2016 Propane Market Outlook: Driving Change in Consumer Propane Markets

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1 Propane Market Outlook: Driving Change in Consumer Propane Markets NPGA Southeastern Convention & International Propane Expo April 8, 2016 Presented by: Michael Sloan ICF International 9300 Lee Hwy Fairfax, VA 22031

2 Propane Market Outlook: Driving Change in Consumer Propane Markets April 2016 By: Michael Sloan Principal ICF International 9300 Lee Highway Fairfax Virginia Disclaimer: This presentation presents the views of ICF International. The presentation includes forward-looking statements and projections. ICF has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual market results to differ materially from the projections, anticipated results or other expectations expressed in this presentation.

3 2 Today s Topics 1. General energy market conditions 2. Propane supply outlook 3. Opportunities and risks in domestic propane markets

4 3 Critical Messages for the Propane Industry 1) General market conditions plus lower propane prices create opportunity for a rebound in traditional propane markets Targeted consumer education and marketing is critical 2) The largest growth opportunities are in internal combustion engines However, lower gasoline and diesel prices mean the propane industry will have to work harder to develop these markets 3) The propane supply balance is shifting again: From an over supplied market with propane resource prices below sustainable levels To potentially tight supplies and volatile prices As early as this fall depending on international demand, and short term propane production trends

5 Cents/Gal 4 Propane/WTI Ratio Propane & Crude Prices Mont Belvieu Propane WTI Crude Oil Propane/WTI Ratio

6 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 $/MMbtu Propane, Gasoline, & Diesel Spot Prices Mont Belvieu Propane NY Harbor ULS Diesel NY Harbor Gasoline 5

7 6 Observations on Low Energy Prices According to the American inventor Thomas Edison: Invention is 10% inspiration and 90% perspiration But in today s energy price environment: Innovation is 10% inspiration and 90% desperation And the 10% inspiration is also driven by desperation. Low oil, natural gas, and NGL prices are accelerating the rate of innovation in oil and gas supply and creating a long term cycle of lower prices.

8 USD/bbl ICF Crude Oil Price Outlook ICF s expects a slow rebound in WTI oil prices Reaching $75 per barrel by WTI Crude Oil Price However, expect oil prices to fluctuate widely ICF does not anticipate a sustained rebound above $100/bbl a sustained rebound above $80/bbl is unlikely. Low Historical Futures Base 7

9 Propane Supply Balance 8

10 Propane Markets are Transitioning Back into a Period of Tight Supply U.S. Propane Inventories 9 Propane Inventory Withdraws/Injections Propane inventories reached historically high levels last summer 120, ,000 Propane Storage Inventories Propane Withdraws/Injections 6,000 4,000 However, withdrawals are also at record levels 80,000 2,000 0 And new demand and export capacity is on its way 60,000 40,000-2,000-4,000 How will propane markets balance in the future? 20,000 Propane Withdraws/Injections 0 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16-6,000-8,000

11 Propane Supply Outlook Source: ICF 10

12 Thousand Barrels per Day Historical and Projected Propane Production by Production Basin Propane production is expected to grow at 3% per year between 2015 and ,000 2,500 North American Propane Production Outlook Growth is dependent primarily on natural gas production 2,000 1,500 Production may stabilize in the short term 1, Oil prices will have relatively limited long term impacts Refinery Production Other Marcellus/Utica Western Canada Eagle Ford Permian Bakken Anadarko 11

13 (Million Gallons) 12 U.S. Petrochemical Propane Demand 14,000 12,000 10,000 8,000 Company Output Volume (tons/yr) Propane Consumption (gal/yr) Existing Plants Location Start-up Year 6,000 4,000 2,000 0 Petrochemical demand expected to grow by about 90 Mbbl/day by 2018: 2016: 26 Mbbl/d 2017: 34 Mbbl/d 2018: 31 Mbbl/d PetroLogistics 640, ,900,000 Texas 2010 Dow Chemical 750, ,550,000 Texas Q Plants Under Construction Enterprise 750, ,550,000 Texas Q Formosa Plastics 680, ,230,000 Texas Q Plants Under Consideration Williams 500, ,590,000 Alberta 2018 Ascend 1,173, ,910,469 Texas 2019 Sunoco Dow Chemical PA

