Energy Transfer LP (ET) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Southern Union Company second quarter 2003 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 requires assistance at any time during the conference please press the star followed by the 0. At this time I'll turn the call over to Rick Marshall, Treasurer and Director of Investor Relations.

Good afternoon. This is Rick Marshall. I would like to welcome you to the second quarter earnings call. With me is Dave Kvapil Executive Vice President and Chief Financial Officer, and Dennis Morgan our Executive Vice President of Administration, General Counsel and Corporate Secretary. And John Graph our Corporate Controller. Please be advised a replay of this call will be available through Thursday, February 6th by dialing 800-405-2236. And entering conference ID 520164 followed by the pound sign. I would like to welcome those joining us by way of the live web cast. A replay of the web cast will also be available on our web site. By now you should have received a copy of Southern Union's second quarter earnings release this morning. If not, it's available on our web site or you may request a fax copy by calling 570-829-8928. Today we will be discussing our second quarter results and other significant events, including our pending acquisition of CMS and the close of the safely our Texas assets. Following the presentation we will be happy to address any questions you may ask. If you have further questions after the conclusion of the call contact me directly at 570-829-8662.

Before beginning today I would like the 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 in today's news release. I'll turn the call over to Tom Karam, President and Chief Operating Officer.

Thanks, Rick. And good afternoon, and welcome to our second quarter earnings call. This morning, we announced record earnings of 53 cents per share as compared to a year ago 35 cents per share. That reflects an increase of 50 percent. Although I think, judging by the way our stock has been trading in the market today, that some people may be confused by the way we had to report discontinued operations in our 8 K. David Kvapil will address that issue shortly. And it will quickly become clear just how good these earnings are and how well positions we are moving forward once he explains how we had to report the discontinued operations according to gap. The earnings reported today reflect several key components. First, and dispelling a nasty myth that had been has been around the past several years, weather for the quarter was indeed normal. So normal weather does exist. Degree days in our service territories ranged anywhere from 96 percent of normal to roughly 102 percent of normal. The second that, in my opinion, the more important factor was our continued ability to manage our costs. Specifically, we were able to hold the line year-over-year to expenditure levels that reflect our very successful cash flow improvement plan. Further, we were able to absorb higher insurance and pension costs as a result of the down stock market without increasing our total O and M costs. In addition to that, we've continued to show tremendous discipline in our capital budgeting and expenditures so that we manage with great efficiency the capital dollars we spend. These results were delivered with some help from mother nature by a determined and talented management team driven to run the best natural gas company in the country. At this time, I'd like to ask David Kvapil to discuss in more detail the earnings we reported today. And then following David's report, I would like to speak to some other things that we are working on which will further fuel our growth into the future. David, if you could give some clarity as to the earnings, and authenticly to the confusion discontinued operations, I think that would be helpful to the listeners of the call.

Surely. Thank you, Tom. Good afternoon. As noted in our earnings release as the supplementary information including in the form 8 K filed with the SEC earlier today, the company's second quarter fiscal 2003 operating results reflect record earnings of $29.4 million, or 53 cents her ir -- per share, which compares with net income of $19.7 million or 35 cents per share for the quarter ended December 31st, 2001. As Tom noted, this quarter's earnings reflect a return to a more normalized weather person. Current quarter results also reflect almost $2 million in reductions of operating expenses. This is from both continuing and discontinued operations. And that is despite increases in both pension and post retirement medical expenses, as well as increases in insurance costs reflected throughout most of our industry. Those costs increased by about $2 million. The operating cost reductions are the result of the restructuring and reorganization effort initiated by our company during the summer of 2001.

