The Propane Market OutlookThe Propane Market OutlookAlphabet Soup:Alphabet Soup: Energy and Economic RecoveryEnergy and Economic Recovery

Bruce B. Henning – bhenning@icfi.comMichael D. Sloan – msloan@icfi.com

ICF International

August 11, 2009

2

2009 Propane Market Outlook• Key trends and assumptions in the recently published report

Energy Market Behavior• The environment in which propane competes

Uncertainty, Risk, and Opportunity• The economy and recovery• Commodity market regulation: objectives of legislative proposals• Electricity pricing: Climate change legislation is the key

• But the impact is years away!

• Oil and natural gas pricing: Coupled or going there separate ways

Propane Market Assessment Tools

Questions are encouraged

Overview

3

4

U.S. Odorized Propane Demand

-

2,000

4,000

6,000

8,000

10,000

12,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Mill

ion

Gal

lon

s

Residential CommercialResellers Industrial Agriculture Internal Combustion

Near-Term Odorized Propane Consumption Forecast

5

The Housing Market Slide

U.S. National Housing Units Authorized

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008

Th

ou

san

ds

of

Un

its

6

But, New Housing Starts will Rebound

Quarterly Housing Starts and Forecasts

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

An

nu

aliz

ed

Ho

us

ing

Sta

rts

(M

illio

ns

)

Federal Reserve

Mortgage Bankers Assoc.

Fannie Mae

Freddie Mac

National Assoc. of Realtors

7

NAHB Forecast of New Single-Family Home Sales

Source: NAHB Spring Board Meeting

Thousands of Units, SAAR

2009: 379,000; 39% below 20082010: 517,000; 36% above 2009

2009: 379,000; 39% below 20082010: 517,000; 36% above 2009

8

-

20,000

40,000

60,000

80,000

100,000

120,000

2000 2001 2002 2003 2004 2005 2006 2007

Pro

pane

Sin

gle-

Uni

t H

ousi

ng S

tart

s

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Pro

pane

Mar

ket

Sha

re

Propane Single-Unit Housing Starts

Propane Market Share

Propane Home Heating Market Share of New Construction Starts

Source: Survey of Construction

9

Site-Built Households Using Propane by End-Use

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

All End Uses SpaceHeating

Water Heating Cooking Drying

Mill

ion

Hou

seho

lds

1997 1999 2001 2003 2005 2007

Source: American Housing Survey

10

Propane Market Share of New Home Construction by Household Sales Price

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Least Expensive20% of Homes

20-40% 40-60% 60-80% Most Expensive20% of Homes

No Sales Price(Built for Owner)

Mar

ket

Sha

re

2000 2001 2002 2003 2004 2005 2006 2007

Source: Survey of Construction

11

Impact of Prices and Efficiency Trends on Propane Use-per-Customer

Weather Normalized Propane Primary Space Heating Consumption per Household

0

100

200

300

400

500

600

700

800

900

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Gal

lon

s p

er H

ou

seh

old

Site-Built Housing Base Case

Manufactured Housing Base Case

Site-Built Housing No Price or Efficiency Impact

Manufactured Housing No Price or Efficiency Impact

12

Residential Propane Demand Forecast by End-Use

0

1,000

2,000

3,000

4,000

5,000

6,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Mill

ion

Ga

llon

s

Primary Space Heating Supplementary Space HeatingWater Heating Cooking/Other ApplicationsManufactured Housing Seasonal Housing

13

Commercial Odorized Propane Demand by Region

0

500

1,000

1,500

2,000

2,500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Pro

pane

Dem

and

(Mill

ion

Gal

lons

)

New England Middle Atlantic East North CentralWest North Central South Atlantic East South CentralWest South Central Mountain Pacific

