Energy Transfer LP (ET) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Southern Union Company fiscal year 2003 earnings conference call. During the presentation all participants will be in a listen-only mode. If you have a question please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded August 6th, 2003. I would now like to turn the conference over to Richard Marshall, vice president of investor relations for Southern Union Company.

Good afternoon. This is Rick Marshall. I'd like to thank you for joining us today for Southern Union’s fiscal year 2003 earnings conference call. With me today is Tom Karam, SUC’s president and Chief Operating Officer. Dave Kvapil, our Executive Vice President and Chief Financial Officer, Dennis Morgan our Executive Vice President and General Counsel and John Graf, our vice president and corporate controller. Please be advised that a replay of this call will be available through Wednesday, August 13th, by dialing 800-633-8284, and entering reservation No. 21155792. I'd like to welcome those also joining us by way of our live webcast. A replay of the webcast will be available on our Website at www.southernunionco.com. If you have not yet received a copy of today's earnings release you may request a copy by calling 570-829-8928, or you may obtain it from our Website. Today we'll be discussing our fiscal year 2003 earnings and other significant events including our acquisition of Panhandle Eastern Pipeline Company and its subsidiaries. Following our presentation we ill be happy to address any questions you may have. If you have any further questions after the conclusion 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 10-K as well as in today's news release. I would now turn the call over to Tom Karam, Southern Union's president and Chief Operating Officer.

Thanks Rick. Good afternoon, everyone and thank you for joining us on our call today. This morning, we released our fourth quarter and full fiscal year earnings before the market opened. And for clarity's sake, those earnings did, in fact, meet the guidance that we had repeated first in October and then later in June to the marketplace, and I'll be a little bit more specific about that in a minute. The fourth quarter, we reported a loss of 18 cents a share for 2003, against a prior year loss for the same quarter of 24 cents per share. For the fiscal year ended June 30th, we reported earnings of $1.29 per share, versus prior-year earnings of 33 cents per share. These earnings included the gain on the sale of our Texas division. As we have discussed at length previously, this fiscal year contained one-time nonrecurring accounting issues because of the sale of our Texas division. We had previously given guidance, as I mentioned, first in October when we signed for the sale of our Texas division, and again in early June, when we announced our equity offerings, that we would earn between $1 and $1.10 per share. The earnings we announced today for the full fiscal year represent pre-stock dividend, earnings of $1.02 per share.

After adjusting for our stock dividend, this guidance would be revised to be between 95 cents per share and $1.05 per share. So the earnings of 97 cents per share, as I said, are in fact consistent with the guidance we gave. It's a very convoluted process because of the stock dividend and because of the sale of Texas. However, as I said, moving these issues aside, we delivered on what we had committed to deliver to the street. This past year has been a very busy and productive year for Southern Union. We settled our long running litigation with Southwest Gas and others. We sold our Texas division to ONEOK for $420 million in cash. We purchased the Panhandle and trunk line LNG facilities and companies for $1.8 billion. We issued approximately $300 million worth of equity and equity linked securities. We commenced a tender offer for all of the Panhandle debt. We will soon offer a refinancing of north of $500 million of new debt at the Panhandle to refund that tendered debt. And today we delivered the earnings we had promised to deliver.

Southern Union today is two times the size it was a year ago. And we are 99% regulated, and we continue to be focused on strengthening our balance sheet, and growing our earnings and cash flow. We are happy, through these many activities, that each of the rating agencies has affirmed our investment grade credit ratings which are so important to us. We will, during the next several months, take some additional steps to shore up our balance sheet by selling some nonessential assets and dedicate the proceeds to pay down debt. We are going to do what we need to do in order to get our debt to cap ratio to 60% by the end of the calendar year 2004. We firmly believe that with our expected cash flows and the proceeds from these sales, we will be able to far outstrip that 60% debt to cap by the end of '04. In looking at our past year's operating performance, which Dave Kvapil will discuss in greater detail momentarily, we were aided by a return to normal winter weather, and by solid operating practices. I believe we will file, in Missouri, at our Missouri Gas Energy division, sometime in October a request for a base rate increase for our tariffs. We need to continue to seek recovery for our capital investment in Missouri as well as to seek improvement in our rate design and finally get a weather normalization clause in our tariff. We are optimistic that we will have a successful outcome in this rate case. Each of our LDC divisions had improved earnings and each was able to manage their bad debt expense during this recent period of colder weather and higher gas cost. We remain very comfortable that our reserves are adequate to cover our expected bad debts.

