Energy Transfer LP (ET) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Southern Union Company third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] 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, and welcome to Southern Union's third quarter 2006 earnings call and webcast. Presenting on today's call will be George Lindemann, Chairman, President, and CEO; Rick Marshall, our newly appointed Senior Vice President, and CFO; Rob Bond, Senior Vice President of our Pipeline Operations; and Craig Strehl, Senior Vice President of Gas Services. A replay of this call will be available for one week by dialing 888-286-8010 and entering passcode 85841654. A replay of the webcast will also be accessible through our website at www.Sug.Com. If you have not yet received a copy of the earnings release issued today you may request a copy by calling 800-321-7423 or you may obtain it through our website.

Today we will be discussing results for the third quarter of 2006, 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'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 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 1933 and the Securities Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking language in our Earnings release.

I will now turn the call over to Mr. George Lindemann. Mr. Lindemann?

Thank you, and good afternoon. I would like to welcome Rick Marshall to his first investor call as Chief Financial Officer of Southern Union. Rick has been with us since we acquired PG Energy in 1999 and has served as Vice President And Treasurer of the Company since 2001. Julie Edwards has assumed a new role in Corporate Development and will work extensively with Eric Herschmann and me in evaluating strategic opportunities that will continue to drive shareholder value. We are confident that this move directly aligns the skill set of management team with positions that they can make the most impact.

Southern Union has been successful on several fronts since we have last addressed this market of investors. In August, we closed the sale of two distribution companies. In September we announced a series of transactions that will increase our ownership in Florida Gas Transmission to 50% and eliminate our ownership in Transwestern Pipeline. We expect this transaction to close in December. In the third quarter, we are happy to report our EBIT from continuing operations was $88 million, up $21 million or 31%. Unfortunately, this positive growth was not recognized in earnings per share due to several one-time items that distort actual earnings power of our business.

I would now like to turn the call over to Rick Marshall to give you a detailed overview of the quarter. Following Rick, Rob Bond will give you an overview of our pipeline business and then Craig Strehl will give you an overview of our Midstream business. After that we'll be happy to address any questions you might have. Rick?

Thank you, George, and good afternoon. It's my pleasure to be here and I look forward to meeting with many of you in the investment community as the new CFO of Southern Union. As George just mentioned we reported strong EBIT of $88 million for the third quarter. This represents an increase of $21 million or 31% over the prior year's $67.4 million. Net earnings from continuing operations were $11.8 million or $0.06 per diluted share. This compares to net earnings from continuing operations of $26.1 million or $0.19 per diluted share in the same period last year. The current quarter's results are not comparable to the prior year due to the interest expense and debt issuance cost amortization related to the recently repaid $1.6 billion bridge loan we had used to acquire Southern Union Gas Services.

For the quarter, interest expense and amortization related to the $1.1 billion portion of the bridge loan repaid in August was $14.4 million pretax. After excluding the $14.4 million, net earnings from continuing operations would have been $20.9 million or $0.14 per share. We feel this presentation gives investors a look at how the Company will appear going forward with the remaining $525 million of the acquisition financed with our junior subordinated note issued this past October.

Our operating revenues for the quarter were $564.4 million, an increase of $377.9 million compared to $186.5 million in the prior year. This increase is largely driven by the addition of SUGS on March 1. Including discontinued operations the Company posted a loss of $166.9 million, or $1.42 per diluted share. Discontinued operations which include our Pennsylvania and Rhode Island distribution assets accounted for a net loss of $174.5 million, or $1.48 per diluted share. This loss was primarily driven by a $147 million income tax charge largely a result of non-deductible goodwill associated with the book loss on the sale of the assets. The remainder of the loss was comprised of additional impairment charges relating to the cessation of depreciation expense, the funding of pension obligations, premiums on the early extinguishment of debt and transaction costs.

