Energy Transfer LP (ET) 2006 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Southern Union Company fiscal year 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Jack Walsh.

Thank you, operator and welcome to Southern Union's fiscal 2006 earnings call and webcast. Presenting on today's call will be George Lindemann, Chairman, President, and CEO; Eric Herschmann, Senior Executive Vice President; Rick Marshall, Senior Vice President and CFO; Rob Bond, Senior Vice President of our Pipeline Operations; and Mitch Roper, 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 52642761. A replay of the webcast will be accessible through our website at www.Sug.com.

Today we will be discussing results for fiscal 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 212-659-3208.

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 1933 and the Securities Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking information in our earnings release. I'll now turn the call over to Mr. George Lindemann. Mr. Lindemann?

Thank you, and good afternoon. Today, we would like to discuss our 2006 earnings. Our earnings guidance for 2007, our strategic plan and outlook that was issued last night. We are happy to report that our 2006 earnings per share from continuing operations of $1.40 excluding certain one-time items. This compares to our 2005 earnings of $1.20 per share. We're also pleased to provide 2007 guidance in the range of $1.60 to $1.70 per share. Our EBIT from continuing operations excluding one-time items from 2006 was $482.2 million, an increase of 45% compared to the $331.6 million in 2005. Largely driven by strong performance in our transportation segment, and the addition of our gathering and processing segment. With regards to our strategic plan issued last night, many of you will observe that we have retained the fundamental strategy that is served the Company so well.

First, we will continue to manage our daily operations in a safe and efficient manner. Second, we will pursue investments in organic growth opportunities around our existing base assets. Third, we will continue to be active in the market and pursue strategic opportunities that we believe will create value for our shareholders.

Included in our strategic plan is our decision to move forward with an MLP structure, which we expect to form at the end of the third quarter. At the same time, we are watching closely the Santa Fe Pacific pipeline case which we believe might have a profound impact on the MLP holding FERC regulated assets. We believe that starting an MLP with our Southwest Gas storage assets will allow us to create a growth vehicle with a competitive cost of capital and will allow us to evaluate future drop down sales of existing assets into an MLP. We believe this strategic plan shows how we intend to create shareholder value and at the same time maintain our investment grade rating. I'd like to turn the call now over to Rick Marshall to give you some detailed reviews of the year. After that, we'll be happy -- after we finish everyone, we'll be happy to address any questions you have. Rick?

Thank you, George, and good afternoon. As George just mentioned, we reported strong EBIT of $482.2 million for fiscal 2006 which represents an increase of $150.6 million or 45% over the prior year's $331.6 million.

2006 EBIT excludes three significant non-recurring items. First, 74.8 million book gain on the December 2006 transaction that saw us eliminate our ownership in Transwestern Pipeline, and increase our ownership in Florida Gas Transmission to 50%. Second, $14.2 million of transaction related bonuses paid during the quarter. And third, a $6.5 million impairment charge related to the writedown in value of a corporate facility in Scranton. Net earnings from continuing operations were $217.1 million or $1.70 per diluted share. Excluding the aforementioned one-time items, net earnings from continuing operations were $181.2 million or $1.40 per share. 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. The adjusted 2006 results compared to net earnings from continuing operations of $153.1 million or $1.20 per diluted share for 2005. Our operating revenues for 2006 were $2.3 billion an increase of $1 billion compared to $1.3 billion in the prior year. This increase is largely driven by the addition of SUGS on March 1, 2006.

Including discontinued operations, the Company posted net earnings available for common shareholders of $46.8 million or $0.40 per diluted share. Discontinued operations which include our Pennsylvania and Rhode Island distribution assets accounted for a net loss of $153 million or $1.30 per diluted share. This loss was primarily driven by a $142.4 million non-cash 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 related to the cessation of depreciation expense, the funding of pension obligations, premiums on the early extinguishment of debt and transaction costs.

Breaking down these results, transportation and storage, including our investment in CCEH had EBIT of $417.5 million including the one-time gain of $74.8 million related to the previously mentioned cross country transaction compared to $281.3 million in 2005. Excluding the one-time item, EBIT for this segment increased $61.3 million or 22% to $342.6 million. This increase is attributable to Panhandle Energy which includes Panhandle Eastern, Trunkline, Trunkline LNG and the Sea Robin operations up $65.5 million on an EBIT basis and comes primarily from a $49.3 million increase in LNG revenue largely a result of Phase I and Phase II expansions of our LNG facility being placed in service during 2006. Additionally, Panhandle Energy benefited from higher transportation storage revenue, primarily a result of higher average reservation rates and increased parking revenue offset partially by higher operating expenses.