Interest expense on outstanding debt also decreased by about $1.7 million when comparing quarter over quarter results. The reduction in interest cost is due to both lower interest rates, about 50 basis points less than the prior year on both our term and revolving facilities, and reductions in our outstanding principal balances. Year-over-year our outstanding long term debt balance has been reduced by over $220 million. As previously noted the company filed a form 8 K supplemental data earlier today. That particular form requires that we include certain gap-required presentations on both the income statement and balance sheet. The 420 MLD sale of the Texas properties occurred on January 1st, 2003. And thus will be reflected in the company's third quarter results ending march 31st, 2003. As a result of that announced sale in October of 2002, gap requires the segregation of both discontinued operations in the income statement as well as the segregation of its assets and liabilities on our balance sheet. That presentation does not allow the company to pro forma any associated interest expense or any other reductions in allocated costs. Nor does that presentation provide for any expected return upon the deployment of the cash proceeds received from the sale of the Texas operations or from the interest income that might be earned in the periods between redeployment. Also, depreciation and amortization on those assets were discontinued as of October of 2002 per FAS 144 thus impacting earnings about 4 cents per share this quarter. Certain expense total being $1.3 million associated with the Texas asset sale were incurred during the quarter ended December 31st, 2002. These costs are also reflected in the secretary income statement ended December 31st, 2002. On the cash flow front, the company's cash flow from operations before working capital changes were 79 cents per share for the quarter ended December 31st, 2002. A 12-cent improvement over the same period in the prior year, when we recorded 67 cents per share. Overall, our second quarter results reflect our continued efforts to focus on cost containment and free cash flow improvement. We expect that our ability to continue to maintain and reduce controllable costs will extend throughout the rest of fiscal 2003. I will now turn the call back over to Tom Karam.

Thanks, David. And I hope with David's explanation it's now clear to the listeners that the way in which we reported discontinued operations consistent with GAAP did not allow us the opportunity to allocate corporate costs to that discontinued operation, nor the allocation of interest expense, which will then dramatically change what could be the perceived impact of those discontinued operations on our going forward business. To reiterate very emphatically, we are very well positions with the redeployment of these assets into the CMP panhandle to have a stronger greater earning stream and cash flow moving forward.

To go back to what David said, on January 1st, we did indeed close the sale of our Texas assets to [INAUDIBLE]. And we would be remiss if we did not salute our long time valued employees in Texas. We expect they will continue to serve their customers very well long in the future. Required us to consummate our investment into the panhandle companies. Speaking of the panhandle companies, as you know, we along with the AIG hi star signed a purchase agreement on December 22nd to acquire it from CMS energy for approximately $1.8 billion. To provide some additional clarity as to the relationship between AIG hi star and Southern Union, AIG hi star will invest $150 million in nonvoting preferred stock in Southern Union panhandle, which we created as the acquisition vehicle. The AIG hi star investment will take the form of this participating nonvoting preferred security in Southern Union panhandle with a participating dividend equal to 22 percent of any distributions which are payable out of the panhandle's operating earnings. We have filed for all required approvals and we are working our way through the process. To be specific, we have filed under the hearts got Re Dino act with the FTC. We have filed for consents in Missouri as well as in Massachusetts. To date, we have no reason to believe that our target, and expected closing in the first quarter of 2003, namely by march 31st, is not still on track. Much of the focus on our communications with these regulatory bodies has focused on the need for transparency and credits and educational answers about affiliate transactions as well as the general corporate structure. Our transition effort to seamlessly consolidate the panhandle into Southern Union is well underway. We are also immersed in evaluating all the assets of the panhandle. Consistent with statements we've made earlier of our intent to sell or mon advertise certain of these assets. We have not yet concluded on any definite course of action although we are narrowing the focus to several parallel tracks. We have, as most of you know, filed an $800 million omnibus shelf filing with the SEC. Following the SEC review and certain other state approvals that are required which we expect should take somewhere between an additional four to six weeks, we would be looking following those approvals to transactions designed to strengthen our balance sheet from both an equity and debt perspective. We have not, as of yet, determined the size or timing of any of these offerings. However, at the completion of this recapitalization program we will have a stronger balance sheet, as well as improved coverage ratios. To be more to the point, as we have disclosed before, we will issue equity. We will recast our balance sheet as it relates to maturities and type of debt instruments we have outstanding. We will raise additional cash through discrete asset monitoring as we alluded to earlier and at the end we will have dramatically improved cash flow. And further we continue to confer our structural models which show that we will continually improve our earnings per share moving forward.

