Equity-Based Compensation

In December 2011, the Partnership's unitholders approved the Regency Energy Partners LP 2011 Long-Term Incentive Plan (the “2011 Incentive Plan”), which provides for awards of options to purchase the Partnership's common units; awards of the Partnership's restricted units, phantom units and common units; awards of distribution equivalent rights; awards of common unit appreciation rights; and other unit-based awards to employees, directors and consultants of the Partnership and its affiliates and subsidiaries. The 2011 Incentive Plan will be administered by the Compensation Committee of the board of directors, which may, in its sole discretion, delegate its powers and duties under the 2011 Incentive Plan to the Chief Executive Officer. Up to 3,000,000 of the Partnership’s common units may be granted as awards under the 2011 Incentive Plan, with such amount subject to adjustment as provided for under the terms of the 2011 Incentive Plan.

The 2011 Incentive Plan may be amended or terminated at any time by the board of directors or the Compensation Committee without the consent of any participant or unitholder, including an amendment to increase the number of common units available for awards under the plan; however, any material amendment, such as a change in the types of awards available under the plan, would require the approval of the unitholders of the Partnership. The Compensation Committee is also authorized to make adjustments in the terms and conditions of, and the criteria included in awards under the 2011 Incentive Plan in specified circumstances. The 2011 Incentive Plan is effective until December 19, 2021 or, if earlier, the time at which all available units under the 2011 Incentive Plan have been issued to participants or the time of termination of the plan by the board of directors.

In 2010, upon the change of control from GE EFS to ETE, all then non-vested restricted and phantom units, exclusive of the May 7, 2010 phantom unit grants described below, vested during the predecessor period and the Partnership recorded a one-time general and administrative charge of $9.9 million as a result of such unit vesting. LTIP compensation expense of $3.6 million, $1.8 million, $12.1 million and $6 million is recorded in general and administrative expense in the statement of operations for the year ended December 31, 2011, for the periods from May 26, 2010 to December 31, 2010 and from January 1, 2010 to May 25, 2010 and for the year ended December 31, 2009, respectively.

Common Unit Options. The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Pricing Model. Upon the exercise of the common unit options, the Partnership intends to settle these obligations with new issues of common units on a net basis. The common unit options activity for the years ended December 31, 2011, 2010, and 2009 is as follows:



2011
Common Unit Options	Units		Weighted Average Exercise Price		Weighted Average Contractual Term (Years)	Aggregate Intrinsic Value* (in thousands)
Outstanding at the beginning of period	201,950		$	21.93
Granted	—		—
Exercised	(38,300	)	20.84			$	224
Forfeited or expired	(6,800	)	26.72
Outstanding at end of period	156,850		21.99		4.3	498
Exercisable at the end of the period	156,850					498
2010
Common Unit Options	Units		Weighted Average Exercise Price		Weighted Average Contractual Term (Years)	Aggregate Intrinsic Value* (in thousands)
Outstanding at the beginning of period	306,651		$	21.50
Granted	—		—
Exercised	(100,200	)	20.60			$	444
Forfeited or expired	(4,501	)	23.73
Outstanding at end of period	201,950		21.93		5.3	1,087
Exercisable at the end of the period	201,950					1,087
2009
Common Unit Options	Units		Weighted Average Exercise Price		Weighted Average Contractual Term (Years)	Aggregate Intrinsic Value* (in thousands)
Outstanding at the beginning of period	431,918		$	21.31
Granted	—		—
Exercised	—		—			$	—
Forfeited or expired	(125,267	)	20.87
Outstanding at end of period	306,651		21.50		6.3	184
Exercisable at the end of the period	306,651					184

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*	Intrinsic value equals the closing market price of a unit less the option strike price, multiplied by the number of unit options outstanding as of the end of the period presented. Unit options with an exercise price greater than the end of the period closing market price are excluded.

