Energy Transfer LP (ET) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Southern Union third quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. I would now like to turn the call over to Mr. Richard Marshall, Treasurer and Director of Investor Relations for Southern Union. Mr. Marshall, you may begin.

Good afternoon, Rick Marshall. Thank you for joining us today for Southern Union's third quarter earnings call. With me is Tom carom, Southern Union's President and Chief Operating Officer, Dave Kvapil, Chief Financial Officer, and John Graft, our Corporate Controller. Please be advised that a replay of this call will be available Wednesday, May 7 by dialing 1-888-843-7419 and entering pass code 7043097. I'd like to welcome those also joining us by way of our live web cast. A replay of the web cast will be available on our Web site at www.southernunionco.com. By now you should have received a copy of our third quarter earnings release issued this morning. If you have not, it is also available on our Web site or request a faxed copy by calling 570-829-8928. Today we will be discussing our third quarter results and other significant events including our pending acquisition.

Following our presentation, we will be happy to address any questions you may have. If you have any further questions at the conclusion of the call, please contact 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 10k, as well as in today's news release. I'll now turn the call over to Tom Carom, Southern Union's President and Chief Operating Officer.

Thanks, Rick. Good afternoon, everyone, and welcome to our third quarter earnings call. This morning before the market opened, we released our third quarter earnings. We stated that we reflected an approximately 20% increase in our year over year earnings from continuing operations. 83 cents versus 69 cents. As many of you will recall, after we signed the sale agreement with [inaudible] to sell our Texas properties, we gave full year earnings guidance of approximately $1 to $1.10. That guidance remains valid today. In our third quarter results, earnings from our new England and Pennsylvania operations exceeded our plan while our Missouri results fell short of its plan. Overall, our expenses in all divisions were in line with our budget. So for the quarter, when you look at the overall aspect of our operations, weather averaged out to be just about normal, even though there were periods of very cold weather in different parts of our service territory at different times. But in addition to that, as is taken into effect in our results in spite of the historically high cost of gas, we have aggressively monitored our receivables and our bad debt expense, and to date we've actually seen a slight decrease.

So in summary, the results of our operations continue to be strong and stable. And we're very happy that not only are we showing improved results, but our results are consistent with our plan, which evidenced s to us that we're now creating a business profile that is predictable and stable from the management's point of view. We're poised, as we sit here today, to capitalize on this stable foundation, as we move to close the Panhandle acquisition and effectively integrate its operation with ours. In a moment I'll talk more on that subject. But at this time what I'd like to do is to ask Dave Kvapil to get into a little bit greater detail on the numbers of the quarter and how they may seem to be convoluted because we have to both disclose continued operations results as well as discontinued operating results. And the auditors and GAAP require us to record things in certain ways that might not at first blush seem to make sense to you. So David, why don't you try to make some sense out of the numbers before I'll get back on and give an overview of the status of the Panhandle and other things?

Okay. Thank you, Tom. Good afternoon. As noted in our earnings release as well as the supplementary information included in the form 8 K that we filed with the SEC earlier today, the company's third quarter fiscal 2003 earnings, including both the continuing and the discontinued operations, were $63.9 million, or $1.14 per common share, which compares with net income of $43.8 million , or 78 cents per share for the comparative quarter, ended March 31 of the prior year, 2002.

This quarter's earnings reflect the gain on the sale of our Texas operations, which we sold to ONEOK on January 1, 2003. The after-tax gain on this transaction was $17.7 million, or 32 cents per share. Excluding the gain on the sale of the Texas assets, our earnings from continuing operations for the quarter are $46.2 million, or 83 cents per share, or as Tom noted earlier, about 20% increase when compared with continuing earnings from operations of $38.9 million, or 69 cents per share in the prior year 2002. Normalized Texas operations would have contributed approximately 15 to 20 cents per share during this past quarter. Of course, those were excluded because of the sale.

In 2002, the Texas assets contributed a total of 13 cents per share during the March 31, 2002 quarter. With the commingling of discontinued and continuing earnings and the one-time gain on the sale of the Texas assets, a simple explanation of variance period to period could get confusing.

I will, though, identify some of the major factors that impacted results during this past quarter. First of all, weather did positively impact our earnings this quarter. Average weather throughout Missouri, Pennsylvania and the New England service territories was near normal.

Weather in the prior year was quite a bit different. It was only 87% of normal. As such, weather in our continuing operations contributed about 20 cents per share when compared with the prior year. However, with the positive impact on margin by the colder weather this past winter, certain operating and particularly maintenance expenses increased as well during this quarter. This, combined with increases in both expected pension and post-retirement accrued expenses, this negatively impacted earnings by about 7 cents per share, as compared to the prior year, same quarter.

