Reviewing the 2013 - 2014 Propane Markets: A Look at the Numbers – and a Look at the Future February 3, 2014

Michael Sloan

Principal

ICF International

703-218-2758

Michael.Sloan@icfi.com

Propane Shortages (and Prices) Are Making the Evening News

Widespread talk of shortages

and high prices at the retail

level.

― Wholesale propane prices in

the Midwest have tripled in

the last two weeks. Conway reached nearly $5 per gallon

before falling back to $2.45 per gallon

― Residential prices reported by

DOE for the Midwest states

have doubled in the last four

weeks.

Significant concern at the

national and state government

level.

― Widespread propane industry

involvement at both the state

and federal level.

2

This Presentation is About the Numbers

1) Review of primary near term propane market drivers

2) A more focused look at the numbers and the markets this

winter.

―The supply balance in the midwest

―Markets and prices .

3) Looking forward: If this year has been bad (and it has),

what will the future look like.

3

IN 2013, U.S. PROPANE PRODUCTION INCREASED BY 1.4 BILLION GALLONS SO WHY ARE WE SHORT OF SUPPLY?

4

1) Crop Drying

2) Cold Weather

3) Cargo Exports

4) Capacity Constraints

NEAR TERM PROPANE MARKETS

2013 Grain Drying Demand Drew Down Secondary and Tertiary Propane Inventories, particularly in the Midwest

The 2013 Harvest Season:

― The 2013 corn harvest was about

13.9 billion bushels, a historical

record.

― Cooler than normal weather in July

and August delayed the harvest.

― In October, the corn belt received

above-average rainfall, with the

first week of October at 200 to 500

percent of normal precipitation.

ICF estimates total grain-drying

demand for propane at 300 –

350 million gallons

― 235 – 285 million gallons above 2012

levels.

5

Weather: 2013 Heating Degree Days Above Historical Norms, and Significantly Above Last Year

Through to January,

reported HDDs for the

current heating season

are:

― 3.1% above NOAA’s 30-

year Average

― 10.1% above the

2012/2013 Heating Season

― 15.0% above the

2011/2012 Heating Season

ICF estimates impact

of colder weather in 2013

relative to 2012 to be 640

million gallons.

6

Propane Exports Doubled After the 2013 Terminal Expansions Came On-line

7

Enterprise

Debottlenecking

+30 MBPD

Enterprise

Expansion

+115 MBPD

New Targa Refrigerated

Capacity

+120 MBPD

2.6 billion gallons in 2012

4.5 billion gallons in 2013

U.S. Propane Exports are Driving Domestic and International Propane Markets

Increasing U.S exports have

narrowed the spread between U.S.

and European propane prices.

8

And are starting to put pressure

on international propane prices

relative to crude oil.

In 2013, U.S. Propane Production Increased by 1.4 Billion Gallons. So Why are We Short of Supply?

1) Crop Drying

― +235 million

gallons

2) Colder Weather

― +640 million

gallons

3) Cargo Exports

― +1.9 billion

gallons

4) Stock Drawdown

― -1.4 billion

gallons

9

Changes in Propane Supply Balance Between 2012 and

2013 (Million Gallons)

2012

2013

(Estimated) Change

Total Propane Supplied 16,265 18,657 2,393

U.S. Natural Gas Plant Production 10,950 12,250 1,300

U.S. Refinery Production 4,227 4,290 63

U.S. Propane Imports 1,644 1,254 (390)

U.S. Propane Stock Drawdown (556) 864 1,420

Total Propane Consumption 13,644 14,180 535

U.S Consumer Demand (exc. Grain Drying) 7,755 8,396 641

U.S. Grain Drying Demand 65 300 235

U.S. Petrochemical Demand 5,824 5,484 (341)

Propane Exports 2,620 4,478 1,857

Note: Improvements in efficiency and other market changes offset

about 80 million gallons of consumer propane demand in 2013.