As you can see, this is a very busy time for our company. It is more so a very exciting time of transformation and growth. It is not lost on our management team that in order for us to provide the opportunity for future growth we must be successful in managing the execution risk in each of the issues that are in front of us today. It should be no surprise to those of you listening that we firmly believe we are prepared to execute. We have shown the market and proven ourselves that we are very good at developing an integration strategy and delivering on every one of the results. We are currently developing an enhanced managing structure that will highlight our commitment to cost-effective integration. And we expect that in the near future we will make certain announcements about these initiatives. Further to that point, as part of our transition handling with the panhandle, we are developing a shared services structure will be -- which will be designed to drive the integration process, consolidate our operating platform and allow us to support our varied and disparate properties in the most cost-effective possible. We believe it will allow us to maximize synergy as we assimilate the panhandle with our existing operation. So in conclusion, I would reiterate something that I said on our last earnings call, that we must be disciplined and dynamic in our approach to providing growth for our shareholders. We have demonstrated that we can do so on several fronts at the same time and we will continue to remain focused on execution of our strategy. And obviously, judging by the number of times that I used the word execution in this call today you can gather that we are keenly focused on executing on each and every one of the strategies we've laid out to you today. With that, I would be very happy to turn the call back over to the operator, and at this time we would entertain any questions that the listeners may have.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If office question, please press the star, followed by the 1 on your push button phone. If you would like to decline from the polling process, please press the 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, we would ask that you lift the handset before pressing the numbers. One moment, please. Our first question comes from Gordon Halard. Please state your company affiliation followed by your question.

Thank you. I have two questions. You talked about the allocation of costs and the way that kind of broke out from an accounting standpoint. Would you have kind of an -- I don't know if you can provide this -- some kind of a normalized number had you been able to account for the discontinued operations in a proper manner? You know, what the earnings would have been under those circumstances?

Gordon, do you mean what the earnings would have been as they were attributed to the discontinued operations?

Exactly. Specifically the interest costs.

We have not done that allocation, Gordon. Obviously, we were pressed to make sure that we complied with the gap and all of the requirements to make this filing. I think that we could probably do that for you in short order.

I think that would be interesting. And I -- well, I guess we can talk in a short while about that. Could you also just give me -- I apologize for not understanding this completely -- a little more detail regarding the panhandle nonvoting preferred, and how the dividend placed through again? I'm sorry, I couldn't take it down quick enough.

Sure. It's nonvoting participating preferred dividend. Which will entitle AIG hi star to their prorated share of any distributions to the operating earnings that are made out of Southern Union panhandle. There is no stated dividend. It's basically a participating dividend on the operating earnings. And their prorated share of that is I think 22.11 percent.

So helpful thank you very much. Appreciate it.

Thank you.

Thank you, sir. Our next question comes from Beaton.

JP Morgan, good afternoon, everyone. Two questions. One is on the pipeline systems. As you go forward in the deal, and as you incorporate on the deal how does that affect your outlook on the economics? Have there been any surprises that you have seen in the Midwest pipes, whether it's underinvestment from CMS's standpoint or anything along those lines that you guys have uncovered?

I think that's a very good question. And the answer is quite the contemporary to what you would expect. First of all, we fully modeled the fact that we would be making significant expenditures into the future on the pipeline integrity act. And all of those numbers are included in our economics. Further, as we got more informed and educated as to the manner in which panhandle has operated their pipelines, we have jointly agreed that there are opportunities where we can Mitt gate and manage those Cap Ex dollars moving forward. So I think that any surprises in our view would be to the good. And I think that's a complement to the operating management staff of the panhandle pipeline.

Great. And, Tom, in term of the sharing arrangements and best practices, does that carry over to the central system? Is that an integration that you guys are now considering? Or will those be completely separate entities?

What we have -- that's a separate subject. We have a management agreement with the central pipeline. We don't have any equity involvement in that. Had we're focused on now is trying to use shared services that can initially and most importantly take advantage of -- I would call them backbone operations. Certain IT functions, certain, you know, support functions. We have not yet even begun to address anything beyond the panhandle and our LDC properties right now.

Great. And last question. On dividends with the back drop of the proposals. And, of course, I think it's anyone's guess what happened to dividend policy from a taxation standpoint going forward, but how are you guys thinking about that and how are you incorporating that into the potential for a cash dividend at Southern Union?

I think that we're certainly very interested in the proposals that are floating around Washington. I think it's premature for us to chart any course of action based on proposals or bills that have been submitted in Washington. But first and foremost, we want to make sure that we solidify our own capital structure, our own cash flows and then with that as the backdrop we would be in a much better position to evaluate any revised dividend policy. While we are interested and curious about what's floating around in Washington right now, we are most focused on establishing the strongest platform possible for southern union from both a balance sheet and cash flow perspective so that we are in a position to continue to take advantage of opportunities as they arise. I know that's a convoluted answer so that we have not ruled out changing our dividend policy but that is not where we are focused right now.

