Energy Transfer LP (ET) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your Q2 2004 Southern Union Company earnings conference call. My name is Jean, I will be your conference coordinator today. At this time, all lines are on a listen-only mode. After our presentation, we will open the call to questions.

Should you require operator assistance on this call, phone key star 0 on your tone-dial phone and we will be happy to assist you. I would like to advise you this conference is being recorded for replay purposes.

Now I'd like to turn it over to your host, Jack Walsh, Director of Investor Relations. Sir, over to you.

Thank you. Good afternoon, this is Jack Walsh. I'd like to thank you for joining us for Southern Union's fiscal 2004 second quarter earnings call. With me today in Pennsylvania is Tom Karam, Southern Union's President and Chief Operating Officer, David Kvapil, our Executive VP and Chief Financial Officer, John Graf, our Vice President and Corporate Controller and Rick Marshall, our Vice President and Treasurer.

Please be advised that a replay of this call will be available through Wednesday, February 11th by dialing 888-286-8010 and entering passcode 98149837. 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 web site at www.southernunionco.com. If you have not yet received a copy of our earnings release, you may request a copy by calling 570-829-8928, or you may obtain it from our web site.

Today, we will discussing our second quarter ended December 31st, 2003 and significant events. Following our presentation, we will be happy to address any questions you may have. If you have any further questions after the conclusion of the call, please contact me directly at 570-829-8662.

Before beginning, I would like to caution you that many of the statements contained in our call may be based on management's current expectations, estimatates 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 will now turn the call over to Tom Karam, Southern Union's President and Chief Operating Officer for a brief overview of the quarter and recent events.

Thanks, Jack. Good afternoon, everybody and thank you for joining us on today's call.

Before I comment on the earnings we released today, I'd like to introduce Jack Walsh, officially, to all of you. I know that some of you have spoken with him already.

Jack recently joined us from the financial world to take over the -- the full-time duties of Director of Investor Relations. Jack has a very strong background in accounting. He's a CPA as well as in the finance and treasury and Investor Relations. And the good news is he really hit the ground running with us providing benefits and productive work right from the get-go.

The bad news is, is that he fits in with us pretty nicely and he's here to free up Rick Marshall a little bit who's got more time now to spend on the treasury functions with our growing company, as well as we wanted to free up Rick because he's made a request that he wants to begin to -- begin rehearsals for next year's Super Bowl halftime show that he's looking forward to performing it. So, with that, let me turn to -- so, Jack, welcome aboard.

Thank you.

With that, let me turn to the second quarter fiscal results that we issued today. We reported earnings of 40 cents -- 47 cents per share or $35 million. These are very solid results with which we are very happy. Especially given that most of us enjoyed an Indian summer in December of 2003.

We were able to overcome the loss of margin in the LDCs of about $9 million with the strong performance of Panhandle Energy and Trunkline LNG. And the benefits derived from the cost savings at Panhandle from our integration process.

These results reinforce our strategic rationale for acquiring the Panhandle, and at the same time, diversifying our asset portfolio within the regulated natural gas business. These results represent something that is slightly ahead of our internal plan, and with your indulgence, I'll talk in greater detail about these operations and -- and the integration process a little later.

As I hope most of you know, on Monday we announced two exciting growth projects at the Trunkline Gas Company and the Trunkline LNG. At Trunkline LNG, we announced a Phase II modification to our plant, which will further increase the capacity by 50%, taking -- taking the capacity to sustained daily sendout of 1.8 bcf per day and peak sendout of 2.1 bcf a day. This Phase II modification, which is being done at the request of BGLNG Services is supported by a full capacity contract with BGLNG Services through the year 2023.

The other growth project we announced is the construction of what we are calling the Trunkline Loop Pipeline, which is a takeaway pipe from Trunkline LNG, which connects downstream at our main line pipe at Trunkline 23 miles down stream. This 30-inch pipe, which we expect to put in service in July of 2005, will increase our takeaway capacity from the LNG facility from 1.3 bcf a day to 2.1 bcf a day. This pipeline also is supported by a capacity contract with BGLNG Services through 2023.

Again, we're very excited about these projects. They will be immediately acreted to our earnings and our cash flow when they come on-line. And will continue our double-digit earnings growth visibility. And once again, I will provide a little bit more detail on these initiatives later in the call.

What we'd like to do as -- by way of format on today's call is for me to turn over to David Kvapil the microphone and allow Dave to provide some color behind our operating results and the detail behind the numbers, and then I'll take over when he's done and talk in greater detail than we have before about our fiscal 2004 cash flow expectations, what our integration savings targets are and where we stand, as well as the status of our MGE rate case and some greater specifics about the LNG expansions and Trunkline Loop deals, as well as our thinking around how we will finance these -- these projects.