Equity earnings from our share of Cross Country Energy were up $70.7 million, largely a result of the $74.8 million book gain on the December transaction. Excluding the gain, equity earnings were down $4.2 million primarily related to Transwestern's results. Our gathering and processing segment generated $62.6 million in EBIT for the 10 months ended December 31, 2006. In addition, we received $63.6 million in cash from the settlement of the natural gas and natural gas liquids put options that is not included in segment EBIT. The effective EBITDA of the segment is its EBIT plus depreciation plus the cash settlement value of the put options. The gathering and processing segment EBITDA totaled $173.5 million.

Our ongoing distribution business generated EBIT of $41.9 million for the year as compared to $61.7 million in 2005. The $19.8 million year-over-year decrease is primarily attributable to a $9.7 million reduction in operating revenue attributable to a 15% decrease in heating degree days, an increase in taxes other than on income due to a $6.8 million property tax refund received in the prior year, and a $2.9 million increase in operating expenses. As you may know, we have filed for a $41.7 million rate increase in Missouri. We are optimistic that a favorable outcome will be reached. By law, new rates will be effective no later than April 1, 2007. In Massachusetts we're also seeking a rate increase and expect results in early 2007.

Interest expense was up $81.6 million compared to the prior year and is primarily due to $57 million of bridge loan, interest, and related debt issuance cost amortization. The bridge loan was repaid during 2006 with the net proceeds from the closing of our LDC asset sales on August 24, and the issuance of our 7.2% $600 million junior subordinated notes in October. During the year we invested approximately $333 million in our operations. Growth capital accounted for $169 million, and maintenance capital was $164 million. Panhandle Energy spent $245 million, $132 million for growth and $113 million for maintenance. Approximately $35 million has been invested in gathering and processing with growth accounting for $22 million. We have reinvested approximately $48 million in our remaining distribution business with growth capital of approximately $15 million. Approximately $5 million has been invested in our corporate and other segment.

For 2007, we expect our total capital spending to be in the range of 560 to $640 million. Broken down by segment, we expect Panhandle to spend approximately 480 to $530 million, gathering and processing to spend approximately 45 to $55 million, distribution to spend approximately 30 to $40 million, and corporate and other to spend 5 to $15 million. Of the total capital expenditures, maintenance capital is expected to be approximately $155 million at Panhandle, $15 million at gathering and processing, $30 million at distribution, and $5 million at corporate. As George mentioned earlier, we expect our 2007 earnings per share to be in the range of $1.60 to $1.70. As you may have already seen, we have presented EBITDA guidance by segment for 2007 and 2008 in our strategic plan outlook which was issued last night on a proportionately consolidated basis which includes 50% of the EBITDA of Citrus Corp, We expect EBITDA to be approximately $854 million in 2007, $883 million in 2008, and if you annualize the Trunkline LNG IEP project EBITDA for 2008, it would be approximately 913 million. For comparative purposes, our proportionate EBITDA for 2006 would have been approximately $786 million, had we owned 50% of Citrus Corp. for the entire year.

What we hope to accomplish by presenting this level of detailed information in our strategic plan and outlook was to show the growth in operating cash flows over the next two years. As our capital expenditure program slows down in 2008, we expect to see a significant amount of free cash flow develop. At that point in time, we will be able to evaluate what the best use of that free cash flow will be. While working within the parameters of our investment grade ratings, we will evaluate such options as repayment of debt, increasing our dividend, repurchasing stock, or investing in additional growth projects. 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 mentioned, the transportation and storage business of our business performed very well for the year. Largely driven by the contribution from our recently completed Phase I and Phase II LNG expansions, and the continued strength at Panhandle. I'd like to reiterate for everyone, the transaction that was finalized on December 1, 2006. Through a two step process, Southern Union was able to increase its ownership in Citrus Corp. The holding company of Florida Gas Transmission to 50% from 25% by effectively exchanging our 50% interest in Transwestern Pipeline. The other 50% of Citrus continues to be owned by a subsidiary of El Paso. We're excited about the transactions as it allows us to increase our investment in a very stable and growing asset and will allow us to participate to a greater degree in future growth in the Florida energy market.

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 LNG Services through 2028. We expect this project to contribute 30 to $35 million in annual EBIT once it is completed.

