Energy Transfer LP (ET) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Southern Union Company second quarter earnings conference call. My name is Ann Marie and I will be your coordinator for the day. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time during the call you require assistance, please press star zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to Mr. Jack Walsh, Director of Investor Relations. Sir, you may proceed.

Thank you Ann Marie, and welcome to Southern Union's second quarter 2005 investment call and web cast. Presenting on today's call will be George Lindemann, Chairman and CEO; Tom Karam, President and COO; Julie Edwards, Senior Vice President and CFO and Rob Bond, President and COO of our Integrated Pipeline Operations. A replay of this call will be available for one week by dialing 888-286-8010 and entering pass code 84049725. A replay of the web cast will be accessible through our web site at www.southernunionco.com. If you have not yet received a copy of the earnings release issued today, you may request's copy by calling 1-800-321-7243 or you may access it through our web site. Today we will be discussing results for the second quarter ended June 30, 2005, significant events and outlook. Following our presentation we will be happy to address your questions. If you have any further questions at the end of the call please contact me directly at 800-321-7423.

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, estimates and projections about the industry in which the Company operates. These statements are not guarantees of future performance and involve risks. 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 1993 and the Securities Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking information and our earnings release. I will now turn the call over to Mr. George Lindemann. Mr Lindemann.

Thank you and good afternoon everyone. Today I would like to open the call by welcoming Julie Edwards on her first investor call as Senior Vice President and CFO of Southern Union. Julie brings extensive financial and operational experience with her from her most recent role as CFO of Frontier Oil. Julie's diverse background in the energy industry and corporate finance will serve as a tremendous asset to our Company as we continue our transformation as one of the nation's leading energy and [protractor] companies. Additionally we would like to thank Dave Kvapil for his many years of hard work and dedication, and we wish him well in his future endeavors.

I personally am pleased with the results we reported this morning and we continue to increase our earnings and successfully integrate acquisitions. It will better position Southern Union to take advantage of the opportunities in the market as we see them, and to create future value for our shareholders. Now turn the conference call over to Tom Karam to moderate the remainder of the call. Tom?

Thanks George. Good afternoon everyone. I too would like to welcome Julie to her first conference call with a great deal of excitement and anticipation. And hopefully this will be a very mundane call where we report solid earnings with hitting all of our targets and we can hit the ground running with Julie as our new CFO. I too would like to extend my warm thanks and gratitude to Dave Kvapil for all of his efforts to get our Company to this point.

As many of you know, this morning we reported earnings of $11 million or $0.10 a share, as compared to a net loss in the prior year of approximately $400,000 or $0.01 a share. This dramatic turn around is largely the result of our investment in Cross Country Holdings, which contributed about $20 million or $0.15 a share to our results. In in addition, our existing pine line and transportation business along with our LNG businesses continue to show ever increasing results. At our LDC's our operating income and earnings before interest and taxes were both down year over year, and quite frankly did not perform up to par. We have certainly identified all of the areas where we had variances, which were some timing issues related to expensing some of our system maintenance costs, our general payroll costs, some of our benefit and pension costs, as well as much warmer than normal weather in our Missouri Gas Energy service territory. Again the LDC's continue to be the area of focus for us to make sure that we can be in a better position over time to create stable -- stable earnings and cash flow -- cash flows from those business.

With regard to that, we will very shortly be making an announcement to fill a newly created position at Southern Union, which would be the Senior Vice President for Utility Operations, whose responsibilities will be to operate and coordinate all of the LDC operations so that we can take advantage of the most efficient way to run those LDC's by consolidating and standardizing much of our operation. We expect that announcement to come within the next week.

As I stated in the earnings release, these results are consistent with our business plan and earnings guidance while reflecting substantial completion of the Cross Country integration. And I don't want to steal Rob Bond's or Julie's thunder on this, but we're pretty far along and things are going almost exactly as we had hoped and laid out. So at this point we feel that there's very limited remaining execution risk with the integration of that company. Earnings are strong, we're on schedule with our integration efforts. We look forward to continuing to drive value for our shareholders and with that we are in fact reaffirming our expected 2005 per share earnings of $1.45 to $1.55, and we are again reaffirming our expectations for 2006, which we see at this point as being 10 to 15% higher than 2005. So with that, I will introduce Julie Edwards for some detailed discussion of the numbers, and then after that Rob Bond will take the microphone to give some detail behind the transportation and LNG business.