So, before turning the call over to Dave, let me once again reaffirm our comfort with our earnings guidance for fiscal year 2004 of $1.28 to $1.43 per share. And you should note that with the earnings we announced this morning, taken with the fact that January of 2004 is among the coldest ever on the east coast, we believe that we're well on our way to delivering solid fiscal 2004 earnings.

So, with that, David, if you could get -- get behind the numbers with some detail for the group?

Yes, thank you, Tom.

Good afternoon. The company reported second quarter net income from continuing ops of 34.4 million or 47 cents per common share. This compares with 2002's net income from continuing ops of 18.5 million or 32 cents per share. Additional information and detail on these results may be found a Form 8K, which we filed with the SEC earlier today. You can find this filing also on our web site.

Because of the sale of the Texas operations in January of 2003, the purchase of Panhandle Energy in June 2003 and the equity offering, which we finalized also in June of 2003, are results of operations and earnings per share for the three-month period ended December 31, 2003 and 2002 are not necessarily comparable. With the inclusion of the Texas operations in the quarter ended December 2002, net earnings for the quarter were 34.4 million or 40 cents per share in 2003, compared with 29.4 million or 50 cents per share in 2002. Net earnings from the Texas discontinued ops for the three months ended December 2002 were 10.9 million or 19 cents per share.

Our earnings were principally impacted by Panhandle Energy's contribution, which positively impacted earnings by 33 cents per share in this quarter. On the other hand, as Tom eluded to, warmer weather during the quarter ended December 31, 2003 negatively impacted earnings by 9 cents per share when compared with the prior year 2002 results. Despite the warmer than normal weather during this quarter, we remain on target with our fiscal 2004 profit plan, as well as on target with our annual earnings guidance.

Let me provide a little more insight into our numbers and the impact from the company's two operating segments. Those segments being our gas distribution operations in Missouri, Pennsylvania, Rhode Island and Massachusetts, and our gas transformation and storage operations through our subsidiary Panhandle Energy.

First of all, weather throughout our distribution service areas during this quarter was 94% of normal. This compares with 2002's weather, which was 104% of normal. Although prior year's winter through December was colder, the extreme cold weather that we just experienced during this past month in the northeast may put some pressure on our collections. At this time, though, the company is adequately reserved for its outstanding receivables at December 31st, 2003.

As a side note, the January, 2004 weather was 25% colder than normal in our northeast service territories, while our Missouri operations experienced January weather that was 5% below normal.

Our distribution margins were down 8% or 9 million compared to the prior year. Our distribution volumes decreased 12% and our transport revenues also decreased 16%. Our distribution operations also experienced increases in several operating expenses when compared to the prior year. These were not unexpected.

On a prior year-over-year comparison for this quarter, employee benefits, including pension, post-retirement and certain medical expenses were up 4.5 million or 9 cents per share during this quarter. Because of the deterioration in investment values over the last several years, as well as a lower implied discount rate, the increase in pension expense was included in our profit plan, as were certain increases in medical expenses.

Our transportation and storage segment, Panhandle Energy, provided significant improvements to Southern Union's operations during this quarter. The results of operations of Panhandle Energy reflect net earnings contributions of almost 25 million, or 33 cents per share. Panhandle's earnings contribution to Southern Union continued to be on track, if not exceed our expectations. Throughput was up 3% in the year in year-over-year quarterly comparisons and commodity revenues remained very stable.

Also impacting this quarter were increases in LNG revenues of nearly 1 million, due to increases in cargos at the Lake Charles Terminal. 21 ships were unloaded during this quarter compared to 17 in 2002.

During the quarter ended December 2003, Southern Union's other income and expense reflects income from certain off system gas sales and gas fired equipment rentals. Included in Southern Union's prior year results for this line item were certain nonrecurring costs and expenses associated with the sale of our Texas operations. That was about 1.3 million, and litigation cost per claims against Southwest Gas, which approximated 2.5 million.

Interest expense on our outstanding debt increased year-over-year, but includes the additional debt acquired in the Panhandle Energy acquisition. However, year-over-year our outstanding long-term debt balance, excluding the debt assumed in the Panhandle acquisition and the recent issuance of 125 million in equity-linked securities has been reduced by 175 million.

As noted in our October earnings call, on October 8, 2003, the company completed its $230 million offering of depository shares with a coupon of 7.55%. Proceeds from this preferred stock issuance were used to repay outstanding indebtness and permitted our redemption of all 100 million principal amount of the 9.48% trust originated preferred securities, which we had originally issued in 1995. That redemption was finalized on October 30th.

Preferred stock dividends of 4 million are reflected in this quarter's statement of operations. The issuance of this preferred stock and the use of proceeds to pay down our debt and debt-like securities, is continued evidence of our commitment to the rating agencies and to the Street to strengthen our balance sheet and solidify our investment-grade status.

