Energy Transfer LP (ET) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to fiscal 2004 Southern Union Company earnings conference call. My name is Christie and I will be your call coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jack Walsh, Director of Investor Relations. Please proceed, sir.

Thank you, Christie. Good afternoon. This is Jack Walsh. I would like to thank you for joining us for Southern Union's fiscal 2004 earnings call. Joining me on the call are Tom Karam, Southern Union's President and Chief Operating Officer, David Kvapil, Executive Vice President and Chief Financial Officer, Jon Graf, Vice President and Corporate Controller, Rick Marshall, Vice President and Treasurer, as well as other members of our management team. A replay of this call will be available through Monday, August 9th by dialing (888)286-8010 and entering passcode 90103665. 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 our earnings release you may request a copy by calling 570-829-8928 or you may obtain it from our website. Today we will be discussing our fiscal year ended June 30, 2004 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'd like to caution you that many of the statements contained in our call 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 will now turn the call over to Tom Karam, Southern Union Company President and Chief Operating Officer, for a brief overview of the quarter and recent events. Tom?

Thanks, Jack. Good afternoon, everybody, and thank you for joining us on our fourth quarter fiscal year and year-end earnings call. As you should all have seen by now this morning we released and reported record earnings for the fiscal year '04 period of $1.37 per share which represent earnings of a little bit more than $101 million. You know, it was about a year ago that we were speaking about our acquisition of the Panhandle in one of our conference calls and we -- we said that we would increase our earning by 40% as a result of this operation and today we reported record earnings of $1.37, which represent that 40% increase in operation -- operating income from continuing operations. About 60% of which was driven by the Panhandle and LNG operations. We told you that we would strengthen our balance sheet and pay down our debt and this past year we've seen debt pay down of about $200 million and we've seen our primary credit metric ratio of debt to total capitalization fall from 72% to a pro forma 58% which would include the stock that we issued last week of 4.8 million shares. We told you last year that we would be keenly focused on integrating the Panhandle in about a year and we would look to drive about $15 million worth of synergies from that integration. As we stand here today that integration is largely complete. We've delivered over $12 million worth of savings and the balance of that 3 million is in process and we've intentionally timed it so that we can deliver it by this coming winter. We told you that we liked the LNG business and that we would continue to look to build it further and that with -- with some attention it would get bigger and better. And as we stand here today it is indeed getting bigger and better. We've signed contracts that will expand the trunkline LNG project to triple the size it is today and increase by 50% its above grounds storage. We told you that as we started to put these components in place we would be able to deliver double-digit earning growth through our fiscal year '07.

We are now one year closer to when that accelerated growth will kick off. We are well on our way and we have eliminated substantial execution risks in order to get us there. We told you that in conjunction with the Panhandle integration we would create a platform that will allow us to grow and to facilitate successful integration of future acquisitions and that platform is now in place. And, further, we have positioned Southern Union to build on this platform with our possible acquisition of Cross Country Energy. We are very excited to talk about our results today. We are excited about where we stand in relation to our business strategy. We like the direction the Company is moving, which is more toward the interstate pipeline business. As we look down the road, if indeed we are successful in acquiring Cross Country, our business model will be roughly 70% interstate pipeline and LNG and a little less than 30% LDC business. That is not to say that we no longer like or are capable of running the LDC business. We are just taking advantage of opportunities that present themselves in the marketplace and we are prepared to continue to take advantage of those opportunities to drive value for our shareholders. What I'd like to do now is to turn the microphone over to Dave Kvapil to give you some of the detail behind the numbers we reported today for the quarter and for the fiscal year, talk a little bit about some of our ratios and then I would like to come back and talk a little bit about the status of LNG, our status of the MGE rate case and to give a little bit of more information about the Cross Country Energy opportunity. David?

Thank you, Tom. Good afternoon. The Company recorded fiscal year 2004 earnings from continuing ops of 101 million or $1.37 per common share. This is on a fully diluted basis. This compares with 2003 net income from continuing ops of 43.7 million or 74 cents per share, an increase of 132%. Additional information and detail on these results may be found in a form 8(K) which we filed with the SEC earlier today. That filing is also available on our website. For the three months ended June 30, 2004 the Company recorded a net loss from continuing ops of $398,000. That's less than a one cent per share loss and compares with a net loss from continuing ops in 2003 of 11.9 million or a 20 cents loss per share. Prior to our acquisition of Panhandle Energies, Transmission and LNG assets in 2003, the Company historically recorded a sizeable fourth quarter loss due to the seasonal nature of our local natural gas distribution business. These fiscal year results are in line with our 2004 guidance which was $1.35 to $1.40 per share.