14 Growing Maritime Export Capacity 13

15 Mbbl/Day Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep LPG Available for Exports Potential LPG (Propanes/Butanes) Exports Total LPG Export Capacity FORECAST Propane and Butane available for export at projected levels of consumer and petrochemical demand Propane/Propylene Butane/Butylene Exports LPG Export Capacity

16 Propane Inventories (mbbl) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 15 Propane Inventories Outlook 100,000 80,000 60,000 40,000 Projected 2016 Inventories if Export Capacity Utilization is Maintained at Current Levels 20, Year Range Min Max Min

17 16 Transitioning from an Over Supplied Market to a Balanced/Tight Market As of November 2015, propane inventories were the highest level on record 106 Million Barrels The addition of new export capacity and PDH Plants in late 2015 have resulted in historic inventory drawdown rates. At current export rates, propane inventories could drop below the 5-year minimum level by the end of 2016 Tighter supply will lead to increased price and market volatility, and unexpected changes in demand could lead to major market disruptions Exports and petrochemical demand will serve as the incremental market.

18 Cents/Gallon Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018 Jan-2019 Jan-2020 Jan-2021 Jan-2022 Jan-2023 Jan-2024 Jan USD/BBL Impacts on Propane Markets Propane prices will equilibrate with international markets Short term increase in propane prices U.S. propane prices will be set by International price minus the incremental transportation costs to market Mont Belvieu Propane Price U.S. prices will fall relative to oil as exports must go further to find markets Propane marketers may need to bid higher prices to keep inventories at home Base Low Historical

19 Consumer Propane Demand Outlook 18

20 2015 Propane Market Outlook Demand Overview Residential housing markets are improving Improving market share in new construction Growth in new construction markets More competitive market Continuing conversion of fuel oil customers Overall, the number of propane customers is expected to increase. However, total residential sales are expected to continue a slow decline Long term efficiency trends will continue to reduce use per customer And residential market growth is high regional Commercial markets are expected to remain relatively stable Improvements in efficiency offset increased utilization of propane resulting from Economic growth Fuel oil conversions Residential and commercial markets will continue to face significant threats from electricity and natural gas Continuing loss of market share to electricity in warmer regions of the country Continuing improvements in electricity technologies Threat from natural gas conversions 19

21 U.S. Average Annual Residential Prices 20

22 Change in Propane Market Share between

23 Fuel with Largest Market Share Gain where Propane Declined between 2010 &

24 Fuel with Largest Market Share Loss where Propane Increased between 2010 &

25 24 Propane Space Heating Market Share in New Residential Construction Increased in 2014 National Average 7.1% in % in % in % in 2014 High market share propane markets (Lot size above ½ acre) 67% of new propane residential construction 18.0% in % in % in % in 2014

26 2014 Propane-Heated Housing Starts and Market Share 25

27 26 Residential New Construction Market Trends by Region Region 2014 Market Share New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific U.S. 48.2% 9.5% 15.8% 4.0% 4.8% 1.5% 1.4% 2.7% 3.9% 6.0% 2013 Market Share 49.9% 10.6% 12.9% 4.9% 5.2% 0.7% 1.2% 1.2% 2.9% 5.8% Net Change from % -1.2% 2.9% -0.9% -0.4% 0.8% 0.2% 1.6% 1.0% 0.2% In 2014 propane new construction market share increased in 5 regions, and decreased in 4 regions Declines occurred in the regions most impacted by supply and price concerns (East Coast, West North Central) Increases occurred largely in regions where fuel oil and natural gas market share declined

28 Significant Growth in Propane Heated Households in New Construction 27 Residential new construction market is expected grow aggressively Recent decline in propane prices relative to electricity and natural gas is expected to lead to growth in propane market share The propane new construction market is expected to increase substantially through 2017

29 Fuel Oil Conversions Estimated Fuel Oil Space Heating Conversions to Propane Propane captures 10-15% of the fuel oil conversions Most fuel oil conversion are going to natural gas Conversions will vary from year-to-year: Comparative fuel prices Economic conditions Perception of the propane industry The conversion market declines slowly as overall number of fuel oil households available to convert declines 35,000 30,000 25,000 20,000 15,000 10,000 5,000-28