14

Propane Demand Forecast for the Internal Combustion Sector

0

100

200

300

400

500

600

700

800

900

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Mill

ion

Ga

llons

Forklift On-Road Vehicles Non-Road Vehicles

15

Propane On-Road Vehicle Sales

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Nu

mb

er

of V

eh

icle

s b

y T

ype

HDV's (Bluebird Buses and others)LDV's (Roush F150 and others)Secondary Market Conversions

16

Mt. Belvieu Historical and Projected Spot Price Scenarios

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Dol

lars

/ G

allo

n

Projected PricesHistorical Prices NYMEX

August 2008 Scenario

June 2009 Scenario

April 2009 Scenario

17

Volatility in Recent Energy PricesHistorical Spot Prices &

NYMEX Futures Strip August 2009

$-

$5

$10

$15

$20

$25

$30

Jan-00Jan-01

Jan-02Jan-03

Jan-04Jan-05

Jan-06Jan-07

Jan-08Jan-09

Jan-10

$/M

MB

tu

NY Harbor Heating Oil Spot

WTI Crude

Mt. Belvieu Propane

Henry Hub Natural Gas

18

Broader Commodity Markets are Down

CRB Spot Index

0

100

200

300

400

500

600

1/3

1/1

99

5

7/3

1/1

99

5

1/3

1/1

99

6

7/3

1/1

99

6

1/3

1/1

99

7

7/3

1/1

99

7

1/3

1/1

99

8

7/3

1/1

99

8

1/3

1/1

99

9

7/3

1/1

99

9

1/3

1/2

00

0

7/3

1/2

00

0

1/3

1/2

00

1

7/3

1/2

00

1

1/3

1/2

00

2

7/3

1/2

00

2

1/3

1/2

00

3

7/3

1/2

00

3

1/3

1/2

00

4

7/3

1/2

00

4

1/3

1/2

00

5

7/3

1/2

00

5

1/3

1/2

00

6

7/3

1/2

00

6

1/3

1/2

00

7

7/3

1/2

00

7

1/3

1/2

00

8

7/3

1/2

00

8

1/3

1/2

00

9

7/3

1/2

00

9

Month-Day-Year

Ind

ex

Va

lue

Source: Commodity Research Bureau

19

Short-Term Residential Energy Price Outlook Monthly Residential Energy Prices

Source: EIA - July 2009

0

5

10

15

20

25

30

35

40

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Oct-09

Jan-

10

Apr-1

0

Jul-1

0

Oct-10

$/M

MB

tu

PropaneNo. 2 DistillateElectricityNatural Gas Forecast

20

U.S. Gross Domestic Product (GDP) and Industrial Production

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2003 2004 2005 2006 2007 2008 2009 2010

Ann

ualiz

ed G

row

th R

ate

GDP Industrial Production

Forecast Annual GDP Growth Rate is constant at 2.8%

Forecast Annual GDP Growth Rate is constant at 2.8%

U.S. GDP growth drives electricity demand growth and (to a lesser extent) residential and commercial energy demand growth.

U.S. industrial production growth drives industrial electricity and energy demand growth.

Actual GDP is applied through Q4 2008 and actual industrial production is applied through Q3 2008

From Q3 2008 through Q1 2010 a recession is assumed.

• Average GDP growth for the period is -2.0%.

• The recession bottoms out at -6.3% annualized GDP growth in Q4 2008.

After Q1 2010, the GDP growth rate bounces to 4.0% for Q2 before being is held constant at 2.8% thereafter.

Forecast Annual Industrial Production Growth Rate is constant at 2.3%

Forecast Annual Industrial Production Growth Rate is constant at 2.3%

HistoricalPeriod

Assumed 2008-09 Recession

Assumed 2008-09 Recession

21

Is that Forecast of Recovery Correct?Alphabet Soup

The “U”, sometimes called the “bathtub”

The “V”

The “L”

The “W”

The “inverted square-root sign”(I’m not making that up!)