Our Trunkline Gas Company fuels zone expansion project which will expand our system from East Texas into Louisiana has been filed with FERC. This project will create up to an incremental 840 million a day of capacity from Texas to Louisiana and will also create up to 1 Bcf per day of capacity into the Henry Hub. The majority of this capacity has already been contracted under long term agreements. The project is expected to cost 190 to $200 million, and will generate EBIT between 20 and $27 million. This expansion is expected to be in service by late 2007.

And lastly, a project that is currently under construction is the Florida gas phase 7 expansion. This project will initially add 100 million a day of additional capacity for customers in the Orlando area. We plan to build approximately 33 miles of pipeline looping in several segments and install additional compression. We expect the project to be in service by mid 2007. Total project is expected to cost $60 million and will contribute $8 million in EBIT, half of which would be for the benefit of Southern Union.

I'd like to now turn the call over to Mitch Roper, our Senior Vice President of Gas Services. Many of you have already met Mitch and know that he replaced Craig Strehl who retired at the end of December to spend more time with his family and the charities that he supports. Mitch has worked with Craig over 18 years including the last nine at gas services and as its Senior Vice President. Mitch?

Thank you, Rob, and good afternoon. As Rick mentioned, Southern Union Gas Services produced an effective EBITDA of $173.5 million for the 10 months ended December 31, 2006. This amount included $63.6 million of cash settlement value that is not reflected in our GAAP EBIT. Our total wellhead volume averaged $585,000 Mmbtu per day for 2006 compared to 541,000 Mmbtu per day in 2005.

Due to favorable processing economics throughout the year we processed an average of 451,000 Mmbtu per day, the last 10 months of 2006 as compared to 394,000 MMbtu per day in 2005. This represents a 15% increase in process volumes at relatively attractive processing spreads. This has resulted in total product gallons per day of 1.43 million for 2006 relative to 1.28 million in 2005. We have not added any additional hedges to our portfolio since the positions we purchased last July. We continue to monitor the market on a daily basis and do not feel a net price available after relatively expensive put option premium costs is reflected of what the forward market will ultimately produce. Remind everyone in July of 2006, Southern Union substantially completed its hedging program for 2007. As we discussed on our last call, we purchased put options on natural gas liquids and crude oil to compliment the put options on natural gas that we already owned. At this point we are 85 to 95% hedged on our equity volumes through 2007. The practical effect of the hedging is that we are selling our equity BTU's at a net price of $9.12 per Mmbtu in 2007. For 2006 we were effectively selling our equity BTUs at a net price of $9.23 compared with a market average of $5.78 per Mmbtu of gas at Waha. And approximately $0.93 per gallon on liquids at Mont Belvieu.

Our average processing spread for 2006 was $0.43 per gallon compared to $0.18 per gallon in 2005. As it are relates to 2007 earnings guidance we have budgeted a processing spread of approximately $0.30 per gallon which is indicative of the current forward market. The Company continues to see active drilling throughout its 4800 mile pipeline system. We feel that our operational flexibility, coupled with our large footprint, will allow us to competitively seek out higher margin volumes to add to our system throughout the year. As we outlined in the strategic plan and outlook we have approximately 28 million of organic work projects and 23 million of system enhancement projects that we plan to develop during 2007. These projects we expect to generate an internal rate of return of between 25 and 55%. I'd now like to turn the call back over to George Lindemann.

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

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question will come from the line of Lasan Johong of RBC Capital Markets. Please proceed. Your line is open.

Hi. I wanted to ask a question about the MLP, the reason for why you're doing an MLP versus selling the assets to an MLP which should net you essentially the same kind of MPV in terms of doing it because otherwise you're going to be on a very slippery slope trying to replace assets to keep up your discount rate.

Well, I mean, as far as establishing the MLP, we recognize it as a growth vehicle with a competitive cost of capital. We believe that the markets are going to forward the MLP structure of premium in their equity value. With that all said, we're closely monitoring the Santa Fe Pacific pipeline case that was mentioned earlier that is currently at the DC Corp. Which is challenging the ability of an MLP structure to continue to select tariffs in their taxes in their tariff rates charged to customers and if that case is positively resolved and the MLP equity premiums are preserved, we're going to move forward with starting the MLP.

I appreciate that and I'm not disputing whether or not it is effective with or without this court case being in place, but assuming that the court result is favorable, I've been hearing all across-the-board that MLPs are competing very vigorously for assets and is becoming more and more difficult to find assets and so what I'm hearing is a lot of companies are doing what you plan to do in part which is drop down -- continuously drop down assets over time but at some point, there's a limit to how many assets you can drop down unless you convert the entire company to an MLP. So it becomes more and more difficult and last time, we had talked you guys had mentioned that perhaps it was better part of valor to sell the assets to an MLP versus creating one and I'm wondering what's kind of changed that dynamic to -- so they can be more effective going forward to do an MLP?