On June 11th we finally closed on the Panhandle acquisition and I would like to officially welcome the Panhandle employees to our family. We've been very busy on many fronts at the Panhandle. We've just appointed David Stevens to the position of president and Chief Operating Officer. David has over 20 years experience in the natural gas business. He's a professional engineer, a chemical engineer and has experience in the pipeline EMP and distribution businesses and he has a very long track record of successfully operating in the natural gas business. And we're certain that he will do a tremendous job leading the very fine management team at the Panhandle. That team is led by two stalwart experienced executives. Gerald Moen, Senior Vice President of operations, who very graciously accepted to serve as interim president of the Panhandle, and brought much-needed stability to this transition, he will remain a key employee and vital to us and to our success moving forward. I'd also like to recognize Ralph Bond, Senior Vice President of marketing who has really hit the ground running with our new ownership and is doing a great job in strengthening and growing our relationship with the BG group which holds the major contract at Trunk Line LNG as well as strengthening all our other contractual relationships with our major shippers such as Proliant and DTE and others. And speaking of LNG, the BG group has been very active in recent months particularly in June, July and for scheduled ships in August. They've been bringing in about 11 ships per month. And for us, that translates into sendout of about 1 BCF a day out of the Lake Charles facility. Our contract calls for daily sendout of about 630 million per day and only reasonable efforts to achieve the 1 BCF a day of sendout. So this sendout speaks volumes to the quality of our team's efforts as well as the being successful cooperation and interaction with the folks at BG.

We expect to have the official groundbreaking for the LNG first phase expansion sometime in late September or early October. This expansion which will double the size of the facility, is scheduled to come on line in January of 2006. It is fully contracted to BG under a long term agreement and should be very accretive to our earnings when it comes on line in January. We are very excited about the $150 million project which we expect to finance on a project finance basis, nonrecourse to Panhandle or Southern Union. At the pikes or Panhandle and trunk line, we've successfully extended almost all of the contracts which were coming due in 2003 and 2004. Those few remaining contracts we expect to extend in the very near future. In fact, we have seen a firming of capacity in terms of pricing and length of contracts. We still have room for improvement, and we understand very well that Panhandle is a competitive pipe, and we will focus our efforts in that area moving forward.

Our integration process is well under way. And in some areas ahead of schedule. We are on track to complete most of the critical integration and system migration by year end. We have already commenced a 5% workforce reduction at Panhandle. And net of the required positions at corporate, to provide shared services, we expect additional workforce reductions and synergies throughout the company. In conclusion, we are executing on our plan, we like our business profile, we confirm our previously stated guidance, which after adjusting for our recent stock dividend, is $1.28 to $1.42 per share for fiscal year '04, and we are confident that beyond that, we can deliver double digit earnings growth for one or two years at least beyond '04. For now, I'll turn the call over to Dave Kvapil, our CFO to give you some detail behind the numbers and then, after his presentation we'd be happy to answer any questions that any of you may have. Thank you.

Thank you, Tom. Good afternoon. As noted in our earnings release, as well as the supplementary information included in the form 8-K filed with the S.E.C. also earlier today, the company reported fiscal 2003 earnings of $76.2 million or $1.29 per common share, which compares with 2002's net income of $19.6 million or 33 cents per share. First of all, I want to remind all of you that the earnings per share amount included in our press release and throughout our discussions today have been adjusted to reflect the 5% stock dividend that was recently declared and issued by the company. Our 2003 earnings also reflect both the continuing and discontinued operations. As you may recall, we've sold our Texas operations back on January 1st, 2003, generating a net gain on sale of 18.9 million, or 32 cents per share. Net earnings generated by the Texas operations prior to that sale on January 1st were 13.6 million, or 23 cents per share. Excluding the gain on sale and excluding the earnings from the discontinued operations, net income for the period was 43.7 million or 74 cents per share.