The company's cash flow before -- before working capital changes was $1.28 per share for this quarter, a significant improvement over prior year's cash flow of 90 cents -- 79 cents per share during the 2002 December quarter. Free cash flow from continuing operations was 31 million or 42 cents per share in 2003 versus 25.3 million or 43 cents per share in 2002. Free cash flow being defined as net earnings plus depreciation and amortization less capital expenditures and adjusted for actual income taxes paid versus income taxes accrued. Tom will expand on our expected free cash flow number for this fiscal year in just a moment.

We are also on track with our 2004 Cap Ex budget of 150 million. This number excludes any numbers related to the LNG expansion. Tom will also address the LNG expansion announced earlier this week in greater detail in a moment.

Our Cap Ex budget is roughly split 50% for our LDC operations and 50% for our transportation and storage operations at Panhandle. The company is in full compliance under Sarbanes Oxley. We continue to document and test the necessary controls compliance required under Section -- Section 404 of that Act. We fully expect to be in full compliance with that section and the entire Act by our fiscal year ending June 30th, 2004.

I will now turn the call back over to Tom who will give us some added insight into the company's operations and our strategic expansion plans.

Tom?

Thanks, David.

What I'd like to do now is -- is discuss a list of important issues that I think are on everybody's mind and will help give some clarity to what Southern Union is now, what our growth strategy is and how we intend to move forward.

Following the -- the closing of the Panhandle acquisition on June 11th of last year, it did not take us long to determine that we could not integrate the Panhandle into Southern Union. We needed to establish a new operating platform. And by doing that at Panhandle, we obviated the need for any corporate IT allocation ,and even more importantly, we established a more efficient platform from which to operate all of our businesses.

We have seen substantial success and have largely eliminated the execution risk to this integration process. Our internal target for direct integration savings has been $15 million. This number is something we have not previously disclosed. To date, we have achieved almost $11 million of direct post-acquisition savings. We do not include the approximate $13 million of allocated corporate and IT costs in Panhandle's preacquisition numbers, which we eliminated.

The modest execution risks that remain are largely timing issues around the LDC migration to the newly-established Oracle operating system at the Panhandle. Obviously, we do not want to undertake any of this migration during the winter months.

So stay tuned. We feel very comfortable that once winter is over, we will begin the migration process, which includes running parallel systems as we work through some of our HR payroll and finance systems. Which leads me to talk a little bit about our free cash flow, which has been a hot topic, both internally here and with many of the questions that have been directed at Rick Marshall and Jack Walsh. We've previously stated that we expect our 2004 fiscal free cash flow to be about $100 million, excluding Phase I LNG expansion costs. We are now comfortable in stating that our fiscal 2004 free cash flow, excluding the LNG expansion costs of Phase I, Phase II and the Trunkline loop, will be approximately $225 million.

This $225 million is comprised of cash flow from operations, turnarounds in working capital and timing differences for cash flow generated from deferred taxes. And these deferred tax cash flow benefits, which are largely the timing differences between tax and book accounting, we do not foresee a material turnaround in those timing differences. So that there will not be, in the near-term, any volatility in what our expectations are as it relates to cash flow benefits from deferred taxes.

If you recall, we talked about the fiscal year 2004 costs associated with the Phase I of the LNG expansion to aggregate about $60 million. With the recently-announced Phase II and Trunkline loop projects, they will add somewhat to that number in fiscal year 2004. However, taken the $225 million of expected fiscal cash flow, and even factoring in the cost for the LNG expansion, you can see that we have a great deal of flexibility in how we choose to finance these projects and still remain committed to paying down our debt. And I will talk about that in a moment.

If I can jump to the LDC business for a moment, you recall in early November, Missouri Gas Energy filed a request to increase its base rates by $44.8 million. On Friday of last week, MGE amended that filing to increase that request by $9 million to $54.2 million. This increased request reflects updated test year expenses and capital costs. And we do not believe that this will delay the ultimate adjudication of the case, which is expected by the end of October in 2004. We will continue to be dilligent and aggressive in making our case to the Missouri Public Service Commission.

And now if I can turn to discuss the Monday announcement of the Phase II modification and the Trunkline loop pipeline. The Phase II modification, as I said before, will increase the sustained send-off capacity of Trunkline LNG from 1.2 bcf a day to 1.8 bcf a day and increase the peak day sendout to 2.1 bcf a day. And as you know, Trunkline LNG currently has sustained sendout capacity of 630 million a day.

Phase I expansion will increase that to 1.2 bcf a day, and now Phase III will further expand that to 1.8 bcf a day. Phase II will not include any additional storage, which, with the Phase I expansion, will be set at about 9 bcf of total storage.