22

What will Determine the Shape of Recovery

Stimulus and Bailouts• “One shot wonder” or “priming the pump” • Moral hazard and government control

Capital and Debt Markets• Costs and availability of debt and capital• Re-pricing of risk

Another Shoe to Drop?• Commercial mortgage default and regional banks

The Deficit and the Perception of Future Deficits• Will government spending and tax revenue be brought into better balance by

2012 and beyond?• Will the debt have to be “monetized?” The risk of long-term inflation.

Consumer Spending vs. Consumer Savings Global Economic Performance

• The U.S. is still the biggest economy in the world and the world’s favorite market • Will our trading partners build their own consumption?

23

Energy Policy and Climate Change Regulation – The 800 Pound Gorilla is Coming and the Train Has Left the Station

The economic downturn threatened to stall further Federal action, however, that moment has passed.

The Obama Administration is committed to national climate regulation.• GHG Reporting Rule• Support for national cap and trade legislation that passed the House

2010 federal budget proposal assumes the existence of a GHG cap and trade program in 2012.

• 14 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050• All allowances auctioned with approximately 80% of proceeds going directly to

taxpayers and the remainder to support clean energy.

If the Federal government does not act, the states certainly will.

24

GHG Regulatory Overview for Propane Propane is not regulated as a GHG. Regulated emissions from the propane industry would be CO2

emissions or fugitive methane emissions. Few if any regulated emissions likely for propane dealers and

distributors. Gas processors are affected for CO2 and methane emissions in

multiple programs. Propane throughput is regulated at the point of fractionation under

the House Waxman-Markey bill, but this could change. States will receive some allowances earmarked for efficiency

programs for oil and propane customers (parallel to electricity and natural gas customers).

25

GHG Regulatory Overview for Propane Under the new Waxman-Markey proposal, propane throughput will

be regulated at:• Processing plants• Refineries• Import points

Regulated emissions from the propane industry would be CO2 emissions.

• Propane is not likely to be regulated as a GHG.

Few if any regulated emissions likely for propane dealers and distributors.

Climate change and energy policy also likely to result in direct regulation influencing propane markets.

• New residential and commercial energy efficiency standards and transportation fuel efficiency standards are likely.

• Federal and state tax incentives to “Do the Right Thing”.

26

State Initiatives on GHG Regulation

States with stripes have state-specific GHG reduction goals or mandates.

Regional Greenhouse Gas Initiative (RGGI)

Signed: 2005 Launch: Jan 2009

Western Climate Initiative (WCI)Signed: Feb 2007

Scheduled launch: 2012

Midwest Greenhouse Gas Reduction Accord (MGA)

Signed: Nov 2007Scheduled launch: 2012

27

Market Implications for Propane

Competitive Price Impacts• Propane price will reflect at least the cost of upstream emission allowances

• likely around 20 – 50 cents/gallon starting in 2012.

• Electricity and petroleum prices will be similarly affected starting in 2012.• Gasoline price impacts: 30 – 75 cents/gallon• Diesel price impacts: 35 – 90 cents/gallon• Coal based electricity prices: 2 – 6 cents/Kwh

• LDC natural gas prices will be affected in 2016.

Competitive Market Impacts• The electric industry will fight back.

• “Free Allowances”???• Renewable power, nuclear power.• Improvements in electricity technology.• Increased incentives for high efficiency equipment, including geothermal heat pumps,

high efficiency all electric homes.

• Opportunities for propane engine applications.• Increased cost of diesel and gasoline fuels.• Increased costs of environmental compliant diesel engine technologies.

28

Relationship Between Crude Oil Prices, Distillate Prices and Propane Prices

In the short-term, price advantage of propane has declined as distillate demand and distillate prices have dropped faster than propane.

• Diesel and other distillate prices have returned to more historical levels with respect to propane.

• Crude oil and distillate stocks currently well above average due to demand destruction and economic downturn.

Long-term structural relationships likely to result in permanent shift upward in distillate prices relative to propane.

