Energy Transfer LP (ET) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Southern Union Company fiscal year 2003 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press star followed by the zero. As a reminder, this conference is being recorded today, Thursday, October 31, 2002.

I would now like to turn the conference over to Mr. Richard Marshall, Treasurer and Director of Investor Relations. Please go ahead, sir.

Good afternoon, everyone. This is Rick Marshall, Treasurer and Director of Investor Relations for Southern Union Company. I'd like to thank you for joining us today for our fiscal year 2003 first quarter conference call. With me today is Tom Karam, Southern Union's President and Chief Operating Officer; David Kvapil, our Executive Vice President and Chief Financial Officer; and John Graf, our Corporate Controller.

By now you should have received a copy of our earnings release. If you have not, it's available on our website at www.southernunionco.com. Or you may request a fax copy by calling 570-829-8928. Also, a replay of this call will be available through Thursday, November 7, by dialing 1-800-405-2236, and entering conference ID number 504681 followed by the pound sign. I would also like to welcome those joining us on our webcast. A replay of the webcast will be available for 30 days on our website.

Today we'll be discussing our fiscal year 2003 first quarter results and other significant events. Following our presentation we'll be happy to answer any questions you may have. If you have any further questions after the conclusion of the call, feel free to call me directly at 570-829-8662.

Before beginning today I would like to caution you that many of the statements contained in our call today may be based on management's current expectations, estimates, and projections about the industry in which the company operates. These statements are not guarantees of future performance and involve risks. Also, the company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise. Such statements are intended to be covered by the Safe Harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking information in the company's 10-K as well as in today's earnings release.

At this time, I will turn the call over to Tom Karam, Southern Union's President and Chief Operating Officer for an overview of our first quarter results.

Thanks, Rick. And thank you to everyone who is on the call today who has an interest in Southern Union and our earnings that we announced this morning.

As all of you know, we announced earnings this morning that showed a loss of 12 cents a share versus prior year loss of 55 cents a share, which include various one-time items in both year-over-year quarters. I'd like to first state that we're very gratified by these results. Management has worked -- continued to work very hard to make sure that we stay the course and continue to capitalize on the cash flow improvement plan that we started last year. While you look at the operating and general expenses year over year, they're only slightly below last year. They do include some substantial increases in our pension and insurance costs which were not reflected in the prior year quarters. They also represent what we believe to be a 5 to 7 percent reduction in what we had originally forecast for these quarters' expenses.

I'd like to slightly alter the standard conference call format here and allow David Kvapil to speak to some of the detail of this morning's earnings release, and then I would like to take a few minutes when Dave is finished to discuss the pending sale of our Texas assets as well as our strategy for the application of the proceeds and the direction of Southern Union, as well as to -- in some fashion to discuss what our earnings expectations may be. So, for a more in depth discussion of our quarterly results, I'd like to turn the microphone over to Dave Kvapil, our Chief Financial Officer.

Thank you, Tom. Good afternoon.

As noted in this morning's earnings release, as well as in the supplementary information that we included in a form 8-K filed with the SEC earlier today, the company's first quarter 2003 operating results reflect a net loss of 6.5 million or 12 cents per common share. This compares with a net loss of 30.4 million, or 55 cents per share in 2001. As you are quite familiar with, the company normally records a loss during this a non-heating season quarter. Both the 2002 and 2001 first quarter results, however, were affected by several non-reoccuring gains and charges. Excluding these unusual items which I will discuss in a moment, the net loss for the quarter was 16.1 million, or 30 cents per share, which represents a 14 percent improvement over the 19.2 million, or 35 cents per share loss in 2001.

The 2002 quarterly results reflect almost 4 million of reductions in operating expenses which is typical O&M and depreciation, and this was in spite of increases in both pension and post-retirement medical expenses and increases in insurance cost. The operating cost reductions are due to the restructuring and reorganization efforts that we put into place over a year ago. Another key factor is interest expense which decreased over 22 percent, a decrease of $6 million in interest cost when comparing quarter-over-quarter results. This reduction in interest cost is due both to lower interest rates, about 240 basis points less than the prior year on both our term and revolving facilities. And reductions in our outstanding principal balance. Year over year our out standing long-term debt balance has been reduced by over $185 million.