On a positive note, interest expense continues to decline. Interest expense on our outstanding debt decreased by about $2 million, or 5 cents per share, when comparing quarter over quarter results. The reduction in interest costs is due to both lower interest rates and reductions in our outstanding principal balance. Year over year, our outstanding long-term debt balance has been reduced by almost $175 million. The company's cash flow from continuing operations , before working capital changes, was $1.09 per share for this quarter, a 15-cent improvement over the same period of the prior year of 94 cents per share. And once again, that 94 cents reflects continuing operations only.

As Tom noted earlier, during our fourth quarter earnings call in October, we had provided earnings guidance of $1 to $1.10 per share for fiscal 2003. Historically we had not provided guidance, but with the sale of Texas, we felt it was appropriate to do so. That estimate was based on our then announced first quarter earnings and the announced sale of our Texas operations, which was expected to close and did close in early January 2003. We also noted that the earnings per share range provided was in anticipation of a timely reinvestment of the Texas sale proceeds towards a new acquisition, as well as further reduction of debt and a contemplation of normalized weather. While the timing of the reinvestment into the Panhandle acquisition has been delayed beyond our earlier expectations, and thus negatively impacting the replacement of the Texas contributions, we did experience near normal weather.

However, excluding the one-time gain on the sale of the Texas operations of 32 cents per share recorded this quarter, our earnings per share year to date are $1.23 per share. Given the typical fourth quarter losses of our natural gas distribution business, and assuming a timely close of the Panhandle acquisition prior to our year end June 30, we wish to reconfirm our previous earnings estimates of $1 to $1.10 per share. All that being said, though, our focus today is on fiscal year 2004 and the pending consolidation of the Panhandle operations into Southern Union Company.

I'm now going to turn the mic back over to Tom, who will bring you us up to date on the status of that acquisition.

Thanks, David. That was a pretty good job trying to clarify some pretty convoluted things. Before open thing the call to questions, I'd like to address several issues, not the least of which is the acquisition of the Panhandle pipeline and the status of that. While the closing has been delayed, as David said, we are very far along in the approval process. To date, we have received approval from the Massachusetts Department of Telecommunications and Energy and from the Missouri Public Service Commission. The final required clearance is antitrust. As the parties have been working collectively and productively and tirelessly to address the issues that have been raised in that regard. We remain very confident that we will close this transaction prior to June 30. While we are disappointed that it has taken longer than we had expected, the silver lining is that it has provided us an opportunity to make greater progress in our integration planning, which will provide benefits to us sooner after closing than we had originally planned.

As it relates to our continuing analysis of the Panhandle assets, which might be sold to provide cash for additional debt paydown to further strengthen our balance sheet, we are continuing to evaluate several interesting and viable plans. While we have not yet made a final determination as to how we will generate the cash for further debt paydown, we remain committed to doing so. In addition, we are still on track with several the offerings that we had alluded to earlier of equity and debt refinancings to strengthen the balance sheet even further.

We have not, as yet, determined the size or timing of these offerings. In the last two years since our management team has been in place, we have accomplished a great deal. At a time of chaos in the energy industry and negativity in the stock market, we have successfully restructured the company to create a predominantly regulated business. We have divested all non-core assets, dramatically paid down debt, vastly improved our cash flow and our earnings, sold our Texas operations, and have contracted to acquire the Panhandle pipeline company.

These are not small achievements. Two years ago, our stock was trading at multiples that were off the charts with no stable operating results to support it. Today, as we have just reported further evidence of, we have established solid earnings performance with stable cash flow, and we are currently trading at multiples at the low end of the sector average. And our future is bright. We have successfully created a platform of predictable earnings provided by regulated businesses with conservative risk profiles. We are anxious to bring into that profile the Panhandle companies which will further provide stable earnings, conservative risk profile, and opportunities for future growth. So in conclusion, let me just summarize this way. The acquisition approvals have dragged a bit, yes. However, we fully expect to close prior to June 30, and we are more bullish now than ever as to the value that will be created by completing this deal. We will remain very disciplined in order to successfully integrate the Panhandle and provide material earnings accretion moving forward.

And with that, that concludes my prepared remarks. Rick, if we'd like to open up the telephone for questions, we'd be happy to answer any as the audience may have.

Thank you. We will now begin the question and answer session. If you have a question, you will need to press the one on your touch-tone phone. You'll hear an acknowledgment that you've been placed in queue. If your question has been answered and you wish to be removed from the queue, please press pound. Your questions will be queued in the order they're received. If you're using a speakerphone, please pick up the hand set before pressing the numbers. For any questions, please press the 1 on your touch-tone phone. Our first question comes from Mike Heim from AG Edwards. Please go ahead.