Well, thank you very much, Tom, and thank you as well George for the warm welcome to the Company. I really feel lucky to have joined Southern Union, it's a very dynamic place, which is sort of a nice way of saying there's been a lot going on and I've tried to hit the ground running to get my arms around the business and numbers. But to our investors listening, if I can answer a specific question on the spot I will get the information and make it available to you shortly after the call. Bear with me a little bit it's a lot to learn as you must appreciate.

As Tom said the Company earned $11.3 million or $0.10 per share on operating income of 51.4 million in the second quarter of 2005. This operating income number does include earnings from unconsolidated investments, the lion's share of which are the earnings from Cross Country Holdings. These results compare favorably with the loss of $400,000 on operating income of 35.5 million in the second quarter a year ago. In terms of a breakdown of these results, the transportation and storage business, and when we talk about that we are specifically referring to the Panhandle, the Trunkline, the Sea Robin Pipeline operation and the Trunkline LNG business, results from those businesses were up 7.7 million on an operating income or EBIT basis compared to a year ago. This increase came both from the revenue and cost sides of the P&L statement with increased reservation revenues of 3.3 million and decreased operating expenses of about 4.5 million. Part of this decrease in cost was simply a timing difference, really related to system maintenance work, which should normalize in the third quarter. Part, however, is related to savings from the integration of the Cross Country operations and that's really more permanent.

On an EPS basis the improvement in our transportation and storage business equated to about $0.06 per share. In addition to these improved results in what I'll refer to as the legacy pipeline business you're seeing the impact of the late 2004 investment we made in Cross Country Energy. In the quarter our 50% interest in this business contributed approximately $20 million to Southern Union's operating income, which is about $0.15 on a per share basis. For the six months of this year the impact of this investment has been about 35 million to operating earnings or about $0.24 per share.

Our distribution business which includes the local distribution businesses in Missouri, Pennsylvania and New England, generated an operating loss in the second quarter, 6.4 million compared to a positive contribution of 1 million 8 a year ago. This decrease comes on the heels of a better first quarter in 2005 and is reflective of warmer weather in the Missouri market compounded by higher operating expenses across the board. Quarter over quarter the LDC business booked 9.1 million more in operating expenses relative to last year. Some of these expenses, for example a bad debt reserve of 2.3 million, are not necessarily recurring types of charges. Other of the expenses such as some of the costs associated with wages and benefits are likely to recur to some degree. In terms of degree base, the New England and Pennsylvania markets are a couple of percentage points ahead of last year through the six months. But Missouri is down about 6% year-to-date and we cannot control whether or not this will be caught up. We're continuing to work on the expense side of the equation and the management of our collections in an effort to minimize the cost increases we have experienced.

Our interest expense was up only slightly from a year ago and is related to the bridge financing of our investment in Cross Country, plus a slightly higher LIBOR rate on our borrowings. Our current debt to capitalization based on the way we calculate it which gives equity credit to preferred stock in mandatory convents is 49%. Our share count has increased to 106 million basic shares with average shares outstanding for the quarter of 108.6 million. This is up significantly from the 75.5 million outstanding shares in the middle of 2004, and again stems from the financing of our November investment in Cross Country.

In terms of Cap Ex, we have invested 135.5 million in operations so far this year. Of this amount 96 million was spent in the transportation and storage business. This included 52 million on the phase one and phase two expansions of the LNG facility at Trunkline LNG. We expect to spend an additional 54 million on the LNG expansion through the end of the year as well as an additional 10 million next year. Approximately 33 million has been invested so far this year in the distribution business. For the full year we expect our total capital expenditures on a cash basis to be approximately 260 million.

Last but not least, the quarter benefited from a downward adjustment in our income tax rate to 20%. This is from a prior rate and an annual expectation of about 29%. The adjustment was due to three primary factors, the planned reversal of an $11.9 million deferred valuation allowance, which is related to last years acquisition of Cross County Energy -- or investment in Cross Country Energy. We recognize an 80% dividend received deduction on expected dividends from Citrus Corp in 2005 and we received benefit from the Medicare part D tax free subsidy. Going forward after 2005, our average tax rate ought to be around 35% for modeling purposes. With that being said I'll turn the call over to Rob Bond, the President and Chief Operating Officer of our Integrated Pipeline Operations.