Restricted (Non-Vested) Units. The fair value of each restricted (non-vested) unit is determined using the grant date closing price of the Partnership’s common units. All outstanding restricted units vested on May 25, 2010, and the Partnership did not issue any additional restricted units during the remainder of 2010 or 2011. Restricted (non-vested) common unit activity for the years ended December 31, 2010, and 2009 is as follows:



2010
Restricted (Non-Vested) Common Units	Units		Weighted Average Grant Date Fair Value
Outstanding at the beginning of the period	464,009		$	28.36
Granted	—		—
Vested	(444,759	)	28.19
Forfeited or expired	(19,250	)	32.35
Outstanding at the end of period	—		—
2009
Restricted (Non-Vested) Common Units	Units		Weighted Average Grant Date Fair Value
Outstanding at the beginning of the period	704,050		$	29.26
Granted	24,500		11.13
Vested	(176,291	)	29.78
Forfeited or expired	(88,250	)	27.96
Outstanding at the end of period	464,009		28.36

Phantom Units. All phantom units granted prior to November 2010 were in substance two grants composed of (1) service condition grants with graded vesting over three years; and (2) market condition grants with cliff vesting based upon the Partnership’s relative ranking in total unitholder return among 20 peer companies. Upon the change in control from GE EFS to ETE, all then-outstanding phantom units, exclusive of the May 7, 2010 grant described below, vested. The service condition grants vested at a rate of 100% and the market condition grants vested at a rate of 150% pursuant to the terms of the awards. Subsequent to November 2010, all phantom units granted are service condition grants that vest at a rate of 100%.

On May 7, 2010, the Partnership awarded 247,500 phantom units to senior management and certain key employees. These phantom units include a provision that will accelerate vesting (1) upon a change in control and (2) within 12 months of a change in control, if the grantee’s employment is terminated by the Partnership without “Cause” (as defined in the Form of Grant of Phantom Units) or the grantee resigns for “Good Reason” (as defined in the Form of Grant of Phantom Units). Distributions related to these unvested phantom units will be accrued and paid upon vesting.

On November 21, 2010, Mr. Byron R. Kelley, the Partnership’s former President and Chief Executive Officer, retired. The Partnership entered into a consulting agreement with Mr. Kelley, pursuant to which Mr. Kelley will provide consulting services to the Partnership for a term of three years and received a grant of 33,000 service condition (time-based) phantom units. Distributions on the phantom units (including non-vested units) will be paid concurrent with the Partnership’s distribution for common units.

In November and December 2010, the Partnership awarded 574,700 phantom units to senior management and certain key employees. These awards are service condition (time-based) grants that generally vest ratably over the next five years. Distributions on the phantom units (including non-vested units) will be paid concurrent with the Partnership’s distribution for common units.

During 2011, the Partnership awarded 596,320 phantom units to senior management and certain key employees. These awards are service condition (time-based) grants that generally vest ratably over the next five years. Distributions on the phantom units (including non-vested units) will be paid concurrent with the Partnership’s distribution for common units.

The following table presents phantom unit activity for the years ended December 31, 2011, 2010 and 2009:



2011
Phantom Units	Units		Weighted Average Grant Date Fair Value
Outstanding at the beginning of the period	742,517		$	23.61
Service condition grants	596,320		24.55
Market condition grants	—		—
Vested service condition	(142,520	)	24.73
Vested market condition	(8,550	)	19.52
Forfeited service condition	(88,474	)	24.99
Forfeited market condition	(12,900	)	19.52
Total outstanding at end of period	1,086,393		24.51
2010
Phantom Units	Units		Weighted Average Grant Date Fair Value
Outstanding at the beginning of the period	301,700		$	8.63
Service condition grants	716,200		24.72
Market condition grants	148,500		11.89
Vested service condition	(166,173	)	11.63
Vested market condition	(200,610	)	5.85
Forfeited service condition	(18,787	)	20.18
Forfeited market condition	(38,313	)	11.43
Total outstanding at end of period	742,517		23.61
2009
Phantom Units	Units		Weighted Average Grant Date Fair Value
Outstanding at the beginning of the period	—		$	—
Service condition grants	133,480		13.43
Market condition grants	174,720		4.64
Vested service condition	—		—
Vested market condition	—		—
Forfeited service condition	(2,600	)	12.46
Forfeited market condition	(3,900	)	4.49
Total outstanding at end of period	301,700		8.63

The Partnership expects to recognize $20.7 million of compensation expense related to non-vested phantom units over a period of 4.2 years.