Gathering and Processing Segment
The Gathering and Processing segment was primarily engaged in connecting producing wells of exploration and production companies to its gathering system, providing compression and gathering services, treating natural gas to remove impurities to meet pipeline quality specifications, processing natural gas for the removal of NGL, and redelivering natural gas and NGL to a variety of markets. Its operations were conducted through SUGS, which was contributed to Regency on April 30, 2013. SUGS’ natural gas supply contracts primarily included fee-based, percent-of-proceeds and margin sharing (conditioning fee and wellhead) purchase contracts. These natural gas supply contracts varied in length from month-to-month to a number of years, with many of the contracts having a term of three to five years. SUGS’ primary sales customers included exploration and production companies, power generating companies, electric and gas utilities, energy marketers, industrial end-users located primarily in the Gulf Coast and southwestern United States, and petrochemical companies. With respect to customer demand for the products and services it provides, SUGS’ business was not generally seasonal in nature; however, SUGS’ operations and the operations of its natural gas producers could have been adversely impacted by severe weather.
The majority of SUGS’ gross margin was derived from the sale of NGL and natural gas equity volumes and fee-based services. The prices of NGL and natural gas were subject to fluctuations in response to changes in supply, demand, market uncertainty and a variety of factors beyond the Company’s control. The Company monitored these risks and managed the associated commodity price risk using both economic and accounting hedge derivative instruments. For additional information related to the Company’s commodity price risk management, see Note 8 to our condensed consolidated financial statements.
The following table presents the results of operations applicable to the Company’s Gathering and Processing segment:
Nine Months Ended
September 30, 2013
Period from Acquisition
(March 26, 2012) to September 30,
January 1, 2012 to
Cost of natural gas and other energy (1)
Gross margin (2)
Operating, maintenance and general, excluding non-cash compensation expense and accretion
Taxes other than on income and revenues
Segment Adjusted EBITDA
Cost of natural gas and other energy consists of natural gas and NGL purchase costs, fractionation and other fees.
Gross margin consists of operating revenues less cost of natural gas and other energy. The Company believes that this measurement is meaningful for understanding and analyzing the Gathering and Processing segment’s operating results for the periods presented because commodity costs are a significant factor in the determination of the segment’s revenues.
Following is a discussion of the significant items and variances impacting Segment Adjusted EBITDA for the Company’s Gathering and Processing segment.
Gross Margin. Gross margin for the nine months ended September 30, 2013 decreased primarily due to the contribution of SUGS to Regency on April 30, 2013. This change was partially offset by a favorable impact from natural gas and NGL prices.
Operating, Maintenance and General Expenses. Operating, maintenance and general expenses reflected increases between periods due to the expansion of the SUGS system, offset by the impact of the contribution of SUGS to Regency on April 30, 2013. Additionally, the period from March 26, 2012 to September 30, 2012 included $16 million in merger-related employee severance expenses.