In terms of a break down of these results from continuing operations, our transportation and storage segment including our investment in CCEH had EBIT of $86 million, up $17.9 million from the prior year. This increase is attributable to Panhandle Energy which includes Panhandle Eastern, Trunkline, Trunkline LNG and the Sea Robin operations up $20.5 million on an EBIT basis. This increase tame primarily from a $17.3 million increase in LNG revenue. This is largely a result of the Phase I and Phase II expansions of our LNG facility being placed in service on April 5, and July 8 of this year respectively. Additionally, Panhandle Energy benefited from higher transportation and storage revenue primarily as a result of higher average reservation rates and increased parking revenue offset partially by higher operating expenses.

Equity earnings from our share of CrossCountry Energy were down $2.5 million year-over-year primarily as a result of lower transportation rates on Transwestern. Our gathering and processing segment generated $17 million in EBIT for the third quarter. In addition we received $21.5 million in cash from the third quarter settlement of the natural gas and natural gas liquids put options we purchased last December. This amount is not included in the segment EBIT. The effective EBITDA of the segment is their EBIT plus depreciation plus the cash settlement value of the put options. For the third quarter, this amount totaled $52.4 million. The seven month effective EBITDA is $124.8 million. This is consistent with our annualized guidance of 200 to $220 million. This is not GAAP -- this is a non-GAAP measure and includes the value of the put options we booked in the first quarter as mark-to-market gain.

Our ongoing distribution business generated a loss before interest and taxes of $4.9 million for the quarter as compared to a profit of $3.8 million one year ago. The year-over-year variance is primarily attributed to a $5 million property tax refund received in 2005 and a $3.6 million trueup pension credit also booked in 2005. The pension adjustment relates to a 2004 MPSC or Missouri Public Service Commission rate order.

As it relates to our remaining distribution assets, we have filed for a $41.7 million rate increase in Missouri. We're optimistic that a favorable outcome will be reached. By law the new rates will be effective no later than April 1, of 2007. In Massachusetts we're also seeking a rate increase and expect results in early 2007. Interest expense was up $25.4 million compared to the prior year and is primarily due to $20.2 million of bridge loan interest and related debt issuance cost amortization. We retired approximately $1.1 billion of the bridge loan with the net proceeds from the closing of our LDC assets on August 24, and repaid the remaining $525 million with proceeds from our 7.2%, $600 million junior subordinated notes offering in October.

During the quarter we invested approximately $96 million in our operations. Growth capital accounted for $48 million and maintenance capital was also $48 million. Panhandle Energy spent $71 million, $37 million for growth and $34 million for maintenance, approximately $11 million has been invested in SUGS with growth accounting for $7 million. We have reinvested approximately $13 million in our remaining distribution business with growth capital of approximately $4 million. For 2006, we expect our total capital spending to be approximately $295 million at Panhandle, 40 to $45 million at SUGS, $30 million at distribution, and $10 million at corporate for a total of approximately 375 to $380 million.

With regards to 2006 earnings guidance, you will recall at the beginning of the year we had given earnings per share guidance from continuing operations in the range of $1.35 to $1.45 per share. Excluding any unusual or non-recurring items we still expect to be within this range for 2006. We expect there will be an additional one-time adjustment in the fourth quarter as it relates to the accounting ramifications of the CCEH transaction. Because of the numerous one-time items that the store EPS, what may be helpful at this point is to reaffirm the EBITDA guidance per segment that we provided on our last call.

We expect Panhandle Energy to have EBITDA in the range of 315 to $335 million, our distribution segment to be in the range of 70 to $80 million, and our Midstream segment to have an annualized range of 200 to $220 million including the value of the put options. Our equity earnings from CCEH are expected to be 50 to $60 million, excluding any one-time items related to the Florida gas transmission Transwestern exchange. I'll now turn the call over to Rob Bond, Senior Vice President of our Pipeline Operations.

Thank you, Rick. Good afternoon, everyone. As Rick pointed out the transportation and storage business performed very well for the quarter, largely driven by the contributions from our recently completed LNG expansions and the continued strength at Panhandle. In addition to our ongoing business in our growth projects, one of our primary areas of focus recently has been on the transactions surrounding the exchange of our 50% interest in Transwestern, for an additional 25% interest in FGG. The first part of the transaction, which saw HEP purchase GE's class B interests occurred on November the 1st. We are comfortable that we will be able to close the second part of the transaction within the next several weeks.

