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2016 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

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2016 Propane Market Outlook: Driving Change in Consumer Propane Markets

April 2016By:

Michael SloanPrincipal

ICF International9300 Lee Highway

Fairfax Virginia22031

michael.sloan@icfi.com703-218-2758

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.

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1. General energy market conditions

2. Propane supply outlook

3. Opportunities and risks in domestic propane markets

Today’s Topics

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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

Critical Messages for the Propane Industry

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Propane & Crude Prices

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Mont Belvieu Propane WTI Crude Oil Propane/WTI Ratio

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Propane, Gasoline, & Diesel Spot Prices

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$/M

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Mont Belvieu Propane NY Harbor Gasoline

NY Harbor ULS Diesel

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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.

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ICF Crude Oil Price Outlook

• ICF’s expects a slow rebound in WTI oil prices

– Reaching $75 per barrel by 2025.

• 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.

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WTI Crude Oil Price

Low Historical Futures Base

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Propane Supply Balance

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Propane inventories reached historically high levels last summer

However, withdrawals are also at record levels

And new demand and export capacity is on its way

How will propane markets balance in the future?

Propane Markets are Transitioning Back into a Period of Tight Supply

-8,000

-6,000

-4,000

-2,000

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6,000

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hd

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s/In

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U.S

. Pro

pan

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tori

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Propane Storage Inventories

Propane Withdraws/Injections

Propane Withdraws/Injections

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Propane Supply Outlook

Source: ICF

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Historical and Projected Propane Production

by Production Basin

• Propane production is expected to grow at 3% per year between 2015 and 2030

• Growth is dependent primarily on natural gas production

• Production may stabilize in the short term

• Oil prices will have relatively limited long term impacts

-

500

1,000

1,500

2,000

2,500

3,000

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Tho

usa

nd

Bar

rels

pe

r D

ay

North American Propane Production Outlook

Refinery Production Other Marcellus/Utica

Western Canada Eagle Ford Permian

Bakken Anadarko

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U.S. Petrochemical Propane Demand

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2,000

4,000

6,000

8,000

10,000

12,000

14,000

(Mill

ion

Gal

lon

s)

Company

Output Volume

(tons/yr)

Propane Consumption

(gal/yr) Location Start-up

Year

Existing Plants

PetroLogistics 640,000 459,900,000 Texas 2010

Dow Chemical 750,000 536,550,000 Texas Q4 2015

Plants Under Construction

Enterprise 750,000 536,550,000 Texas Q1 2017

Formosa

Plastics 680,388 475,230,000 Texas Q4 2017

Plants Under Consideration

Williams 500,000 352,590,000 Alberta 2018

Ascend 1,173,000 842,910,469 Texas 2019

Sunoco PA

Dow Chemical

Petrochemical demand expected to grow by about 90 Mbbl/day by 2018:– 2016: 26 Mbbl/d– 2017: 34 Mbbl/d – 2018: 31 Mbbl/d

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Growing Maritime Export Capacity

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LPG Available for Exports

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Potential LPG (Propanes/Butanes) Exports

Propane/Propylene Butane/Butylene Exports LPG Export Capacity

Total LPG Export Capacity

FORECAST

Propane and Butane available for export at projected levels of

consumer and petrochemical demand

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0

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n

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5-Year Range Min

Max Min

2015 2016

Propane Inventories Outlook

Projected 2016 Inventories if Export Capacity Utilization is Maintained at Current Levels

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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.

Transitioning from an Over Supplied Market to a Balanced/Tight Market

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Propane prices will equilibrate with international markets

– Short term increase in propane prices

U.S. propane prices will be set by International price minusthe incremental transportation costs to market.

– 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.

Impacts on Propane Markets

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Mont Belvieu Propane Price

Base Low Historical

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Consumer Propane Demand Outlook

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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

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U.S. Average Annual Residential Prices

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Change in Propane Market Share between

2010-2014

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Fuel with Largest Market Share Gain where

Propane Declined between 2010 & 2014

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Fuel with Largest Market Share Loss where

Propane Increased between 2010 & 2014

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Propane Space Heating Market Share in New

Residential Construction Increased in 2014

National Average

• 7.1% in 2007

• 5.2% in 2012

• 5.8% in 2013

• 6.0% in 2014

High market share

propane markets (Lot

size above ½ acre)

• 67% of new propane residential construction

• 18.0% in 2007

• 14.0% in 2012

• 15.3% in 2013

• 15.3% in 2014

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2014 Propane-Heated Housing Starts and

Market Share

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Residential New Construction Market Trends by Region

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

RegionNew

England

Middle

Atlantic

East North

Central

West

North

Central

South

Atlantic

East

South

Central

West

South

Central

Mountain Pacific U.S.

2014 MarketShare

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 2013 -1.7% -1.2% 2.9% -0.9% -0.4% 0.8% 0.2% 1.6% 1.0% 0.2%

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Significant Growth in Propane Heated

Households in New Construction

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

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Estimated Fuel Oil Space Heating Conversions to

Propane

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5,000

10,000

15,000

20,000

25,000

30,000

35,000

Fue

l Oil

Co

nve

rsio

ns

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

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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

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Propane Space Heating Households

Propane site-built space heated

households increased from

2012-2014

• 5.54 million in 2012

• 5.56 million in 2013

• 5.57 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 2012

• 958,000 in 2014

• Projected to decrease to 706,000 by 2025

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Residential Construction Activity is not

Distributed Evenly Across the Country

Counties with Higher than Average Construction Activity

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Counties in Propane Country with Higher than

Average Construction Activity

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Change Per Year in Propane Site-Built Space Heated

Households

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Pennsylvania

(4,000)

(3,000)

(2,000)

(1,000)

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4,000

5,000

6,000

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Minnesota

(7,000)

(6,000)

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

-

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Tennessee

(120,000)

(100,000)

(80,000)

(60,000)

(40,000)

(20,000)

-

20,000

40,000

60,000

80,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

U.S.

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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

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2015 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

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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

Effective marketing and consumer education more important than ever in this market

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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 2025

– 60 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

0

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Total Propane On-Raod Vehicle Sales

FORECAST

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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

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Consumer Propane Demand

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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

Critical Messages for the Propane Industry (One More Time)

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Much of the information in this presentation is available in the PERC report “2016 Propane Market Outlook”

Available on the PERC Website at:

http://www.propanemarc.com/ProductDetails.asp?ProductCode=9507-CS-15

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Michael Sloan

ICF International 9300 Lee Hwy

Fairfax, VA 22031

michael.sloan@icfi.com

703-218-2758 (o)

703-403-7569 (m)

THANK YOU!