As Tom mentioned the Southern Union's year-over-year earnings improvement is chiefly attributable to the Panhandle acquisition of last year. Let me provide a little more insight into our numbers and the impact from the Company's two operating segments. Those two segments being our gas transmission storage and LNG operation through Panhandle Energy and our local gas distribution operations which are in Missouri, Pennsylvania, Rhode Island and Massachusetts. Our transportation, storage and LNG segment, Panhandle Energy, continues to exceed our initial expectations and again was a significant contributor to our earnings during this quarter as it has been throughout all of fiscal 2004. As indicated in the earnings release Panhandle contributed 94 million of net income for the fiscal year and over 14 million during this past quarter. These numbers reflect Panhandle's operations on a standalone entity basis. This is a year-over-year improvement of 14%. The increase was due mainly to reductions in interest expense and in addition to improvements in revenue. In addition Panhandle recorded a non-recurring loss in the prior year relative to its investment in a subsidiary. Interest cost on Panhandle's debt decreased from 77 million to 48 million due to certain Panhandle debt refinancings during 2003 and 2004. In addition purchase accounting at the time of the acquisition required the revaluation of Panhandle's debt. One time gains on the repurchase of debt and the amortization of debt premium contributed 10.5 million or 14 cents per share to Southern Union during fiscal 2004.

While throughput was down slightly, about one half of 1% from the relatively strong prior year period, transport reservation revenues, which make up 65% of Panhandle's total revenues, were up 1% for the year. Weather did cause a comparable negative impact between periods. Weather throughout our distribution service areas during 2004 was about 97% of normal winter weather. This compares with 2003's weather which was 104% of normal. Our Missouri LDC, Missouri Gas Energy, experienced weather that was only 92% of normal during 2004. As a result our LDC throughput was down about 8%. This impacted net earnings by about 4.6 million net of tax or 6 cents per share as compared with the prior year. Our LDC operations also experienced increase in several operating expenses. On a year-over-year comparison employee benefits, which include pension, post retirement and medical expenses, as well as certain insurance costs were up for a combined 8 million net of tax or 11 cents per share. Because of the deterioration of investment values over the past several years as well as a lower implied discount rate the expected increase in pension expense was a factor in our 2004 earnings guidance. Medical costs have also trended upwards but this is consistent with most all other companies.

While our LDC margins remain stable in 2004, the relate -- the related revenues were up significantly as a result of increased gas costs. Bad debt expense increased by 4 million net of tax or 5 cents per share during this past year. However the Company's LDC receivables are adequately reserved at this time. Higher gas costs also had a negative impact on revenues from our LDC transport customers. This negatively impacted earnings by about 2.7 million net of tax or 4 cents per share. The Company's interest expense on our outstanding debt increased year over year but includes the additional debt acquired in the Panhandle Energy acquisition. Excluding that additional debt assumed in that acquisition, earnings were positively impacted by reductions in interest expense, which was a result of debt reductions and lower effective interest rates caused by recent debt refinancing. Our net debt and preferred security levels have been reduced by almost 200 million since June of 2003. The reduced interest costs positively impacted earnings by about 6.7 million net of tax or about 11 cents per share. The continued reduction in our outstanding debt balances evidences our commitment to the rating agencies that we are strengthening our balance sheet and solidifying our investment grade status. At June 30, 2004, our debt to cap ratio was 61% whereas our debt to cap ratio a year ago at June 30, 2003, was 72%. We remain committed to improving our balance sheet and maintaining an investment grade rating and we are proud of our accomplishments in 2004.

We completed several Panhandle debt refinancings as well as a Southern Union preferred stock offering. These debt offerings took advantage of lower interest rates. The proceeds from the preferred stock offering were used to redeem the 100 million of 9.8 trust preferred securities and other short term facilities. In addition we recently renewed Southern Union's revolving credit facility and for a full 5 year term. Last Friday, August 30th, the Company closed its public offering of common stock and issued 4.8 million new shares of common stock. Net proceeds of 87 million from the offering are being used to repay debt and for other general corporate purposes. On a pro forma basis our debt to cap ratio is now at 58%. This puts us well on our way to meeting our debt to cap goal of 55% by mid calendar 2005. We plan to continue to use our free cash flow to repay debt. As many of you already know Southern Union has distributed an annual 5% common stock dividend since 1994. Since we are committed to using cash flows to grow our business and to deleverage our balance sheet we have no current plans to change that dividend policy. The Company's cash flow before working capital changes was $4.18 per share for the year ended June 30, 2004, a 92% improvement over prior year cash flow of $2.18 per share from continuing ops. Free cash flow from continuing ops was 176 million or $2.38 per share for the year ended June 30, 2004, versus 49 million or 83 cents per share in 2003. Free cash flow being defined as net earnings plus depreciation and amortization less CapEx and adjusted for actual income taxes paid versus income taxes accrued.