Finally I'd like to update you on the status of our current growth projects, the infrastructure enhancement project at Trunkline LNG continues to be on track for a second half 2008 in service date. To remind everyone the project is expected to cost approximately $250 million and is fully contracted to BG through 2028. We expect this project to contribute 30 to $35 million of annual EBIT once it is completed. Our Trunkline gas company fuel zone expansion project, which will expand our system from East Texas into Louisiana has been filed with FERC. We currently have contracts signed with our anchor shippers for $510 million a day. We're modifying this project to create additional capacity that we are in the process of selling. The project is estimated to cost 190 to $200 million and will generate annual EBIT between 20 and $27 million. The expansion is expected to be in service in late 2007.

And finally, a project that we continue to develop is the Florida phase seven expansion. This project will add about 100 million a day of additional capacity for our customers in the mid part of the state. We plan to build approximately 33 miles of pipeline looping in several segments and will install additional compression. We've received a certificate from FERC, we expect to begin construction in December and plan to have the project in service by mid 2007. This project is expected to cost $60 million and will contribute $8 million in annual EBIT. I'll now turn the call over to Craig Strehl.

Thank you, Rob. And good afternoon to everyone. Southern Union Gas Services produced an effective EBITDA of $52.4 million in the third quarter with the effect of the hedge included. Our total wellhead volume was 589,000 Mmbtu per day in the third quarter compared to 567,000 Mmbtu per day in the comparable quarter in 2005. This growth is understated due to unusual operating issues reducing throughput and increasing FFNU volumes related to higher system pressures that we saw in the quarter.

October, into the fourth quarter, has seen significantly reduced FFNU usage consistent with our normal expectations. Due to favorable processing economics during the quarter we were at full processing mode and have processed 448,000 Mmbtu per day in the quarter as compared to 400,000 Mmbtu per day in 2005. This represents a 12% increase in processed volumes at relatively attractive processing spreads. This has resulted in a total product gallons per day of 144 million gallons in '06 relative to 134 million gallons in '05.

In July, Southern Union substantially completed its hedging program for 2006 and 2007. As discussed on our last call, we purchased put options on natural gas liquids and crude oil for 2007, and the practical effect of the hedging is that we are selling our equity Mmbtu's at a net price of $9.23 for all BTU's at our equity BTU, starting September 1, for the remainder of '06 at $9.16 per Mmbtu for 2007. As it relates to physical pricing for the third quarter, average daily gas prices were $5.69 per Mmbtu at Waha. This compares to $8.53 at Waha for the prior year's quarter.

From a natural gas liquids standpoint, we were able to realize $1.02 per gallon in 2006 compared to $0.91 per gallon last year. Strong processing economics and the efficiency and flexibility of our system have allowed us to translate that into a processing spread of $0.52 per gallon in 2006 up from $0.17 per gallon in 2005.

With the recent increase in gas prices and the decline in crude, we've seen that relationship start to revert back towards a historical mean. Operating results were negatively impacted for the third quarter by continued higher operating expenses related to higher supply and third party service costs being seen throughout the energy sector. Additionally, the previously mentioned operating issues and higher FFNU volumes partially offset the benefit that we received from the higher processing spreads. The Company continues to see active drilling throughout its pipeline system and we feel that our operational flexibility coupled with our large footprint in the area will allow us to competitively seek out and connect higher margin volumes to our system throughout the year. I would now like to turn the call back over to George Lindemann.

Thank you, Craig. At this point, we would like to open the meeting up to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Sam Brothwell from Wachovia. Please proceed.

Hi, good afternoon. Actually I've got a question for George and a question for Rick. George, can you give us any more color on with this transfer of Julie to Senior VP of Corporate Development, and managing strategic options, can you give us any more color around that? And then Rick, there was looked like a pretty substantial increase and pardon me, I had to jump off for a second. I hope you didn't cover this but there's a pretty sharp increase in income taxes, wondered -- or income tax rate and I wondered if you could delve into that and also give us maybe a little bit more color on the increase in O&M.