2013 estimated by ICF: All values based on preliminary data and ICF

forecasts, and will change as additional data becomes available.

In 2013, Propane Markets Balanced Due To Inventory Drawdowns

10

In 2013 inventories fell

by 864 million gallons

relative year end 2012

inventory levels.

― Propane inventory levels

are currently below 10-

year seasonal lows.

Propane inventories

started the heating

season at normal levels

Change in U.S. October 2013-January 2014 Propane Consumption Relative to Last Year

ICF estimates that between

October 2013 and January

2014, total U.S. propane

demand increased by about

450 million gallons relative to

the same period in the

previous year:

― Grain Drying: 235 million

gallons

― Cold Weather: 215 million

gallons

11

Change in Midwest (PADD 2) 2013/14 Heating Season Demand

12

ICF estimates that between

October 2013 and January

2014, propane demand in the

Midwest increased by 390

million gallons (9.5 million

barrels) relative to the same

period in the previous year:

― Grain Drying: 225 million

gallons

― Cold Weather: 165 million

gallons

Propane Supplies into the Midwest have been Constrained by Production and Transportation Outages and Limitations

Constrained Capacity on Cochin Pipeline

― Out of service for three weeks (November 27- December 17).

― Currently flowing below capacity due to high Canadian demand for

propane.

Removal from service of Todhunter storage capacity in Ohio

― Reduced PADD 2 propane storage by about 0.8 – 0.9 million barrels.

Reversal of TEPPCO line for ATEX Pipeline has created congested flows on

the remaining TEPPCO system.

― Scheduling propane shipments along with other products.

Several Midwest refinery and gas processing plants have been offline for

routine maintenance and other reasons.

Fractionation outages at Mont Belvieu have reduced propane production.

Storage deliverability has started to decline as storage volumes reach critical

levels.

13

What is the Shortfall in Midwest (PADD 2) Supply October - January

14

Million

Barrels

Million

Gallons

Increase in Midwest Demand + 9.3 + 390

Changes in PADD 2 Supply + 2.9 + 120

Decline in PADD 2 Production + 0.7 + 30

Cochin Pipeline Shutdown and

Capacity Constraints + 2.2 + 90

Increase in Stock Withdrawals + 3.3 + 140

Todhunter Storage - 0.9 - 40

Other Storage + 4.2 + 180

Increase in Midwest Requirements + 8.8 + 370

Total Midwest Requirements 50 2,100

Estimated by ICF: All values based on preliminary data and ICF forecasts, and will change as

additional data becomes available.

Remaining Inventories in PADD 2 and PADD 3

15

PADD 2 Inventories are below

5-year minimum, normally seen

in mid-March, near end of heating

season

At January withdrawal rates,

current PADD 2 inventory is 5

days away from 10-year

minimum level.

PADD 3 inventories are at 5-

year minimums for this time of

year.

17.4 million barrels below 3rd

Week January 2013 levels.

At January withdrawal rates,

current PADD 3 inventory is 28

days away from 10-year

minimum level.

Ten-Year Minimum, Mar.

wk 2 2008, 7,951 MBBL

8,789 MBBL

Ten-Year Minimum, Feb.

wk 4, 2004. 10,134 MBBL

14,924

MBBL

Market Price Response

16

Source: Bloomberg, 2014-01-30, ICF Analysis

Increasing U.S. Propane Exports

have reduced the price spread

between the U.S. and Europe

The price spread between Mont Belvieu

and Conway shifted as PADD 2 Inventories

started to fall below normal levels

LONGER TERM OUTLOOK FOR PROPANE SUPPLY

17

ICF Forecast of Propane Production from Natural Gas Liquids

18

Propane From North American NGLs

(million barrels):

333 in 2013

552 in 2020

628 in 2025

Marcellus & Utica propane output

grows from 16 million barrels in

2013 to 124 million barrels in

2025.

