Vantage publishes research suggesting processing plant flooding and high power plant demand from low pricing

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1 Executive Summary: On August 28 August 30 th 2012 while NG pricing was $2.65/MMbtu, Vantage wrote Hurricane Isaac flooding would effect Natural Gas processing plants in Southern Louisiana due to our flood surge analysis. Flooding would slow the return of production from the Gulf and onshore production. Vantage Power production stack models also accurately predicted that low September 2012 baseload pricing for Natural Gas near $2.60/MMBtu would be enough to force natural gas power demand levels to be high enough to clear most storage constraints during the Fall of Five to Ten days later, public press agencies such as Reuters reported that Targa stated their Ycloskey and Venice processing facilities were flooded and daily pipeline nominations for Natural Gas came in with natural gas burn levels that verified Vantage forward power demand prognostications. Prices over the same period rose 17.6%. The aforementioned example illustrates how Vantage s Unparalleled Field work and patented supply measurement technology assists our clients to be ahead of market moves in strategy formulation rather than reactionary. How are we recommending to be structured for the next market events? Vantage publishes research suggesting processing plant flooding and high power plant demand from low pricing Public Media outlets report bullish flooding on processing plants and higher power demand realizations.

2 News reports by Reuters 5 days after Vantage Targa says Venice, Louisiana natgas plant flooded by storm Tue Sep 4, :07pm GMT Print Single Page [-] Text [+] NEW YORK, Sept 4 (Reuters) - Targa Resources Partners' natural gas processing plant in Venice, Louisiana, did not sustain any major equipment damage from Tropical Storm Isaac, but its Yscloskey plant remains offline and is being checked, the company said in an ed statement on Tuesday. Targa operates three natural gas processing plants in southern Louisiana that were down last week due to Tropical Storm Isaac. The Stingray plant is back up and running. The Venice and Yscloskey plants were affected by flooding from the storm, the company said last week. Initial assessments of the Yscloskey plant "will be ongoing as clean up progresses," the company said on Tuesday. Partial power at the Venice plant was restored and personnel are testing the electrical and instrumentation systems, and cleaning up the facility, the company said. "Gas production re-starts are being limited by downstream outages for crude and condensate in the area," Targa said in the statement of the Venice plant. Throughput volumes, as per 2011, were million cubic feet per day at the Venice plant, mmcf/d at the Yscloskey plant, and mmcf/d at the Stingray plant, the company said

3 The largest question the market needs to assess as it moves into September is ascertaining the steady state level of power demand on a weather adjusted basis vis-à-vis the lower market prices that were set for September baseload. Largely upon review of power demand from gas flowing to power plants over the holiday weekend is that the market has been able to maintain the higher weather adjusted demand that started to show up early last week as prices had bottomed to set baseload pricing for September last week. Last year average gas burn in the US dropped from BCF/day in August 2011 to BCF/day in September 2011 as normal temperatures declined. Accordingly the market saw gas burns drop a whopping 7.4 BCF/day month over month last year. As the market knows, August 2012 gas burns averaged slightly over 32 BCF/day due to expected compression as loads peaked earlier in the month and also rose significantly at month end when prices dropped. Transco Power Burn 2011 Transco Burn 2012 Tranco Burn /1/2012 1/15/2012 1/29/2012 2/12/2012 2/26/2012 3/11/2012 3/25/2012 4/8/2012 4/22/2012 5/6/2012 5/20/2012 6/3/2012 6/17/2012 7/1/2012 7/15/2012 7/29/2012 8/12/2012 8/26/2012 9/9/2012 9/23/ /7/ /21/ /4/ /18/ /2/ /16/ /30/2012 Texas Power Burn Sample

