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| RGNC > SEC Filings for RGNC > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
OVERVIEW. We are a growth-oriented publicly-traded master 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.
Partnership. On September 2, 2009, we issued 4,371,586 Series A Cumulative Convertible Preferred Units ("Convertible Redeemable Preferred Units") at a price of $18.30 per unit, less a four percent discount of $3,200,000, for net proceeds of $76,800,000.
On September 11, 2009, we announced the Logansport Expansion which will extend our Nexus gathering system. This project will add approximately 300 MMcf/d of gathering capacity and is anticipated to cost $46,500,000. The Logansport Expansion will be funded from the proceeds of the recently issued Convertible Redeemable Preferred Units and our revolving credit facility.
Joint Venture. On March 17, 2009, we announced the completion of the transactions included in the Contribution Agreement relating to a joint venture among Regency HIG, EFS Haynesville and the Alinda Investors. We contributed RIGS, which owned the Regency Intrastate Gas System, valued at $401,356,000, to HPC, in exchange for a 38 percent interest in HPC. EFS Haynesville and the Alinda Investors contributed $126,928,000 and $528,284,000 in cash, respectively, to HPC in return for a 12 percent and a 50 percent interest, respectively. On September 2, 2009, we purchased an additional five percent partner's interest in HPC from EFS Haynesville for $63,000,000, increasing our ownership percentage to 43 percent.
HPC was formed to finance the construction and development of the expansion of our existing natural gas pipeline in north Louisiana and to operate the Regency Intrastate Gas System.
On September 14, 2009, HPC announced plans to construct a $47,000,000 pipeline extension of the Haynesville Expansion Project. This extension, which is called the Red River Lateral, will add approximately 100,000 MMbtu/d of capacity to the Haynesville Expansion Project, bringing the total project capacity to approximately 1.2 Bcf/d. Substantially all of the incremental capacity on the Red River Lateral has been contracted to third parties.
Drilling and Pricing Pressure Trends.
General. We continue to see a lower level of drilling activity in certain operating regions compared to last year. As long as natural gas prices remain at current levels, we believe that drilling activity will continue to remain low and may decline further. We believe that current drilling levels are not sufficient to meet expected demand for natural gas over the next few years and that higher prices will be needed for drilling levels to rise to more normal 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 and decreased drilling activity, our natural gas contract compression segment is currently experiencing a challenging environment. Overall, revenue generating horsepower decreased by three percent for the three months ended September 30, 2009, compared to levels as of June 30, 2009, and we anticipate continued challenges in redeploying compression that comes up for renewal as well as deploying newly-fabricated compression units during the near term.
OUR OPERATIONS. We manage our business and analyze and report our results of operations through three business segments.
· Gathering and Processing: We provide "wellhead-to-market" services
to producers of natural gas, which include transporting raw
natural gas from the wellhead through gathering systems,
processing raw natural gas to separate NGLs from the raw natural
gas and selling or delivering the pipeline-quality natural gas and
NGLs to various markets and pipeline systems;
· Transportation: We own a 43 percent interest in HPC that delivers
natural gas from northwest Louisiana to more favorable markets in
northeast Louisiana through a 320-mile intrastate pipeline system;
and
· Contract Compression: We provide customers with turn-key natural
gas compression services to maximize their natural gas and crude
oil production, throughput, and cash flow. Our integrated
solutions include a comprehensive assessment of a customer's
natural gas contract compression needs and the design and
installation of a compression system that addresses those
particular needs. We are responsible for the installation and
ongoing operation, service, and repair of our compression units,
which we modify as necessary to adapt to our customers' changing
operating conditions.
HOW WE EVALUATE OUR OPERATIONS. We use 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 operation 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:
· the level of workovers or recompletions of existing connected
wells and successful drilling activity in areas currently
dedicated to our pipelines;
· our ability to compete for volumes from successful new wells in
other areas; and
· our ability to obtain natural gas that has been released from
other commitments.
We routinely monitor producer activities in the areas served by our gathering and processing systems to pursue new supply opportunities.