Bakken (North Dakota and

Montana) production over 57

million barrels in 2025.

Niobrara (Rockies) production

increases from zero in 2010 to

nearly 24 million barrels in 2025.

Planned Export Terminals Significantly Add to Current Export Capacity

Company

Export

Capacity Mil.

Gallons/m Location Start-up

Cost

($Million)

*Estimated

Targa 154 Galena Park, TX 2014, Q3 $240

Sunoco Logistics LP 51 Marcus Hook, PA 2014, Q3 $270

Occidental 96 Corpus Christi, TX 2015, Q1 $400

Sunoco Logistics LP 253 Nederland, TX 2015, Q1 $400*

Enterprise 63 Houston Ship Channel, TX 2015, Q1 $100*

Pembina Pipeline Co. 51 Prince Rupert, BC 2015, Q3 $320*

Boardwalk 128 Moss Lake, LA 2015, Q4 $700*

Enterprise 291 TX/LA 2015, Q4 $500*

Phillips66 185 Freeport, TX 2016, Q3 $1,000

Total Proposed 1,272 $3,930*

19

Existing and Proposed PDH and Export Capacity is Likely to Exceed Propane Supply

20

Economics of Export Capacity Greater Than Supply

The availability of additional propane export capacity does not guarantee that

the capacity will be used. Instead, it links the domestic propane market to the

international propane market.

― Domestic and international prices will equilibrate, (at least on a rough

basis).

― Propane will stay in domestic markets -- if the domestic price is high

enough.

Price volatility is likely to increase.

Propane in storage will not automatically be available to the domestic market.

― Will require price bidding, or contracted storage.

Seasonal stock builds for winter demand will no longer be automatic.

― Seasonality of international demand will impact domestic markets

Asian demand will have limited seasonality

Central and South American demand generally countercyclical.

21

Economics of Limiting Exports

Limiting propane exports will reduce domestic propane prices, and increase

International propane prices. Lower domestic prices:

― Benefit propane consumers

― Probably benefit the petrochemical industry

― But will hurt producers, traders, exporters….

Return to traditional seasonal supply/demand and inventory patterns.

Indirect impacts are complex, but likely would offset some of the benefits to

consumers.

― Lower domestic prices will reduce the overall value of natural gas and liquids

production, and will reduce natural gas and liquids production.

― Lower ethane production increases ethane prices, potentially shifting petrochemical

feedstock demand from ethane to propane.

― Lower domestic propane prices (and higher international propane prices) drive growth

in domestic PDH facilities and propylene exports.

Some economic theories suggest limiting exports would slow overall economic

growth.

22

Cochin Pipeline Reversal

Cochin is a major source of

propane supply into Midwest

markets.

Current Cochin pipeline

capacity at almost 1.2 billion

gallons per year

Recent annual propane

throughput to U.S. has

averaged around 300 million

gallons per year.

A major source of incremental

supply to meet unusual swings

in demand

Grain drying

Cold weather

Access to propane storage

capacity in Western Canada

Cochin will be taken out of

propane service in March/April

2014

23

Estimated Cochin Flows for U.S. Delivery

Source: EIA Petroleum Imports Database, propane receipts at Portal and Sherwood, ND

Cochin Pipeline Reversal

The annual loss of supply into the Midwest due to the Cochin reversal is

roughly equivalent to the amount of propane needed to meeting this year’s

grain drying demand.

However, while reversal of Cochin removes the readily defined path to market

for Alberta propane, it does not remove or reduce the supply of propane.

― Likely to reduce propane prices in Alberta, indirectly reducing supply.

Excess Alberta propane will find a market.

― Injection into the Alliance Pipeline for removal at the AuxSable plant near

Chicago.

― Rail and truck transport out of Alberta

― Waterborne export markets from British Columbia

Hence, more markets will be competing for the supply, and the supply

transportation infrastructure will be slower and less reliable.

― Less supply certainty

― More price volatility

24