All right, let me answer the Julie Edwards question, first. Julie was brought in over a year ago to help us put the accounting and financial process and procedures in place in a Company of our size and dynamics in nature. She successfully has done that and we believe that she will now have one of the best accounting and financing teams in the business, and that will help us grow into the future. Julie's background is in Investment Banking and her vision and insight into the industry will serve the Company better with its shareholders if she works in development of new strategies, and Julie has a lot of fans, Julie, do you want to say at least hello?

Hello, everybody, I'm sitting right here. I appreciate the support.

Rick? Do you want to handle taxes?

Sure. I guess with respect to the income tax rate, first let me say that our expected effective income tax rate for 2007 is approximately 33%, but with respect to your question, Sam, in the quarter, we booked a $0.05 per share income tax charge to reflect the change in our new composite tax rate as a result of selling the Pennsylvania and Rhode Island assets and those states had lower effective tax rates and had the effect of producing a lower composite rate but now that we no longer operate in those states we had to make a one-time adjustment to our deferred taxes to reflect the higher composite rate so that adjustment in the quarter is what is causing the overall effective tax rate to occur.

With respect to increased O&M expenses, there is a second non-recurring item that skewed the quarterly numbers in the amount of about $12.8 million or $0.11 per share that represented one-time bonuses paid in conjunction with the Midstream acquisition and LDC sales and the pending Transwestern FTT transactions. If you eliminate these types of items, you kind of get back to the $0.22, $0.21 per share where we're right around consensus.

Okay, thank you very much.

Your next question comes from the line of Craig Shere from Clayton [sic] please proceed.

Hi, I think we're going to have to change our name over here. A couple of questions. First, to be honest, I'm really getting confused about the accounting for the hedges at Midstream. If I remember correctly, before you all closed on the acquisition of Sid Rich, in January, February, you had $39 million of mark-to-market gains, and then that was going to kind of be reversed, in other words, you would have economic earnings that wouldn't be recognized on GAAP in future periods as a result of recognizing that early. But since then it seems like in March we had $6.7 million that wasn't recognized and the first quarter we had, I'm sorry, second quarter $21.8 million, third quarter $21.5 million, that adds up to $50 million. I'm confused, I'm sorry.

Okay, before we answer it, I must make one comment that you are not the only confused person. We spent about four hours going through this back and forward with our Board and it is very difficult to understand, so I am going to give you the best expert we have on it. Julie? Give your normal lecture on this one.

Your facts are exactly right. We had booked gains of $39 million between the period December 15, and March 1, and that was because we purchased GAAP puts prior to closing on the Sid Rich acquisition so we didn't have the ability to take advantage of 133 hedge accounting. So the first quarter, the corporate $37.2 million gain on the put was a non-cash earnings number that affected our EPS for the quarter and for the year. Then what happened on March 1, we assigned those puts, if you will, to the subs business, and at that point, they were marked up to what had been the cost of the premium plus the gain that we had booked. So at that point, they were marked at $89 million. So we had assets that we recorded in connection with day one of the acquisitions for $88 million which related to puts that extended through 2006 and 2007.

There was a model put in place which basically allocated the value off against that period of time. Then, as each month occurs, there's recognition of some, I guess, I'll call it amortization, but that's not the technical accounting word but some recognition of that asset value during that period which is offset by the cash that we actually collected those puts expire in the money. So when we talk about the cash collected, what we're trying to do is give you sort of the economic impact of having the puts against the business. The reality is you book $37 million, we never booked the $49 million of initial premium that was expensed, so until we've effectively recovered all of those costs, you won't see additional earnings coming from the puts, but because they are working, they are in the money and they are giving us good economics we're giving you each month the cash benefit from the collection.

So--?

I know it's not a very simple picture.

How about the next one, how about trading in gas, I'm sorry, oil.

Well, I've got a quick follow-up to that. That was helpful, but so there was $180 million value after the markup.

$89 million.

189.

No, not 189. Just 89.

Just 89, okay.

Like which was a purchase, it was the premium, it was the cash cost of buying the put.

Which was 49?

That's correct on December 15, I think the day was. And then the gains that had been incurred over that two and a half month period.