Much of the work needed to be done for the Phase II modification, we expect to be done simultaneously with the Phase I work. We expect that Phase I will come online by December 31 of 2005. Phase II we expect to come online shortly after that, and like Phase I, Phase II is fully contracted with BG for 100% of the capacity through 2023.

The construction of the Trunkline Gas Company's new loop pipeline, which is a 23-mile, 30-inch takeaway pipeline from the Trunkline LNG facility, will increase the takeaway capacity from Trunkline LNG to 2.1 bcf a day from its current 1.3 bcf a day. This pipeline, which we expect to come online in July of 2005, also has a capacity contract with BGLNG Services through 2023.

The cost of Phase II and the Trunkline loop are estimated to be about $125 million. We believe that our LNG strategy will be a strong force in providing a secure source of natural gas supply to the United States for a very long time.

So, let me summarize some of the facts around Phase I, Phase II and the Trunkline loop. In the aggregate, these three projects will do several things. If you look at the capital costs, the three projects will cost approximately $250 million, excluding cap interest. They will generate, on an annualized basis in -- and let's use fiscal year 2007. They will generate $80 million of revenue. Most of which will fall directly to the earnings before interest, taxes, depreciation and amortization line or EBITDA.

The Trunkline loop will replace the current situation with BG and other shippers of short-term firm and IT capacity with a 19-year long-term firm capacity contract. The three projects in the aggregate will be acretive to our cash flow and our earnings. And in addition, they will extend Southern Union Company's earnings visibility for double-digit earnings growth through the fiscal year 2007.

These projects obviously beg the question: How are we going to finance them? And to that I would say we have both time and options. We remain fully committed to retaining our investment-grade ratings. So, obviously, that will be an important factor in our decision.

We've stated before that we intend to look at project finance for Phase I, and we still are. However, the key driver for us will be to finance this growth in a way that is most accretive to our earnings and our cash flow, and at the same time maintain the strength of our balance sheet.

It would be safe to assume that we will take advantage of the short and long-term debt markets, the strength of our own internal cash flow and the issuance of some equity or equity-linked securities as a means of the totality of the financing project. We are very confident that we can completely finance these projects in a manner that is accretive and consistent with our double-digit earnings growth expectations, while at the same time continuing to maintain our balance sheet strength.

In terms of the issues I wanted to highlight, that's just about it. What might be the most effective way to get more information out to the group is if we open the call now to questions, and those of us on this end are pretty much prepared to answer any questions you have for us.

So, operator, if you could open the phone to questions.

Thank you, sir.

Ladies and gentlemen, if you have a question or comment, key star then 1 on your tone-dial phone. If you want to withdraw your question, key star 2. Once again, key star 1 for questions. We'll pause for just a moment while your questions are collected.

We do have a question from Donato Eassey of Royalist Equity. Please proceed.

Hey, Tom and David and all. Congratulations on a good quarter here.

My first question deals with the 9 cents you mentioned, David, you know, due to the warmer-than-normal weather in December. Does that take into account the added expenses that you may have incurred, as well? Is that kind of a -- I mean, you did say EPS so I assume it's per share, but I just want to verify it and maybe you could explain, you know, how you account for the higher expenses, if weather was normal, you know, be it fuel or whatever and how we come up with the 9 cents?

Well, the 9 cents is really the -- the difference from the prior year as far as the decline in -- in heating degree days. What you normally have, though, in a period like we just went through in January, where you do have extreme cold weather as you may often have some increased costs, not excessive, but increased costs in the way of call center and we're cruising to go out and work on various projects, but you have -- when you have such cold weather, you all didn't have some line breaks that may occur, as well.

But overall, I think what you're -- that 9 cents represents the differential in the warmer weather that occurred this year than last year. If you remember last year, 2002, the November/December were one of the coldest on record. And that's what caused the decrease during this period.

Okay. And Tom, if you would, there was a lot -- I say a lot -- it was some discussion last time about the dividend being 5% stock dividend or what your thoughts might be, given that you've got this rather sizeable project to work with and everything else, you know, rate cases going on and everything, do you see any change for this fiscal year at all? Or is it still sort of under advisement-type --

We don't see any change in the fiscal year 2004 dividend policy in the company, Donato, and quite frankly, we haven't discussed it since the last quarter. We've been focused on integrating the Panhandle and our growth projects.

We have previously stated that we will not entertain a change in our dividend policy until we fully delivered on our commitments to the rating agencies, and we're not there yet. In part because we continue to grow, but also right now, we're just focused on -- on using all of our free cash flow to pay down debt.

Great. And lastly, as you summarize everything, I just want to make certain, when we look at it, virtually all of the capacity that you're expanding for is subscribed sufficient enough to give the kind of numbers that you were talking about. There's not a, you know, anything on the comment, if you will, for the -- for the excess capacity that, you know, could be subscribed for later.