To translate as you have done throughout this call, basically until the completion of recaptallization the dividend policy will not be modified?

I think that's correct.

Super. Thanks, everyone.

Before the next question is asked, if I could go back to the question that Gordon Howel asked, Rick Marshall did a back of the envelope calculation here and came up with something approaching 10 cents a share as what we would revise in the pro forma allocation of the discontinued operations. So, Gordon, I hope that was responsive to your question.

Thank you, sir, our next question comes from Mike Keen.

AG Edwards. Two questions. First one on the [INAUDIBLE]. Is that a straight preferred? It's not a convertible, so it won't be included in any diluted earnings per share account?

That's correct.

And the second one, I was interested with one of your last comments talking about how the new cost structure will support commercial operations. Can you expand upon that a little bit and talk about what commercial operations and how there is a benefit via having a new cost structure?

Yeah. Actually, I think -- I would not want to leave the impression in any shared services are going to directly support commercial operations. It was my intent to say that commercial operations will be completely separate and will not have anything to do with the shared services. Commercial operations of each of our divisions are independent of one another. The shared services will be those general and administrative functioning that if we can avoid redundancy or have a single IT platform or single operating or fewer operating platforms, Mike, that's what we're going to work for. We have absolutely no intent or desire or designs to reduce the number of commercial operations we have. The naend division will have a separate and distinct commercial operation. Pennsylvania has a separate and distinct commercial operation. Missouri has a separate and distinct commercial operation and the the panhandle will have a separate and distinct commercial operation. Each of those will, in fact, have no interaction between one another because we will adhere to strict affiliate policies and further each of those commercial policies will be insented through their packages based on solely how their own division performs. The shared services are going to be those back office things which, you know, as I say, support our other operations but are not integrate to them.

Okay. That's helpful. My question was more basic. When you are referring to commercial operations, are we just talking about the safely gas to industrial customers? That type of stuff?

Yes. I mean, if you are thinking are we going to go out and expand our commercial activity? The Sean no.

Okay. Thank you. The answer is no.

thank you.

Thank you, our next question comes from Tim Flannery.

I'm with Front Point Partners. And my question has been answered.

The next question comes from Egan, please go ahead with your question.

Very quick one, guys. With the rise in gas prices, are you starting to see any kinds of repeat of the 2000-2001 accounts receivable issues?

Well, as we sit here today, we are not seeing any repeat of that. But let's go back. I think in the 2000-2001 winter gas prices were somewhere around the 8 to $10 range. And here we are sitting, I think in the 5 to $5.5 range. So the price of natural gas is significantly lower. Second, I think that the cold weather that we are experiencing now really didn't start to hit until earlier in January. So many of the bills that customers will receive that reflect the colder weather have not as yet gone out. Having said that, we've been very focused on making sure that we pay attention to our receivables and our collectibles. We think we are going to be in a much better position if the worst would happen this year as it relates to gas prices than the prior winter. And then on top of that, we've been with drawing much 6 our gas from -- of our gas from storage as opposed to buying it on the stock market. We've been going into this winter with a greater percentage of our gas with a fixed price in storage.

Then a follow-up. Was there a disproportionate sort of responsibility for that issue stemming from the Texas properties or was it kinds of prorata across all the regions?

It was not disproportionately allocated to Texas. I think it was --, in fact,, there were more instances in Missouri although we rectified some of those. And, in fact,, I think we lost a whole bunch of customers that never came back on the system after we aggressively tried to collect. So on one hand we lost some customers. On the other hand, we lost customers that weren't paying us anyway.

Great. Thanks, Tom.

Right.

Thank you, sir. Ladies and gentlemen, if there are additional questions at this time, please press the star followed by the 1. If you are using speaker equipment, you will need the lift the handset before pressing the numbers. One moment, please, for the next question. Our next question comes from Bernard Higgins, please state your company affiliation followed by your question.

Garner Lewis Outside Management. Just a quick question. During your prepared comments you talked about how you are managing your costs and you mentioned something quickly about higher pension costs. I was wondering your pension status and discount rate and rate of return. Thanks.