Our free cash flow definition excludes any CapEx associated with the various LNG project expansions. We met our 2004 CapEx budget of approximately 150 million. Our budget was roughly split 50% for our LDC operations and 50% for our transportation and storage operations at Panhandle Energy. This number excludes our LNG expansion CapEx. The LNG -- the LNG CapEx incurred in fiscal 2004 was about 67 million or approximately 26% of the total expected commitment for the LNG expansion project and that number is at 250 million. Forecasted LNG CapEx to be incurred during fiscal -- fiscal year ended June 30, 2005, is about 145 million. The Company is in full compliance under Sarbanes-Oxley. Because of the recent extension of the section 404 documentation compliance, Southern Union is thereby granted an extension until fiscal year end June, 2005. However, the Company, as you know, is considering a change in our fiscal year end. Should we decide to make that change the Company must be in compliance with Sarbanes-Oxley 404 by December of '04. As previously announced on July 19th and in anticipation of our recent common stock offering our earnings guidance for fiscal '05 is in the range of $1.30 to $1.40 per share. This guidant -- guidance reflects the 4.8 million new shares issued in connection with that equity offering. As we have said all year our 2005 guidance is going to be consistent with our 2004 guidance and now our 2004 actual results.

As we noted earlier, the 2004 results reflect certain one time accounting gains resulting from the purchase accounting at Panhandle. As a result the quality of our 2005 earnings should be even better than 2004. Beyond 2005 we see significant, longer term earnings growth opportunities through the planned trunkline LNG expansions, the expected rate increase at MGE, continued ongoing integration and productivity improvements and interest rate reductions which were achieved through several debt refinancings during the past 12 months. That pretty much summarizes the financial side of this discussion. I am going to now turn it back over to Tom. Tom?

Thanks, David. Just to get some clarity behind David's comments about the recently completed stock offering, the actual number of shares that we offered in the offering was 11 million shares with a 15% green shoe taking the total shares up to 12.6 million shares. Only 4.8 million of those shares were primary shares offered by the Company. So that it is only those shares that are included in our future '05 earnings guidance. The balance of the shares, or roughly 7.8 million shares, were offered to the public on what is called a forward purchase contract where we had entered into a contract with JP Morgan and Merrill Lynch who then borrowed shares from the marketplace and turned around and sold those shares to the public. We internally call this an equity on demand strategy because, to the extent that we are in fact successful in acquiring the Cross Country Energy assets, it is that equity that we would then settle and issue shares, issue those 7.8 million additional shares to add to our equity balance. So it's a strategy that we've employed to provide very appropriate and measured access and orderly access to the capital markets while at the same time trying to be progressive and aggressive to eliminate as much execution risk as we can around this potential acquisition. What I would like to do now is to turn to some of what we view as the primary drivers for our being able to deliver double-digit earnings growth through our fiscal year '07. These are things that you've all heard before but I'd just like to give everybody an update and to reiterate the high probability of certainty around our ability to deliver double-digit earnings growth. We've talked a great deal about Trunkline LNG which is located in Lake Charles, Louisiana. And we believe that Trunkline LNG is the gold standard for all LNG projects anywhere.

Currently the Trunkline LNG has a sustained send-out capacity of 630 million a day with 6.3 BCF of above-ground storage. And as we have said before it is 100% under contract with BG LNG services. Since the time that we've announced and closed the acquisition of the Panhandle we've commenced three expansion projects at Trunkline LNG. The phase I expansion project, which will double the sustained send out capacity and increase by 50% the above-ground storage capacity, is already under construction and all permits and ferk(ph) approvals are in hand. The project is scheduled to be completed by December 31 of 2005. It is on time, on budget. Phase II is very much underway with respect to the design phases and as much work that can be done for phase II in conjunction with phase I is being done. We have filed for our ferk certificate in February and we expect an orderly receipt of that some time in the September time frame of this year. Phase II will take the sustained send out capability -- capacity of Trunkline LNG from 1.2 BCF to 1.8 BCF and further extend it's peak send out to 2.1 BCF a day. This project is scheduled for completion in early to mid 2006. The third component of our three legged stool expansion project, if you will, at Trunkline is a Trunkline loop, which is a take away pipe from the LNG facility of 23 miles, which will increase our take away capacity by 62%, up to 2.1 BCF a day. We have filed for the ferk permitting and once again we expect to have an orderly receipt of that permit in September of this year.

