsored by The Pew Center on Global Climate Change and the National Commission on Energy Policy.

Hydrogen is just one of a number of alternative fuels that may become commercially viable and available at a refueling station; we’re now well familiar with E85, but others include biodiesel, compressed natural gas, electricity and propane. Adding any of these alternative fuels to the mix will represent a significant capital investment. In anticipation, gas station owners and suppliers are learning about technical and financial requirements at association meetings and conferences so that they’ll be prepared to implement the most promising fuels as the market develops.

While the media serves up amazing news of alternative energy developments — such as today’s story on a new hydrogen storage method that uses carbonized chicken feather fibers — we still are a long way from seeing alternative fuels replace fossil fuels. (Read this report by American Petroleum Institute about U.S. energy demand growth and fossil fuels through 2030.)

In the interim, our current gas station infrastructure will continue to supply us, while gas station owners and suppliers concentrate on strengthening their businesses, given the tough economic environment.

Author: Tricia Morley

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National Petroleum & Convenience News (NPN) is currently surveying site visitors on whether they think it’s a good time to invest in petroleum properties. Results to date are strongly in favor.

1) Do you think now is a good time to invest in buying more petroleum properties?
Absolutely.   (80.00%)
I’m interested.   (20.00%)
I’m going to sit on the fence a while longer.   (0.00%)
No way.   (0.00%)

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RNCOS, a market research firm, has released a report that says the U.S. convenience stores industry should register impressive growth between 2009-2013. Entitled “U.S. Convenience Stores Market Outlook to 2013,” the report projects convenience stores sales will grow at a compound annual growth rate of approximately 5 percent due to strong demand for motor fuel and increasing in-store sales. An overview of the report is available here.

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Many business owners pursue lease financing for desired accounting and tax treatment.  With a true (or operating) lease the property user can expense its monthly lease payment — allowing for a typically larger monthly write-off) — as opposed to depreciating the asset.  Also, with a true lease, the property user does not show the asset and corresponding liability on its balance sheet.  For some entities these are very important factors in its loan vs. lease decision process, but there are defined conditions that have to be met in order to treat the asset as leased property.

The Financial Accounting Standards Board (FASB) issued FASB Statement No. 13 Accounting for Leases (SFAS No. 13) to address the differences between these two types of financing.  SFAS No. 13 creates standards for financial accounting and reporting for leases by lessees and lessors.

For lessees, a lease is a financing transaction that becomes a “capital lease” (purchase/sale agreement) if it meets any one of four specified criteria; if not, it is an operating lease (usage or rental agreement). Capital leases are deemed as the acquisition of assets and the incurrence of obligations by the lessee.  Operating leases are treated as current operating expenses.

There are situations that can affect these guidelines but generally, FASB 13 states that a lease will be considered a capital lease if one or more of the following four criteria are met. If none of the following applies, the lease is then treated as an operating lease:
- The lease automatically transfers ownership of the property to the lessee by the end of the lease.
- The lease contains a bargain purchase option (usually 10% or less is considered a bargain).
- The lease term equals 75% or more of the estimated economic life of the property (determined by the IRS depreciation tables).
- The present value of the minimum lease payments (excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon) equals or exceeds 90% of the excess of the fair value of the leased property to the lessor.  The leased property is recorded at the total cost net of interest expense (the present value at the inception of the lease).

The fourth point is often the most difficult to determine.  The lessee must know its incremental borrowing rate to calculate the 90% present value measurement.  One must understand that the rate (and term) that the lessee typically borrows from its bank for most assets may not be the same as the bank would provide for this particular leased asset.  The Lessee’s Incremental Borrowing Rate is defined as:  The “rate that, at the inception of the lease, the lessee would have incurred to borrow over a similar term the funds necessary to purchase the leased asset.”
The property user should calculate the present value of the guaranteed payment stream using its true incremental borrowing rate (not the rate of the lease).  If the borrower is obligated to make 48 payments of $1,000 (factoring in if the payments are to be made in advance or arrears, usually with a lease, it is in advance) and had an 8.5% incremental borrowing rate, the present value of that payment stream is $40,858.12.  The property must cost $45,398 or more at the lease’s inception (and, of course, none of the other three conditions have been met) for this to be given operating lease treatment by FASB.