During Southern Union's first quarter earnings call in late October of 2002, we previously provided earnings guidance for our fiscal year 2003 end of $1 to $1.10 per share. Tom referred to this in his presentation earlier but I'm going to repeat it for sake of clarification. This was done to reflect the comparative post 5% stock dividend issued last month. Those guidance numbers are restated at 95 cents to $1.05 per share. Our guidance numbers reflected the exclusion of the gain on the Texas sale but did not include -- but did include earnings from the Texas operations prior to the sale. Net earnings for 2003 excluding the net gain on the sale was 97 cents. Again, assuming the prestock dividend guidance of $1 to $1.10 we are at a comparative $1.02 per share. We are very proud we achieved our previously stated earnings guidance. I might also note in going back to the little bit of the history of the company these 2003 earnings per share amounts reflect the best EPS performance by the company since the mid 1980s. Included in the fiscal first quarter of 2003 are the results of the operations of the Panhandle Energy since its acquisition by Southern Union on June the 11th. Those results reflect net earnings contributions of 4.9 million or 8 cents per share. There are several other factors that impacted fiscal 2003 which I will discuss now as well.

First of all, weather did positively impact earnings this year. Average weather throughout our Missouri, Pennsylvania and New England service territory was slightly better than normal. Weather in the prior year was only 86% of normal. As such weather in our continuing operations contributed an additional approximately 15 cents per share when compared to 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. This combined with increases in both pension and post retirement accrued expenses negatively affect earnings by about 8 million or 14 cents per share. Additionally the overall increase in revenues during the past winter also increased our bad debt reserves. Recent media focus on future GAAP commodity supply and gas cost has had some negative impact on collections and has increased age balances. This is not unexpected. Historically we've seen that when there's been media focus on gas prices it has had some blip in our collection process. However, our bad debt expense in 2003 has increased only $3 million over the prior year, and only negatively impacted 2003 earnings by about 4 cents per share, when compared to the prior year. Despite this near normal weather in fiscal 2003, we did not achieve our allowed rate of return in our Missouri Gas Energy operating division. Several factors including rate design contributed to this shortfall. And as Tom noted earlier we expect to file a rate case in Missouri in the next several months.

Interest expense on our outstanding debt excluding the Panhandle debt service cost assumed after June 11th decreased by about 6.3 million or 11 cents per share when comparing year over year results. The reduction in interest cost is due to both lower interest rates and reductions in our outstanding principal balance. Year over year, our outstanding long term balance has been reduced by over $112 million and this excludes any new debt that we assume with the Panhandle acquisition. The company's cash flow from continuing operations before working capital changes was $1.77 per share for the year ended June 30th. That's a 75 cent improvement over the prior year of $1.02 per share. Free cash flow from continuing operations, and we define that as net earnings plus depreciation and amortization less any capex and adjusted for actual taxes paid versus accrued was approximately 63 million. Our focus today is on fiscal year 2004 and the assimilation of the Panhandle operations. Through our May 30th, 2002, press release, we provided earnings guidance for 2004 of $1.35 to $1.50 per share. Those amounts will need to be recaptured for the 5% stock dividend issued in July and as Tom noted these recast guidance numbers for 2004 are $1.28 to $1.42 per share. We fully expect to meet those guidance numbers. We also anticipate that our free cash flow for 2004 excluding any of the LNG expansion capex we referred to earlier will be approximately $100 million. And that amount will be used to retire outstanding debt. I'll now turn the phone back over to Tom. Tom.

Thanks, David. I'd now like to open up the call for any questions that the listeners may have, operator.

[Operator instructions] Donato Eassey from Royalist Research, please go ahead. Mr. Eassey, your line is open. We'll take a question from Maura Shaughnessey. Please go ahead.

Good afternoon. I have actually several questions if I may. First of all can you explain to me the rationale for doing the stock dividend and what is the policy going to be in the future?