Yes.

Do you think the asset values are such that you can continue to buy assets or drop down assets and replace them with something else?

Well, we think we can do both, but I don't recall us ever suggesting that--.

No, I'm not saying that you did certainly say this is the best way, but what I thought I heard you guys say is that this is one way, this is another way, we're considering both, it could go either way, but we haven't made a decision yet.

Well, I think the storage assets in particular are strategic and integral to our existing operations and if you want to compare that to Transwestern, which we did ultimately sell to an MLP in 2006, I think that was a distinction that we drew was that Transwestern was not a strategic part of our business going forward or we could see our business going forward without Transwestern in it and an MLP was able to pay a strong price for Transwestern.

And why would you not do this for the storage assets, because it's an integral part of the business?

Yes.

What about CGS?

I think likewise, we feel that gas services is a platform for us in the future and we're not interested in exiting that part of the business.

Would that be subject to potentially a push down to drop down to an MLP?

I think as we move forward and grow our MLP's certainly that would be one of the assets that would be a fit, and as we would grow, then we would expect that our proportional distribution we would expect to see the GP splits increase and I think we can look around our Company and see many assets that would fit into that, to that structure.

Could you prioritize which ones might come first before others?

I think that's premature at this point.

Thank you very much.

And your next question will come from the line of Carl Kirst of Credit Suisse.

Good afternoon, everybody, and I'll throw in my congratulations for the added transparency of segments and certainly for Citrus. Just a clarifying question on the MLP and obviously the SFPP is an important case here. Is it safe then to say that you guys are going to wait here for the SFPP resolution before moving forward and I understand this is a hypothetical, but sometimes these cases wind up being settled, particularly when one party would like to complete and MDO. If that happens, what does that do inasmuch as there may be some lingering uncertainty here?

It's Eric Herschmann, Carl. I think that right now, the case that the DC circuit is considering is beyond just the parties, and FERC has made clear that as a policy position and they want the DC circuit to rule so even though there's a potential LVO, I don't think that would resolve the entire matter. We're going to proceed with the expectation so far that things are status quo but obviously, the case could have a significant impact on the market and we've been told that the decision will be coming out relatively soon within the next few months.

Okay, that's very helpful. Mitch, can I just turn to SCGS for a second. You said where the current total system run rate is at 585 or actually average for '06, where did we end exit rate for '06 and perhaps if you can help us out, given the growth opportunities that you see here as we look into the guidance for '07 and as well as the EBITDA guidance for '08, what net equity volumes are you baking into that?

We ended the year -- basically ended the year somewhere close to 600 million and much of that was slightly over 600 million a day and that was mostly Atoka gas and that's really what drives the big volume increases is the Atoka gas so those wells come on at 20 million a day or so. We expect to be by the end of the year somewhere in the 685 to 700 million range depending on what's going on with volumes on the Atoka.

That's a nice count. And then with respect to just one last question on that, with respect to I guess the forward outlook, you've got sort of a commodity price curve baked into the assumptions, and I guess what I'm specifically looking at is the [keep hold] processing spread and the natural gas price was commented on. Inasmuch as we're looking at $62 oil prices, I would think and this is where I'm asking the question, you can correct me where I'm wrong, where the current NGL basket is probably somewhere closer to the 9 or $10 per Mmbtu range and I guess I want to confirm that A, that's the case but B, with the amount of equity volumes the 55 to 60 billion BTU that you have, as we're looking at maximizing which commodity can be sold at, is it safe still to assume that up to about 75% can be sold as liquids and 25% of that can be sold as gas, if indeed the NGL price is greater than the gas price?

Yes. What you're talking about is total wellhead volume?

Yes, correct.

Yes, we'll end up probably in processing at 450 plus, and we're doing some expansions with moving some things around. I would expect we'll peak over 450 given a $0.30 processing spread.

Okay, thank you.

And your next question will come from the line of Faisel Khan of Citigroup.

Good afternoon. With regards to your guidance, the $1.60 to $1.70, what effective tax rate are you guys baking into the assumption?

I want to say in the neighborhood of 32% or so.

Okay. And in terms of your interest expense, are you baking in any sort of acquisition fees or is there anything that is not cash that would be in that number that we should know about?

