May 2011, Vol. 238 No. 5

Features

Regency Energy A Model For Midstream Sector

Dallas-based Regency Partners LP seems as though it was destined for success as a midstream operator. Regency owns 5,252 miles of gathering pipeline, eight active midstream-operated treating/processing plants and 790,000 horsepower of third-party revenue-generating compression.

Regency’s assets also include a 49.99% ownership interest in the Haynesville Joint Venture which owns the Regency Intrastate Gas System, consisting of 450 miles of intrastate pipeline in north Louisiana, and a 49.9% interest in the Midcontinent Express Pipeline, which consists of 507 miles of interstate pipeline stretching from southeast Oklahoma to an interconnect in Alabama. Regency’s assets are located in some of the most prolific gas-producing regions of the United States, including the Haynesville, Eagle Ford, Barnett, Fayetteville and Marcellus shales.

Regency has three primary reporting segments:gathering and processing, transportation and contract compression.

Shannon A. Ming was elected senior vice president of finance and investor relations of Regency GP LLC in November 2010. She has been with the company for five years, joining Regency after spending nearly five years with TXU Corp.

P&GJ: From your perspective, where are the best shale prospects in North America? How long can we expect this boon to last?

Ming: We believe three key areas – the Eagle Ford Shale in south Texas, the Permian Basin in west Texas and the Haynesville Shale in north Louisiana – offer the most promising opportunities for several of our business segments.

We believe wet gas will continue to have a significantly higher value over dry gas for the foreseeable future, and we expect to see NGLs continue to price significantly higher on a Btu basis. Therefore, we believe the shale plays that will receive significant investment and interest include the Eagle Ford, Bakken and Niaroba.

With fracing issues being resolved there, we are also seeing increased activity in the Haynesville shale, where Regency has built a significant G&P, transportation and treating presence.

P&GJ: What is the prospect for pipeline development in these areas and what new infrastructure does Regency have planned?

Ming: Because our business begins with our customers’ needs, we focus on creating value not only through superior customer service, operational efficiencies and guaranteed run-times, but also by listening to our customers and providing the services they need, where they need them. The recently announced JV with Energy Transfer to purchase LDH’s NGL assets is an excellent example. Producers have an urgent need for NGL takeaway and storage, in particular. This acquisition, once completed, will allow our companies to meet this critical need.

P&GJ: Overall in North America, do you see the new market dynamics dictating where future pipeline development and expansion is most likely? Do you think the number of planned pipeline miles is sufficient to handle near-term production from the various plays?

Ming: In particular to the Eagle Ford, because this is a liquids-rich play, producers are looking for a midstream provider with a large gathering footprint that can provide a full array of services, particularly efficient processing capabilities. We believe the region will require further expansion of gathering and liquids handling capabilities, and over the next three to five years new treating infrastructure will also be required, as current treating infrastructure is primarily comprised of units with <20 gpm,="" which="" is="" unsuitable="" for="" large,="" high-pressure="" deep="" shales.="" regency’s="" portfolio="" of="" services="" in="" south="" texas="" diverse="" and="" includes="" gathering="" processing,="" treating="" capabilities;="" the="" recently="" announced="" expansions="" will="" serve="" to="" better="" expand="" our="" service="" offerings="" producers.="">P&GJ: What strategies are you pursuing in developing your shale properties?

Ming: Geographically, Regency’s assets are strategically positioned in the heart of the most prolific shale plays and basins, allowing us to service producers’ needs and grow with them. Additionally, Energy Transfer’s support and midstream expertise provides Regency with an excellent foundation to reach our long-term objectives by leveraging partnerships, sharing best practices and capitalizing on strategic growth opportunities, such as the recent announcement of our joint venture to acquire the assets of LDH from Louis Dreyfus.

P&GJ: What precisely is Regency’s role as a producer, transporter, processor, marketer?

Ming: Regency is a full-service midstream company, providing contract compression, treating, gathering and processing, transportation and marketing of natural gas and natural gas liquids to customers in many of the major producing regions in the U.S.

With our recently announced joint venture with Energy Transfer, we will now be able to provide producers with significant NGL takeaway options, storage and fractionation.

P&GJ: Do you feel there is a lack of NGL infrastructure for transport and fractionation? If so, what do you perceive as the key for continued NGL development?

Ming: Yes, and that is why we chose to enter into a joint venture with Energy Transfer to purchase LDH’s assets.

P&GJ: Is today’s low-price environment for natural gas affecting your planning, and are there any ways you can leverage against that?

Ming: Rich gas plays continue to be attractive targets for producers as a result of the high crude-to-gas ratio. As a result, we believe wet gas will continue to have a significantly higher value over dry gas for the foreseeable future, and we expect to see NGLs continue to price significantly higher on a Btu basis. We are leveraging this by answering producer demand in the areas where they’ve shifted their focus: the Eagle Ford shale, Permian Basin and Haynesville. And upon closing the LDH acquisition, we’ll be offering robust NGL services and storage.

P&GJ: How has your asset mix changed in the past few years and do you foresee further changes coming up? What businesses would you primarily like to focus on?

Ming: In the last two years, Regency has been transformed – both in terms of geography and service offerings. Since our initial public offering in 2006, we have evolved from primarily a gathering and processing company into a broadly diversified midstream service provider.

In 2008, we added additional gathering assets in the mid-continent area, additional gathering and processing assets in north Louisiana and a contract compression business to our portfolio.

The greatest transformation at Regency occurred in 2010 – most notably with Energy Transfer Equity’s acquisition of 100% of our general partner interest. Energy Transfer brings significant expertise in the midstream sector and the potential to leverage growth opportunities between our two companies, as we just saw with our new joint venture to acquire LDH.

Also in 2010, Regency increased its joint ownership interest in the Regency Intrastate Gas Systems (RIGS) in the Haynesville shale by 6.99% and acquired our first interest in an interstate pipeline through the purchase of a 49.9% stake in the Midcontinent Express Pipeline from Energy Transfer.

In addition to expanding our transportation assets, we further diversified our portfolio to include robust contract treating services through the acquisition of Zephyr Gas Services in September. With the announcement of our JV with Energy Transfer, our evolution will accelerate with the addition of a suite of NGL service offerings.

P&GJ: What have been some of the challenges that you’ve encountered in working the shale plays?

Ming: We’ve seen the volatility in pricing for natural gas and liquids shift demand to different geographies, many without the infrastructure necessary to meet the demand. The good news is that Regency’s assets are well-positioned in liquids-rich plays, which are seeing strong demand. This is creating an opportunity for us to build out much-needed infrastructure in these areas. The addition of LDH’s assets will further strengthen our position in these liquid-rich shale plays.

P&GJ: Is the shale now the centerpiece of the midstream natural gas sector, and what do you consider the most challenging aspect going forward as a midstream operator?

Ming: Offering both the right infrastructure and service in the areas where producers are moving is going to be a challenge. One way we have met that is by investing in our assets in liquids-rich plays. In 2010, our capital spend was nearly $193 million. Our announced intent to purchase LDH through a JV with Energy Transfer will further strengthen our ability to provide the necessary solutions to producers as these areas are developed.

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