That's correct.

Okay. Thank you.

Thank you, Donato.

Your next question comes from Mark [Kowald] with Advisory Services. [ INAUDIBLE ]

Hello, operator, we're not able to hear the caller.

Sir, please adjust your volume or your mute button.

We'll take the next question from Devon [Gulligan] of Zimmer Lucas Partners.

Hi, congratulations on a good quarter.

Hi, Devon.

Hi. Just a couple of questions.

You mentioned the 80 million of EBITDA from the three projects together. And then you mentioned the cap -- the total capitals of 250 to go into it. What sort of life of depreciation should we assume for those projects?

Devon, let me restate what I said. I think you may have --

May have misheard?

Yeah. You may have misheard me a little bit.

The total capital costs, excluding cap interest for the three projects is 250 million, approximately. Those projects, on an annualized basis, will generate $80 million worth of revenue.

That's right. I'm sorry.

Most of which will fall to the EBITDA line.

I can't give you, off the top of my head, the average, useful life of those projects or the contracts run through 2023. I'm sure that they're long-term depreciation.

Why don't I see if I can get Gary Lefler on the line later and have him get back to you? My guess would be 30-year life but --

Okay, that's helpful.

Rather than guessing --

That's probably a good range.

Yeah.

It's a mix of assets, but I think It's probably close to 30.

Right. Rather than guessing, let's have somebody get back to you with the best answer we can give you.

Okay. Fantastic.

And next question is, in terms of the capital left to spend for Phase I, how much do you guys have left just as of the end of the second quarter? Does it make sense, if you have to spend 250, I think you -- how much have you spent already of the 250?

Well, of the 250, don't forget, we just announced Phase II and the loop two days ago. So, we -- we've not spent very much of that, probably about 40 to 45 million in this fiscal year. I mean, is -- is Gary Lefler on the line? Yeah. I think --

Yes, Tom. This is Gary.

Gary, how much do we have left to spend relative to the Phase I contract for FY04?

Fiscal year '04 we've got about -- we've got about 30 million left to spend.

Okay. Thank you.

Okay. So does that mean that 30 of the 250 has been spent?

Yes.

Okay. Great.

And the last question, you mentioned deferred taxes being a benefit. Do you have an estimate of what those might be for '04 and '05?

Yes.

Yes. I mean -- for 2004 -- this is Rick Marshall speaking.

Hey, Rick.

Devon, we don't anticipate any -- any taxes being paid in 2004.

Any cash taxes.

Any cash taxes being paid in 2004. As a result, if, you know, it obviously depends on the -- the ultimate earnings for 2004 as to what that ultimate benefit is, but -- but you would look at it, it would probably be in the $70 million range for 2004.

You know, looking out to 2005, that level is sustainable of -- but there would be some -- some minor amount of cash taxes of any -- and cash taxes paid in 2005, at this point, you know that could range between 5 and $10 million.

So it sounds like -- so is the sustainable cash flow really more like -- what I'm confused about is the 70 million of deferred taxes is roughly sustainable? Does that mean that the total free cash flow before Trunkline and debt pay down would be like 150 to 170 going forward?

I'm just trying to understand the 225 in relation to like '05. I don't know if that makes sense.

Yeah. It makes sense. I think I would like to hedge a little bit --

Okay.

-- and say it's largely sustainable.

Okay. That's fair. That's fair. Thanks very much.

Thank you.

Again, congratulations for a great quarter.

Thank you very much.

Your next question comes from Gordon Howell of Credit Lyonnais. Please proceed.

Hi, guys.

Hi, Gordon.

Wondering if you -- well, you had stated that, both in the past, you had said about Panhandle and Trunkline Gas were fully subscribed in the winter of '03 and '04. Storage was 95% contracted. Maybe a similar question to what Donato asked earlier. But what percentage subscribed are these assets in the summer months? And how does that relate to your plan?

I think - that's a difficult question to answer in generally. I think our plan calls for just baseline utilization in the summer months. But if you look at where we stand this winter, Gordon, particularly with January, we see storage levels starting to -- to dip now, which is a good sign for pricing and utilization in the summer months. So, so we would expect to have a reasonable summer capacity utilization.

As it relates to '04 and '05, and I know you like to ask the question about capacity contracts, for all of the '04 contracts, we've recontracted those. For '05, there are, I would say, three main ones, two of which were in -- we've already got taken care of.

The third one, which really doesn't come up until October of '05, so, it's really premature to even talk about recontracting that yet.

All right. Okay. That's fair. Second question, if I could, you guys have mentioned the possible sale of the Sea Robin Pipeline expected something by the end of the -- I guess the calendar year. Could you talk a little bit about where you stand on -- on asset sales, particularly Sea Robin, if that's the case?