Thanks Julie, and I offer my welcome as well. First I'm going to provide a brief overview of the pipeline operations and their market conditions. And then I'll update you on the two main areas of focus relating to Southern Union's pipeline operations, which are the integration of Cross Country and the status of the various expansion projects that we have underway.

Panhandle Eastern Pipeline and Florida Gas Transmission are both fully subscribed. Transwestern is fully subscribed going east, but can accommodate some additional customer requests going west. Trunkline Gas has a small amount of field to market available capacity. As many of you know, it's been a hot summer in much of the country and the pipelines have been run at or nearly fully subscribed. We have had several major contract renewals on Panhandle Eastern and Trunkline, and we see the contracts moving to longer terms, which is indicative of the market conditions on these pipelines. On Panhandle Eastern shippers are contracting further in advance and signing longer terms at increased rate levels.

Integration of Panhandle and Cross Country operations continues to go smoothly. We began moving the Houston employees into the west Hummer location in mid April, and the final move was completed by the end of June. Employees are now all together in a single location, although some of us are in temporary offices while the construction of our floors are being completed. The build out of our office space is scheduled to be complete by the end of the year.

Information Technology System Migration project is continuing to move forward on time and on budget as everyone moves onto common systems and a common desktop platform. The phase two transition involves combining and standardizing the day to day policies and procedures that govern how we operate. While these initiatives are ongoing and targeted to be complete by year end, we have made very good progress and have focused on effort first on those areas that will have the biggest impact on our business. As we continue with our integration efforts, we are focused on growth and continue to expand our business.

Currently we have a major expansion that was just completed and put into service and two other expansion projects that are in the construction phase. All three are related to Trunkline LNG. We have several other projects that are moving through the development stage, and I'll talk about those in just a second. The project that was just completed is the Trunkline LNG Loop, or Trunkline Loop as we refer to it, which provides additional take away from the LNG terminal to Trunkline Gas' main line. We started construction on the 23 miles of 36 inch diameter pipeline around April the 15th and the pipeline was put in service by the end of July in time to help us handle the peak send out of the current facility and the additional phase one plant send out that will be available by the end of the year. The two major expansions underway are phases one and two of the Trunkline LNG terminal. These expansions are designed to triple the current send out capacity of the terminal, to 1.8 BCF per day of sustained send out and 2.1 BCF per day of peaking send out by mid 2006. Both phase one and phase two are on track to be completed on time and on budget.

As we have described before, all of the Trunkline LNG terminal capacity, including both phase one and phase two are fully contracted to BGLNG Services through 2023. We are continuing to move forward with the expansion of Trunkline Gas System from east Texas into Louisiana. There's an enormous amount of gas that's being produced in east Texas that needs to move eastward into Louisiana. This was evidenced by our successful open season. We announced last week that we are working to negotiate contracts, and will begin to prepare our National Environmental Policy Act prefiling with the FERC.

Florida gas and Transwestern also have projects in the development phase. Florida gas is working on another expansion, that will be phase seven, which will add 160 million a day of additional capacity. This project will take gas from El Paso's proposed Cyprus project, near Jacksonville Florida, and deliver it into the Orlando area. FERC has told us that the approval process for phase seven will be tied to the Cyprus pipeline project.

Transwestern is negotiating with its customers to construct a new lateral off our main line into the Phoenix market. This would add another 500 million of capacity into the area. We've had had a successful open season and are including our negotiations with the shippers. If those negotiations can be completed by the end of the summer we would expect to maintain a project time schedule to hit a late 2007 or an early 2008 in service target.

This continues to be an exciting time for Panhandle Energy and Southern Union. We believe that our strategy to access gas supply areas to provide new market services will be successful. With that I'll turn the call back over to Tom Karam.

Thanks Rob. So as all of you on the phone can tell, we have a great deal going on from the organic growth side as we continue to progress on our integration and completion of that integration of the Cross Country assets. So with that,operator, what I would like to do is turn the call back over to you to accept any questions that listeners may have.

Thank you sir. [OPERATOR INSTRUCTIONS] Your first question will come from Greg Schultz with SAB Capital. You may proceed.

Hi guys.

Hi Greg.

Could you help me summarize just all the projects you've got, all the expansion projects you have got, you talked about them, but I wanted to make sure I got them all. You have got phase seven on Citrus, you've got Phoenix on Transwestern, and then what are the other ones?