There's some level of amortization but it's just our standard level of amortization expense from the debt issuance that we have, so nothing that's any, that's that material.

And looking at the EBITDA guidance for the year, is that including any benefit from the hedges you have in place right now?

For 2007, yes, it does.

Okay, very good. And then in terms of your distribution guidance at the LDC's, are you factoring in a full, a 100% success rate on the rate case?

No, we're not factoring in 100% success rate on it and we're also anticipating that the rates will go into effect on April 1.

And on the guidance, just following up on Carl's question, so is the guidance that you guys have out there, is that based on the current curve of natural gas and oil prices, is that fair to say?

Yes, it is.

Thank you. And then in terms of on the tax side of the equation, with regards to the like kind exchanges you entered over the last 12 to 24 months, have all of the issues been resolved in terms of the IRS signing off on your ability to institute the like kind exchange?

No. It's still subject to IRS audit in the future. We were successful though with respect to the like kind exchange that related to our sale of our Texas LDC back in 2003, when we used it as a like kind exchange for the Panhandle acquisition.

Okay. And then a question for Rob. In terms of what you're seeing on your returns for your-projects that you have either under construction or going into construction, has the cost of materials and labor, are those effecting your returns that you initially projected in terms of what you're projecting going forward today?

Well, thus far, I think we entered into these projects that are laid out in the strategic plan. We were fortunate and able to lock in our steel and materials cost. As we examine new projects going forward, there's no doubt that the higher costs that we're seeing across the industry are impacting the viability of different projects, but that is part of our continual evaluation.

Okay. And in terms of looking at potentially new projects, do you think that your current producer customers or LDC customers are willing to take on those higher tariffs that compute the higher cost of labor and materials or are you getting some resistance to those higher costs as you look for new projects?

Well, I think the marketplace does a good job of dictating that for us, and our customers are always looking for additional diversity and security and supply, so they are very, very interested, but we have to live within the framework of our existing tariffs and/or the marketplace to help us determine whether or not it's something that if they are willing to move forward with.

Okay. Thanks for the time, guys.

Your next question is from the line of Rick Gross of Lehman Brothers.

Good afternoon. I want to clear up one thing. Is the MLP contingent, definitely contingent on the FTP case or will you go ahead, if you have an adverse decision?

I don't think it's definitely contingent.

Okay.

When you say an adverse decision, obviously, if it's a very broad brush decision that is completely against the industry and makes it clear, that the structure wouldn't work, then that would obviously be a factor but obviously we don't know what it's going to say and that's not our expectation now.

Okay. My question is, is why did you guys pick the Southwest Gas assets in the context of we've got a rate challenge going on and you alluded to the fact that you wanted to migrate this to market based rates which is not where you are. So how do I think in terms of when this asset as such would be ready and will the outcome be roughly in line with the 35 to $40 million of EBITDA that they generated over the last 12 months?

Well, I think it's a little early for us to predict the outcome of the section 5 case. We clearly have filed a cost and revenue study that is supportive of our existing rates or at least supportive of our existing rates. That being said, none of us can predict where that will ultimately end up; however, we have determined that the storage assets do seem to be the right size for an MLP. The storage assets don't have as large a negative tax implication as some of our other assets because we've held them longer, and lastly, it's a part of our business that we are eager to grow and that we want to pursue growth opportunities both within the existing facilities as well as evaluate other growth projects for Southwest Gas Storage, so just I think in general, we feel like it is the best fit of all of our existing assets to start with.

Okay, from the time frame -- when we talk about forming an MLP, does that mean we will file an MLP in the third quarter or we will actually be out marketing?

We'll end up filing before the end of the third quarter.

Okay and then completely different question. What's the GPM on the Atoka?

It's dry gas. It's pipeline quality gas so it's 1,000 BTU.

Okay, thank you.

And your next question will come from the line of Becca Followill of Pickering Energy.

Good afternoon. Following up on Rick's questions, on filing for market base rates at Southwest Gas Storage, am I correct that the customer, the key customer at Southwest Gas Storage is Panhandle?

Yes, that's correct.

So, internally, is there are any problem with filing for market base rates with just being that one key customer?

Well, I think Becca, the idea here is largely around the growth projects that we have within Southwest Gas Storage, and so we will examine the market base rates for all of Southwest Gas Storage if we ultimately feel that that's appropriate but clearly what we're trying to do is as FERC has encouraged market based rate treatment to allow for the expansion of certain facilities, that is what we're going to be pushing for.

So that would be for new facilities but not for existing storage?

