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Old 05-22-2009, 06:42 PM
watson watson is offline
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Default Regency energy partners lp

The following discussion analyzes our financial condition and results of operations. You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes included elsewhere in this document.
OVERVIEW. We are a growth-oriented publicly-traded Delaware limited partnership engaged in the gathering, processing, contract compression, marketing, and transportation of natural gas and NGLs. We provide these services through systems located in Louisiana, Texas, Arkansas, and the mid-continent region of the United States, which includes Kansas and Oklahoma.

RECENT DEVELOPMENTS.

HPC was formed to finance the construction and development of the Partnership's previously announced expansion of its existing natural gas pipeline in north Louisiana and to operate the Regency Intrastate Gas System.

Drilling and Pricing Pressure Trends.

General. Other than in north Louisiana, south Texas and Arkansas where prolific natural gas shale reservoirs are believed to exist, we continue to see a decline in drilling activity in our operating regions. As long as oil and gas prices remain at current levels, we believe that drilling activity will continue to remain low. Currently, we believe that drilling levels are not sufficient to meet ongoing demand and that higher prices will be needed for drilling levels to rise to recent historical levels. Management cannot predict the timing of higher natural gas prices, but if prices remain at current levels for an extended period of time, our business operations could be adversely impacted.

Contract Compression Segment. As a result of depressed natural gas prices, decreased drilling activity, and overall deteriorating economic conditions, our natural gas contract compression segment is experiencing a challenging environment in re-applying horsepower that comes up for contract renewal. Though overall applied horsepower increased slightly for the three month period ending March 31, 2009, compared to levels experienced during 2008, we anticipate continued challenges in redeploying horsepower that comes up for renewal as well as new horsepower sets during the near term.

OUR OPERATIONS. We manage our business and analyze and report our results of operations through three business segments.

HOW WE EVALUATE OUR OPERATIONS. Our management uses a variety of financial and operational measurements to analyze our performance. We view these key performance indicators as important tools for evaluating the success of our operations and review these key performance indicators on a monthly basis for consistency and trends. For our gathering and processing and transportation segments, the key performance indicators include volumes, segment margin, and operating and maintenance expenses. For our contract compression segment, the key performance indicators include revenue generating horsepower, average horsepower per revenue generating compression unit, segment margin, and operation and maintenance expenses. Management also reviews EBITDA for each reportable segment and in total to analyze performance.

Volumes. We must continually obtain new supplies of natural gas to maintain or increase throughput volumes on our gathering and processing systems. Our ability to maintain existing supplies of natural gas and obtain new supplies is affected by (a) the level of workovers or recompletions of existing connected wells and successful drilling activity in areas currently dedicated to our pipelines, (b) our ability to compete for volumes from successful new wells in other areas and

To increase throughput volumes on our gathering systems and intrastate pipeline, we must contract with shippers, including producers and marketers, for supplies of natural gas. We routinely monitor producer and marketing activities in the areas served by our transportation system in search of new supply opportunities.

Revenue Generating Horsepower. Revenue generating horsepower growth is the primary driver for revenue growth in the contract compression segment, and it is also the base measure for evaluating our operational efficiency. Revenue generating horsepower is our total available horsepower less horsepower under contract that is not generating revenue and idle horsepower.

Average Horsepower per Revenue Generating Compression Unit. We calculate average horsepower per revenue generating compression unit as our revenue generating horsepower divided by the number of revenue generating compression units.

Segment Margin. We calculate our gathering and processing segment margin as our revenue generated from our gathering and processing operations minus the cost of natural gas and NGLs purchased and other cost of sales, including third-party transportation and processing fees. Revenue includes revenue from the sale of natural gas and NGLs resulting from these activities and fixed fees associated with the gathering and processing of natural gas. We also generally purchase pipeline-quality natural gas at a pipeline inlet price adjusted to reflect our transportation fee and we sell that gas at the pipeline outlet.

Prior to our contribution of our Regency Intrastate Gas System to HPC, we calculated our transportation segment margin as revenue generated by fee income as well as, in those instances in which we purchase and sell gas for our account, gas sales revenue minus the cost of natural gas that we purchase and transport. Revenue primarily includes fees for the transportation of pipeline-quality natural gas and the margin generated by sales of natural gas transported for our account. Most of our segment margin is fee-based with little or no commodity price risk.

After our contribution of RIGS to HPC, we will not record segment margin for the transportation segment because the income attributable to HPC will be recorded as income from unconsolidated subsidiary. Because of the materiality of HPC to the Partnership, we are providing a discussion of HPC's results of operations and cash distributions.

We calculate our contract compression segment margin as our revenues generated from our contract compression operations minus the direct costs, primarily compressor unit repairs, associated with those revenues.

Total Segment Margin. Segment margin from gathering and processing, transportation, contract compression and inter-segment eliminations comprise total segment margin. We use total segment margin as a measure of performance. The reconciliation of the non-GAAP financial measure, total segment margin, to its most directly comparable GAAP measure, net income, is included in Note 9, Segment Information, within the condensed consolidated financial statements included in Item 1 of this report.

Operation and Maintenance Expenses. Operation and maintenance expenses are a separate measure that we use to evaluate operating performance of field operations. Direct labor, insurance, property taxes, repair and maintenance, utilities and contract services comprise the most significant portion of our operating and maintenance expenses. These expenses are largely independent of the volumes flowing through our systems but fluctuate depending on the activities performed during a specific period. We do not deduct operation and maintenance from total revenues in calculating segment margin because we separately evaluate commodity volume and price changes in segment margin.

EBITDA. We define EBITDA as net income plus interest expense, provision for income taxes and depreciation and amortization expense. EBITDA is used as a supplemental measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:

EBITDA should not be considered as an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP. EBITDA is the starting point in determining cash available for distribution, which is an important non-GAAP financial measure for a publicly traded master limited partnership. The following table reconciles the non-GAAP financial measure, EBITDA, to its most directly comparable GAAP measures, net income and net cash flows provided by operating activities.
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