Thanks. I hate to spend too much time on '03 numbers because I believe '04 will be the critical year. When you talk about guidance to a buck and buck 10. That's excluding the gain on the Texas property sales, correct?

That's correct.

But it does not exclude any gains on the settlement, it looks like about 18 cents in the first quarter from settling with Southwest, or it looks like 5 cents settling with ONEOK in this quarter, is that correct?

That's correct.

And am I right, it was about 5 million this quarter with ONEOK? Was that a pretax? I guess I got that from one of the footnotes.

Was that in this quarter with ONEOK?

The 5 million was in this quarter, correct.

Was that pretax?

That's pretax.

All right. As I kind of look through the income statement in the 8 K provided, would that ONEOK settlement fall into the other net line of the other income?

Yes. Yeah, Mike, and as you recall, I think the earnings call we had for the prior quarter was January 30. So those settlements were already included in the calculations.

The interest on the proceeds from the sale of Texas , what line item -- does that also fall in the other net line item of other income?

Yes. That's correct. But it's minimal, but it's sitting with a qualified intermediary, and it's really being just held and it's at a very low interest rate, so it's not a significant number coming from that.

All right, then. That explains why there wasn't as big a jump as I thought there might be. Oh, on the -- you've alluded before of possibly calling some of the preferred debt. Can you refresh us what the call provisions on that would be?

Those are the toppers. And those were actually callable four or five years ago already. They could be called at any point in time with the 30-day call provision.

But they're callable at par.

Callable at par. Yes, $25.

Yeah, par plus accrued dividends, I would imagine.

Okay. All right. I think that's it for my questions. Thank you.

Thanks, Mike.

Our next question comes from Anatol Feygin from J.P. Morgan. Please go ahead.

Good afternoon, everyone. Wanted to drill in some numbers a little bit. On the O & M , which is up about 5 million year over year, can you just run through the big pieces of that increase given the restructuring and the cash improvement program?

Yeah, there's still some significant benefits coming from that, but I think what we saw in this particular quarter the increase in pension costs, the accrued pension costs, noncash, and that's -- really results, as you see in most companies' portfolio, values going down so that the amortization of those losses over periods cause that increase along with post-retirement medical as well has been affected by those calculations. But one of the items that's in there, a couple of pennies per share, just added maintenance and overtime costs that occur when you have the kind of colder winter than we had, let's say, over the prior year. Increased callouts and then with some of the freeze lines dropping this year in the northeast, we had some added maintenance because of line breaks and things like that. So that made up the other portion of it.

Great.

Anatol, if I could jump in here just to clarify, the prior year's quarter was post-cash flow improvement plan implementation. That was actually -- we are now comparing apples and apples.

Absolutely.

So the increase -- first of all, we had budgeted for the increase because we knew of the accrued pension costs, the post-retirement benefits as well as an uptick in our insurance costs. Where the variable may come into play with the O & M is that we did have a slightly higher than prior year maintenance costs, but that was more than offset by the additional margin generated by the weather.

Got it. And it doesn't include -- or not a significant amount of that is incremental bad debt expense or something along those lines?

Actually , I think as I alluded to, our bad debt expense is slightly lower than prior year.

In absolute dollar terms. I thought you meant as a percentage it's lower.

No, in absolute dollar terms.

Excellent. So the accounts receivables are up about $100 million year over year with better collections? Can you give us a feel for how that's played out over the last month?

The last month we haven't seen any dramatic change in the pattern. I think what we did learn from the winter of 2000 and 2001 when we first took over was that we had to have a very aggressive monitoring plan and collection plan. Whether the cost of gas is high or low, because if we did have a return to normal weather, as we were hoping at that time we would, we were going to have a lot of money fall through the cracks. So we implemented companywide policies to very aggressively, when regulatory law allowed, go after the nonpayers, and it worked.

Terrific. So is it safe to assume that there will be a substantial amount of working capital coming in from that program since you guys had a balance of under $100 million June 30 of last year?

I would not ascribe a huge increase in working capital for a couple reasons. Yes, we are going to generate more cash from that. But the cost of gas is still significantly higher than in prior years. So historically, we're spending more money now to fill storage, which was depleted because we had normal weather this winter. So while we will have an increased source of funds, or source of working capital, we're also going to have a counterbalancing increase in use of capital.

Understood. Understood. Great. Dave, maybe I could bug you for a minute on reconciling some of the numbers on the Texas sale. There's a pretax gain of $63 million. There's an after-tax gain of 18 and then there's a long-term liability established of 92.5 on the sale of four -- you know, sale price of 420. Can you give us some color on what those moving pieces are?