Well, you have phase one at Trunkline LNG, which will take the capacity from the 630 million a day of capacity, send out capacity up to 1.2. Then you have phase two, which will take it from 1.2 to 1.8 with peak day of 2.1. Then you have on Trunkline Gas Company a expansion out of east Texas into Louisiana, which is basically a loop of its main lines from around Kountze,Texas over to Longville, Louisiana. And that will increase the capacity of the Texas leg by about 400 million a day.

That's separate from the loop, right, the LNG loop?

Separate from the loop we talked about -- that we just put in service. That was 23 miles of 36 inch that came from the Trunkline LNG terminal south of Lake Charles up to the Trunkline Gas' main line facility in south Louisiana.

Okay. So other than the LNG stuff you have got phase 7, which is 160 a day.

Right.

You have got Transwestern Phoenix, which is 500 a day.

Right.

And you have this east Texas Trunkline other loop that's 400 a day.

Correct.

And what's the capital required for those projects approximately?

I'm not sure how much we have divulged on phase seven. I think it's roughly 65 million. It can be expanded again, which would take the capital cost up to close to a hundred million. On Phoenix it's still preliminary numbers, but we will round it to a couple million dollars a mile -- couple million dollars per mile, or about $500 million. And then I think it's a little bit too early to tell on the east Texas. We had a very successful open season. It was oversubscribed, so we're still working being on the scale there, and compression is an issue, so it's too early to estimate the capital.

Then just lastly, the in service dates, you said Phoenix might be early 08, then if you can give me a feel for the other two -- for the phase seven for when east Texas, when those might come on line?

Phase seven as I talked about briefly is going to be connected with the El Paso Cypres project, which, if you recall, will take gas out of Elva [ph] Island and go south to Jacksonville. Because of the environmental impact that project will have, our project itself will have very little environmental impact, we will be some looping and some compression along our existing system. But it's not really a project until the other project is complete, so timing is largely going to be dependent on the process associated with Cyprus. My guess is late 2007.

Okay.

And then on the Trunkline gas company project, I think it could be as early as early 2007, but I'd be -- that would be bold I think. Probably mid 2007 on that project.

All right, sounds good, thank you.

And Rob don't you think we're pushing 2008 on Phoenix?

I think so. I think that's what we find the sweet spot for our anchor customers to be.

Yeah, I think for us to try to push that into '07 might be a little bit of a long shot, so Greg I think that you should look closer to 2008 on Phoenix. I think if you're trying to solve, Greg, for the prior total capital expenditures that we had given in terms of expansion, the only project that was not included in there was the north Texas line, which --

And these will all be funded at the -- I mean you won't need to inject capital, right? I mean these are sort of self funding projects at those entities, right? At least for Citrus and TW.

I'll let George speak to that, but our philosophy has always been to only issue equity if we positively have to.

Okay, thanks.

And your next question will come from Casey Alexander with Gilford Securities. You may --.

Hi, good afternoon. Let me kind of just ask a bigger picture question and see if you can't give me some sort of a feel for it. You're meeting your guidance, you're on track for your guidance for next year, so you have a pretty good idea of how your cash flow is likely to run and it seems to be running very well. At what point in time, out in the future, do you think that you will have generated enough cash flow that you can start to take down some pieces of GE's position on Cross Country? And how do you balance that decision with the capital that you're expanding on some of these other expansion projects? If you could just give me some flavor for that I would appreciate it.

Well, I'll take a stab at it, unless George do you want to take a stab at it?

Sure. Contractually GE -- we do not have the right to buy them out till the fifth year, and then it's a 20% buyout per year or 25% buyout per year. So the answer to your question is, unless GE comes to us and says they would like to be taken out, we don't have the right to do it sooner.

Okay. I thought you had the right to accelerate that.

No. We would like to, but we don't.

Is the return on these projects, these expansion projects that you're doing about equal to what the return is off of Cross Country, I mean which one would be a better deal if you had your druther's?

Between what and what?

Between the expansion projects that you have going that are sort of on the ground, the extension on the properties you own versus taking down chunks of the GE position at some point in time?

I think Rob would want to expand LNG to about 20 BCF a day.

I would like to do them all, I mean they're all good.

Okay. All right, thank you.

If we're in a candy store, you're not going to tell me all the candy isn't good.