To increase throughput volumes on our gathering systems, 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 our contract compression segment, and it is also the primary 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. In addition, we 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 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 included 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 was fee-based with little or no commodity price risk.
Since our contribution of RIGS to HPC, we do not record segment margin for the transportation segment because the income attributable to HPC is recorded as income from an unconsolidated subsidiary. Because of the significance of HPC to the Partnership, we are providing a separate 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, corporate and other and inter-segment eliminations equal to total segment margin. We use total segment margin as a measure of performance. The reconciliation of the non-GAAP financial measures of segment margin and total segment margin to their most directly comparable GAAP measure, net income, is included in Note 10, Segment Information, within the condensed consolidated financial statements included in Item 1 of this report.
Operation and Maintenance Expense. Operation and maintenance expense is a separate measure that we use to evaluate the operating performance of field operations. Direct labor, insurance, property taxes, repair and maintenance, utilities and contract services make up 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 expenses 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:
· financial performance of our assets without regard to financing
methods, capital structure or historical cost basis;
· the ability of our assets to generate cash sufficient to pay
interest costs, support our indebtedness and make cash
distributions to our unitholders and general partners;
· our operating performance and return on capital as compared to
those of other companies in the midstream energy sector, without
regard to financing or capital structure; and
· the viability of acquisitions and capital expenditure projects and
the overall rates of return on alternative investment
opportunities.
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.
Nine Months Ended
September 30, September 30,
2009 2008
(in thousands)
Net cash flows provided by operating activities $ 107,113 $ 149,280
Add (deduct):
Depreciation and amortization, including debt issuance
cost amortization (85,666 ) (76,751 )
Noncash income from unconsolidated subsidiary 268 -
Derivative portfolio valuation changes (3,040 ) 1,007
Gain (loss) on asset sales, net 133,389 (434 )
Unit based compensation expenses (4,361 ) (3,087 )
Gain on insurance settlement - 3,282
Changes in current assets and liabilities:
Trade accounts receivables, accrued revenues and related
party receivables (32,121 ) 11,084
Other current assets (14,478 ) (38 )
Trade accounts payable, accrued cost of gas and liquids,
and related party payables 47,943 11,125
Other current liabilities (5,628 ) (22,448 )
Other assets and liablities 417 (3,628 )
Net income $ 143,836 $ 69,392
Add:
Interest expense, net 55,968 48,261
Depreciation and amortization 81,134 74,638
Income tax (benefit) expense (611 ) 142
EBITDA $ 280,327 $ 192,433
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CASH DISTRIBUTIONS. On October 27, 2009, the Partnership declared a distribution of $0.445 per outstanding common unit including units equivalent to the General Partner's two percent interest in the Partnership, and an aggregate distribution of approximately $633,000, with respect to incentive distribution rights, payable on November 13, 2009 to unitholders of record at the close of business on November 6, 2009.
RESULTS OF OPERATIONS
Partnership
Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008
Three Months Ended
September September
30, 2009 30, 2008 Change Percent
(in thousands except percentages and volume data)
Revenues $ 250,582 $ 547,175 $ (296,593 ) 54 %
Cost of sales 155,586 408,165 (252,579 ) 62
Total segment margin (1) 94,996 139,010 (44,014 ) 32
Operation and maintenance 32,139 33,688 (1,549 ) 5
General and administrative 14,126 13,976 150 1
Gain on asset sales, net (109 ) (34 ) (75 ) 221
Transaction expense - 2 (2 ) N/M
Depreciation and amortization 27,009 26,422 587 2
Operating income 21,831 64,956 (43,125 ) 66
Income from unconsolidated
subsidiary 3,532 - 3,532 N/M
Interest expense, net (22,173 ) (16,072 ) (6,101 ) 38
Other income and deductions, net (13,929 ) 118 (14,047 ) 11,904
Income tax benefit (196 ) (67 ) (129 ) 193
Net loss (income) attributable
to the noncontrolling interest 39 (162 ) 201 124
Net (loss) income attributable
to Regency Energy Partners LP $ (10,504 ) $ 48,907 (59,411 ) 121 %
System inlet volumes (MMbtu/d)
(2) 1,518,263 1,604,655 (86,392 ) 5
Revenue generating horsepower
(3) 743,289 742,804 485 -
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(1) For a reconciliation of total segment margin to its most directly comparable
financial measure calculated and presented in accordance with GAAP, please read
"Item 1. Financial Statements - Note 10, Segment Information."