Yeah. I think that's a very good question and I apologize for omitting that in my prepared remarks. It was an oversight.

I've not been -- I've not been satisfied with the -- the offers that we have to date for the Sea Robin Pipeline. We -- this is not a fire sale, we make money at the Sea Robin. It contributes to our cash flow and our earnings. And we had a determination that we would not sell the Sea Robin in a dilutive transaction, and dilutive to our earnings and the cash flow.

So, the offers we had didn't meet that test. So, for right now, we have no plans to sell it unless we get an offer that meets that test.

What could make that asset more attractive to a potential buyer?

Well, I think there's a lot of speculation and a lot of activity in that area of the Gulf around LNG projects, and you raise an interesting point because time may actually be on our side to the extent that Accelerate or Chevron-Texaco or one of the other big players that is -- that is in the Gulf spending time and money to develop LNG projects, to the extent that they start to get some traction, we look at that as only adding to the value of the Sea Robin.

I appreciate it.

Thank you.

And your next question comes from Anatol Feygin of J.P. Morgan.

Hi. Good afternoon, everyone.

A couple of questions, some just follow-ups. In terms of the free cash flow, obviously, the two components that are driving the upside, we've talked about deferred taxes, and on the working capital side, just wanted to get a little bit more color, obviously, with the high gas costs and a lot of capital going into inventory, that will be coming back in by year-end, by fiscal year-end, but what do you guys think is is a sustainable -- sustainable kind of working capital delta from June 30 to December 31?

Yeah, Anatol, this is Rick Marshall. I mean, we've -- we've felt -- we feel, as we mentioned earlier, the 225, the 225 million includes the recovery of these working capital turnarounds, which is recovery of undercollected gas costs, as well as, you know, the collection of receivables and reductions related to gas and storage. As far as the recovery of undercollected gas costs, that's a one-time permanent type of component of cash flows. But we don't see prices increasing above what we've got modeled in that would result in a turnaround of working capital and that, you know, we would end up seeing increased working capital needs through -- for the fiscal year 2005.

So I guess what we're saying is we don't see, going forward, a difference between the amount borrowed for working capital purposes at the end of -- between -- at the end of 2004 versus at the end of 2005.

Except for the piece that -- that is the recovery, right?

That's correct. That is -- that is a -- a permanent recovery, if you will.

Okay. Great.

Question on cost savings, Tom, you had mentioned that you guys are well on track and $11 million has been achieved, I guess, that's on a full-year run-rate basis. In the previous call, you had told us that the pebble head count has been reduced from about 1200 to about 1100 people.

Just as we look at the O&M line for the quarter, it seems roughly flat with the previous quarter. Is that because we're waiting for these savings to really kick in and this is something that's going to really going to play out in the second half of the year? Or were there other costs that these savings offset?

Well, I think it's -- in large part the -- the rolling in of the savings, when we talk about the completion of the head count reduction, that was a rolling reduction. A fair number of those employees were retained for a period of time to provide for an orderly transition prior to their being let go.

So, I think when we're talking about annualized numbers, the second half of the year will begin to show some benefit, or greater benefit than you saw in the first two quarters, Anatol. So I think you're correct.

Great.

And, Tom, another, I guess, follow-up to Gordon's question. Also you had mentioned that the dynamics on the pipes are improving and you're seeing better and longer contract terms, and I think the numbers you gave us were the average -- the average contract life has -- had extended to that point from 3.4 years to 3.7. Yeah. I don't know if you have the specific numbers, but just in terms of trend, is that something that you are continuing to see sort of multiyear deals and -- and less discounting?

We haven't had occasion within the Panhandle since the last call to renew very many contracts of substance, Anatol. We -- we expect, as we sit here today, that that trend will continue. The discussions we have with our customer base relative to that would suggest that the only deal we've done of substance is the one we announced on Monday --

Sure.

-- which is virtually a 20-year deal. Which -- which will further lengthen our average length of contract for that loop capacity.

Great. Thanks, Tom.

Last one --

Yeah, Anatol, if I can jump back in here again.

Sure.

That's another benefit that we didn't highlight enough, and that is that when you can take short-term firm and IT capacity and turn that out for nearly 20 years and provide secure supply, not only to the country, but to what the end user customer base may be, that can do nothing but strengthen the opportunity to add long haul contracts on our pipes.

No doubt. No doubt. Thanks, Tom.

One last question, just in terms of short-term debt, you guys have done a tremendous amount on that front over the first half of the fiscal year. There's still some work to be done. Can you give us some thoughts on -- on what the strategy is going forward on the remaining, you know, 500 million or so?

Short-term term debt, you're defining as the debt that we've coming due at Southern Union and the Panhandle?

Right, and the -- and the -- and the notes payable, as well.

And the revolver.

Yep.

