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Market Turmoil Forces Regency to Cut Haynesville Pipe Plans

Regency Energy Partners LP, which serves as a platform for GE Energy Financial Services' growth in the midstream sector, has slashed its 2009 and 2010 growth plans and sharply reduced its planned pipeline infrastructure project for the emerging Haynesville Shale.

The Dallas-based master limited partnership owns and operates 320 miles of intrastate gas pipe in North Louisiana, as well as 5,894 miles of gathering pipeline and 10 active treatment plants in Louisiana, Kansas, Oklahoma and Texas.

In September the partnership announced a $1.1 billion project to expand its Louisiana gas system to transport gas from the Haynesville Shale (see NGI, Sept. 15). The expansion was to provide 1.45 Bcf/d of new capacity to handle output increases from the region. Regency said then it had obtained letters of intent for long-term transportation agreements from anchor shippers that covered about 76% of the incremental capacity.

All of those preliminary plans have changed with the markets, Regency stated.

"Regency has experienced, and expects to continue to experience, substantial capital expenditure and working capital needs, particularly as a result of the Haynesville Expansion Project," the partnership stated. "Regency's planned capital expenditures for 2008 and 2009 are expected to exceed substantially the net cash generated by operations. In addition to using borrowings under the revolving credit facility, Regency will need to raise additional financing from future debt or equity offerings to fund the budgeted capital expenditures for 2009."

In light of the recent volatility in the capital markets, Regency elected to rescope the Haynesville project. "The availability of capital and the total cost of current financing options do not justify the project as originally envisioned," it stated.

"With the higher cost of capital our sector is now facing, we believe it is prudent to adapt by maintaining a solid balance sheet and preserving unitholder value," said CEO Byron Kelley.

Under Regency's revised plans, the Haynesville project would retain more than 1 Bcf/d of the original 1.45 Bcf/d of increased capacity. Costs would be cut to around $650 million, excluding capitalized interest and labor costs, said Kelley. "We have reduced the near-term capital requirements for the project without sacrificing our ability to expand the pipeline in the future."

Discussions are under way with producers, suppliers, contractors, banks and other financing providers related to the redesigned project. In the near term, Regency said, it would work to obtain firm transportation agreements for the "rescoped" project and seek "acceptable financing" and supplier agreements for the project. "If these conditions are met," Regency expects the project to be in service by the end of 2009.

"Regency has made significant progress securing right-of-way permits and signing contracts with suppliers," Kelley noted. "While many producers are cutting back on drilling in other areas, we continue to see strong demand and promising economics for the Haynesville Shale and our project."

Regency warned that any delay of the Haynesville Expansion Project "could result in Regency not being able to enter into contracts with the anchor shippers necessary for the company to finance and construct the project...If Regency is not successful in these efforts, it may incur substantial costs for commitments made for materials and services," and as a result of the costs, cash flow may decrease, possibly resulting in a reduction in distributions to unitholders.

If Regency is unable to complete definitive transportation agreements or if producers are unable to execute their exploratory drilling and development plans in the play, "the return on Regency's investment from this project may not be as attractive as originally anticipated," the company said.

Even though Regency cut its spending plans, the partnership still expects to deliver strong growth over the next two years, Kelley said. Regency plans to spend $356 million on organic growth projects in 2008, which would include $143 million to add compression to its contract compression segment, $97 million more related to the Haynesville Expansion Project and another $116 million for its gathering and processing segment.

The partnership reported a 69% jump in 3Q2008 earnings to $67 million, compared with $39 million in 3Q2007. Revenue increased 85% to $547 million from $296 million. Adjusted total segment margin jumped 84% to $117 million in 3Q2008, compared with $64 million a year ago.

Net income rose to $49 million in 3Q2008, which compared with a loss of $10 million in the same period of 2007. The growth primarily was attributed to an expansion of the business, noncash gains from hedging activities and from the absence in 2008 of a debt-refinancing loss associated with the early termination penalty for Regency senior notes.

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