(2) System inlet volumes include total volumes taken into both our gathering and
processing and transportation systems.
(3) Revenue generating horsepower is our total available horsepower less
horsepower under contract that is not generating revenue and idle horsepower.
N/M - not meaningful
The following table contains key company-wide performance indicators related to our discussion of the results of operations.
Three Months Ended
September 30, September
2009 30, 2008 Change Percent
(in thousands except percentage and volume data)
Segment Financial and
Operating Data:
Gathering and Processing
Segment
Financial data:
Segment margin (1) (2)
(3) $ 59,501 $ 88,400 $ (28,899 ) 33 %
Operation and maintenance
(4) 22,518 25,225 (2,707 ) 11
Operating data:
Throughput (MMbtu/d) (5) 981,925 1,082,139 (100,214 ) 9
NGL gross production
(Bbls/d) 21,814 21,386 428 2
Transportation Segment
Financial data:
Segment margin (1) (2)
(3) (7) N/A $ 16,667 N/M N/M
Operation and maintenance
(4) (7) N/A (1,007 ) N/M N/M
Operating data:
Throughput (MMbtu/d) (5)
(7) N/A 795,104 N/M N/M
Contract Compression
Segment
Financial data:
Segment margin (1)(2)(3) $ 34,085 $ 39,288 $ (5,203 ) 13
Operation and maintenance
(4) 11,012 16,020 (5,008 ) 31
Operating data:
Revenue generating
horsepower (6) 743,289 742,804 485 -
Average horsepower per
revenue generating
compression unit 836 851 (15 ) 2
Corporate & Others
Financial data:
Segment margin (1) (2)
(3) $ 2,618 $ 1,294 $ 1,324 102
Operation and maintenance
(4) 170 73 97 133
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(1) For a reconciliation of segment margin to its most directly comparable
financial measure calculated and presented in accordance with GAAP, please read
"Item 1. Financial Statements-Note 10, Segment Information."
(2) Segment margin differ from previously disclosed amounts due to functional
reorganization of our operating segments as well as eliminations.
(3) Combined segment margin varies from consolidated segment margin due to
intersegment eliminations.
(4) Combined operation and maintenance expense varies from consolidated
operation and maintenance expense due to intersegment eliminations.
(5) Combined throughput volumes for the gathering and processing and
transportation segments vary from consolidated system inlet volumes due to
inter-segment eliminations.
(6) Revenue generating horsepower is our total available horsepower less
horsepower under contract that is not generating revenue and idle horsepower.
(7) Subsequent to March 17, 2009, we no longer report segment margin, operation
and maintenance, or throughput for the transportation segment.
N/M - Not meaningful.
In addition to the revenue generating horsepower and units owned and operated by the contract compression segment disclosed below, the contract compression segment operates 158,718 horsepower owned by the gathering and processing segment as of September 30, 2009. The contract compression segment also operates 25,030 horsepower owned by HPC as of September 30, 2009.
