Overview of factors that are affecting the propane market, and a financial tools to help manage price risk

1. This material has been prepared for informational purposes only and is not an offer to buy or
sell or a solicitation of any offer to buy or sell any security or other financial instrument or to
participate in any trading strategy. Past performance is not necessarily a guide to future
performance. Please see additional important information and qualifications at the end of this
material.
Copyright 2014 Powerhouse
David Thompson, CMT Executive Vice President
202-333-5380 www.powerhouseTL.com
Buying Smart, Selling Smart
Despite Volatile Propane Prices
NPGA 2014 Southeastern Propane Expo
April 12-13, 2014

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Major Changes to Propane Market Fundamentals

3. Propane to WTI Crude Price Ratio
3

4. U.S. NGL Supply Sources
4

5. U.S. Propane Production
5

6. U.S. Propane Exports
6

7. Propane Share of Heating Demand by Key States
7

8. PADD 2 (Midwest) Propane Inventories Trended Lower
on Strong Crop Drying Demand and Extreme Cold
8

9. Winter 2013-14 Propane Supply Disruptions
9

10. Additions to U.S. Gas Processing Capacity
10
Source: Envantage

11. Increasing NGL Extraction Capability
11
Source: Envantage

12. Propane Supply
12

13. Propane Demand
13

14. Propane Days of Supply
14

15. Propane Prices: Potential Floor & Ceiling
15

16. Propane Export Margins Turn Positive
16

17. Continuous CME Mt. Belvieu Propane Futures, weekly
17
“But in the last two months, the steady price
decline has turned into a free-fall, as unusually
mild temperatures across much of the U.S.
have damped demand for gas to heat homes
and offices.”
Wall Street Journal 12/31/2011

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What Can You Do To Protect Margins
and Grow Your Business?

19. Why Hedge Price Risk?
19
1. To help stabilize profit margins
2. To help protect the value of inventory in storage
3. To help protect the value of fuel in transit
− Pipeline
− Railcar
− Barge
1. To help differentiate your business
− Fixed price offerings to your customers
− Capped price offerings to your customers
1. To help keep company fuel costs within a budget
2. To take advantage of market opportunities
− Carry markets (storage trade)
− Regional differences in price (basis trade)

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What is a Futures Contract?
1. Several Contract Months Available
2. Relatively Low Up-Front Cash Requirements
3. Daily Mark-to-Market
4. High Flexibility to Adapt to Changing Market Conditions
A. Regulated Exchange Assures An Opposite Buyer or Seller
B. Positions may be liquidated at your discretion
1. Retain Freedom to Purchase Physical Oil at Best Current Price
2. Regulated by the Commodity Futures Trading Commission
3. Financial Security of CFTC Regulated Hedge is Protected by NYMEX Balance Sheet
A standardized contract, traded on a regulated exchange, to buy
or sell a specified quality and quantity of a commodity at a
specified price and time in the future

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Futures Can Be Used To Fix a Purchase Price
and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)
Jun 15th
Lock in Local “diff”: CME Mt. Belvieu + $0.10 per gallon
Yore Co. Buys Futures @ $1.15 per gallon
Effective local price: $1.25 per gallon
Dec 15th
Polar Vortex Returns – Propane Prices Go to $2.00
December Futures Prices at $1.90 per Gallon
Local Prices Futures Position
Jun 15th
$1.25 $1.15
Dec 15th
$2.00 $1.90
Profit or Loss -$0.75 +$0.75
Effective Purchase Price $1.25 per Gallon
($2.00 Local Price - $0.75 Futures Profit)
Note: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.

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Futures Can Be Used To Fix a Purchase Price
and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)
Jun 15th
Lock in Local “diff”: CME Mt. Belvieu + $0.10 per gallon
Yore Co. Buys Futures @ $1.15 per gallon
Effective local price: $1.25 per gallon
Dec 15th
Propane Production Surges – Prices Go to $0.75
December Futures Prices at $0.65 per Gallon
Local Prices Futures Position
March 15th
$1.25 $1.15
Dec 15th
$0.75 $0.65
Profit or Loss +$0.50 -$0.50
Effective Purchase Price $1.25 per gallon
($0.75 Local Price + $0.50 Futures Loss)
Note: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.