4 SONAT Power Burns 2011 Power Burn Sample SONAT 2012 Power Burn SONAT /1/2011 2/1/2011 3/1/2011 4/1/2011 5/1/2011 6/1/2011 7/1/2011 8/1/2011 9/1/ /1/ /1/ /1/2011 To the best of our knowledge and assessment, it appears the analogues we mentioned the past two days regarding flooding of processing facilities is getting some indirect forms of validation both from implied notes from pipelines as well as market pricing. On Wednesday the Army Corps of Engineers reported that Hurricane Isaac had pushed 13.6 feet of surge into Lake Borgne which is adjacent to the large Yscloskey Gas Processing facility just South East of New Orleans. By contrast Katrina had reported 15.5 feet. Our assumption in our assessment analogue was that indeed those facilities had taken on water which was likely confirmed by the fact that Tennessee Gas Pipeline reported yesterday at noon that Targa would perform a fly over assessment yesterday alluding to the fact that there is likely standing water in the area. TGP of course requires all gas upstream of the plant to be shut in due to gas quality concerns. SONAT has also posted that travel conditions have prevented them from making meter visits yesterday, but they hope to be able to start inspections Friday. Again these longer than normal delays in assessment are confirmed as slightly longer than normal and likely have something to do with the very high surge levels reported by the Army Corp on Wednesday.

5 13.6 surge The following Map illustrates the location of the 13.6 flood surge at Lake Borgne and its relative location next to the Yscloskey plant. As of 17:45 last night, TGP had reported that the Yscloskey plant was still down and told producers to hold off reactivating meter deliveries until such time as the plant is ready and operationally able to process gas. As we discussed yesterday there was a risk of storage coming out in the mid to upper 60 s with the extra normal large Salt Dome samples that were reported, but as we discussed prior to the report the market would likely be supported from any knee jerk reaction lower due to the ongoing processing issues fromt the storm as well as the fact that Natural Gas Power Plant nominations have come in impressively strong due to the attractive price set for September baseload and recent cash pricing. These factors which have allowed us to lower our end of season balances are encouraging for front end pricing in our view and also encouraging for winter pricing consistent with our recommendations. Entergy continues to make good headway with power restoration as crews have seen total reported outages drop by 17% the past 12 hours from near 900K to nearer 750K.

6 To date Hurricane Isaac has effected a little under 1 BCF/day of NG processing capacity along the Gulf Coast. The very slow moving nature of the storm has greatly exacerbated normal course of flooding for a storm of lower intensity. The circled area represents processing plants that will have delayed recovery times due to flooding. This morning plants such as Yscloskey along TGP remain offline.

7 As of Noon Thursday, 85% of Gulf Oil production was shut in and 72% of Gulf Gas production was shut in according to the Bureau of Safety and Environmental Enforcement from operator reports. Current Shut Ins reported by the Bureau of Safety and Environmental Enforcement are BCF/day of Gas and 1,310,801 BOPD. Shutin volumes will last until Friday or Saturday at a minimum according to our current model estimations and place BCF cumulative volumes offline after all is said a done. Obviously Cat 1 or 2 storms have minimal infrastructure impact. Inland flooding however will delay processing plant restoration times. Pipelines will generally require short term safety inspections before allowing operator nominations to be confirmed. I- Hub remains offline in the Gulf as far away as Mississippi Canyon Independence Hub Flows 1,000, , , , ,000 mmbtu 500, , , , , /1 1/8 1/15 1/22 1/29 2/5 2/12 2/19 2/26 3/4 3/11 3/18 3/25 4/1 4/8 4/15 4/22 4/29 5/6 5/13 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8 7/15 7/22 7/29 8/5 8/12 8/19 8/26 9/2 9/9 9/16 9/23 9/30 10/7 10/14 10/21 10/28 11/4 11/11 11/18 11/25 12/2 12/9 12/16 12/23 12/30 The Graph below shows government reported offshore shut-ins, not including onshore processing offline and an implied recovery rate. Current estimates would point towards a cumulative loss of ~30 BCY assuming a reasonable recovery rate from flooding recovery.

8 Offshore Shut-In Natural Gas Statistics(not including Onshore Processing) Isaac Cumulative Daily Isaac 40,000 5,000 4,500 Cumulative Production Offline 30,000 20,000 10,000 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Daily Production Offline