The phase I, the phase II and the Trunkline loop expansion projects are all 100% contracted with BG LNG services through the year 2023. This represents a total capital expenditure excluding capitalized interest of approximately $250 million. This $250 million worth of expansion CapEx will generate approximately $80 million worth of annual revenues, 90% of which, 70 to $72 million, will fall directly to the EBITDA line. And as we said often on the road show when we are selling the stock last week, it is a rare occurrence in the regulated natural gas business when you can build a turnkey business at 3.5 times EBITDA. And we are very proud and pleased to be able to deliver that to our shareholders. All of these projects will begin to add to our earnings beginning in fiscal year '06, the beginning of fiscal year '06, and flow through fiscal year '07. I'd like to turn now to the Missouri rate case at MGE. If you recall we filed in November of 2003 for a $54 million base rate increase. The Missouri Public Service Commission staff came out with a recommendation of a $300,000 rate reduction. Since that time we have been in constant discussions and negotiations and hearings and briefings as is customary for a rate case in Missouri. And we've been successful in reaching settlement on a whole host of issues with the staff and with the Office of Public Counsel. The state of the case right now is that the two largest remaining issues are return on equity and our capitalization. And taking effect for all of the issues that have been settled and filed, we now believe that the staff's and OPC's recommendation is that we receive a $13 million rate increase and that our position is that we are entitled to a $39 million rate increase. So as the process typically goes we have narrowed the bid and ask as we successfully argue each of our positions and settle cases in the best interests of all parties concerned. These rates by law must go into effect by October 2nd of this year, which would mean that the Missouri Public Service Commission would have to weigh in on this some time in September of this year. Relating to current events or recent developments. By now many of you have heard about our bid, together with our joint venture partner GE Commercial Finance, to acquire the Cross Country Energy Company, which was formed by Enron, for $2.35 billion. That price includes $461 million of assumed debt. Cross Country Energy, which is a newly formed entity by Enron, is a holding company which holds Enron's interest in and operates three major North American natural gas pipeline businesses. Transwestern Pipeline, it owns 50% of the Citrus Corporation which owns Florida Gas Transmission, and Cross Country also owns general partnership and limited partnership interests in Northern Border Partners. The U.S. Bankruptcy Court has granted its approval and awarded our joint venture, which we call CCE Holdings, stalking horse status, which designates us as the top bidder to beat in the auction process. This process which is ongoing is scheduled to reach its conclusion on September 1 of this year.

All qualified bidders seeking to submit a higher and/or better offer than the one that we have submitted and have presented to the Bankruptcy court have until the end of business on August 2rd to submit their bid. If a higher and/or better offer is submitted and is so deemed to be such by Enron in consultation with the creditors, then we will proceed to an auction which will commence and conclude on September 1 of this year. Following that auction it is proposed that the U.S. Bankruptcy Court enter a sale order about a week later on September 8th or 9th. Should we be successful in the auction process, and obviously we have every intension of being successful, Cross Country expands our interstate pipeline footprint with access to very key additional markets. Transwestern Pipeline provides gas transportation services to various markets, most notably the fast growing southern California market. In addition, one of the things we like about Transwestern is that it has the bi-directional capabilities to flow gas east or west and can take advantage of opportunities that exist anywhere along their pipe. Cross Country's ownership, 50% ownership of Citrus Corporation, contributes the very valuable Florida Gas Transmission Pipeline which is the preeminent provider of natural gas transportation services to customers in Florida. With 9900 miles of pipeline and approximately 8.5 BCF of capacity per day, Cross Country Energy serves customers in four major geographical regions in 17 states. Combining Cross Country with Southern Union's existing footprint we will be one of the 5 largest pipeline companies in the United States, as well as continuing to be the leading LNG import facility in the nation. We will operate over 21,000 miles of interstate pipeline with capacity of about 14 billion cubic feet a day in 21 different states.

Needless to say our pursuit of Cross Country is a natural progression of our move into the interstate pipeline business. With these well run assets combined with the superior operation of Panhandle we will create sufficient critical mass and scale to facilitate our ability to drive down our existing unit costs while being better positioned for top line growth as well. We like the management at Cross Country. We like the long established stable cash flows and the consistent performance and we very much like how these assets fit operationally with ours. We are excited about and committed to the near and long-term benefits this acquisition will provide to our shareholders. And, needless to say, we are confident in our ability to successfully integrate these assets. With that I'd be happy to open the floor to any questions that you and the listening audience may have. Operator?

(Caller instructions) Your first question comes from Gordon Howald of Calyon Securities. Please proceed, sir.

Great, thanks, guys. Tom, in the past you talked about O&M and interest cost savings over at Panhandle, third quarter for example if I remember correctly, O&M was down about 7% versus the third quarter, fiscal third quarter of last year. Could you talk a little bit about O&M? It seems like you talked a lot about interest expense reductions in this conference call.

Gordon, we typically -- I think in the past we've talked about part of the driver that is reported in the 10(K) in terms of reduced O&M costs being the reduced interest costs. But we typically don't give line item disclosure on our O&M costs. But I think that it would be safe to say that all of the interest rate savings that arose from recasting our balance sheet are largely in place. The going forward interest rate savings will be driven by our debt pay down, naturally, and that we've reached what we believe to be a fairly stable run rate on our O&M cost at the Panhandle.