The non-reoccuring items I referred to earlier that impacted this quarter included an after-tax gain of 10.9 million or 20 cents per share on the settlement of the company's claims against Southwest Gas company relative to Southern Union's attempts to purchase Southwest in 1998. This gain was partially offset by related litigation costs of $1.3 million, or 2 cents per share. The net loss per the 2000 -- for the 2001 quarter included an after-tax restructuring charge of 20.4 million, or 37 cents per share and an asset impairment charge of about 3.3 million, or 6 cents per share related to several of the company's subsidiaries. These charges were partially offset by 10.7 million in after tax gains generated by the settlement of interest rate swaps and a $3 million gain on the sale of certain noncore assets.

The company's cash flow from operations before working capital changes was 23 cents per share during this quarter, which is a 20-cent improvement over the same period in the prior year when it was 3 cents per share. All in all, our results during this quarter reflect our continued efforts to focus on cost containment and cash flow improvement. We expect that our ability to continue to maintain and reduce controllable costs will extend throughout fiscal 2003. Additionally on the revenue side, we are currently reviewing our rate recovery needs in several jurisdictions and are considering filing rate increases in several of these jurisdictions later in fiscal 2003.

With that, I will turn the call back over to Tom Karam. Tom?

Thanks, David.

As most of you know, about 15 months ago, we began a process to create a solid platform for growth. With the successful execution of our cash flow improvement plan, we completed the first of several steps designed to provide increased value for our shareholders into the future. And part of management's responsibility involved in that is to develop a strategic plan which is both disciplined and dynamic. Disciplined in the sense that we must remain focused on our core competencies, yet the strategy must also be dynamic to provide for reaction to changes in the environment and industry in which we operate. This is precisely where we find ourselves today. We have made the significant decision to assess our assets, to determine how we could best capitalize and optimize them during this time of unprecedented confusion in the energy business. Thus, on October 16, we announced the sale of our Southern Union gas division in Texas to ONEOK of Oklahoma for $420 million in cash. This sale which we expect to close by year end following the required consents and approvals represents the next step in our efforts to transform and refocus the company in order to provide superior returns to our investors. We are very pleased with the return we will have achieved with the sale of this asset.

As we have previously stated, we intend to use the proceeds from this sale to do several things. We will strengthen our balance sheet by paying down debt. And we will also look to possibly recast some of our debt maturities to better balance short- and long-term debt as well as looking at opportunities revolving around either our preferred shares or some other mechanism to better strengthen our balance sheet. We will clearly look for various structures which might minimize the tax liability which is predicated by this sale. And furthermore, as we have stated before, a portion of these proceeds will also be earmarked to invest in current opportunities available in the energy market.

As we speak, we are actively evaluating several opportunities involving regulated natural gas pipeline and distribution assets. It is our intent to consider these in a disciplined manner and act on them in a structure that will not cause deterioration of our credit profile, yet will provide attractive returns for our shareholders. We continue to explore the extent to which redeploying our assets in this fashion can create future earnings momentum. While we do not have anything definitive to announce today, we are hopeful that our efforts might be successful in the near future.

As it relates to our current fiscal year earnings, given our pending sale of Texas, we feel in this particular instance it would be appropriate to provide some earnings guidance. Obviously, our earnings expectations are impacted by if, when, and to what extent we reinvest the proceeds from the sale. So given that as a predicate, our internal model suggests that our earnings per share for the fiscal year 2003 will be between $1.00 and $1.10 per share. And given an attractive redeployment of some of these proceeds, we will clearly revise these estimates as necessary.

At this point, I'd like to call -- ask the operator if there are any questions that those of you on the phone would like to ask of anyone here at the company.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press star followed by the 1 on your push button phone. If you would like to decline from the polling process, please press Star followed by the 2. You will hear a three tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question. Our first question comes from Casey Alexander. Please state your company name followed by your question.

Guilford Securities. Good afternoon. Hey, let me ask you, in assessing the assets to optimize, you say that you're evaluating several opportunities. Are you -- are you also considering any further sales?

Casey, that's a loaded question. I think I would like to stand on -- on what I said earlier in my remarks in that we are assessing all of the assets we currently own and those assets that are on the marketplace today to determine which portfolio of assets can best provide superior returns for the shareholders. We will not say that we're actively marketing any of our divisions. And by the same token, to the extent that we have assets that people find attractive and would be willing to pay a price that's acceptable, we would certainly listen to them.

Well, let me ask you a different question. Did Texas -- you know, in assessing the assets in order to optimize, is there a desire to put together a more strategic and contiguous footprint?

