Midstream operator Regency Energy Partners LP expanded its footprint in South and East Texas Thursday with the purchase of San Antonio-based TexStar Field Services LP for $350 million. The TexStar System adds 1,476 miles of gas gathering pipelines, more than 36,800 horsepower of compression and four processing and treating facilities to Regency’s growing asset base.

As part of the acquisition, BlackBrush Oil & Gas LP, an affiliate of TexStar and a major shipper on the TexStar system, has agreed to enter into a long-term agreement for dedication of its production to TexStar.

TexStar was assembled through a roll-up of nine separate acquisitions of midstream assets with equity capital provided by HM Capital Partners LLC. HM Capital and its affiliates, formed by mega-investment firm Hicks, Muse, Tate & Furst Inc., own 53% of Regency’s outstanding limited partnership interests of the partnership, and they own and control the general partner (see Daily GPI, Nov. 3, 2004).

Eight of TexStar’s midstream assets were considered inactive or underutilized assets in South Texas that were producing minimal revenue, and Regency said they were “not suitable acquisition targets” for a publicly held master limited partnership. However, the assets “were assembled into an attractive and profitable gathering system in an active drilling area of South Texas.”

TexStar’s ninth major acquisition was made last year, when it bought 627 miles of gas gathering, 121 miles of intrastate pipeline and five gas treating plants in Texas and Oklahoma from Enbridge Energy Partners for $106 million (see Daily GPI, Oct. 27, 2005). TexStar also is in the process of acquiring a complementary treating facility and related gathering system in East Texas from an undisclosed buyer, a deal expected to close before the Regency transaction is completed.

“This acquisition enhances the geographic diversity of our asset base and creates numerous opportunities for near-term organic growth,” said Regency CEO James W. Hunt. “Regency’s team has extensive experience in South and East Texas, and with TexStar’s management team has identified approximately $30 million of near-term growth capital projects, which management will attempt to complete before the end of 2007. Depending upon the timing of completion of these projects, TexStar’s [earnings before interest, taxes, depreciation and amortization] EBITDA could increase by up to 25%.”

Regency expects the TexStar acquisition to be immediately accretive to cash available for distribution. The acquisition is expected to add about $40 million to Regency’s 2007 earnings. Initially, the acquisition will be funded by issuing 5.2 million restricted common units to the seller and $235 million of bank debt. Regency intends to issue, prior to the end of 3Q2006, sufficient additional common units that, together with the units issued in the transaction, will finance 50% of the purchase price.

Regency has received commitments from UBS Loan Finance LLC, Wachovia Bank, National Association and Citicorp USA Inc. for $850 million to fund the cash portion of the acquisition price, refinance existing debt of approximately $400 million and provide an expanded revolving credit facility. The agreement is subject to regulatory approvals and other customary closing conditions. The transaction is expected to close in 3Q2006.

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