Gotcha. If I could, one other quick question. Is the new range that we can expect from the Missouri rate case, 13 to 39 million, did I understand that correctly?

You did hear that correctly. And the range is being driven, actually, Gordon, by filed and agreed upon settlements on issues.

Okay. So we should not expect in any way it to be -- to see anything below 13 million come through?

I think that's correct. I know that's correct.

I apologize. When did you say the decision is expected at this point?

The rates have to be in effect by the 2nd of October, so that a decision from the commission will likely be handed down in September.

I appreciate it. Thanks.

Thank you.

And your next question comes from Paul Fremont of Jefferies. Please proceed, sir.

As part of the -- as part of the agreement has staff stipulated in Missouri to a level of rate base? And are we correct or am I correct in assuming that you guys had filed for something on the order of about 555 million of rate base?

Yes to both of those questions, Paul. And I will ask Rick Marshall to answer them for you.

Yes, you're correct in what we have filed for and my recollection of the rate base is it was agreed upon in this proceeding is that it's in the neighborhood of $530 million.

So, okay, so under the agreement it's very close to what you had actually asked for?

That's correct.

So then we should assume that with respect to expenses, allowed expenses, you've largely gotten through those issues and that the really -- from what I understood on the conference call the two remaining areas of disagreement which basically get you to either 39 or 13, relate to ROE and the level of equity to total cap?

Well, I think I said that the two largest issues remaining open. There are still other issues, Paul. And I think it would be a little premature to say that we've settled all of the issues as they relate to expenses. But in terms of your conclusion I think that's correct.

And then lastly can you remind us what you've asked for in terms of both ROE and equity to total cap?

When we filed the case we filed for a 43% common equity and a 12% ROE. The staffs original rebuttal or when they put their case on they came out with a 28% common equity and an 8.5 to 9.5% ROE.

And then lastly, what were they basing the 28% equity to total cap on? Their recommendation? The staffs original rebuttal or when they put ?

What were they -- where did they get the 28%, is that what you're saying?

Right.

It's probably directly from our balance sheet at that point. Right?

Okay, So then we're just looking at the actual, on a historical test year basis?

On a consolidated basis.

Right.

Thank you.

And your next question comes from Rebecca Followill of Howard Weil. Please proceed, sir -- ma'am, I apologize.

That's okay. Good afternoon. Several questions for you. What is your timing on determining when or if you will change to fiscal year end? And then I'll proceed as we go along.

Our timing -- we don't have an artificial deadline to determine that. I think we have some time. What we're working through, Becca, and I think it's a very good question and Dave alluded to it, one of the significant factors in our making that decision is our ability to do all of the testing required so that we can be in compliance, more or less, with Sarbanes Oxley 404. Those rules are very vague, some of them are very, very broad, we don't have any idea as to whether it helps or hurts our ability to get what would be a clean opinion from our auditors as it relates to our compliance and we don't know just how closely they're going to view if we have one exception or two exceptions that don't impact the integrity of our financial systems what that means. So we're trying to get some clarity and working very closely with PWC on this. It is our game plan to continue to get more and more comfortable in our ability to change our fiscal year to a calendar year and still deliver a clean opinion in conjunction with PWC on the Sarbanes Oxley. But that's one of the primary drivers and as you know we're in unchartered territories.

So the intent is to go to a calendar year-end, it's just getting through this Sarbanes Oxley is the issue. I think that's one of the primary drivers and we've said all along that our recommendation is to convert from a physical to a calendar year. Okay. Second question on LNG. In order to complete phase II and the loop on the schedule that you have, what is the drop dead date to get a ferk certificate for both of those. Probably sometime in early '05. Okay, so you have a little bit of wiggle room.

We do.

And then on financing and I understand you are limited on what you can answer on your questions on Cross Country but in the realm of big picture if you were to make a large scale acquisition of some asset, would some of your LDC properties be -- be potential sale candidates in order to finance an acquisition.

Actually I would like to answer that question having nothing to do with any potential.

That's why I'm trying to couch it that way.

Right, that's on the board. We, as you know and it's well documented, we are transaction oriented in nature. We believe that we are very good integrators of companies. What we've always said is that almost any asset we own is for sale at the right price if we can figure out a way that by selling an asset we can drive additional value to our shareholders. And that is always a component in the mix, whether we are looking at an acquisition or not.

Okay. Then finally on the Missouri rate case, one more question. I understand the timing is October 2nd drop dead. You're looking for a September decision. But, in the meantime are there any other dates that we can look for? When would the staff make their final recommendation? Or is there a good chance that we see a settlement before that? Give us some more color on the process if you could.

