Propane Market Outlook: Identifying Propane Market Opportunities and Assessing PERC Driven Demand Potential

1. Propane Market Outlook: Identifying Propane Market Opportunities and Assessing PERC Driven Demand Potential Presented by Mike Sloan and Bruce Henning msloan@icfi.com bhenning@icfi.com April 9, 2010

2. Objective: Provide market context for the Stage-Gate process and Upcoming Strategic Planning Discussion Identify market opportunities Market share Number of units/customers in marketplace Unit gallon sales Determine potential PERC impact in key market segments Assess share of market needed to reach identified potential. Translate changes in market share to new unit sales and customer captures. Calculate potential PERC impact on propane gallon sales. Impacts utilize PERC data and market information where available. Where not available, ICF utilized reasonable assumptions subject to PERC review. Inform the PERC Stage-Gate process and strategic planning efforts.

3. ICF Baseline Forecast of Propane Demand 2015

4. Near-Term Odorized Propane Consumption with PERC Driven Demand

5. The PERC Driven Demand Wedge is the sum of the Market Wedges from all of the PERC Programs in all of the Propane Market Segments. Gallons

6. What do these Market Wedges Represent? Market wedges represent assessment of the size of potential propane market opportunities. Market wedge segmentation based on market opportunities identified by PERC staff and Advisory Committees. Amount of each wedge ultimately achieved will depend on: The level of investment by PERC and the propane industry Market conditions Regulatory environment. Next steps in market wedge analysis Extension to other market segments, programs, and new technologies Risk-adjusted cost-benefit analysis The PERC strategic planning process will determine how resources are allocated to target each of these wedges.

7. Residential Sector Market Challenges and Opportunities

8. Baseline Residential Demand Source: ICF Forecast

9. Residential New Construction Market

10. Harvard Joint Center on Housing Forecast ICF Projection

12. Residential Sector Wedges Fill the House Replace Electric Water Heaters Reduce Losses Fuel Oil Conversions Gallons Increase New Home Share Baseline Residential Demand

13. Increase Share of New Homes Market Opportunity • Increase market share to position propane for rebound in housing market. • Propane in 6.5% of new households • Share increasing since 2002, despite market downturn. Program Target: • Additional 1.0% to 1.5% of new homes • 5,000 to 15,000 new homes per year. • 55 million gallons per year of incremental propane sales by 2015. Increase New Home Share Gallons Baseline Residential Demand

14. Displace Oil Equipment Market Opportunity • 8.4 million existing fuel oil households consume the equivalent of 7.5 billion gallons of propane per year. • Residential oil heating in decline due to environmental issues and market conditions. Program Target: • Increase capture rate by 2% to 3% per year. • 9,000 households per year. • 40 million gallons per year of incremental propane sales by 2015. Fuel Oil Conversions Gallons Baseline Residential Demand

15. Reduce Conversion Losses Market Opportunity • More than 75,000 propane heated homes switch to other fuels each year. • Electric/geothermal heat pumps. • Natural gas. • South hit hardest. • Decisions to convert often occur when homes are sold to a new owner. Program Target: • Reduce switching by 5% to 6% of total opportunities per year. • 7,500 households per year. • 20 million gallons per year of incremental propane sales by 2015. Reduce Losses Gallons Gallons Baseline Residential Demand

16. Replace Electric Water Heaters Market Opportunity • 4.4 million propane customers use electric water heaters. • Total potential: 500 million gallons per year. Program Target: • Capture additional 2% of electric water heater replacements • 7,400 water heaters per year. • 8 million gallons per year of incremental propane sales by 2015. Replace Electric Water Heaters Gallons Baseline Residential Demand

17. Fill The House Market Opportunity • 8 million existing propane customers could add a propane furnace, water heater, or cooktop/range • Total potential of 1.5 billion gallons Program Target: • Increase share of existing equipment replacements by 1.0% to 1.5% per year. • 14,000 new applications annually. • 10 million gallons per year of incremental propane sales by 2015. Fill The House Gallons Baseline Residential Demand

18. Potential PERC Driven DemandResidential Gallons

19. Commercial sector includes restaurants, schools, houses of worship, motels, hotels, retail stores, service businesses, malls, assembly and recreational halls, police and fire stations, warehouses, storage facilities, and hospitals. Commercial Sector Challenges and Opportunities

21. Commercial Sector Challenges and Opportunities • Second largest propane business segment. • 20% of existing odorized propane market. • 10% of the total commercial floor space is served by propane for one or more application. • Significant opportunities to increase propane applications in buildings currently using propane. • Commercial fuel oil demand: 3.6 billion gallons of propane equivalence. • Commercial fuel oil market is expected to decline steadily over time due to cost and environmental issues. • Large existing propane customer base (cooking & water heating) using fuel oil for heat. • Diverse market less reliant on space heating. • Wide variety of different customer types, resulting in smaller discrete markets that are harder to evaluate and target effectively. • Growth in propane demand from future commercial customers likely to be offset by: • Price induced conservation. • Fuel switching from propane to electricity (and other fuels) by existing customers.