23. Margin
23
• Collateral deposited for each contract as a show of good faith
• Minimum account balance requirements set by the exchange
• Margin requirement is eliminated when the trade is liquidated
• Subject to change at any time
• Your brokerage firm (Futures Commission Merchant) may set margin
requirements higher than those set by the exchange
• If you are unable to post margin, your positions may be liquidated by your
brokerage firm with little, or no, prior notice

24. Margin: Must Be Satisfied Daily (Mark-to-Market)
24
Example: Long 1 propane futures contract
Monday:
Buy 1 contract: $1.15 Settlement price: $1.15
Margin requirement: $3,000 Cash in account: $3,000
Tuesday:
Propane contract settlement price $1.14
Mark-to-market -$420
Account balance $2,580
Margin requirement $3,000
Margin call $420
Wednesday:
Action needed: wire $420 to meet call

25. Margin: A Zero Sum Game
25
Example: Short 1 futures contract
Monday:
Sell 1 Propane contract: $1.15 Settlement price: $1.15
Margin requirement: $3,000 Cash in account: $3,000
Tuesday:
Propane contract settlement price $1.14
Mark-to-market +$420
Account balance $3,420
Margin requirement $3,000
Wednesday:
No action needed, account in excess

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Options on Futures
Option BUYER (Policy Holder)
 Pays Premium
 Receives Right (To Reimbursement if Risk Occurs)
Option SELLER (Policy Writer):
 Receives Premium
 Takes on Obligation (To Reimburse Policy Holder if Risk Occurs – and
Policy Holder Files Claim)
Option Types
Calls gain value as prices rise (are “called up”)
Risk Avoided: Prices Rising
Puts gain value as prices fall (are “put down”)
Risk Avoided: Falling Prices

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Options Can Be Used To Cap a Purchase Price
and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)
Jun 15th
Local Price - $1.25 per gallon
December Futures at $1.15 per gallon
Yore Co. Buys Call Options: The $1.15 Call @ $0.15 per gallon
Dec 15th
Polar Vortex Returns – Propane Prices Go To $2.00
December Futures at $1.90 per gallon
$1.15 Call Option Worth $0.75 per gallon
Local Price Option Position (Premium)
Mar 15th
$1.25 ($0.15)
Dec 15th
$2.00 $0.75
Profit or Loss -$0.75 +$0.60
Effective Purchase Price $1.40* per gallon
($2.00 local price less $0.60 option profits)
*plus commission and feesNote: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.

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Options Can Be Used To Cap a Purchase Price
and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)
Jun 15th
Local Price - $1.25 per gallon
December Futures at $1.15 per gallon
Yore Co. Buys Call Options: The $1.15 Call @ $0.15 per gallon
Dec 15th
Propane Production Surges – Propane Prices Go To $0.75
December Futures at $0.65 per gallon
$1.15 Call Option Worth $0.00 per gallon
Local Price Option Position (Premium)
Mar 15th
$1.25 ($0.15)
Dec 15th
$0.75 $0.00
Profit or Loss +$0.50 ($0.15)
Effective Purchase Price $0.90* per gallon
($0.75 local price plus $0.15 option premium paid)
*plus commission and feesNote: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.

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Propane Cap Program: A Real World Example

30. Why Use a Cap Program?
• Customers will be economically harmed by higher prices but are concerned they
may “buy the top of the market”.
• If a customer locks in a price and price moves lower, the marketer often receives
undue blame.
• Establishing a cap price deal puts the marketer on the same side of the table as
the customer. If price mover higher, the customer will have some protection. If
price moves lower then the marketer can pass along some of the benefit to the
customer.
• In the following actual example, on June 19, 2013, the marketer established a
$0.8425/gal. cap on 84,000 gal./mo. on Conway propane paying $0.09 cts./gal.
premium. This cap deal covered the months of October ‘13 – February ‘14.
30

31. Establishing the Hedge Position
31

32. Hedge Snapshot: Expiration of October Options
32

33. Hedge Snapshot: Expiration of November Options
33

34. Hedge Snapshot: Expiration of December Options
34

35. Hedge Snapshot: Expiration of January Options
35

36. Summary of Hedge
• Customer paid $38,295.20 premium to protect 420,000 gallons of Conway-priced
propane over the course of winter 2013-14.
• The options paid off as detailed below
36
Month Strike Price Premium Paid Protected From Avg. Settlement Price
Oct '14 $0.8425 $0.09 $0.9325 $1.10044
Nov '14 $0.8425 $0.09 $0.9325 $1.19206
Dec '14 $0.8425 $0.09 $0.9325 $1.36795
Jan '15 $0.8425 $0.09 $0.9325 $2.14565
Feb '15 $0.8425 $0.09 $0.9325 $1.53714

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Remember:
There are two sides to every hedge position:
1. Cash Position (Long or Short)
2. Hedge Position (Long or Short)
The NET RESULT determines the outcome
of the hedge

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Disclaimer
© 2014 Powerhouse
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security/instrument or to participate in any trading strategy. This material is based on public information as of the specified date, and may be stale thereafter.
We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness
of this material. Powerhouse has no obligation to provide updated information on the securities/instruments mentioned herein.
Futures trading involves significant risk and is not suitable for everyone.
Transactions in securities futures, commodity and index futures, options on futures markets carry a high degree of risk. The amount of initial margin is small
relative to the value of the futures contract, meaning that transactions are heavily "leveraged". A relatively small market movement will have a proportionately
larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial
margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are
increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for
additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will
depend on an investor’s individual circumstances and objectives. This material does not provide individually tailored investment advice or offer tax, regulatory,
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