Okay so the $89 million has to be accreted off for lack of a better word?

Yes.

Through the last ten months of this year or nine months or so.

Yes.

And then into '07; right?

That's correct.

But so far am I correct in adding it up that we've accreted off $50 million?

Effectively, yes. That's one way to think about it, yes.

So as I think about this going forward, would fourth quarter be a similar sum as the third quarter and then next year would be a much smaller amount each quarter?

Assuming the gas curve stays where it is today, yes.

But we're not marking to market anymore, right, we're just accreting?

No, we still are. Puts are treated differently than forward sales so we're actually having to mark-to-market at the end of each month based on the then forward curve so there is some wiggle that happens and each month that's why there's a trueup. Sometimes it's slightly positive or sometimes it's slightly negative within the SUGS numbers, but assuming the curve stays as it is, intellectually you're right. We should collect a lot more cash in the fourth quarter and then in 2007, A, because the volumes were smaller and B, because we've already basically sort of made back this value that we have reported and you ought to see less of an impact.

On to Mr. Lindemann's question.

This is Craig. Let me just follow-up one other thing relating to the hedges. The hedges that we did in July for the remaining balance of 2006 which represented about 15% of our equity volume and represented 50% of our equity volumes in '07, were done at the SUGS level so they were done since we it was within the business unit that is owned so there isn't -- that second tranche of hedges is not going to have that mark-to-market markup and correspondingly effects in confusion that the gas hedges cause because of the nature of when they were done and who owned the hedge.

That's accrual accounting all the way?

It is, well, this is to George's question. Two of the three kinds of hedges we bought, yes. The third one did not qualify under 133 for cash flow hedge and therefore, that kind of accounting, so it's going to be treated more like the first one and that's the portion that we did in crude oil, because crude oil, while it's an effective economic hedge against our heavy liquids is not a product that we actually deal in so therefore it did not qualify.

Less than 25% of our hedge volumes in '07 are done using crude as a proxy for the heavier end of our stream. It's not uncommon for midstream companies like ourselves to use crude to track butane, natural gasoline, and heavier products to the crude, so it provides a good correlation. Unfortunately it's not a direct correlation, so it doesn't get the same accounting treatment as the propane and butane which we hedge or we actually produce.

Okay. And every quarter you're going to tell us the recorded -- that the EBIT or cash settlement value that was not reflected in earnings but are you also giving us the wiggle quarter to quarter on the mark-to-market?

Yes. And it should be in there and I'll have to look in the Q where it is. We talk about the ineffective portion and the part that was amortized or accreted off. Those numbers are pretty small right now, Craig, but we will make sure we're consistent so you can always find that information.

I'll look in the Q. Great. And two more quick questions.

And just one exclamation point, all the hedging we did we used puts so we didn't hedge spreads or anything else that can get upside down on us.

Okay. Last two questions. Now that you're swapping Transwestern for Florida Gas, you're basically losing the Phoenix lateral which was kind of a really large expansion project and you're losing the call rights to buy down the other half of CrossCountry, and I'm not questioning that, oh, this was a bad deal, but all of a sudden, you have a lot of future cash flow that doesn't have a home. So my question is what are you all thinking as far as the application of future cash flow over the next three, four years, and also can you remind me again that number for CCH guidance for the year?

CCH guidance for the year $50 to $60 million.

Okay. And that's equity income?

Yes.

Okay, great.

Well, I think in the beginning of Rick's comments, he listed out a large group of projects that we still have that use up the majority of our money. We also picked up in this deal about 500 some odd million, I don't remember the right number, of debt, in the transfer of Transwestern to Citrus. Julie, you must have a list there of all of the other projects. Do we have any excess funds? I don't think so.

Well, the 2007, we're just about even with our free cash flow. I mean, they are getting past that, once you get past mid 2007 when IEP is on and we completed the Trunkline expansion, we do expect to be generating positive free cash at that point in time. Now, that being said, Rob is dying to -- get involved to make sure there are no more projects in development. So do you want to talk about it?