The process is ongoing. We are in the briefing stage now after hearings. We are in constant communication with the staff, Becca, so that there's always the possibility that there could be a settlement. Quite frankly we would like there to be a settlement because that means that we've made our case and the staff and the commission have taken our points. But I don't think that there's any gate keeping date between now and the time it would be presented to the -- through the ALJ to the commission.

Okay. Thank you very much.

Thank you.

And your next question comes from Andy Aurbens(ph) of Morgan Stanley. Please proceed.

Hello. I was wondering with respect to the --- to the guidance for the coming year, which is kind of flattish from the past year and obviously the greater number of shares is a key factor but I was wondering if you could talk about any other dynamics going on with respect to that?

Sure, Andy, thank you for the question. We announced this morning our fiscal year '04 earnings of $1.37. We had about two weeks ago given guidance that our '05 earnings would be $1.30 to $1.40. From the onset of our acquisition of Panhandle we have stated that we would be able to deliver double-digit earnings growth through fiscal year '07. However, that earnings growth was not linear, that it was in fact backend loaded with the rapid acceleration in earnings beginning in '06 and culminating in '07. What Dave spoke to in his comments was the fact that in this $1.37 that we reported this morning were about 12 cents a share in non-recurring balance sheet benefit from the tender and the early redemption of debt at the Panhandle. If you withdraw that what we had was about $1.25 in earnings from continuing operations, from recurring operation. Balance that with our '05 guidance of $1.30 to $1.40 simply taking the midpoint and what you've got is a nearly 10% improvement in operations from earnings -- or earnings from operations. We think that's pretty significant because once again we are in the regulated business. We don't have a lot of swing so that to the extent that you can improve your earnings from operations year-over-year by 10%, that further reinforces the statements and commitments we've made to the marketplace that we can integrate companies, that we do know how to operate efficiently in this transportation and distribution business. So what I would tell you is that while from the reported earnings standpoint, yes, in fact '04 is going to be -- '05 is going to be flat to '04. The quality of the underlying earnings is stronger and it gets us that much closer on that much shorter a runway to life off, if you will, to our accelerated earnings growth. I would also tell you that, remember, we are already in our '05 year.

Right.

So that when you look at other companies in the marketplace who are trading off multiples of their next year's earnings, we are in '05.

I was wondering what the -- what's the base year you're using and EPS amount to do the -- the double-digit calculation through the fiscal year '07.

fiscal year '04.

Okay. Thank you very much.

Thank you, Andy.

And your next question comes from Anatol Feygin of Banc of America Securities. Please proceed.

Good afternoon, everyone. A couple quick questions. Could you provide us with some flavor on where you think pensions -- pension expense will run in '05?

We don't anticipate any substantial increase in our pension expense in '05, Anatol. '03 and '04 were kind of tough years in the marketplace and we had a precipitous drop in '03 in terms of the discount rate. We've seen a stabilization of that. We haven't been given our final actuarial report but our expectation is, is that we will be relatively flat.

You guys are on a June 30 pension year, right?

Yes, we are.

Any, and considering how dismal the interest rate environment was a year ago you don't anticipate a big uptick in the discount rate which would sort of swing the pendulum back the other way?

No.

Okay. Another question. On the -- in the quarter it looks to us like the LNG shipments actually received in Lake Charles were down quite a bit year-over-year. Is there any reason for that and did that impact you guys financially? And will it going forward?

Let me answer the second question first. It did not have any impact on us financially because our contracts are largely insulated from deliver. To answer the first question, I think that's better posed to BG LNG services as to what the rationale is for where they take deliveries and how robust their own shipments are?

I appreciate that. Just on your side there weren't any operational issues that --?.

Absolutely not.

Great. Just one last clarification. On the stock dividend do you still plan to go forward with that and the $1.30 to $1.40 does not include the impact of the stock dividend.

The guidance we've given for fiscal year '05 does not reflect the 5% stock dividend and it's our intent at this time to continue as we have since 1994 to offer a stock dividend.

Great. Thanks very much, everyone.

Okay.

And your next question comes from Mary Elizabeth Brennan. Please proceed, ma'am.

Hi, quick question and that is I was wondering, it seems like the rating agencies have been a little quiet after the equity offering and specifically Moody's. And I was wondering if you could give us a little bit of color in terms of your discussion with them, are they -- are they pleased with the progress that you've made toward deleveraging?

Sure, Mary Elizabeth. I think the -- there was a note put out by S&P which largely, in their own rating agency's way, endorsed the steps that we took with the offering. We've been in constant communication with Moody's. We would expect that they would take action sometime later this month. The discussions we've had with them have been very positive. They very much endorse the moves we've taken so that we would expect to have -- we would expect to have positive action out of Moody's. And I can tell you that we've already had several conversations with Moody's where we have strongly suggested that they take action to remove the negative outlook on our stock.

