Equity Investment in Unconsolidated Affiliate
We own a 40% non-operating membership interest in Centrahoma, a joint venture with Cardinal
Midstream, LLC (‘‘Cardinal’’) that is accounted for using the equity method. Centrahoma owns certain
processing plants in the Arkoma Basin and Cardinal operates an additional processing plant that is not
owned by Centrahoma but is located adjacent to and operates in conjunction with the Centrahoma
plants. We have signed long-term agreements to dedicate the processing rights for our natural gas
gathering system in the Woodford Shale to Centrahoma and to Cardinal’s independently owned
processing facility. The financial results for Centrahoma are included in Earnings from unconsolidated
affiliates and are not included in our segment results.
Our Contracts
We generate the majority of our revenues and net operating margin (a non-GAAP financial
measure, see Non-GAAP Measures below for discussion and reconciliation of net operating margin)
from natural gas gathering, transportation and processing; NGL transportation, fractionation, exchange,
marketing and storage; and crude oil gathering and transportation. We enter into a variety of contract
types. In many cases, we provide services under contracts that contain a combination of more than one
of the arrangements described below. We provide services under the following types of arrangements:
• Fee-based arrangements: Under fee-based arrangements, we receive a fee or fees for one or more
of the following services: gathering, processing and transportation of natural gas; transportation,
fractionation, exchange, marketing and storage of NGLs; and gathering and transportation of
crude oil. The revenue we earn from these arrangements is generally directly related to the
volume of natural gas, NGLs or crude oil that flows through our systems and facilities and is not
directly dependent on commodity prices. If a sustained decline in commodity prices were to
result in a decline in volumes, however, our revenues from these arrangements would be
reduced. In certain cases, our arrangements provide for minimum annual payments, fixed
demand charges or fixed returns on gathering system expenditures.
• Percent-of-proceeds arrangements: Under percent-of-proceeds arrangements, we gather and
process natural gas on behalf of producers, sell the resulting residue gas, condensate and NGLs
at market prices and remit to producers an agreed-upon percentage of the proceeds. In other
cases, instead of remitting cash payments to the producer, we deliver an agreed-upon percentage
of the residue gas and NGLs to the producer and sell the volumes we keep to third parties at
market prices. The percentage of volumes that we retain can be either fixed or variable.
Generally, under these types of arrangements, our revenues and gross margins increase as
natural gas, condensate and NGL prices increase and our revenues and net operating margins
decrease as natural gas, condensate and NGL prices decrease.
• Percent-of-index arrangements: Under percent-of-index arrangements, we purchase natural gas at
either (i) a percentage discount to a specified index price, (ii) a specified index price less a fixed
amount or (iii) a percentage discount to a specified index price less an additional fixed amount.
We then gather and deliver the natural gas to pipelines where we resell the natural gas at the
index price, or at a different percentage discount to the index price. With respect to (i) and
(iii) above, the net operating margins we realize under the arrangements decrease in periods of
low natural gas prices because these net operating margins are based on a percentage of the
index price. Conversely, our net operating margins increase during periods of high natural gas
prices.
• Keep-whole arrangements: Under keep-whole arrangements, we gather natural gas for the
producer, process the natural gas and sell the resulting condensate and NGLs to third parties at
market prices. Because the extraction of NGLs from the natural gas during processing reduces
the Btu content of the natural gas, we must either purchase natural gas at market prices for
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