September 30, 2009
Percentage of
Revenue Revenue Generating Number of
Horsepower Range Generating Horsepower Horsepower Units
0-499 66,135 9 % 368
500-999 76,184 10 % 123
1,000 + 600,970 81 % 398
743,289 100 % 889
June 30, 2009
Percentage of
Revenue Revenue Generating Number of
Horsepower Range Generating Horsepower Horsepower Units
0-499 64,648 8 % 363
500-999 82,397 11 % 133
1,000 + 620,015 81 % 411
767,060 100 % 907
March 31, 2009
Percentage of
Revenue Revenue Generating Number of
Horsepower Range Generating Horsepower Horsepower Units
0-499 62,147 8 % 360
500-999 80,587 10 % 129
1,000 + 646,760 82 % 431
789,494 100 % 920
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Net (Loss) Income Attributable to the Partnership. Net loss attributable to the
Partnership for the three months ended September 30, 2009 was $10,504,000
compared to net income attributable to the Partnership of $48,907,000 in the
three months ended September 30, 2008, a decrease of $59,411,000. The decrease
was primarily due to a decrease in total segment margin of $44,014,000 caused by
lower commodity prices and less volumes processed through our system in the
gathering and processing segment as well as the contribution of RIGS to HPC on
March 17, 2009, a decrease in other income and deductions of $14,047,000
primarily related to the non-cash value change associated with the embedded
derivative related to the Convertible Redeemable Preferred Units issued on
September 2, 2009, an increase of interest expense of $6,101,000 primarily
associated with the issuance of $250,000,000 senior notes in May 2009 at higher
interest rates, and an increase in depreciation expense of $587,000 related to
organic growth projects since September 30, 2008, and was partially offset by:
· $3,532,000 of income from HPC, which was formed in March 2009; and
· $1,549,000 decrease in operation and maintenance expense,
primarily due to cost control and efficiency measures.
Segment Margin. Total segment margin for the three months ended September 30, 2009 decreased by $44,014,000 compared with the three months ended September 30, 2008. This decrease was the net result of a $28,899,000 decrease in the gathering and processing segment, a $16,667,000 decrease in the transportation segment margin attributable to our contribution of RIGS to HPC on March 17, 2009, and a $5,203,000 decrease in the contract compression segment and was partially offset by an increase of $1,324,000 in the corporate and others segment. Combined segment margin varies from consolidated segment margin by $1,208,000 and $6,639,000 in the three months ended September 30, 2009 and 2008, respectively, due to intersegment eliminations. Segment margins differ from previously disclosed amounts due to the functional reorganization of our operating segments as well as eliminations.
Gathering and processing segment margin decreased to $59,501,000 in the three
months ended September 30, 2009 from $88,400,000 for the three months ended
September 30, 2008. The major components of the decrease were as follows:
· $16,937,000 from non-cash value changes related to certain
contracts associated with our risk management program;
· $9,149,000 related to lower commodity prices compared to the 2008
price level;
· $2,096,000 related to our limited producer service; and
· $717,000 from various other sources.
Transportation segment margin decreased by $16,667,000 for the three months ended September 30, 2009; the decrease is related to the contribution of RIGS to HPC on March 17, 2009.
Contract compression segment margin decreased to $34,085,000 in the three months ended September 30, 2009 from $39,288,000 for the three months ended September 30, 2008. The decrease is primarily attributable to the decrease in inter-segment revenue which is eliminated upon consolidation.
Operation and Maintenance. Operation and maintenance expense decreased to
$32,139,000 in the three months ended September 30, 2009 from $33,688,000 for
the corresponding period in 2008, a five percent decrease. This net decrease in
operation and maintenance expense was the result of the following factors:
· $1,334,000 decrease in materials and parts costs due to cost
control and efficiency measures;
· $588,000 decrease in property tax related primarily to the
contribution of RIGS to HPC; and were partially offset by
· $373,000 increase in various other operation and maintenance
expenses.
General and Administrative. General and administrative expenses increased to $14,126,000 in the three months ended September 30, 2009 from $13,976,000 for the same period in 2008, a one percent increase. General and administrative expenses remained relatively flat as a result of management emphasis on cost controls.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $27,009,000 in the three months ended September 30, 2009 from $26,422,000 for
the three months ended September 30, 2008, a two percent increase. The net
increase in depreciation expense is attributed to the following factors:
· $4,093,000 increase related to various organic growth projects
completed since September 30, 2008; and partially offset by a
· $3,506,000 decrease related to the contribution of RIGS to HPC.
Interest Expense, Net. Interest expense, net increased by $6,101,000, or 38 . . .
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