That's a very good question. I think that in -- in looking at our decisions to retain or divest any assets, it is clearly a component as to our ability to very efficiently operate the assets that we retain. And it is clearly more efficient for us to operate a contiguous footprint, if you will. So I think your question is right on point.

Okay. I think this one might be better by Dave. Dave, if I read this correctly, the degree days in the quarter were off the charts low. I mean, am I reading this right?

You're probably reading from the 8-K that was filed?

Yeah.

Yeah. That's true. As you compare to last year. But there really was -- I mean, this is not really a quarter where we have too much in the way of weather anyway. If we have any, it comes way late in the end of September. It is less than last year and a little bit less than normal, but when you consider the jurisdictions that we have, Texas is about 60 percent weather normalized. And some of the rate changes we have had in recent years would give us minimum customer charges that tend to cover some of that. But overall, in this quarter, you are not looking at significant dollars that come from the fact that it's slightly warmer than normal. I think October, though, as we look at the numbers already, we're seeing throughout the -- many of the jurisdictions that were at normal or maybe slightly cooler than normal.

Yeah, I was about to say, do you have any feel for, you know, how this quarter has started out?

Well, this quarter in 2000 -- our fiscal year 2003 has started out a lot better than our fiscal year 2002 quarter.

Okay.

In terms of weather.

It snowed here in Pennsylvania all day yesterday. So, if that gives you any idea.

Okay. Good.

So keep those windows open and your heat on! [ Laughter ]

When you talked about recasting your maturities, you mentioned the preferred. You kind of glanced off of it, let me say. The only way I'd know that you can recast that would be to call it. That preferred is currently callable?

Yes.

Okay. Lastly, are you thinking about a name change for the company?

Not at this point.

Well, I mean, Texas was the Southern Union Gas Company, wasn't it?

Yes. I mean, it's a valid question. We haven't -- we haven't really had the time to focus on what -- whether we should change our name or not.

Okay. I just wondered.

Yes.

It seems --

You know what? While a name change would be really nice and warm and fuzzy, it costs money.

Okay. Just wondering. I'm done. Thank you.

Thank you, Casey.

Our next question comes from Gordon Howald. Please state your company name followed by your question.

Yeah. It's Gordon. Credit Lyonnais. A little surprised about the $1.00 to $1.10 earnings guidance. Can you give me a little more substance around that? That 10-cent swing could very welcome from weather. Does the $1.10 require the successful redeployment of assets from the sale, or just give me a little more color around that $1.00 to $1.10.

Sure. Sure. And let me start by saying that we will not get into the practice of providing guidance. We just feel that in this instance, given the fact that there are so many moving parts here that we have an obligation to provide guidance. But the predicates are that we do not assume any reinvestment, if you will, or redeployment of the proceeds. We assume normal weather, and we strip out all of the non-recurring one-time effects that either are currently in our fiscal year '03 or that we might expect to be. So they're from the $1.00 to $1.10 is from continuing operations with normalized weather.

That's just assuming that you keep cash on the balance sheet?

That's assuming this we apply the proceeds in a fashion that does not include an acquisition, if you will.

Okay. That's what I was a little concerned about. One other question, if I could follow up on that?

Sure.

You're selling assets to a company that you have a pretty ugly lawsuit filed against. I mean it sounds like either the asset sale could come under question, or when does the lawsuit get -- I mean, how do you kind of maintain both of these things at the same time?

Well, first and foremost, our management, we run the business and we do what's in the best interests of our shareholders, day in and day out. And we don't have the luxury of ascribing anything beyond that. As it relates to the litigation, the litigation between Southern Union and ONEOK has been stayed, pending the closing of the Texas transaction. And unfortunately, Gordon, that's all our lawyers will let us say about that topic. But we're very comfortable that the sale of Texas stands on its own merits as a very good one for our shareholders.

Gotcha. And, uhm, I guess a last quick question, if I could. Uhm, you know, we're sitting here trying to figure out why -- why your stock is trading below book value, although it's come up here, you know, over the last couple of -- you know, a week or two. Is there anything that we're missing from that regard? Because I just don't understand quite why that's the situation.

You know, Gordon, I -- I'm as perplexed as you are. We believe that our stock is trading, if you take what we discussed earlier, the $1.00 to $1.10, it's trading at 12 times our current fiscal year earnings. We believe that that is extraordinarily attractive in the marketplace. But we -- we can't understand why our stock goes up and goes down. There's certainly nothing that we can put our fingers on here internally that would suggest that it -- or give us any reasons as to why it's at $12.

