88% of our propane supplied during the year ended December 31, 2011. 43% of our propane supply is provided
by Spectra Energy. The propane supply agreement with Spectra Energy expires April 30, 2012. We sell propane
on a wholesale basis to retail propane distributors who in turn resell propane to their retail customers.
Due to our multiple propane supply sources, annual and long-term propane supply purchase arrangements,
significant storage capabilities, and multiple terminal locations for wholesale propane delivery, we are
generally able to provide our retail propane distribution customers with reliable supplies of propane during
periods of tight supply, such as the winter months when their retail customers generally consume the most
propane for home heating. In particular, we generally offer our customers the ability to obtain propane supply
volumes from us in the winter months that are generally significantly greater than their purchase of propane
from us in the summer. We believe these factors allow us to maintain our generally favorable relationships with
our customers.
We manage our wholesale propane margins by selling propane to retail propane distributors under annual
sales agreements negotiated each spring which specify floating price terms that provide us a margin in excess of
our floating index-based supply costs under our supply purchase arrangements. Our portfolio of multiple supply
sources and storage capabilities allows us to actively manage our propane supply purchases and to lower the
aggregate cost of supplies. Based on the carrying value of our inventory, timing of inventory transactions and
the volatility of the market value of propane, we have historically and may continue to periodically recognize
non-cash lower of cost or market inventory adjustments. In addition, we may use financial derivatives to
manage the value of our propane inventories.
How We Evaluate Our Operations
Our management uses a variety of financial and operational measurements to analyze our performance.
These measurements include the following: (1) volumes; (2) gross margin, segment gross margin and adjusted
segment gross margin; (3) operating and maintenance expense, and general and administrative expense;
(4) adjusted EBITDA; and (5) distributable cash flow. Gross margin, segment gross margin, adjusted segment
gross margin, adjusted EBITDA and distributable cash flow are not measures under accounting principles
generally accepted in the United States of America, or GAAP. To the extent permitted, we present certain
non-GAAP measures and reconciliations of those measures to their most directly comparable financial
measures as calculated and presented in accordance with GAAP. These non-GAAP measures may not be
comparable to a similarly titled measure of another company because other entities may not calculate these
non-GAAP measures in the same manner.
Volumes
— We view throughput volumes for our Natural Gas Services segment and our NGL Logistics
segment, storage volumes for our NGL Logistics segment, and sales volumes for our Wholesale Propane
Logistics segment as important factors affecting our profitability. We gather and transport some of the natural
gas and NGLs under fee-based transportation contracts. Revenue from these contracts is derived by applying
the rates stipulated to the volumes transported. Pipeline throughput volumes from existing wells connected to
our pipelines will naturally decline over time as wells deplete. Accordingly, to maintain or to increase
throughput levels on these pipelines and the utilization rate of our natural gas processing plants, we must
continually obtain new supplies of natural gas and NGLs. Our ability to maintain existing supplies of natural
gas and NGLs and obtain new supplies are impacted by: (1) the level of workovers or recompletions of existing
connected wells and successful drilling activity in areas currently dedicated to our pipelines; and (2) our ability
to compete for volumes from successful new wells in other areas. The throughput volumes of NGLs on our
pipelines are substantially dependent upon the quantities of NGLs produced at our processing plants, as well as
NGLs produced at other processing plants that have pipeline connections with our NGL pipelines. We regularly
monitor producer activity in the areas we serve and in which our pipelines are located, and pursue opportunities
to connect new supply to these pipelines.
Reconciliation of Non-GAAP Measures
Gross Margin, Segment Gross Margin and Adjusted Segment Gross Margin
— We view our gross
margin as an important performance measure of the core profitability of our operations. We review our gross
margin monthly for consistency and trend analysis.
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