If it is important to have operating lease treatment, an experienced lessor should be able to help a lessee achieve this goal.  If the lessor cannot, then they are unwilling to take sufficient risk on the property’s residual value (meaning that they feel that the property will not be worth much at the end of the lease so, in essence, you might as well pursue a loan or “$1-out” lease with this lessor).  If the lessor specializes in this type of property and has been in the industry for some length of time you should respect their opinion, if they are not familiar with this type of property, the lender may fear overestimating the residual value at lease termination and being underwater on their investment.

A well structured operating lease may be in the best interest of many property users, but entities should understand how FASB will view their property acquisition before they enter into any lease.

Author: Ted Smith

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CSP magazine highlights changes to economic landscape for commercial lenders and gas station loan borrowers in the C&G industry

In its February 2009 issue, CSP magazine published an article titled Brave New World  that addresses the upheaval in the national economy and its impact on the Convenience & Gas industry.

For the small independent operator, the message is clear – opportunity will abound in 2009-10 for those who are prepared. Major oil companies are selling gas station sites, industry consolidators are buying gas station chains and flipping sites to dealers, and operators that are selling their gas stations are having to accept less. Sale prices are returning to more traditional levels – where sites used to sell for 5x to 7x EBITDA (Earnings before Interest, Taxes, Depreciation, Amortization), they are now selling for 4x to 5x.

What does the independent operator need to do to position himself for acquisitions? As we’ve described previously in this blog post, cash will be the determining factor. Higher down payments – 30% or more – may be required to obtain financing. Finding a lender will be difficult, but operators with strong business plans, strong resumes, and professionally prepared financial statements will have a better chance. For more information, see our recent entries on Looking for financing? Wondering what lenders look for? , How lenders evaluate your gas station business, and What are the steps to approval for your gas station loan?

The CSP article focused on these key factors in obtaining a commercial loan for your gas station/c-store business:

Credit sources will be scarce. This will drive creative financing and attract a new breed of lenders. With the current lack of national lenders, local and regional banks will only be able to absorb so much of the demand. New sources of capital from overseas and non-traditional lenders will be complemented by seller financing, mezzanine structures (multiple lenders) and sale/leaseback.

The industry ‘power center’ will shift toward super-jobbers and industry consolidators, as major oil companies reduce their ownership of retail assets. Jobbers will continue to grow, acquiring not only major-oil chains, but also smaller competitors. With jobbers taking control, the old DTW pricing structure will gradually give way to rack-plus pricing, leveling the playing field for dealers in many markets.

Small operators will see new opportunities. Where the majors and the super-jobbers are buying and selling whole markets, they won’t keep every site they buy, either due to operating parameters or because the jobber needs to stabilize their capital base. In order to keep the supply contract for these sites, the jobber will sell them only to independent operators.

Petrobanc Finance believes that now is the time to establish strong relationships with growth-oriented jobbers and financial institutions, as you prepare your own organization for growth.

Author: Kevin Morley

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If you’re an independent gas station owner/operator, finding financing means you have to go looking for it.  Traditionally, banks and other lenders haven’t come looking for you.

This is not because lenders don’t like your business. It’s because it’s difficult to reach an independent owner/operator.  Mass advertising is too expensive, given the relatively small number of customers being targeted.  Direct mail, phone calls, or visits to the station rarely reach the owner. 

So if lenders aren’t coming to you, and you want to find financing, how do you start?  The best sources are referrals from jobbers, industry brokers, customer references, local or regional trade shows, or the internet.  And of course, the bank where you currently do business.

Local banks usually have limited capacity for loans into one industry segment.  If yours can’t help you, then the best place to start is to ask your jobber and fellow owner/operators who they borrow from.  The advantage here is twofold.  First it identifies a lender who has shown a willingness to lend to the C&G (Convenience & Gas) industry and probably knows your market.  Second, there’s an implicit recommendation for you as a good operator – particularly if your jobber refers you.

Brokers can be helpful in the right situation – see our recent posting on using a broker.  Trade shows have seen a decline in attendance by financial institutions – it’s unlikely that any will be at trade shows during 2009! 

Which brings us to the Internet – a search method increasingly popular for finding financing.  With all things on the Internet, you’ll want to take the standard precautions regarding security of your confidential information.  You’ll also want to make sure you know who you’re talking to.

If you do a search using key words or phrases like “Gas Station Financing”, or “Gas Station Loans”, you’ll come up with a wide assortment of results.  In general, the results can be divided into 1) real banks, 2) specialty finance companies, 3) mortgage brokers, and 4) hard money lenders.  It’s not always easy to tell the difference.

Banks  Some of the search results will be real banks.  Not many these days, and you’ll probably recognize the names as either local or regional brands.  If you’re not sure, take the name and do a separate search on it – you should get enough information to figure out if it’s a true bank.