I guess the only thing that seems a little odd is what happened later in the month. It's so close to the Cross Country acquisition. You know, would they say, oh, let's wait and see what happens?

I think first of all the Cross Country acquisition is not a contractual obligation yet for the seller. It's not something that's guaranteed. Secondly, Moody's has assigned a new analyst to our account so there might be a little bit of a lag there.

Got it. When did that happen?

That happened about two months ago.

Okay. I really appreciate that. Thanks.

Thank you.

And your next question comes from Michael Caro(ph) of Gilford Securities. Please proceed.

Hi, guys, I'm calling on behalf of Casey Alexander.

Okay, Michael, thank you.

He had a couple questions. First is, if no bidder emerges for Cross Country is there any way to expedite the close of the acquisition?

From Southern Union's standpoint we've already began the regulatory approval process. And in fact we've already passed the HSR hurdle so that we don't have an issue there. We are -- we've already filed in Pennsylvania and in Missouri. And we will be filing very shortly in Massachusetts. We expect that we will have Pennsylvania approval. We are hopeful that we will have Missouri approval. We will have -- we expect that we will have half of the Massachusetts approval all by September 1st, and that the other half of the Massachusetts approval will be received shortly after that time frame. From the sellers standpoint I think that there are some FCC approvals that are needed that may take sometime as well the successful conclusion of some other issues. My sense is that we will be able to close quickly.

Okay. So mid-December is -- ?

Well, the contract that we filed has an outside date of December 17.

Okay, great. And then secondly, you guys commented about the Missouri gas rate case. But do you foresee, if you can say, do you foresee any other future rate cases in, let's say, Pennsylvania or New England?

Well, we always foresee future rate cases. We do not have any planned at this time.

Okay. Thanks a lot.

Thank you.

Your next question comes from Teresa Ho of Salomon Brothers Asset Management. Please proceed, ma'am.

Yes. I have a clarification question. When you were referring to fiscal '04 EPS as a base for the double-digit growth. Are you referring to the 137 or to the 137 excluding the one time 12 cents?

I am saying $1.37.

You are using $1.37 as a base. Okay. And second, in terms of your new facility, how much is available right now?

I believe there's only about 20 million drawn on that.

20 million drawn.

21 million out of the 400.

Okay, great. Thank you very much.

Thank you.

And you have a follow-up question from Andy Aurbens of Morgan Stanley. Please proceed, sir.

Assuming you do the 5% stock dividend again, what -- what would be the timing of that dividend through the year? In terms of, you know, trying to calculate dilutiveness to EPS?

Well, the stock dividend is not dilutive to EPS, Andy. It is in effective a 21 for 20 stock split. So it's not dilutive at all. You simply recalibrate earnings. But you are not changing the base at all. It's simply a stock split more or less. And we typical issue it sometime mid to late summer.

Okay. Thank you.

Again, that is star followed by 1 for any questions. You have a next question from Brad Turpak of Sigma Capital. Please proceed.

Good afternoon, guys.

Hi, Brad.

Can we talk a little bit about free cash flow.

Sure.

You brought your guidance down from 250 to 200. And I saw your inventories looked -- they are a little higher but can you just walk through exactly what happened there?

Yeah. First let me address that, okay, because I know that you've called and some other people have call. We've talked to virtually everybody. In our definition of free cash flow we erroneously included working capital as a component of it. And since it was the first time we had ever given free cash flow guidance we included working capital and we should not have. And if in the event we give free cash flow guidance in the future, which we are now leaning against, we will certainly not include working capital because it is not representative of the strength of our operations and the cash flow generated by our operations. And you correctly point out that in a snapshot in time on any one day if our inventories are higher and the price of natural gas is higher, or receivables, the timing of receivables may be a little bit longer than we originally thought, it gives a distorted view of the strength of our operations. So the components of that working capital are easy to point to. The price of natural gas. The level of storage. The amount of accounts receivable. Those are things which are timing differences that in no way reflect the strength and improvement in our free cash flow and our operations. So I'm glad you raised the question -- the question. Thank you for doing it. We will never use working capital again.

Can you tell me what your -- what you had assumed for just sort of the unit price back in January and.

No.

Okay.

No, it's a dead issue, Brad. It's something that we never should have done. We can't keep going back trying to reconcile it. It's not relevant to the strength of our operations.

Well, okay. Can you tell me what depreciation is going to be for the next forward 12 months?

Well, depreciation is pretty much stable right -- and it's disclosed in our balance sheet. Here's the point, Brad.

I want to try to calculate free cash flow.