Sure. Let me think. I think that we were slightly underfunded at the last quarterly report we saw. The market has improved since then. So at the risk of assuming something, I think we are close to being flat right now.

Okay.

And when I say we were slightly underfunded I'm saying less than $10 million prior to that. So that we're probably, you know, close to flat now.

Right.

As far as our discount rate, I think that we use a 7.5 percent discount rate? That's correct. Right. And I think -- what was your other question?

What is your assumed rate of return?

I think the assumed rate of return -- 5.5? No. It wasn't 5.5. That's kinds of low. We will have to get back to you on that.

I'll follow-up offline.

If you could call Rick Marshall off line we could get that answer. Or before we end the call we could actually get that answer so all the listeners can get the benefit of it.

Great. Thanks a lot.

Thank you.

Your next question comes from Mike Keen. Please state your company affiliation and your question.

I was going to ask another question on pension just in a different way. Do you have any estimated numbers as to what increase in O and M pension is going to have in the upcoming year or conversely, what pension and insurance would have or did contribute -- I'm not saying this well. What was the increase in pension insurance last quarter that you were able to offset by reducing O and M costs in other places.

Mike, I think I've got where you are going.

Yeah, thanks.

Okay. In the second quarter, we've determined that the increase in pension post retirement and insurance costs was approximately $2 million.

$2 million above what it was the same quarter last year or $2 million total?

No, $2 million year-over-year increase.

Okay.

Increase. We expect that we will have some flattening out of the rise in the insurance costs. The level of pension increase, as you well know, is in large part determined on the performance of the stock market. And to a certain extent our own stock so that we are hoping that we've seen the worst of the increases in those areas.

So don't multiply that by four and that's the type of increase we'll see?

No, I would absolutely not do that.

Okay.

I would absolutely not do that in fact, we're optimistic we can get that to decline.

Okay. Thank you. That's helpful.

Right.

Ladies and gentlemen, if there are additional questions at this time, please press the star followed by the 1. If you are using speaker equipment, we ask that you please lift the handset before pressing the numbers. Our next question comes from Casey Alexander please state your company affiliation followed by your question.

Gilford Securities. Good afternoon. You must have some sense that when you go in and as you describe recash your balance sheet, you know how you might like it to look when you come out. Is your sense on the debt side that you are going to be lengthening maturities and trying to lock your funding costs down for the long term? Or is the average maturity of your balance sheet look like it's going to stay kind of the same?

Well, I think that the first thing we would look at would be the ability for us to take out the 9 and 5/8ths percent toppers. The trust preferreds we are. I also think it is a well-known fact that we've gone the last couple of years with a disproportionate amount of short-term debt meaning debt less than 13 months. And I think we will look at that with the view toward spreading that in a lat ladder fashion over varying maturities in conjunction with a possible renewal of our three-year term. That's where we are headed right now, Casey. Everything depends on the interest rate environment and how attractive a deal we can get from the different banks we are talking to at the different maturity levels but I think that we are not opposed to laddering our maturity levels to further diminish our refinancing risk moving forward.

Okay. Great. Thank you.

Ladies and gentlemen, if there are additional questions, please press the star followed by the 1. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please.

If I could jump in again before we take the next question, I think the gentleman's name was Bernard who asked about the pension. I've got the teen those questions. Our expected return on asset on tax exempt accounts is 8.4 percent. On taxable accounts is 5 percent and the discount rate is 7.5 percent. I hope that answers your question.

Management, at this time we have no further questions. Please continue with any further statements.

On behalf of Southern Union, I would like to thank everyone for participating today. We are very excited about where we sit with Southern Union as it relates to our ability to continue to provide growth opportunities in the future. We are excited about the opportunity to have the panhandle companies be part of our company moving forward. We know that it will provide value. And we look forward to our next conference call when we can again report tremendous earnings. So thank all of you for your loyalty and continued interest in Southern Union. We'll talk to you soon. Thank you.

Ladies and gentlemen, this will conclude the Southern Union company's second quarter earnings teleconference presentation. If you would like to listen to a replay, dial 1-800-405-2236. Access code 520164. Once again, please dial 1-800-405-2236. You will need to enter access code 520164. We'd like to thank you for participating. At this time you may now disconnect.