Specialty Finance Companies  These entities have their own funds for lending and, like a bank, have no middle-men asking for additional fees.  In all probability, they will keep the loan on their books and service it for a period of time after funding. Petrobanc Finance is a specialty finance company.

Brokers  It may not always be obvious from the homepage of the website if an entity is a broker, a bank, or a specialty finance company.  They may be ‘captive’ brokers, originating loans for only a few financial entities, such as insurance companies, or they may ‘shop the loan’ to a variety of lenders.  The key is that there will be a separate set of fees, they do not control the decision making on loan commitments, and they will not service the loan after funding.

Hard Money Lenders  These may be similar to Specialty Finance companies in that they lend their own money and service the loan.  However, these are essentially hedge funds looking for high returns.  They focus on very short-term loans (one to three years) at rates 5% or more above average.  They require very little documentation and move quickly.  But it’s very expensive money and should be used as a last resort only.

Author: Kevin Morley 

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A mortgage broker will typically charge one- to three-percent fees for successfully arranging a commercial real estate loan for your gas station.  With conventional loans typically averaging about $1 million, these fees can run from $10,000 to $30,000. The lending bank will also charge a loan origination fee, so now we’re talking about serious money.  SBA loans are even more expensive.

According to the National Association of Convenience Stores (NACS), 62 percent of all gas stations in the U.S. are owned by single-site operators (see the NACS factsheet). If you only own one gas station, getting a million-dollar mortgage is not something you do every day, and can seem to be a daunting task.  The urge to seek professional help is understandable.

A good broker can help you organize your documents, analyze the data and anticipate questions from the lender about potential weak spots in your business, and they will shop the loan with numerous lenders for the best deal.  But how do you know if you’re talking to a successful broker?

Ask for a list of successful deals.  You should focus on deals done after mid-2008 – when the credit meltdown started.  Anybody could get a deal funded in 2007, regardless of their ability.  If the broker successfully closed a deal during the first quarter of 2009, he’s probably a pretty good broker with strong contacts in the financial world.

Ask to see a ‘loan-package’ for a previous deal.  Successful brokers will create binders with tabs for each document group.  Judge it for organization, clarity of writing, and completeness (see our recent entries on Looking for financing? Wondering what lenders look for? and Financing your gas station in today’s tough market.)  Also, ask to see a list of the bank quotes received for each deal.  This will tell if they actually shopped the deal, or took the first offer available.

If you elect to use a broker, here’s some advice:

Beware of non-refundable fees paid up front.  Up-front fees should be minimal – just enough to cover their expenses in preparing a package and shopping it to their list of financial contacts.

Have your attorney review any contract the broker wants to sign.  Items to think carefully about include a request for exclusivity and for how long, confidentiality of your documents, fee structures, and refunds for non-performance.  You may want to limit the broker’s ability to shop your deal through other brokers, as this may mean your confidential data will be spread all over the internet.

Know what a broker can and can’t do for you.  A broker cannot give you a guaranteed commitment for funding.  This can only come from the finance company, and will be addressed in writing from them to you.  Neither can a broker do everything for you.  The lender will want to talk to you.  Especially in today’s tough credit environment, lenders will want to get a sense of how well you understand your business. They will probably visit your site to observe its quality first-hand.

Having read this, you might ask if you really need a broker.  The answer depends on how much you think your time is worth, your ability to present your business (in the way we’ve described in other posts), and in your ability to find a lender that will work with you.  Keep in mind that regardless of today’s market conditions, lenders will want your business if you’re a good operator, and will work with you in much the same way a broker will. 

Author: Kevin Morley

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As the $787 billion economic stimulus package goes to President Obama today for signature, gas station and convenience store owners wonder what benefit it may bring them.

Reports are that $200 million will go to the Leaking Underground Storage Tank Trust Fund for enforcement and cleanup of petroleum leaks, but will not inject cash into reimbursement programs.

This post, “Our Slice of the Pie” on NPN sheds some light on implications for the gas and convenience store industry.

On a related note, the Internal Revenue Service posted on February 5, 2009, on its website “Petroleum and Retail Industries - Leaking Underground Storage Tank Remediation Reimbursement Program” to address the issue whether “payments received by corporate owners or operators of underground storage tanks from state financial assurance and compensation programs (“financial assurance funds”), or other state or local underground storage tank cleanup reimbursement programs, should be characterized as nonshareholder contributions to capital . . .”