• Environmental regulations on diesel and marine fuels.• Global production slate shifting towards heavier, sour crude oil.• Growth in demand for transportation fuels.

29

End-Use Distillate Fuel Prices Have Dropped Faster than Propane Prices

Residential Propane and Heating Fuel Sales PricesU.S. Average $/MMBtu

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-0

7

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Nov-0

8

Jan-

09

Mar

-09

May

-09

($/M

MB

tu)

Propane Price

No. 2 Distillate Price

30

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

$22.00

2000 2005 2010 2015 2020 2025

Fu

el P

ric

es

(2

00

8 D

olla

rs p

er

MM

Btu

)

Projected Annual Average Henry Hub Gas Price (Annual Average - 2008$/MMBtu)

The recession, combined with growth in shale gas production, results in low

prices in 2009.

The recession, combined with growth in shale gas production, results in low

prices in 2009.

After the 2008-09 recession, Henry Hub gas

prices will average between $7.00 and $9.00 per MMBtu - 1990 levels

will not return.

After the 2008-09 recession, Henry Hub gas

prices will average between $7.00 and $9.00 per MMBtu - 1990 levels

will not return.

Sources: Historical data from Platts Gas Daily and EIA

Natural Gas

Distillate

RACC

Residual Oil

The gas prices as shown exclude the cost of CO2 emission allowances. The gas prices as shown exclude the cost of CO2 emission allowances.

31

Key Challenges and Opportunities for Industry

Understanding and taking advantage of regional/local market segmentation

Maintaining current markets• Competition from conventional and geothermal heat pumps in the core

residential heating market• Propane use-per-customer decline• Manufactured housing sector decline

Maximizing opportunities in current energy price environment • Expected longer term price advantage relative to distillate fuel oil• Short-term price advantage relative to electricity (in certain areas and

markets)

32

Key Challenges and Opportunities for Industry (Continued)

Participating in energy, environmental policy, and regulatory process and maximizing green opportunities.

• Engaging policymakers and stakeholders to recognize propane as environmentally friendly fuel

• Taking advantage of state and local environmental regulations and energy policies

Positioning propane in emerging markets that value environment and energy efficiency

Propane is a reliable domestic source of energy that offers a number of advantages over many other fuels, including low emissions, ease of use, and a reputation for reliability and safety. As a result, propane needs to be recognized as a beneficial and environmentally friendly fuel when developing new energy

and environmental policies and regulations.

Propane is a reliable domestic source of energy that offers a number of advantages over many other fuels, including low emissions, ease of use, and a reputation for reliability and safety. As a result, propane needs to be recognized as a beneficial and environmentally friendly fuel when developing new energy

and environmental policies and regulations.

33

Most likely conversion

opportunities

Existing Propane Housing Market

(thousands)Total

U.S.Site-Built

Manu-

facturedNortheast Midwest South West

Homes Using Propane 9,720 8,050 1,670 2,109 2,558 3,912 1,142 Primary Space Heating 6,095 4,966 1,129 808 2,146 2,277 864 Cooking 5,041 3,848 1,193 1,503 1,120 1,840 578 Water Heating 4,133 3,678 455 841 1,265 1,236 792 Clothes Dryer 1,351 1,203 148 472 403 250 228

Homes With Propane But Without…Primary Space Heating 3,625 3,084 541 1,301 412 1,635 278 Cooking 4,679 4,202 477 606 1,438 2,072 564 Water Heating 5,587 4,372 1,215 1,268 1,293 2,676 350 Clothes Dryer 8,369 6,847 1,522 1,637 2,155 3,662 914

Average Propane Appliance Replacements Per Year

Primary Space Heating (20 year lifespan) 181 154 27 65 21 82 14

Cooking (10 year lifespan) 468 420 48 61 144 207 56

Water Heating (20 year lifespan) 466 364 101 106 108 223 29

Clothes Dryer (12 year lifespan) 697 571 127 136 180 305 76 Source: American Housing Survey 2007

By Housing Type By Region

Residential Conversion Opportunities

34

Other Opportunities in the Residential Propane Market

New propane technologies.• High efficiency tankless water heaters. • “Freewatt” propane heating/power systems, backup generation, and other

applications.

