The Propane Market Outlook Alphabet Soup: Energy and Economic Recovery

1. The Propane Market OutlookAlphabet Soup:Energy and Economic Recovery Bruce B. Henning – bhenning@icfi.com Michael D. Sloan – msloan@icfi.comICF International August 11, 2009

2. Questions are encouraged Overview • 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

4. U.S. Odorized Propane Demand

5. The Housing Market Slide

6. But, New Housing Starts will Rebound

7. NAHB Forecast of New Single-Family Home Sales 2009: 379,000; 39% below 2008 2010: 517,000; 36% above 2009 Thousands of Units, SAAR Source: NAHB Spring Board Meeting

8. Propane Home Heating Market Share of New Construction Starts Source: Survey of Construction

9. Source: American Housing Survey

10. Source: Survey of Construction

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

17. Volatility in Recent Energy Prices

18. Broader Commodity Markets are Down Source: Commodity Research Bureau

19. Short-Term Residential Energy Price Outlook

20. U.S. Gross Domestic Product (GDP) and Industrial Production Assumed 2008-09 Recession • 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. Historical Period Forecast Annual Industrial Production Growth Rate is constant at 2.3% Forecast Annual GDP Growth Rate is constant at 2.8%

21. Is that Forecast of Recovery Correct?Alphabet Soup The “L” The “V” The “W” The “U”, sometimes called the “bathtub” 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 Western Climate Initiative (WCI) Signed: Feb 2007 Scheduled launch: 2012 Regional Greenhouse Gas Initiative (RGGI) Signed: 2005 Launch: Jan 2009 States with stripes have state-specific GHG reduction goals or mandates. Midwest Greenhouse Gas Reduction Accord (MGA) Signed: Nov 2007 Scheduled 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

30. Projected Annual Average Henry Hub Gas Price (Annual Average - 2008$/MMBtu) After the 2008-09 recession, Henry Hub gas prices will average between $7.00 and $9.00 per MMBtu - 1990 levels will not return. The recession, combined with growth in shale gas production, results in low prices in 2009. Distillate RACC Residual Oil Natural Gas The gas prices as shown exclude the cost of CO2 emission allowances. Sources: Historical data from Platts Gas Daily and EIA

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.

33. Residential Conversion Opportunities Most likely conversion opportunities

34. 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. Other Opportunities in the Residential Propane Market

35. Propane Conversion Potential in Commercial Buildings Source: CBECS 2003 Data is subject to double-counting and therefore should be used with some caution.

36. Opportunities in Internal Combustion Engine Markets • 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 • 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.

37. PERC Propane Market Analysis Tools

38. Propane Database and Forecasting Model v6.0 (PDFM) County Residential Propane Model v3.0 (CRPM) The PERC Propane Forecasting Models • County-level Projections through 2015 Residential Only • State-level Projections through 2015 Residential Commercial Reseller/Cylinder Industrial Agricultural Internal Combustion

39. 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. Primary Data Sources

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.

41. The Propane Market OutlookAlphabet Soup:Energy and Economic Recovery Bruce B. Henning – bhenning@icfi.com Michael D. Sloan – msloan@icfi.comICF International August 11, 2009