The answer: they are not.  “. . . amounts from state financial assurance funds or other reimbursement programs are included in gross income under Internal Revenue Code section 61(a).”

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Anyone wanting to delve into the mysteries of retail gasoline prices should look at Energy Information Administration’s (EIA) site, which is bulging with statistics and useful information.

A few days ago EIA posted a useful article explaining why the price of crude oil doesn’t seem to correlate with price at the gas pump. In short, here’s why:

There’s a time lag between refining crude oil and distributing it to retail sites — typically about two weeks, but it can be as long as four to eight weeks. Fluctuations in crude oil price during that timeframe can be significant.

Supply and consumer demand also play a role, and at any point in time, can work in the opposite direction of crude oil prices. So while the price of crude has an impact on retail prices, market factors can mitigate or reverse that impact.

This happened in January 2009, when retail gas prices increased during the first half of the month, while crude oil prices were falling. Given the time lag we discussed above, retail prices should be compared against late December’s crude oil price, which in fact, did increase.

What role do the refiners play in all this? Well, in December, some refiners were selling gasoline at prices less than the cost of crude they were purchasing at that time. They have contracts, however, that require them to produce gasoline regardless of profitability. But refiners change production based on perceived consumer demand, so this profitability gap adjusts over time. Toward the end of 2008, refiners reduced gasoline production, responding to signals from the consumer market. In addition to supply dropping, refinery maintenance in January contributed to the positive uptick on prices at the pump.  

For more details, read the full text at http://tonto.eia.doe.gov/oog/info/twip/twiparch/090204/twipprint.html

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Here’s a quick list of the most important things that prospective borrowers can do to ensure they merit financing for their gas station.

Use a CPA, not a bookkeeper. You need financial statements that meet GAAP (Generally Accepted Accounting Principles) standards so that your lender will feel they can rely on the numbers they’re looking at. They’ll be more inclined to give you a better deal and the money you will save in the long term will pay back the cost of a CPA many times over. A ‘tax preparation firm’, or your spouse using QuickBooks, won’t work.

Build your cash reserve. The days of 90% financing are gone. At best, you’ll get a loan for 80% of the appraised value of the land, building and equipment – nothing on business value. Many lenders are holding the line at 75% or less, knowing that the more of your equity you have in the game, the less likely you are to default (and if you do, the less they’ll lose).

Clean up your credit score. Scores of 680 or more for each loan guarantor are the minimum today. Get professional advice on how to improve your score. Tragically, many prospective borrowers fail because of old cell phone charges or doctor bills that insurance failed to pay. Better to address these problems before seeking financing. The money you’ll save by getting better loan terms will most likely cover the cost of fixing these problems.

Brand your station with a major brand image. The lender will infer that your site meets image and operational standards that improve attractiveness to customers and make your site more competitive. Many lenders will visit your site personally to verify the quality of the site.

Establish a long-term supply agreement with a reputable jobber. Lenders want to have confidence in the supply of your most important product.

Understand and operate your business. Absentee owners are one of the most common reasons for business failures. If a lender calls you and hears the cash register ring in the background, your involvement in the day-to-day management will become obvious.

Have your paperwork ready. Lenders are inundated with commercial loan requests. They’re time-constrained, so if your submission is organized and substantive, they’ll move your request to the top of the pile.

Organize the following documents in a folder:
- A summary of your loan request (how much, what is it for)
- Your resume, including a summary of your company’s organizational structure, and of your experience in the industry.
- Corporate tax returns (signed) for the last two years (unless you are a sole proprietorship)
- Personal tax returns (signed) for each owner for the last two years
- Financial statements for each site for the last two years, plus through the most recent quarter of the current year. Revenue and Cost-of-Goods-Sold (COGS) should be broken out for fuel, C-store and other revenue generators. Balance sheets for each year, and the current quarter should be included.
- Gasoline sales (in gallons) month-by-month for the last two calendar years, and the current year. Lenders who understand gas stations will want this information, and you’ll want to have a ready explanation for any declines in volume. If your jobber provides this information, even better as it offers a third-party verification of your performance.
- Personal financial statement: you’ll need to show you’ve got the cash to close the deal
- A copy of your supply agreement: from a reputable jobber
- References: contact names and numbers for your jobber, your banker, and any major supplier
- Pictures of your site: while not mandatory, may have sufficient Wow! to gain more attention

Above all, ensure you hire a CPA that understands your business. This list starts and ends with this, because your CPA is absolutely critical to your success in securing financing.

Author: Kevin Morley

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