Let me give you some direction. Here is the way we view it. This is why, again, we, in retrospect, we never should have created a definition the way we did. We are a totally regulated business. So that if you look at our reported earnings and back out our depreciation which is all pretty much stable, most of it 30 or straight line, you can back that out, our deferred taxes we've repeatedly said will pretty much be stable for the foreseeable future in terms of the benefit of deferred taxes. And our working -- and our capital expenditures, we've already said, will be roughly about $150 million last year and this year as well. So using those components you can get a pretty close picture of what our free cash flow from operations is.

Okay. Just tell me what your cash flow from operation for the past 12 months was? It wasn't in the release today.

Because we don't want to do that any more. And I'm sorry.

You are going to have to put it out in your K. or do you not have to?

Yeah, it will be in the K. We don't have that ready for release today.

To me it's not that big a deal, Tom, but I just wanted -- I mean, if gas prices are higher and the storage is the same then obviously the working capital is adjusted upwards and I'm just trying to back into that calculation and make sure that's correct.

Right, right.

It doesn't matter whether you have 250 or 200 if you pass on to rate.

That's exactly right, Brad.

I understand that situation but I -- .

We were more -- we were touchy about it. I guess I'm still a little touchy about it because it distracted from other things and it should not have and it was just in retrospect we never should have included it.

But, I mean it doesn't matter but I just -- because it seems I'm just trying to make sure that you're saying that inventories were X and they are Y today and it's just the price of natural gas has gone up, different than your calculation which you can control.

Well, but, storage -- storage levels also could have been different from our calculation.

And is it fair to say that storage and price were different than your calculation?

I think price was slightly higher and storage levels were higher, that is absolutely fair to say that.

Okay. Let's just leave it there.

Yes.

And so that 150 CapEx is going to be 75 and 75 or 50 and 50, again, for the --- ?

Yeah, I think, Brad, it will be split just about 50/50.

50/50. And then -- .

Obviously that excludes the LNG CapEx.

Right, the LNG CapEx. And then now with it that you've done the equity offering, do you plan on -- we had talked at different points about project financing for the LNG facility. Does this put you in a better chance or better position to do that or what are your thoughts on how you are going to finance the rest of the LNG CapEx?

We are still contemplating project finance. I think to the extent our balance sheet gets stronger and stronger it always enables a more efficient access to the market from both a cost perspective but also how the rating agencies view it. But for the time being we want to continue to take advantage of using the very strong cash flow at Panhandle and LNG to fund as much of the expansion as possible and then for the balance just using short term interest rate.

What do you think -- what do you think on a project finance if I just think of it in terms of that or since it's -- whether it's project finance or just off your balance sheet, how much equity do you need to put into that? That facility? I mean, you know, is it a 20 -- you know, do you put 20% like do you a house, do you put 50%?

I don't know that project finance is typically done on a percentage of equity. I think the critical multiple there would be the debt to EBITDA.

Okay.

And I don't know what the market is right now to be honest with you.

But it's certainly more aggressive than three times.

Yes, yes, absolutely.

All right. All right. Great job, guys.

Okay, thank you.

And your next question comes from Peter Park, Park West Asset Management. Please proceed, sir. Mr. Park, please proceed. And your next question comes from Bernard Diggens of Gardener Lewis Asset Management.

Hi, good afternoon. I think you just answered the last question -- my question for me on the last caller but I just want to make sure. So your free cash flow -- you are not going to disclose what your free cash flow was from last year?

Well, I think --.

I mean you gave the guidance in the most recent release so I didn't know if had you updated that any further.

I think that you'll be able to get it out of the K.

Okay.

is what we are saying and we haven't completed the K yet.

Okay. And if it's going forward you are not going to provide that type of guidance?

I don't think so.

Okay. The only other question I have for you is on the 4.8 million shares that you offered -- you sold recently. Have you told investors what portion or percentage of that 87 million or so that you raised would be used to pay down debt versus general corporate purposes? Or can you give me some idea of what part of that you will use to pay down debt?

No. No to the first question. No, we haven't publicly disclosed what the pro rata is but typically it's all the same, really. I think it's -- almost all of it is going to pay down debt.

Okay. All right. Thanks very much.

Thank you.

And your next question is a followup question from Andy Aurbens of Morgan Stanley. Please proceed, sir.

Hi. Sorry, I'm still stuck with this stock dividend. If you've got a certain absolute level of net income and one day you issue 5% additional stock to the holders, doesn't that automatically reduce the EPS to roughly 95% of what it was?

It does but you now own 105% of the shares you had before, right?

Oh yeah, okay, okay. Sure. I understand.

Thank you.

Okay. Thanks.

Again that is star followed by one for any questions. You have no questions at this time.

Okay, thank you very much for joining us today. We look forward to an exciting 3 and 6 months ahead from now and we will be certain to communicate with you if any other significant developments occur. That you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.