At the end of fiscal '03, you know, according to our numbers, at least, it looks like book value should be north of $13 a share. It just seems kind of strange, that's all. I'm just wondering if I'm missing anything.

Maybe you are missing a buying opportunity. [ Laughter ] But other than -- I didn't mean to be facetious, Gordon, but I think your assessment is accurate. We're currently either at or slightly below our book value. And as we continue to generate additional cash to pay down debt, additional earnings, our book value's going to rise. And, you know, the current trading is -- is even going to be further below book value.

I tend to agree with you. Thanks, guys. Appreciate it.

Thank you, Gordon.

Our next question comes from Mike Heim. Please state your company name followed by your question.

AG Edwards. Is there still a lot of goodwill on your books?

Yes.

And that would be --

Most of it -- Mike, most of the goodwill on the books, I think, came from the New England acquisitions, correct?

That might be part of the explanation for the book value?

Uhm... I don't know. Rick, is that -- I don't know that that's the case. Is it?

I'll --

I'm not certain that it is the case. I think, you know, the book value that we're talking about is strictly common shareholders investment divided by the shares outstanding, and that gets us to, you know, 12 and -- you know, upper end of $12 per share.

Okay. Let me see. Uhm... when you talk about rebalancing your position between short and long-term debt, does that include locking in more of your debt? You have done a great job, you know, having a lot of debt variable and benefited from the drop in interest rates. But are you starting to think that's that it's time to be locking in stuff?

That's certainly something that we're considering very carefully. Yeah. I think -- I think yes.

Okay.

Would be the answer to that.

Finally, regarding the Southern Union acquisition or sale -- I'm sorry, the sale of the Texas properties, it seems to me the timing of that issue is pretty critical to '03 earnings, and it looks like the timing's probably headed towards a point where you'll be able to book the winter earnings but not the summer losses. Do you have any guesses or any guidance you can give us in terms of expectations when things might close?

On the sale of Texas?

Yes.

Yes. We expect that to close by year end.

Okay.

By calendar year end, not fiscal year end. I'm sorry. By calendar year end. December 31.

All right. Thank you.

And Mike, just to reiterate, the earnings guidance that we gave takes into consideration and assumes a closing by December 31.

Okay. Thanks.

Right.

Our next question comes from Gill Gavae. Please state your company name followed by your question.

J.P. Morgan Chase. Good afternoon.

Hi, Gill.

Two questions. One relates to the tax liabilities related to the sale you mentioned earlier. I was wondering if you could quantify that number.

I can't give you an exact number now. It's a pretty big bite. We had a pretty substantial tax gain on this. But it might be as much as 20 percent of the total proceeds. And we're currently feverishly exploring any avenue we can to mitigate that.

Okay. Good luck with that.

And, Gill, I think you raised another good point. If I may get back to our earnings guidance, that -- that for the purposes of our earnings guidance and the application of the proceeds, we assumed that we would pay the tax bill.

Okay. And secondly, related back to earnings guidance, could you give us an indication as to what you expect on an annualized basis your interest rate -- your interest expense, rather to go down by as a result of paying certain strategic parts of debt whether it be preferred or otherwise?

Gill, we haven't formally done an analysis of that. But I think that if you use a -- an overall cost rate of 6.5 percent and assume that is a good benchmark, we'll -- and apply that to the ultimate net proceeds, that's the number you can come up with to, you know, estimate the reduction in interest expense.

To give you some clarity as to the process we went through, what we did was we created a series of scenarios which assumed different applications of the proceeds to the balance sheet.

Okay.

So that we haven't firmly decided on a particular scenario yet. A lot of that depends on timing and market conditions at the time. So what we've done is we have created a matrix of options available to us in that regard.

Okay. Sounds like you have a bunch of healthy options. Thanks a lot.

Thank you.

Ladies and gentlemen, if there are any additional questions, please press Star followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our next question. (Pause) At this time, there are no additional questions. Please continue.

Thank you very much. That pretty much concludes the conference call for today. We would once again like to thank all of you for participating and your continued interest in the company. And we will certainly keep everyone informed as we continue to chart these rather chaotic waters of the energy business right now. So thank you very much.

Thank you, sir. Ladies and gentlemen, this concludes the Southern Union Company fiscal year 2003 first quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236, followed by access number 504681. Once again, if you would like to listen to a replay of today's conference, please dial 1-800-405-2236, followed by access number 504681. We thank you for participating. You may now disconnect.