Hi, Maura, it's Tom Karam, thanks for joining the call. The stock dividend dates back to I think 1994, about then. The rationale was, that every other utility at the time was paying a cash dividend. Southern Union had just completed the Missouri acquisition. They were a highly leveraged company but in response to many of the analysts Mr. Lindeman got the distinct impression they wanted a stock dividend. He wasn't prepared to issue a cash dividend. It was more efficient in his head that a stock dividend is more efficient return of capital from tax standpoint and it conserved cash from the company's standpoint. That was really the genesis of it. The reason we continue it is because we have a shareholder base that expects it. It's not something that we don't think about. We do think bit regularly. We're not in a motion to talk about a cash dividend today because of our commitments to get to certain balance sheet ratios. But I -- if I could jump to your next question, I think we will continue to evaluate and reevaluate the actual benefits of the stock dividend moving forward.

So how does the dilution impact, which is pretty significant, play into the decision?

Well, I don't really know that it creates any dilution, Maura. It's almost simply like a stock split where it just changes -- it doesn't change the equity outstanding. It doesn't change the capitalization it simply --

I understand. It's just -- it's an interesting philosophy.

It's confusing and it's different and I acknowledge that.

So you're not guaranteed to be doing that a year from now or --

I -- I would only commit to say that we constantly discuss the best strategy as it relates to a dividend policy for us. And we are not in a position at this point to discuss a cash dividend because of our prior commitments.

No, no, I understand that. Second, can you be a little bit more specific in terms of your asset sale goals on this I think you characterize it as a nonessential assets, can you be a little bit more specific about what some of those are, what kind of amounts? Any dilution that that may create, that sort of thing?

Sure. The biggest ticket item is the trunk line LNG facility when which had been talked before as a possible source of proceeds. Because of the success of our equity offering, and the rebound of our stock, and the strengthening of our belief in our ability to generate at least $100 million worth of free cash flow, we're no longer contemplating selling the LNG facility. What we are looking at are some other assets and isolating operating divisions, such as the Sea Robin Pipeline, possibly some isolated LDC customers, and possibly some sections of the Panhandle pipeline. In total, those assets, Maura, could aggregate 100 million.

And if those were sold, any sense as to the dilution that that would create?

Yes. We would not expect any dilution. In other words, particularly with the Sea Robin and the other portions of the Panhandle pipe that we are evaluating, we would expect no dilution.

The free cash flow that you mentioned of the 100 million, you were excluding the LNG exempt. What is that LNG capex in '04?

In '04 I believe it's a little north of $60 million.

So you're actually only going to generate $40 million?

No, that's not true. Because I also stated that we would project finance on a nonrecourse basis the total LNG expansion.

So the total capex for the year broken out total as well as LNG is what?

The total -- the total we expect is going to be somewhere in the mid 140s. To circle a number plus or minus I'd say 145. And then the LNG expansion I would say 60 is a pretty good ballpark number.

Okay. And last question, with regards to the Missouri case, can you talk about what, on a trailing 12 months, what kind of return you would -- sorry -- return you achieved in Missouri, what kind of asset base you have, have there, and that kind of thing?

Yeah, I can't -- I can't specifically and authoritatively answer those. I can tell you that we're probably earning, I'm going to say slightly less than 10% in Missouri. You know, maybe in the high 8s to 9% in Missouri. Our asset base there is probably 500 million. But Maura if you could bear with me I'll have either John Graf or Rick Marshall get you the specific number.

So is the issue, there is a gap between what you think can you get on an authorized ROE base or is it more a rate design issue?

I think it's both. We're underperforming our ROE by I would say 10% at least. And the rate design issue is something that's very critical to us, because as it's our stated strategy to be in the regulated business, what we need to be able to deliver is stable earnings. And the -- without weather normalization in Missouri it makes it very difficult. We've invested several hundred million dollars to almost totally rebuild that system since the company bought it in 1994. And as you know in the state regulatory environment, everything is an incremental basis. So we're recovering that money incrementally. Which is why we have to on a regular basis go in for rate requests, rate increases. So we need to continue to recoup the money we've already spent on the system, we've cut expenses there just about as much as we could cut. We've shown the regulators that we continue to operate year over year more efficiently and yet we're not able to earn anywhere near our allowable rate of return. So it's a rate design and return issue.