Okay. I got you, thank you.

And your next question will come from Steven Rountos with Talon Capital.

Hi everyone. Actually I had a question for Rob, you walked through some of the recontracting on the pipeline, I was hoping, Rob, you could expand on Transwestern. I think there was an industry piece that came out a while back that mentioned that you were looking at a pretty severe rolloff of your contracts and hoping you could talk more specifically about it.

Well, I think what we have said before is that we have recontracted with So Cal so that's a known, we are negotiating currently with other California utilities for their capacity. We have opportunities, of course, as we described in Phoenix and Las Vegas that we're looking at, so I think the bar was kind of set by the So Cal renegotiation in terms of what we can expect to see in California as we roll through the CPC process. But we certainly have ample potential customers to keep our capacity subscribed.

Is it possible to give us some sort of percentage of rolloff, I know Transwestern has three different legs, I don't know if you can give us an overall picture, or maybe break it up by segment, but just something to give us an idea of what rolls off over time?

I don't have that at my fingertips. We don't have another significant rolloff until after the rate case which is November of 2006, so at that point in time you get into a complete different dynamic. So I think between now and -- while we have work to do, I wouldn't tell you differently, in 2006, it's going to look much like 2005, then 2007 is going to be post rate case. So we will be operating under a different rate structure.

Okay. Then sort of a general question I guess, when you talk about earnings guidance of 15% above where you are today next year, that seems, just by looking at the numbers on the LNG expansion, just to come from the LNG expansion, and obviously, as you point out, your costs on the LDC side have been going up. I don't know if there's an opportunity for a little rate relief there, but with any growth at all you should be above that earnings guidance target for next year, so I was wondering if you could comment on that and some of the other changes you might see from 05 to 06?

I think for 06 not all of our earnings growth is going to come from LNG. Some of it will come from the final phases of the integration synergies coming on line. I think we said 70 or 75% of the 25 million will be in 05, the balance will be in 06. It's true that there are some increased costs at the LDC level that we will refocus our energy on seeing if we can't mitigate or offset. We are currently re-evaluating, and Julie can take the lead on this if she wants, but we're re-evaluating our rate position in each of our jurisdictions. As you know we just came out of one rate case in Missouri, so we are really focusing more on Pennsylvania, New England as to what opportunity may exist for rate relief there.

So you would say that not all of that increase is LNG, so between LNG, a little bit of growth, some cost savings and cost containment gets you to that 15% type growth number?

That's right, Steven.

Okay.

And as we get further into the year we will take the position of giving more refined guidance for 2006. But for right now we're comfortable sticking with the 10 to 15% increase over '05, and as we get to the third and fourth quarter if we're more comfortable getting more specific we will give more direct guidance.

Okay, great. Thank you.

Your next question comes from Mike Heim with A.G. Edwards. You may proceed.

Thanks. You talked about the call option and buying out GE's interest, but if I remember right you also have a right of first refusal for the first 18 months if they do choose to sell. And at the time of the agreement you indicated they had indicated their interest so sell within 18 months.

Mike, I think we're mixing a lot of different agreements here. The agreement was written so as to allow them to sell down a portion of their original investment within a window, which they have already done. Okay. Any sell down beyond that, we will have a right of first offer on. Okay. We don't anticipate GE offering any more of their ownership for sale, as George indicated, prior to our contractual call date.

What did they sell down originally?

They sold down I think the number is about $240 million of their original investment, roughly 40%.

Okay. And you don't anticipate them selling more?

We don't anticipate any more of their shares coming on the market, but if they do, as Mr. Lindemann said, we will be ready with a check to buy them.

So really the next thing is the five year call option that kicks in.

That's correct.

All right, thank you.

Thanks Mike.

Your next question will come from Craig Shere with Calyon Securities. You may proceed

Hi, a couple questions. With Cross Country, can you comment on whether it looks like you might be within eye shot of getting management incentive fees for meeting your EBITDA targets. Secondly, pertaining to the comment about getting up to 20 BCF a day on the LNG, I believe that you all commented before, on a more serious note, that there is potential for -- if we can lump everything happening now and call that phase one, there is a potential for an additional significant upgrade to the LNG facilities, and I was wondering if you could comment on the plausibility of getting that done and agreed on, maybe with BG, before the end of the decade. And finally, can you comment on potential acquisition opportunities and whether -- given how the utilities are doing you'd be shying away from opportunities like the Aquila divestitures.