We've got -- we've got 145 million coming due on March 15th at the Panhandle. Southern Union has $150 million short-term revolving credit line and 225 million long-term revolving credit line agreements that mature in April and May, respectively.

We're currently in the process of negotiating the refinancing of all of those, and while we don't have anything signed, sealed and delivered right now, you should expect that we'll be acting on those very shortly.

Great.

One last one, I promise, in terms of the Phase I expansion, I just wanted to clarify, 30 million left to spend in fiscal '04 and that would leave about 60 million to spend in mostly fiscal '05 and a little bit, about, 10 million in '06; is that right?

I don't have the exact draw schedule in front of me.

That's fine. Thanks, Tom, I'll follow up.

You know what, I'm sure that Jack can get you that number.

I will follow-up offline. Thanks very much, everyone.

Thank you.

You next question comes from Mike Heim of A.G. Edwards.

Thanks.

I will start out with a question on Phase II expansion. I appreciate your comments about you have time and options. Just wondering what the schedule is going forward and when the decisions have to be made on financing, when the Furk dollars have to go out?

The -- hi, Mike.

Hi.

The -- we expect probably by the end of February to make our first filings. When the first dollars have to go out, there will probably be, once we receive for approval, there'll be some dollars going out the door. We don't see significant dollars at that point. A lot of the early dollars, particularly on the pipeline, will be engineering and right-of-way and things like that.

But we expect that we're going to start spending money on these projects as soon as we have clearance and full approval to do it. And I can't give you anything more specific than that because, as you know, when you're -- when you're at the mercy of Furk or other outside bodies, you're on their schedule, not your own. But we expect it to be fairly timely.

Let me reword it to say, after -- assuming you get Furk approval, how long after that do you need to make a decision on financing?

How long after that do we --

Well, I think one thing that's safe to say is that the free cash flow that's being generated for, you know, over the next six to nine months, six months, particularly, is going to provide us with an adequate source of -- more than adequate source of capital to fund these, what I'll say is the -- the lower levels of Cap Ex related to the Phase II expansion and -- and the -- the Trunkline loop.

Okay.

So, you know, sometime -- when do we have to make a decision on it? I would think that we'd come to a conclusion sometime by the end of the calendar year? Or have done something by the end of the calendar year.

Okay. Would you comment on the share count, up a couple million versus the September number? Could you give us a -- a quarter end share count number, and just in general, comments about how that -- why that's increasing?

John Graf, our controller, is going to speak to that, Mike.

For our September quarter, when you have a loss like we did, you do not include common stock equivalent, and for this quarter, since we have income, you include the calculation of common stock equivalents, which added probably somewhere between a million to 2 million shares in the calculation for EPS.

Okay.

Last question. Your guidance range is -- is somewhat of a wide range. I'm just wondering if you can kind of rundown the variables as you see it that could make a difference in how things come within that range.

Well, I think with each passing day, the variables become less and less. We've got seven months in -- in the bank. We've got maybe 90 -- not 90, maybe 45 days left of -- of the real winter months. So, we've got 45 days left of -- of high volume, high earnings days on the LDC side of the business. There's very, you know, there's much less volatility on the pipe transmission side of the business. So, I -- I think that we're in pretty good shape here.

I -- I would disagree that that's a wide range, you know, I think that's something that, if you recall, that's a range we gave when we first acquired the Panhandle, and we had a great deal of execution risk relating to the integration, which we have largely mitigated. Because I know that that was a hot button issue of yours, Mike, that you were concerned about our integration risk, and I think that we've gone a long way to address that and alleviate those concerns. But in terms of -- of narrowing the range, I'm not prepared to do that at this time.

Okay. Fair enough. Thank you.

And you have a question from [Briley Trepax] of Sigma Capital.

Hi, can you guys hear me?

Yes, we can.

All right. I just wanted to swing back around to free cash flow again. And it's great news that you're uping -- uping that sort of guidance there. And we've been using about 100 to 110, and then it was going to be 70 from -- 70 from tax deferrals. Is your -- and then -- should I assume it's $50 million from a working capital to get you to the 225 or so?

Yeah. I would say that -- that if you're adding an incremental 70 million for taxes, that typically we had a level in the neighborhood of 20 to $30 million, so you don't add an incremental -- I wouldn't add an incremental 70 for taxes, so I dropped that number down, and then you could assume the balance is working capital.

Okay. Okay. And then -- so then go-forward, you guys, one of the other callers asked the same question, so, the deferred taxes -- when CMS had the same property, they had a more favorable tax situation, so it looks like you guys are going to have a very similar one to the one that CMS had; is that correct?

I'm not familiar with what CMS had. I know that we're fairly happy with the situation we have relative to what our cash taxes are year-over-year for this year and the next couple of years.

Okay.