Thank you very much.

Thank you for your interest.

Question comes from Anatol Feygin from J.P. Morgan. Continues with your question.

If you could give us a sense, I appreciate the 5% workforce reduction but a sense of magnitude of the synergies that you expect to realize and also some further details on the tender offer you guys launched in early July, if you would be so kind.

Let me look at Dave Kvapil here and see if can I answer the second portion. Am I prohibited legally from giving any -- I am. Anatol I can't answer that second question just yet.

Fair enough.

I need to remain silent on that until we make some public announcement which should be forthcoming.

The offer expires on the 11th, is that true?

That's correct. That's correct. So within the next five days there will be a public statement.

Great.

As it relates to the workforce reduction and our expected synergies, we've outlined an integration plan that where it is a very dynamic document. The 5% workforce reduction at the Panhandle, I think translates into plus or minus 60 positions that will largely be from IT and some other areas which are pretty high-paying positions. That will also trickle into a reduction of platform cost, licensing cost and user cost. But in addition to that, as I stated in my remarks, we expect that by calendar year end '03, to have completed a substantial migration, particularly on our payroll and HR systems, where we'll be able to realize further synergies in both workforce, to a moderate degree in our other divisions, and more importantly, to hardware and software cost. To give you an order of magnitude, at this time I think I'd be shadow-boxing. But it will clearly be in the mid-eight digits company wide by the time we're done.

Great.

And I'm sorry for not being more specific. It's just a little premature. I'm hoping at the next conference call I can actually be more specific for you. I'm not trying to dodge your answer.

Appreciate that Tom. Can I ask another follow-up question I guess to that. You mentioned I think in your remarks double digit growth for the next two years beyond '04. So in my math that's before the Panhandle, before trunk line LNG really kicks in. Is synergy savings and sort of interest expense savings, are those the primary drivers or is there something beyond that that we should be looking at?

Well, if I were to -- if I were to say we've got '04, '05 and '06, and let's just talk about those three fiscal years. Because beyond that, you know, the anyone's crystal ball gets a little bit cloudy. '04 we've already given guidance, dividend adjusted to be $1.28 to $1.42. We've already told that you we'll be filing for a rate case in Missouri in roughly October of this year. The results of that should affect our fiscal year 05 earnings. We've already indicated that the expansion at LNG will come into place in '06. If you use those events as baselines, and then add on top of it the positive benefits of recasting the Panhandle balance sheet, the positive benefits of completing the integration and synergy, as well as simple organic growth and firming some business at the Panhandle, that translates into double digit growth for each of those years.

Great. One last clarification. When you speak about that double digit growth are you taking into account the 5% stock split, if you will?

Yes. Yeah, I think that -- I didn't specifically take that into account when I made this statement. But if I think about it, even with the -- if we did stock split dividends for two years that would be 10%. And do I have a 10% cushion in my double-digit number? It's confusing but I guess I'd answer yes.

Thank you very much.

Next question comes from Justin Clifford from Omega Advisors.

Hi Tom.

Hi Justin.

Let me just reiterate what other people have said. From an institutional stockholders view a 5% stock dividend is silly. I understand why it happened. Why you continue to do it now just makes people get confused. One question about your LNG facility. I'm aware of how much they pay you on that lease right now. As this thing gets larger and expansion comes through do you collect additional moneys off of that or does it stay at a level payment for the term of the lease?

No, no. The first phase of expansion that we're going to break ground on is actually a separate contract, separately approved by FERC and will provide substantial, absolutely.

Will you be collecting off that expansion comparable revenues to what you're collecting now?

Yes, without looking at the exact numbers but --

I can take that 58 and roughly double it for each stage of the expansion?

That might be a little bit high but you're in the ballpark.

You're doing a great job appreciate it.

Justin, I would refer back to Maura as well, I hear your comments.

Appreciate it thank you.

Next question come from the line of Bernard Diggins from Gerard Asset Management. Go ahead.