Outdoor living applications. “Off the main” propane communities.

35

Propane Conversion Potential in Commercial Buildings

Source: CBECS 2003

Data is subject to double-counting and therefore should be used with some caution.

Commercial Buildings Using Propane

Northeast Midwest South West Grand Total

Total Buildings 761,145 1,304,739 1,873,195 919,670 4,858,750

Buildings Using Propane 73,016 172,798 176,356 79,757 501,927 Percent of Buildings Using Propane 9.6% 13.2% 9.4% 8.7% 10.3%

Buildings Using Propane by End UsePrimary Space Heating 16,757 125,404 109,785 55,730 307,676

Percent of Buildings with Space Heat 2.4% 10.9% 7.1% 7.3% 7.4%

Water Heating 21,894 43,620 34,517 28,218 128,249 Percent of Buildings with Water Heating 3.5% 4.3% 2.7% 4.0% 3.5%

Cooking 35,214 25,162 27,423 19,704 107,504 Percent of Buildings with Cooking 22.4% 12.2% 9.0% 14.7% 13.4%

36

Opportunities in Internal Combustion Engine Markets

Short-Term Challenges:• Availability and initial cost of new

propane technologies.• Turmoil in automotive industry.• Economic outlook in the private

sector and funding cuts in the public sector.

• Decline in diesel fuel prices relative to gasoline and propane.

• Uncertainty over tax credits.

Long-Term Opportunities:• New technologies and new vehicles

are beginning to reach the market.• Distillate fuel oil prices are expected

to increase relative to propane and gasoline.

• Propane is a clean domestically produced fuel.

• “New” markets with major potential• Commercial mowers

• Buses and other on-road vehicles.

• Stationary engine applications– Irrigation– Back-up power– Engine driven heat pumps

37

PERC Propane Market Analysis Tools

38

The PERC Propane Forecasting Models

Propane Database and Forecasting Model v6.0

(PDFM)

State-level Projections through 2015

Residential Commercial

Reseller/Cylinder Industrial

Agricultural Internal Combustion

County Residential Propane Model v3.0

(CRPM)

County-level Projections through 2015

Residential Only

39

Primary Data Sources US Census Bureau

• 1990 and 2000 Census• American Community Survey • American Housing Survey• Survey of New Residential Construction

U.S. Department of Energy - Energy Information Administration (EIA)

• Residential Energy Consumption Survey (RECS)

• Commercial Building Energy consumption Survey (CBECS)

• Manufacturing Energy Consumption Survey (MECS)

• Vehicle Inventory and Use Survey (VIUS)

American Petroleum Institute• Sales of Natural Gas Liquids and Liquefied

Refinery Gases (annual survey).

National Oceanic and Atmospheric Administration (NOAA)

U.S. Department of Housing and Urban Development (HUD)

National Association of Home Builders (NAHB)

Gas Appliance Manufacturers Association (GAMA)

Propane Industry Sources Harris Interactive surveys for PERC

Much of the data (including the census data on propane households) is included in the models.

40

New: PERC Market Metrics Initiative Website

PERC Forecasting Models and the Propane Market Outlook reports are now available on the new PERC MMI Website:

www.propanecouncil.org/mmi/

The information on this website will be updated on a regular basis.

The forthcoming issue of PERC's quarterly newsletter, In Touch, will come with a copy of the executive summary of the 2009 Propane Market Outlook.

The Propane Market OutlookThe Propane Market OutlookAlphabet Soup:Alphabet Soup: Energy and Economic RecoveryEnergy and Economic Recovery

Bruce B. Henning – bhenning@icfi.comMichael D. Sloan – msloan@icfi.com

ICF International

August 11, 2009