Well, yes, I just think I wanted reiterate that as we've kind of done in the past what we typically don't do is announce our list of potential business development projects until we've reached a point in which we have contractual commitments to move those forward. So yes, we have many Business Development projects and I think perhaps Julie in her new role in Corporate Development will also be generating projects as well, so I think there will be ample opportunity to reinvest and we look forward to making some of those projects happen.

In any case, we're certainly booked 100% out through '08 and into '09.

All the free cash flow for the next three years? I thought it was just '07 your free cash flow will breakeven.

No, I think it goes certainly into '08, some of the two major projects that are on the table are the LNG IEP expansion and then the Trunkline North Texas expansion and those go into '08 as well.

But we will be generating positive free cash flow in '08. It's just in '07 when we will be--.

Rob, and this is the last one, I apologize. Rob, is there any hope of one last big LNG expansion at the end of the decade?

Well, I think, we like, like many folks, look around the globe and see that most of the liquefaction development projects are now expected to come on closer to the end of the decade or early next decade, so to the extent that there is a subsequent expansion at Lake Charles, we would expect that it would be timed in that time frame.

Thanks a lot.

Your next question comes from the line of Ross Payne from Wachovia.

How are you doing, guys? Can you hear me?

Yes.

Okay, first question, thank you very much for giving us guidance by division. I'm coming up with 635 to $697 million of EBITDA. Is that before any G&A that I need to be considering?

No. That's the range that we were giving. I would expect if I gave you a little more color on it, I think we're expecting to come in at the high end of that range.

Okay, so that's on the high end and that's what you're expecting for '06 inclusive of how you report each one of these divisions throughout the year. So, I mean, I got that part of it. Your debt numbers at $2.803 billion, what kind of impact will we see on the debt number once you close Transwestern and what's an expected number to look for at year-end 06?

Yes, through the end of 2006, you should see a number that is consistent with the $2.8 billion.

Okay so you are going to end at close to $2.8 billion. When you're selling Transwestern, you're obviously going to give up EBITDA associated with that. I'm hearing kind of 140, 150 on that number, you're also picking up 25% of additional EBITDA at Florida Gas and I'm calculating that at 95 so it looks like about a net loss of around $55 million or so. Am I missing anything in looking at those numbers?

Yes. Our percentage of the 140 for Transwestern that you mentioned is $70 million. It's 50%.

Okay, so--.

We're actually picking up about 20, $25 million of EBITDA.

20, $25 million, okay. Assuming Transwestern has already happened, what's your new -- what's the EBITDA of the base business post the Transwestern divestiture on an LTM basis 12-31-06?

Your next question comes from the line of [Karen Choi from Ailee and Bernstein].

Wait a minute.

I think if I understand your question, when we gave EBITDA guidance, that I referred to earlier, I mentioned $50 to $60 million in earnings from CCEH, so that was, that's the equity contribution of that, of those entities, but if you wanted to look forward basis or for 2006 estimate what the EBITDA would be from FGT, our percentage of it or portion of it would be about $180 million, if you wanted to take half of Transwestern and our 25% of FGT, you'd take $90 million for FGT and $70 million for Transwestern. I think that's, if we were to give you 2006 EBIT guidance and replace EBITDA from Transwestern and FGT with equity earnings from CCEH, that's the way we would do it.

Next question?

I have a couple questions. In terms of the free cash flow number, you're saying next year is going to be neutral? Just a clarification. That's neutral before any debt reduction; correct?

That includes mandatory debt repayments, but no discretionary debt reduction.

How much is the mandatory debt reduction?

We've got a maturity in March. Rich, do you want to go through the debt maturity?

Right. But I guess I can go through the debt maturities, but as far as mandatory debt repayments, there's other than the maturities, there's very little like sinking funds or amortization of existing loans, but as far as the debt maturities in 2007, Trunkline LNG has a $255 million term loan that matures in March of 2007 and Panhandle Eastern Pipeline Company has a note offering or notes outstanding that also mature around that time and those are the two current maturities in 2007 so they aggregate about $455 million.

Right so the free cash flow neutral is prior to any debt reduction; correct?

Right. Those amounts will have to be refinanced.

Okay. So in terms of financing plans, you do expect to be in the market next year?