Just from a housekeeping perspective as I look through your earnings release the fill year $1.02 that you reported prestock dividend 87 cent post, does that include or exclude the litigation gains?

That includes them.

Okay. Can you just give me because I'm trying to cash up to speed here, can you -- roughly what amount per share that equated to this year? For the past year?

It was 22 million pretax.

Okay.

Net of tax is -- I'm looking at it right here, gain of about 20 cents, 24 cents.

Okay, great.

24 cents net of -- so it would be net about 18 cents.

Okay, okay. Second question you mentioned you're going to try and start aggressively paying down the debt, get the debt to capital to be 60% by calendar year '04 correct?

Yes.

Can you give me sort of an approximate where you're at now debt to cap?

I think we're about 66. Rick, Marshall,66 or 67?

Yes.

Okay. Year end fiscal year '03 year end call, I asked about pension funding and the response was, approximately you guys were approximately $10 million under funded. Curious if you could give me an update on that and did the acquisition of the pipeline results change that one way or the other?

Our under funding which is substantially higher than the 10 million was not affected at all by the Panhandle. The Panhandle did not come with any pension assets or liabilities. They remained with CMS. Our reporting in the 10-K is approximately $100 million and any increased pension costs as a result of that we've already factored into our earnings guidance.

You anticipated my next question.

That's why I get paid the big bucks.

Right. And then be I think your assumptions were previously a rate of return of about 8.25%. Has that changed?

On the pension?

Yeah.

Yeah, I think we've lowered them to about 7.5 to 7.75%.

Okay, okay. Thanks very much.

Okay.

Next question comes from Donato Eassey from Royalist research.

Congratulations and good luck going forward. Basically some most of my questions have been answered. Basically I wanted to know where you goat this double digit and I think you covered that very thoroughly. The $60 million judgment, is that in your number or is that just -- if, in fact, you actually collect those dollars, you know, would that just be additional earnings?

Yeah, it's not in our numbers.

Fair enough.

That would be pure gravy.

And just to clarify on the dividend, you know, it really is a mixed bag out there and it does obviously cause some confusion. For those who can do the math it's pretty straightforward. I do have mixed emotions because I think people can control their own tax destiny with a 5% stock dividend versus a 5% yield or whatever your yield might go to, there is pluses and mines in that argument. I think there are

investors who like it for what it's worth. Thank you.

Thank you Donato. I appreciate your comments. Let me digress here for a second before we take the next question. This is the first conference call where we've had an opportunity to communicate with our new investor base. And we're very anxious to hear your comments about the stock dividend and we'll take it all into consideration. We're not sitting here without a view towards always making sure that our investor base is comfortable and happy and understand where we're going. So we're appreciative of the comments. Operator next question.

Next question comes from Brent Filecroft from Performance Capital. Please proceed.

I guess it's mature but could you comment on the LNG phase two expansion and the timing and dollars of it?

There is no phase 2 expansion of the facility on the boards or committed to right now Brent. What we've got is the baseline LNG plant which is 630 M a day of daily sendout and 6 BCF of storage. We've fully contracted a doubling of that to 1.2 BCF a day of daily sendout and 9 BCF of storage through the BG group through 2023.. There is an opportunity for second phase expansion which could expand that plant up to almost 2 BCF a day of sendout and I think it's 12 BCF of storage, although I'm less certain about the total storage. And that is something that, given market conditions, as they are, we have an interest in exploring. And certainly will continue to explore. But that's not something that we've contracted at this point.

Okay. And just some line items. What, for fiscal '04, what's the D&A in interest?

For fiscal year '04?

Yeah.

Let me look to Rick and see if he can pull that out. You know what Brent, let me ask Rick to get back to you offline.

Okay, good.

He's got about 100 sheets of paper there.

Thank you guys.

As a reminder, ladies and gentlemen, to register for a question please press the 1 followed by the 4 tilt. Maura Shaughnessey please go ahead with your question.

Could you explain of the senior Panhandle management who is still there and I believe on your road show you mentioned something like 20 million in synergies that you expected to achieve from Panhandle. Is that still a good number?