And you should expect that that will not turn around because a company of our type with the capital that we continually put in the company year-over-year that that will be a near-term situation that will not largely turn around.

All right. But then it just basically ends up being an extra $50 million in free cash flow.

Looking at that, I guess, and the next question is the rating agencies, how they're viewing that and have you had discussions with them? And what do you think the sort of next step is? Or where do you guys need to get to on your capital structure so that they're happier?

Well, we constantly have discussions with the ratings agency. I think yesterday's S&P weighed in on the matter and said that they remain neutral, that our recent announcements are neutral from the credit quality standpoint, which we continually have discussions with and we're in constant communications with Moody's as well.

Given what our strong cash flows are, given our commitment to retaining our investment-grade rating and the amount of flexibility we have, we're pretty confident that we're going to be able to reach an accommodation with the rating agencies that retain our investment-grade rating, and we're hoping that Moody's will even remove their negative outlook.

All right. Thank you.

That was a great quarter and I'm really happy about the cash flow.

Thank you very much. So are we.

And you have a question from Casey Alexander of Gilford Securities.

Hi, good afternoon.

Hi, Casey.

Hey, a couple of things.

One, when you purchased the three companies in New England, I seem to recall that there was some sort of an agreement with the rating agencies for a period of rate stabilization and even maybe some cost savings giveback to the -- the customers of the area. Do you maximize your allowable rate of return in that particular geography? Or is there a time period where the stabilizations sort of comes off the cap and you can start to ask for a higher rate of return?

We have no intention of going into the Rhode Island commission right now for any requests for a base rate increase. The Energize Rhode Island program, which was in effect prior to for some time after our acquisition is no longer in effect. We reached an accommodation with the Rhode Island commission whereby there was a sharing mechanism for any merger-related savings, and then there's also a sharing mechanism, give back mechanism, if you will, to the extent that we earn above our allowable rate of return. That, quite frankly, is largely impacted by weather.

Okay. Okay. Secondly, you know, last week I went and listened to a presentation for the Chairman and President of the American Gas Association here in New York.

On this?

Yeah. And they were talking about LNG imports of being in the neighborhood of 450 or 500 billion cubic feet this year, and they expected they -- the LNG imports contribution to go to somewhere around 3 trillion cubit feet in about 10 years. But they also were saying that of the dozen or 15 or so LNG projects that -- that were on the drawing board for new builds, that they thought maybe only 4 would ever actually ever get built and the majority would be projects, of the incremental capacity, would come from projects like yours of expansion.

Can you give me some color as to the -- the difference of the economics involved in an expansion versus a new build? And why this works so much better for you?

Well, sure. First of all, beginning a new LNG project, you first got to start with all of the environmental permitting required and the Furk permitting required, which takes time and is very costly. If you look around the country, you see all of the projects that are being discussed out in California, in the Baja, even expansion projects in -- in New England.

These projects tend to be very costly relative to an expansion of an existing site, such as ours. Trunkline LNG sits on an approximately 400-acre site where the initial construction, all along, had accommodations for expansion projects so that we're able to very efficiently expand that -- that site. And that's why, not only do we have a time and permitting and environmental advantage, the cost advantage is very significant to us. And that, I think, is born out by the fact that our single customer there now, BGLNG Services, was so willing to negotiate a long-term contract with us.

And that is the other thing that we have other over other LNG facilities that are either cited or planned. We're -- we're fully committed for supply. And that gives us a great deal of certainty of revenue and stability of cash flow.

Not to put the cart ahead of the horse, but is there room for a Phase III somewhere down the road?

We're currently focused on Phase I, Phase II and the Trunkline loop.

Okay. Thank you. That's it for me, thank you.

Thank you. Thank you.

Gentlemen, I have no questions at this time.

Okay. Well, in closing, I just like to reiterate that we're very happy where we sit right now rather -- relative to our integration process. The Panhandle has been performing superbly. Trunkline LNG is turning out to be a wonderful growth story for us.

We're not -- we're not blind to the fact that 2005, 2006, 2007 will be very busy and difficult years, and we're also confident that, as we said before, that when you look at 2007 fiscal year, if you look back to 2004, where we sit today, you'll be able to say that we delivered double-digit earnings growth to that point.

So, with that, you know, I'd also like to just conclude by saying that even though weather was warm in the last quarter,in January, we had, on the east coast, 19 straight days of -- of below freezing weather. And the -- the people at the LDCs have been working very hard to deliver service under difficult circumstances, both at the call centers and the MNC people. So, I'd like to tip my hat to them. Because while we talk to you investors all the time, it is the people at the pipes and the LDCs that actually deliver these numbers.

So, with that I would like to thank you all for listening today. We look forward to talking to you again.

Ladies and gentlemen, thank you for joining us on today's call. You may now disconnect.