I'll go to the last one first that's the federal tax liability, with which our acquisition of Panhandle is going to result in a lifetime exchange for tax purposes. So that $92 million will be deferred over a 20-year period. The amortized basically over a 20-year period, so it won't be an immediate payment. As far as the gain on the sale, what you're looking at is a very high book effective tax rate on that gain because we had recorded, at the time we purchased Texas back in 1989, about a $70 million goodwill entry, which is a permanent difference for tax purposes. And so your effective tax rate, when applied to that gain, is something around 75%.

Okay.

You know, this is one of those where, I hate to say it, but it's just one of those accounting type book entries that have to be recorded in accordance with those, and it doesn't look to make a lot of sense because it doesn't apply an effective tax rate of near 40%, it's nearly doubled.

Understood. Great. And last question, the concession on to Missouri to sell Energy Works, what's the process there and timing on that?

I think with the consent order in Missouri, we consented that we would have Energy Works divested by June 30. I think as things are going to work out here, we fully expect to comply with that. It's not a significant issue with us at all. It's more mechanical issue in just affecting it at this point.

So it's still on track for June 30?

Oh, very much so.

Thanks very much, everyone.

Thank you, Anatol.

Our next question comes from Donato Eassey from Royalist Research. Please go ahead.

Thank you, and Tom, and Dave, I'd like to congratulate Tom. We met about two years ago when you had a plan, and you've been executing on this all but flawlessly, and hopefully the market will start to appreciate it, and I want to congratulate you personally. You've done a great job.

Thank you.

You've had a lot of moving parts on it and bringing it all together. You know, if I was a reverse chauvinist, I'd say you've come a long way, baby. But I guess I won't do that. Anyway, congratulations. The Panhandle acquisition when you get it in, are you looking -- or do you have -- you mentioned in your call -- your comments that you had, you know, this additional time to assimilate and think about how you're going to manage this. Is there any uniqueness to what you're going to fund the management out in any way, or bring the entire team on, you know, I'd like to get your thoughts on that. That's one question. None of these are related, unfortunately.

The second is your dividend. I personally like the 5% stock dividend. I think it gives the optionality to the investor to recognize the tax issues. I was wondering if you were going to stick with that. And Dave, for you, the other income was up a little bit here. And I was curious what, you know is there anything unusual in there, or something that we can, you know, count ongoing forward? I think I saw other income up, you know, $1.5 million or 40%. And I was just wondering what all was in there. Sorry for the length of the questions, but I appreciate it. Thanks.

Well, thanks, Donato. Good to hear from you again. I think -- let me answer your first question as it relates to the Panhandle integration as it relates to management and the extra time we've had to do some integration planning. Most of our time -- the additional time that we've had to spend on integration planning has revolved around an opportunity to create a shared services department which would not only seek to capitalize on synergy opportunities and Panhandle, but also to see if we could extract greater synergies from our remaining LDC operations. Because there is much opportunity as it relates to further reducing the IT platforms on which we operate, possibly centralizing payroll and HR administration and functions of that nature that, when you have a short trigger to close, you can't fully bake the plan. And I think we're much further along now in baking those plans. And we were able to bring an excellent guy on board as our chief technology officer, Mark Dessesseris, who has already made a great impact, and we expect great things from him to make a good investment and to him and his department. The people at Panhandle are great people. They're very good managers. They know that business inside and out. And we've relied heavily on them during this transition, because one of the things that we've committed to early in this is that we want to have a seamless transition from the CMS ownership to Southern Union ownership, and nothing has changed our minds in that regard.

Actually, to the contrary. We now see greater opportunities that we will be able to capitalize on, let's say , over our first 18 months of ownership that could fuel further consistent earnings growth once the transaction's complete. As it relates to the dividend policy, we, too, like that policy. And as we sit here today, we don't have any plans to change that policy. We've made a commitment to the rating agencies and to certain of the analysts on the Street that we will remain focused in husbanding our excess cash to pay down our debt and continue to strengthen our balance sheet. And we believe a stock dividend at this point allows us to continue to give a return to our investors while using the priority use of cash to strengthen the balance sheet. As it relates to the other income item, I'll pass that over to Dave.

Yes, Donato. Both 2003 and 2002, other income for this quarter are actually one-time items. This year it was the $5 million pretax number, in settlement with ONEOK on our Southwest Gas litigation. In the prior year, it reflects the recording of derivatives energy trading activity with one of the subsidiaries that was sold as part of the Texas sale. So both are considered unusual items and would not be recurring.