Well, Maura, I don't believe I mentioned a specific number from Panhandle. Because our strategy all along has been that because this acquisition is so substantial to us, in fact doubling the size of our company, we're not going to try to integrate Panhandle into Southern Union. We're going to take the existing Southern Union operation and the Panhandle operation and integrate them into a new operating platform, some of which may cause more synergies and Panhandle, some of which may cause more synergies at the Southern Union companies. So that number would be the total company number, not just the Panhandle number.

So in your guidance for this year --

In our guidance for this year there is a portion of that included in the number, yes. And a lot of that has to do with timing of software and IT migration as well as our ability to train and to consolidate certain functions. So I think that we're -- what we're trying to say is, over the next 18 months, we believe we're going to phase in the totality of that number. Going back to your first question, which is the senior management at Panhandle, of the senior management that was at Panhandle prior to our acquisition, there were only four people who are no longer there. -- or who people, excuse me, two people from senior management who are no longer there. We still have the critical operating people of Gerald Moen and Rob Bond who I mentioned earlier.

And who are the two people who have left?

Chris Helms who was the president and Cindy Albert who was vice president of regulatory and IT. And as you recall, we created a chief technology officer at Southern Union for everything, so in essence that position was a redundancy. And what we did was, we promoted a woman by the name of Debbie Adams who worked at Panhandle for many years as a manager to be the vice president of IT at the Panhandle.

Okay.

So that there's been very little senior management turnover. The critical positions are there. They're still manned by long-time employees. And we're very excited and comfortable with the team that's there. We do believe we've enhanced the team by putting people in who understand Southern Union's way of operating, to help with I guess the cross pollination and the successful integration and meshing of the cultures if you will. And so far we've got nothing but positive feedbacks from the addition of David Stevens and a young lawyer we put there Butch Buchard, vice president of administration now and Mike Langston who is there for business development and regulatory relations. So we think that today, the management of the Panhandle is just outstanding.

Thank you.

Thank you. And Maura the rule on our call is you only get one question. But since you own so many shares, we'll waive that rule.

Next question comes from Gordon Howald from Credit Lyonnais. Go ahead.

Hi Tom.

Hi Gordon.

Why did interest costs in 4Q ’03 increase by about 2 million if your total debt levels were reduced, was it related to financing cost of the equity issuance or something along those lines?

Rick is going to answer that for you.

I think on a short term basis, the, you know for that quarter, the -- there were higher levels of receivables being financed because of higher gas costs and there were higher levels of gas in storage. So on a short term basis, borrowings were a little higher than the prior quarter. But that is temporary. That's temporary working capital turn around situation.

The run rate then would be probably closer to 20 at this point? On a quarterly basis?

Yeah, I would say that's accurate, yes.

Okay. And then second question if I could. The 60% debt to total cap figure that you guys had thrown out by the end of 2004, are you including the 125 million equity units as equity debt accumulation how do you get to the number?

I would -- the targeted 60% rate would not include the 125 million of equity units in debt.

It would include that in the equity?

In total capitalization, yes, therefore in equity, yeah.

Okay, great. And I guess I don't have to comment on the dividends since everybody else has.

Actually we would like you to.

I think Maura and everyone who's commented speaks volumes for everyone that I spoke to about your company feels the same way. Frankly if you guys are going to get to above 60% or an improvement of 60% if not better by the end of -- within 18 months, maybe there is some room for a cash dividend and everybody I think most people would probably like it except your debt holders. We would sure be in favor of it.

Okay, thank you.

Thanks guys.

Once again ladies and gentlemen if you do have a question or a comment please press the 1 followed by the 4 at this time. Gentlemen, I am showing no further questions at this time. Please continue with your presentation or any closing remarks.

Well, thank you very much, everyone. You know, I was remiss early on not to say that it's very gratifying to deliver earnings that we did today in spite of everything else we had going on. And we fully recognize that we've taken on a much larger broader shareholder base and we hope with each passing conference call we can deliver more precise and concise information to allow you to assess the investment you have in our company. And we appreciate your loyalty, we appreciate your investment, and we're going to get back to work now. So thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your particiaption and ask that you please disconnect your line.