Okay, Craig. Let me take your questions in reverse order. We do not anticipate bidding on the Aquila assets. We had, on a previous phone call, said that we would look at the information. We did. We're not there. So we're not there. As it relates to LNG, I think that Rob has previously said, and we have all confirmed, that he is constantly in communications with BG around the opportunities to increase vaporization and possibly take another addition or expansion there to take that site up to 3 BCF. Those conversations continue and are productive. They're not yet as a stage where we could predict timing or order of magnitude, but we think that -- we think that there's real opportunity to achieve that, and I don't think it's unrealistic to think we would achieve it prior to the end of the decade. Your first question about the management fees, given the year-to-date performance and results coming out of Cross Country we are on track for that -- for those fees.

So are the fees reflected in your guidance?

In our current fiscal year's guidance, the fees by in large would not be of the order of magnitude to move us outside that range per se, that $0.10 a share range.

Okay. It would have more of an impact next year

Well, I think it it would have more of an impact in creating an a higher base of results if we continue to meet our management objectives at Cross Country.

And last question, if -- I don't want you to commit yourself to anything here, but if there were the possibility of expanding the LNG terminal to 3 BCF I think I remember you all commenting at a conference, maybe it was AGA, I don't recall, that it could be roughly a 300 to 500 million investment that I'm assuming you're thinking about a high teens, ROE type of return. Am I thinking about that right?

We have not specifically said what our expected return is, but the FERK regulated returns are in the range of the low teens I think would be a reasonable expectation. If we could get high teens on a negotiated contract that's a very good result. When you take the expansion and the vaporization opportunities you're probably talking 400 to $500 million.

Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question will come from Devin Geoghegan with Zimmer Lucas Partners. Please proceed.

Guys, how is it going.

Hi Devon.

I just wanted to try and understand, I know El Paso has fired a rate increase -- a central rate increase for their pipeline which is south of you guys. I think my understanding is that the latest round of recontracting that you did, kind of took you down to the El Paso level. But I think that was the level that they were charging prior to this new rate increase that they're proposing.

Rob, do you want to speak to that?

Yes. I think that's dead on, Devin. You know, I think the rate case they just filed kind of keeps them in line with that. There's some nuances, we're still studying what they have done. It did get suspended, so it will be a while before we see exactly how that turns out. Likely to be a negotiated settlement with the El Paso customers. But I don't think -- it doesn't change, what they have done thus far doesn't change what our expectation is for Transwestern as we described earlier.

The rate increase they proposed, would that take rates higher than where they were previously? And then wouldn't that mean that going forward you should be able to recontract a little better than you had the last time around? Or am I missing something that they are doing?

Hopefully it would push some customers toward us. Yes, that's correct. If we stay at the same level that we are with So Cal, with the so Cal contract, it would give us a little bit of head room as well.

Lastly, if you wouldn't mind talking about, given that you have proposed a bunch of expansions on that system, do those expansions cannibalize each other, or are they really going other directions? Can you talk about how you are getting new customers and whether that means existing customers would need to get knocked off, does that make any sense?

Well, I think what it means is that, we have got a 1.2 BCF a day coming out of San Juan, we have roughly 900 million a day that can flow east on Transwestern, and 1.2 that can flow west to California. If we expand into Phoenix that's 250 million a day, then that gets you down to -- and it stays full, then its -- what does that get you to -- 950 or so that's landing at the Cal border. We can only fill that capacity once clearly. I think what we have tried to do is keep enough flexibility in the terms that we have agreed with our customers and to allow us to fit the Phoenix project into our overall portfolio of contracts headed west.

I mean basically you guys are connecting to the San Juan, I don't think El Paso can get there without a much longer lateral right?

They access San Juan as well.

Shouldn't that expansion allow you to pull more customers away from either El Paso or potentially do a better job competing with some of the more -- the cheaper pipelines.

I think it would be a great strategic pipeline for us in that it would diversify our deliveries west to east of California customers as well as to California customers.

I see what you're saying, thank you very much.

And there are no further questions at this time. I would like to turn the conference back over for Mr. Karam for any closing remarks.

Thank you very much everyone for joining us today and we look forward to speaking to you after next quarter's results, thank you.

Ladies and Gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation. You may now disconnect, have a great day.