Regency Energy Partners LP plans to acquire Zephyr Gas Services, a field services company based in Houston, for $185 million, the company said last week. Additionally, the second quarter the partnership reported a net loss due to the effect of special items.

"We have been focusing our efforts on expanding our treating business since completing our strategic plan earlier this year and we were excited when the opportunity arose to pursue the ownership of Zephyr along with its experienced management team," said Regency CEO Byron Kelley. "This is a rare opportunity to acquire a fast-growing and successful business that complements our current service offerings and brings another strong component to our midstream service portfolio.

"With a high-quality treating platform added to our existing midstream, compression and transportation business segments, we believe we will be able to provide a full suite of contract services and an unmatched set of offerings for our producers. In addition, the acquisition of Zephyr will add fee-based margins to Regency's business mix and is expected to be immediately accretive [to earnings]."

Zephyr's assets align with Dallas-based Regency's gathering and processing and compression segments as the assets are in high-growth areas, including the Haynesville and Eagle Ford shales, the partnership said. Regency expects to integrate Zephyr's current management into the existing reporting structure of its Contract Compression segment.

The acquisition of Zephyr will also complement Regency's existing contract compression segment. Both have similar business models, including a focus on large-scale, centralized fieldwide applications and the utilization of common components packagers, the partnership said. The acquisition is subject to antitrust approval. Regency intends to fund the acquisition under its revolving credit facility.

For the second quarter the partnership recorded a net loss of $10 million, compared to net income of $6 million for the second quarter of 2009. The variance was primarily attributable to three noncash items: a $10 million increase in general and administrative expenses primarily due to vesting of outstanding incentive compensation units upon a change in general partner control from GE Energy Financial Services to Energy Transfer Equity LP; an $8 million decrease in net realized and unrealized gain from derivatives related to a mark-to-market change in the value of commodity derivatives; and a $4 million decrease in other income and deductions, net, primarily related to a noncash value change associated with the embedded derivative within the Series A Convertible Redeemable Preferred Units.

The negative special items were were partially offset by a $14 million increase in income from unconsolidated subsidiaries due to a full quarter's operation of the Haynesville Expansion Project and the Red River Lateral, Regency's increased ownership interest in the Haynesville Joint Venture and the acquisition of a 49.9% ownership interest in Midcontinent Express Pipeline in May.

Regency reported that adjusted earnings increased 40% to $74 million for the second quarter of 2010, compared to $53 million for the second quarter of 2009.

"The second quarter was marked by solid financial performance and significant acquisition activity that have changed the landscape of our company. We believe we are moving closer to our goal of reaching investment-grade metrics," Kelley. "From acquiring additional ownership interest in the Haynesville Joint Venture to expanding our fee-based asset portfolio through the acquisition of 49.9% of the Midcontinent Express Pipeline, we have focused on delivering on all of our business growth objectives.

"We are well positioned to capitalize on further core asset expansion opportunities as we continue increasing our gathering capacity in the Haynesville and Eagle Ford shales. In addition, we expect to grow our contract compression business over the next year."

Total throughput volumes for the gathering and processing segment averaged 1,032,000 MMBtu/d, and processed natural gas liquids (NGL) averaged 28,000 b/d for the second quarter, compared to an average of 985,000 MMBtu/d and an average of 22,000 b/d for processed NGLs in the second quarter of 2009.

The Haynesville Joint Venture, which consists solely of the Regency Intrastate Gas System (RIGS), was previously wholly owned by Regency and is currently operated by Regency. Total combined throughput volumes for the Haynesville Joint Venture averaged 1,156,000 MMBtu/d for the second quarter, compared to an average of 745,000 MMBtu/d for the second quarter of 2009.

The MEP Joint Venture consists solely of the Midcontinent Express Pipeline, operated by Kinder Morgan Energy Partners LP, which owns a 50% interest. Total combined throughput volumes for the MEP Joint Venture averaged 1,310,000 MMBtu/d for the second quarter, compared to an average of 464,000 MMBtu/d for the second quarter of 2009.

Regency said it is increasing its projected 2010 organic growth capital spending from the original budget of $180 million to $245 million, primarily due to an increase of $35 million related to additional growth in its contract compression segment and an increase of $30 million related to additional growth in its gathering and processing segment. The $245 million includes approximately $178 million for gathering and processing, mostly in North Louisiana and South Texas; $59 million for contract compression; and $8 million for "corporate and other."

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