22. Commercial Sector Opportunities New Commercial Programs Market Opportunities: • New construction • Fuel oil conversions • Additional propane applications in existing buildings Program Target: • Additional 1.0% to 1.5% of market opportunities. • 50 million gallons per year of incremental propane sales by 2015. Baseline Commercial Demand

23. Internal Combustion Engine Sector Challenges and Opportunities

24. Source: ICF Forecast

25. Propane Engine Fuel Challenges New technologies threaten propane in some markets. Electricity/hybrids in forklift market. Propane first cost issues remain significant. Propane engines face an economy of scale issue. In many markets, propane advantages are driven by government policy and legislation, which is uncertain. In diesel markets, propane must overcome positive perceptions of diesel engine reliability and power characteristics. Propane faces cultural and infrastructure issues in new markets. Changes in business operating practices needed to integrate propane equipment. Changes in marketing and service practices needed to sell propane equipment.

26. Market Trends Driving Propane Engine Fuel Opportunities Environmental and energy security concerns provide opportunities for propane on- and off-road equipment. Energy and tax legislation may provide significant competitive advantage to propane applications Current focus on “green” energy favors propane. Diesel fuel costs are expected to increase more rapidly than gasoline and propane prices. International supply/demand balance likely to drive diesel fuel prices up more than propane or gasoline prices. Diesel engine costs have increased dramatically due to new NOx emissions requirements. Up to $10,000 per vehicle for new heavy duty vehicles. From $4,000 to $6,000 per vehicle for new medium duty vehicles. $0.15 per gallon of diesel consumed for urea used in new NOx control systems.

27. Engine Fuel Sector Wedges Outdoor Equipment Commercial Mowers On-Road Vehicles Baseline Engine Fuel Demand

28. On-Road Vehicles Market Opportunity: • On-road fleet vehicle market. • PERC supported vehicles in or near market. Program Targets: • OEM programs • 1.0% – 1.5% of Ford F250/350s and Ford E-Series van market. • 3% of GM 6.0 liter market. • School bus programs: 7% of Class A and Class C markets. • 110 million gallons per year by 2015. On-Road Vehicles Baseline Engine Fuel Demand

29. Commercial Mowers Market Opportunity: • 150,000 - 200,000 commercial mowers, and 200,000 -250,000 consumer mowers sold annually • Significant propane opportunity due to environmental concerns and propane operating cost advantages • Propane units from major manufacturers are currently in the market Program Target: • 10% market share by 2015 • 24,500 units per year. • 160 million gallons per year by 2015. Commercial Mowers Baseline Engine Fuel Demand

30. Other Outdoor Lawn and Garden Equipment Market Opportunity: • Outdoor equipment manufacturers (trimmers, blowers, mowers, etc.) • Propane units are currently available in the market. • Propane units are cleaner and quieter than alternatives. Program Target: • 2 million units per year and 16 % of the market by 2015. • 2/3 consumer • 1/3 commercial • 80 million gallons per year of incremental propane sales by 2015. Outdoor Equipment Baseline Engine Fuel Demand

31. Potential PERC Driven DemandEngine Fuels Sector

32. Other PERC Programs to be Evaluated • Residential Markets • New technologies under development • Commercial Markets • New technologies under development • Combined heat and power • Commercial heat pumps • Other new technologies • Targeted application programs to be developed. • Engine Fuel Markets • California off-road propane/diesel injection • Forklift market support and development • New on-road engines and vehicle platforms • After-market conversions • Agricultural Markets • New technologies under development • Targeted application programs.

34. Final Thoughts The propane market wedges could add more than 500 million gallons per year of propane demand by 2015 if opportunities are fully realized. The propane market wedges represent: A look at propane markets identifying the most important opportunities where PERC and propane industry programs may have an impact. A framework for defining market/business opportunities. A first step (but nowhere near the last step) in the Stage-Gate process. The wedges have not yet been evaluated for risk or cost effectiveness. The wedges are not (yet) PERC targets or recommendations, but do provide an assessment of the size of the potential market opportunities.

35. Propane Market Outlook: Identifying Propane Market Opportunities and Assessing PERC Driven Demand Potential Presented by Mike Sloan and Bruce Henning msloan@icfi.com bhenning@icfi.com April 9, 2010