For debt refinancing, sure.

Are you guys considering doing another hybrid security?

We are not currently considering doing another hybrid offering.

Okay. And you're on watch by one of the rating agencies and outlook negative by another. Can you just talk a little bit about your commitment to credit quality? Do you want to stay investment grade or BB, being a BB business, would that change anything significantly? Do you have any ratings triggers or credit triggers?

We have no ratings triggers and no credit triggers. Our -- since 2003 when we acquired Panhandle Eastern Pipeline Company, which we're transforming acquisitions, A transforming acquisition and then moving on to the acquisition of CrossCountry Energy and the acquisition of Sid Rich, we've always and have accomplished this, we've always had an eye towards maintaining our investment grade rating, and we have shown a resolve with respect to that and I don't expect that that's going to change.

Would you consider issuing any debt, any closer to the assets or at the operating company levels?

At this point in time, we might consider it but we haven't made a final determination as to where exactly where our additional debt is going to be placed. I expect that we'll make those determinations as we move on into 2007.

So do you think it's safe to assume Trunkline and I guess the Panhandle debt would be issued at the Southern Union parent Company level or you're saying it's too early to tell?

Yes. It's too early to tell.

Thank you.

Your next question comes from the line of Rick Gross from Lehman Brothers. Please proceed.

Yes, thank you. I've got a question on the Panhandle Energy line expansion project. I think that one has been a little bit off the radar screen but it is a big project. I get the impression that it could be $700 odd million and right about now we are talking about firming up precedent agreements and maybe moving it forward. There's an awful lot of supply coming in the West end of your system between Cheyenne plains and Granite Wash exploding and I'm just curious where that sits.

Well, it is one of those projects that we have on our project business development radar screen, Rick. We just have not yet been able to align both the customers and the capital commitment required into what is an economic project that we can announce, but it is one that we continue to work very diligently on and it would in all likelihood be a 2008, 2009 type of project.

Is it a project that I assume it competes kind of but not really directly with Rex.

Yes, that's right and I think it's been, the Rex project as well as a couple of other projects that were previously announced that has created a little bit of confusion in the marketplace, we've seen some of those other projects begin to kind of fall by the wayside and so I think we should be able to get some clarity around what our prospects are for a Panhandle expansion.

Can this go ahead in increments much smaller than I think the 500 million or so that was proposed?

It is. It can be done in increments. I think in two ways. Number one it can be done strictly in terms of the size of the pipe that would be installed, but it can also be done in segments as to which segment of the pipeline we think creates the most economic value and we're looking at both of those alternatives.

Okay, thank you.

Your next question comes from the line of Faisel Khan from Southern Union.

It's Faisel from Citigroup. I didn't realize I was employed by you guys yet.

There's always a first.

I guess it depends on what question you ask.

Exactly. I just wanted to go back to this understanding what the EPS number was for the quarter. If I take the $0.14 which includes the bridge loan interest and the repayment of the $1.1 billion, is it right to assume that I also, if I want to look at a clean number, add back the $0.05 for the deferred tax charge you had and also the $0.11 without the one-time bonuses you paid, is that the right way to look at it?

That is one way to look at it, yes.

So the $0.11 that you told me that was an after-tax number, right, on the bonuses paid?

That's correct.

And then just wanted to make sure I understood this right going forward. On FGT, that's going to be consolidated going forward; is that right?

No, it won't be consolidated going forward. It will be still--.

Equity earnings?

Yes.

Okay, great. Thank you very much.

Your next question comes from the line of Rebecca Followill from Howard Weil.

Hi, question for you, Julie. You usually move pretty quickly in your jobs in executing what you want to do. Is there a timeline or do you have some kind of plan on what you want to do in Corporate Development or is this just an ongoing process?

It's really an ongoing process, because this change happened obviously very recently and we're going to steal our way. One thing I've learned is if you expect a specific structure or timeline you're bound to be disappointed or frustrated, so we're just going to work this out and see which direction it heads.

Okay, thank you.

You're welcome.

Well, I want to thank you all for attending the meeting and hope to hear you all and see you all again before next quarter, so thanks a lot.

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