Thanks. And if -- I hate to put you on the spot, Tom, but is Chris Helms coming over with the transaction?

Yes.

Okay. Great. Thanks a lot and want to wish you the best and hopefully the market will start to appreciate the night and change times you have next year.

Thank you.

Our next question comes from Casey Alexander from Gilford Securities. Please go ahead.

Hi. Good afternoon.

Hi, Casey.

I would echo that about the 5% stock dividend. I think that's just fine also. I don't see any need for a cash dividend here. Let me ask you a few questions. The weather in the quarter, can you break it out as a percent of normal for the three major geographies?

Yes.

Actually, I think it's in the 8K that we filed. Missouri had -- right at normal. They were 100%.

Okay.

Pennsylvania was at about 108%. And the New England was 108%, but the majority of New England is under a weather normalization factor. So when you look at that, the portions that were not, which is the Massachusetts part of the New England operations, you're probably looking at recognizing about 101 to 102% of impact -- normal -- as a percent of normal weather and how it impacted earnings.

Let me ask you another question. On the pipeline, how is the sort of seasonality of the pipeline versus the seasonality of the distribution business? I mean, is it billed differently and is it smoothed out more?

Yeah. There's a much more level revenue stream on the pipeline. And I wouldn't even term it seasonality as such. Because during the winter, when you're drawing on the capacity to the final LDC company to use to heat or to cook or to fuel the industry, you're utilizing the capacity. In the summer, you need to utilize the capacity on the pipes to fill storage.

Um-hm.

Where the revenues at the LCDs go down. And then in addition to that, the vast majority of the contracted capacity on the pipelines is a reservation charge, not necessarily a demand charge. You pay whether you use it or not, and it's a flattened out payment schedule.

More like rental for access.

Exactly.

Gotcha. When you talk about the opportunities for centralizing human resources and payroll and things, does that create any difficulty if you start pulling those out of the local LDC companies in terms of getting rate increases?

No.

Are you able to, like, calculate percentage overheads and shift them back into the rate cases?

Yeah. There's actually very standard formula both at the fed and state regulatory level to provide for that. Because that's entirely consistent with a regulatory mandate, to provide the most efficient, you know, cost structure possible to the customers. So we're very comfortable that we can do that. And, again, the type of things that we're looking to, I would guess, let me say to lay Panhandle on top of are identical to going back to the cash flow improvement plan. And that is, that we will seek to the greatest extent possible, centralize those things which are systems supported, and we can create leverage. And then opposite that those things that are not systems supported, we're going to seek to decentralize as much as possible so that we can get greater productivity out of the existing work force. Can I go back -- do you have any other questions, Casey?

No.

I'd like to go back to your question about the weather, where we told you that Missouri was 100% or just about at normal, and Pennsylvania and New England were a little bit colder than normal. It is true that in Providence we have weather normalization. But what we've now found, after two years of hard work and trying to restructure this company and try to find out what's right with it and what is wrong with it, we have found that in Missouri, we have some systemic issues as it relates to our rate design that we need to address. When we're at 100% weather and we're still falling short of what our margin would be, which will allow us to earn our allowable rate of return, and at the same time our O & M expenses are coming in below budget, we need to go back in there and file a rate case to address those rate design issues. And we fully intend, in the not too distant future to, get in front of the Missouri Public Service Commission with a rate case designed to address not only the additional capital expenditures that we've invested into Missouri, but also what we believe to be disadvantage rate design that is not fair to the company and to our investors. I think we're going to need to thrash that out with the commission, because I'm sure they'll take a different view. But I think that we need to make the case so that we can make some progress in achieving what we believe to be a fair and balanced rate design to allow us to earn a reasonable rate of return particularly when weather is normal.

Hey, I did have one more question.

Okay.

There was a settlement of a court case with a competitor in Missouri related to reporting requirements. Can you tell me how that affects you guys? Because you were listed as sort of a supporting member of the cast there.

That was actually a case that was filed relating to a promulgation by the Missouri public service commission staff as it relates to affiliate rules of conduct. And by and large, most of those rules -- we were okay with. There were just a few issues in that promulgation that we had some heartburn over. And we were party to the opposition, but we had, prior to the ruling, we had already settled all of our differences with the Missouri Public Service Commission, so that that ruling doesn't have any adverse effect on us at all. We had already settled all of our issues with the staff.

Okay. Great. Thanks very much.

Once again, for any questions, please press the 1 on your touch-tone phone. Gentlemen, at this time we have no additional questions.

Well, thank you very much. Once again, as we always say, thank you for your loyalty in following Southern Union, and we hope that the ride here on in is one that goes straight up on the stock price. Thank you very much, everybody.