UPDATE 2-UPS to buy 1,000 propane-fueled delivery trucks for U.S. fleet

* Biggest purchase yet of propane vehicles

* U.S. propane output at all-time high

* Concerns have arisen about propane supply network

March 5 (Reuters) - United Parcel Service Inc is spending $70 million to add 1,000 propane trucks to its delivery fleet, the biggest bulk purchase of propane-fired vehicles yet as output of the fuel in the United States hits record highs.

The fleet, which UPS is buying from Daimler AG's Freightliner Custom Chassis Corp, will replace gasoline and diesel vehicles in Louisiana and Oklahoma, UPS said in a statement on Wednesday. The investment will include 50 new fueling stations.

The transition is expected to begin in the middle of this year and be completed early next year, UPS said. It also plans to introduce propane-fueled vehicles in other U.S. states.

The fleet, which adds to 900 propane trucks the courier company already runs in Canada, is expected to displace about 3.5 million gallons of gasoline and diesel per year, UPS said.

UPS, known for its brown delivery trucks, already has a fleet of about 3,150 alternative-fuel vehicles running on compressed natural gas, liquefied natural gas, biomethane and electricity.

Propane is "a clean-burning fuel that lowers operating costs and is readily accessible, especially on rural routes in the United States," said UPS Chief Operating Officer David Abney.

Output of propane, which is produced alongside oil and gas and is traditionally used for heating, it at all-time highs in the United States thanks to a drilling boom. Propane is on average between $1.25 and $1.50 per gallon cheaper than gasoline at the pump, a UPS spokeswoman said.

The cheap abundance has made propane a viable alternative to gasoline in recent years, rivaling natural gas and other niche fuels. There are currently about 200,000 propane-powered vehicles on U.S. roads. Last year, Home Satellite TV provider DISH Network Corp signed a deal to run 200 of its trucks on propane.

Despite higher output, however, the delivery network came under severe strain as cold weather drove heating demand higher this winter. Propane suppliers struggled to deliver enough fuel to millions of homes and businesses leading to supply rationing which caused prices to spike higher. A lack of pipelines led to an over reliance on trucks and trains to ship the fuel amid some of the coldest weather in decades

"We have identified some improvements that can be made in our infrastructure," said Roy Willis, president of the nonprofit Propane Education and Research Council, which expects 244,000 propane vehicles in the United States by 2020.

"But this (UPS deal) is a good sign of confidence that the challenges we experienced this winter were a short-term, weather-driven phenomenon." Read more here.