30 29 Outlook for New Propane Households For the past several years, fuel oil conversions have accounted for a major share of new propane households Propane new construction is expected to continue to grow while fuel oil conversions remain stable or decline Conversions away from propane decline due to lower prices

31 30 Propane Space Heating Households Propane site-built space heated households increased from million in million in million in 2014 And are projected to increase to 5.90 million by 2025 Growth primarily in New England and Mid-Atlantic regions Manufactured housing is expected to continue to decline for the foreseeable future 976,000 in ,000 in 2014 Projected to decrease to 706,000 by 2025

32 Residential Construction Activity is not Distributed Evenly Across the Country 31 Counties with Higher than Average Construction Activity

33 Counties in Propane Country with Higher than Average Construction Activity 32

34 Change Per Year in Propane Site-Built Space Heated Households U.S. Minnesota 80,000 6,000 60,000 5,000 40,000 4,000 20,000 3,000-2,000 (20,000) 1,000 (40,000) - (60,000) (1,000) (80,000) (2,000) (100,000) (3,000) (120,000) (4,000) Tennessee Pennsylvania - 20,000 (1,000) (2,000) 18,000 16,000 14,000 (3,000) (4,000) 12,000 10,000 8,000 (5,000) (6,000) 6,000 4,000 2,000 (7,000)

35 Propane Use Efficiency Trends by Region Propane use per customer is expected to continue to decline for the foreseeable future: Appliance efficiency standards Building efficiency standards and building codes 13 percent decline in space heating use per household between 2014 and 2025 Across all regions 34

36 Propane Market Outlook Engine Fuel Demand Overview Most engine fuel markets should see accelerating growth as the new products become more widely accepted by the market On-road vehicles Mowers Forklift markets will continue to face challenges from electric lift trucks and changes in commercial markets There is an opportunity for a new generation of forklifts to grow demand Lower propane prices improve competitive position Agricultural markets should see solid growth supported by agricultural engine applications Irrigation engines Space heating Grain drying load likely to decline due to continuing improvements in efficiency as well as low commodity prices

37 $/MMbtu $/Gal of Propane Equivalent Alternative Vehicle Fuel Prices at Private Refueling Stations (Reported by DOE) DOE prices likely overstate actual private fleet fuel prices Propane vehicle economics driven by: Fuel Prices Capital Costs Alt Fuel Tax Credit, Environmental compliance costs (diesel) Non-economic factors Gasoline Diesel Natural Gas Propane Effective marketing and consumer education more important than ever in this market 36

38 Units Propane Vehicle Sales In 2015, roughly 12,800 on-road propane vehicles were sold ICF forecasts new propane vehicle sales to continue rising year over year to 28,000 by 2020 and 50,000 by percent of new propane vehicle sales will be Medium Duty Vehicles Light duty vehicles primarily conversions Propane marketers own about 55,000 vehicles that could be converted to propane 60,000 50,000 40,000 30,000 20,000 10,000 0 FORECAST Total Propane On-Raod Vehicle Sales 37

39 Propane Engine Fuel Consumption In 2014, 660 million gallons of propane was consumed by internal combustion engines Primarily in the forklift market Propane consumption from this sector is expected to rise steadily to over 1 billion gallons by 2020, and 1.6 billion gallons by 2025 Converting all propane industry vehicles would add 200 million gallons 38

40 Consumer Propane Demand 39

41 40 Critical Messages for the Propane Industry (One More Time) 1) General market conditions plus lower propane prices create opportunity for a rebound in traditional propane markets Targeted consumer education and marketing is critical 2) The largest growth opportunities are in internal combustion engines However, lower gasoline and diesel prices mean the propane industry will have to work harder to develop these markets. 3) The propane supply balance is shifting again From an over supplied market with prices below sustainable levels, To potentially tight supplies and volatile prices This Winter

42 Much of the information in this presentation is available in the PERC report 2016 Propane Market Outlook Available on the PERC Website at: 41

43 42 THANK YOU! Michael Sloan ICF International 9300 Lee Hwy Fairfax, VA (o) (m)

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