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    Regency to expand Permian Basin footprint with SUGS acquisition

    Regency Energy Partners LP (NYSE: RGP) plans to acquire Southern Union Gathering Company LLC, the owner of Southern Union Gas Services Ltd. (SUGS), from Southern Union Company, a jointly owned affiliate of Energy Transfer Equity LP (NYSE:ETE) and Energy Transfer Partners LP (NYSE:ETP). The $1.5 billion acquisition will expand Regency’s presence in the oil and liquids-rich Permian Basin.

    The transaction will include the purchase of a 5,600-mile gathering system and approximately 500 MMcf/d of processing and treating facilities in west Texas and New Mexico for natural gas and natural gas liquids. In addition, SUGS is currently finishing construction of the 200 MMcf/d Red Bluff processing plant with associated treating which is expected to be in service in the second quarter of 2013. An additional 200 MMcf/d cryogenic processing facility with associated treating is in the planning stages and is expected to be in service in mid-to-late 2014.

    “The integration of the SUGS assets with our existing operations will position Regency with a broad Permian Basin gathering and processing footprint,” said Mike Bradley, president and CEO of Regency Energy Partners.

    “We also expect this acquisition will be neutral to slightly accretive in 2013 and to enhance our outlook for long-term distribution growth,” he continued.

    Baird Equity Research analysts view the deal as incrementally negative on Regency Energy Partners.

    “In our view, this transaction materially reduces the prospects of a buyout of RGP by ETP. Coupled with the announced de minimis accretion on the deal in 2013, we would expect RGP units to underperform in today's session,” the analysts commented in a note to investors Thursday.

    Regency will finance the acquisition by issuing $900 million of new Regency units to Southern Union Company, comprised of $750 million of new common units and $150 million of new Class F common units. The Class F common units will be equivalent to common units except will not receive distributions for the equivalent of eight consecutive quarters post-closing. The remaining $600 million will be paid in cash funded from long-term borrowings.

    In addition, in conjunction with the transaction, ETE, which owns the general partner and incentive distribution rights of Regency, has agreed to forgo the incentive distribution rights payments associated with the new common units issued by Regency for the equivalent of eight consecutive quarters post-closing and to eliminate the $10 million annual management fee due from Regency for two years post-closing.

    J.P. Morgan acted as sole financial advisor and Locke Lord LLP acted as legal counsel to Regency with respect to the transaction. Evercore Partners acted as sole financial advisor and Akin Gump Strauss Hauer & Feld LLP acted as legal counsel to Regency’s Conflicts Committee with respect to the transaction.

    The acquisition is expected to close in the second quarter of 2013.

     

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