Well, I'm not going to exclude existing at this time, but I think we have to examine where FERC is and make a judgment as to how we proceed there as well.

Okay. And you filed your cost for these in the 20th of February; is that correct?

That's correct.

And so what's the status now? Where does it go from there? Is it in the first hands?

Well, we have a procedural schedule that we're following. We'll be moving forward here within a month or so on testimony and then rebuttal testimony in June and so forth and back and forth. We're just moving along the process. I don't think I have -- I don't have the date handy for when the next filing will be required, but we'll just be answering protests and comments at this stage.

But isn't ALJ decision supposed to come out in December?

That is the procedural schedule that we're on, correct.

So how do you move forward with an MLP with the uncertainty behind it?

Well, we'll just continue to evaluate where we are in the section 5 process and try to ascertain what we think the future earnings of Southwest Gas Storage will be.

In the event that, A, I don't know what this is -- so bear with me that the SFPT decision comes out as it was in the original decision and B, the section 5 drags on, do you have a plan B? Are there other assets that you would maybe consider doing in the third quarter instead of Southwest Gas Storage?

I think we would have to reevaluate at that point in time exactly what our next step would be, and I don't think we're prepared today to answer that definitively.

And then once you do get that done, what would be the timing to consider additional drop downs? Is this something that you feel a sense of urgency for or is it something that there's no sense of urgency?

Well, again, Becca, I think it's just premature for us to speculate on what the MLP marketplace is going to look like at that stage and where we are on being able to either acquire additional assets or to drop down existing assets.

Okay, a couple more questions for you since others got so many. Any CapEx that is built into your plan for your pipeline compressor replacement?

Yes, there is. It's in the growth cap -- I'm sorry, it's in the maintenance capital that Rick laid out for you.

And how much is in there for that?

2007 I believe it's about 74 million.

Okay, great. And then for George or Adam or anybody who is on the call, would you consider selling the LTC's once these rate issues are resolved?

I don't think we're prepared to discuss that at this time.

Okay. And then finally, Mitch, a clarification. You said you exited the year at 600 million a day on your processing volumes?

Yes.

You expect it to end '07 at 685 so we can just average the two, is that fair?

Yes. I mean, like I said that they jump up and down pretty quickly with these Atoka wells. We're also seeing growth in the Grey Ranch facility which on Mmbtu basis doesn't add up a lot of volume, but it's flowing, Grey Ranch is doing 80 million a day -- 80 million cubic feet a day which is about 20 million of residue, which is a big increase for it over last year and there's a lot of active drilling going on down in that area.

So most of that increment is it due to the Atoka?

I would expect from the rich gas, I think our growth is probably in the range of 20 million a day of rich gas in that volume.

And the rest is coming from the Atoka dry gas?

Yes.

Perfect, thank you.

Thank you.

[OPERATOR INSTRUCTIONS] And your next question will come from the line of Ross Payne of Wachovia.

How are you doing, guys? Hi, there. I had a quick question on the expansion of Florida gas. How easy is it to expand the capacity maybe as you lead the Gulf and head down towards the Panhandle and then down into Southeast Florida and second of all, what can you tell us about Gulf Stream in terms of its capacity utilization and its ability to increase capacity going forward in Southern Florida?

Well, the last question first, it's my understanding the Gulf Stream is now fully contracted. Its utilization much like Florida's is dependent on weather obviously the Summertime is the peak season for utilization on both Gulf Stream and Florida Gas Transmission. Expansion wise, since their pipe runs through the Gulf of Mexico, I understand that there is some expandability on their system by putting compression both on the onshore Florida side of the pipe and I understand that that would allow them to expand their capacity by maybe as much as 100 to 200 million a day. On SGT system, what we have is with phase 7, we have the ability to further expand that and get another about 60 million a day of capacity from the Jacksonville area and then for further capacity, expansions beyond that we would need to be looking at looping our system back from roughly Louisiana through the Florida Panhandle. And most of that would be pipeline at this stage. I'm not sure that there's any more compression expansions that we can do.

Okay. Any thoughts on when that may occur for you guys?

I think it's kind of premature to speculate but it would be the early part of the next decade would be my guess. Maybe a little bit sooner than that, but it's a function of energy demand and continued growth into the State of Florida. I think as we've said earlier, we're largely bullish. The states energy demand in growth, we believe we're extremely well positioned to capture the majority of that and we continue to work with all our customers to find ways to meet their energy demand. I don't know when a next big expansion out of Louisiana would occur, but I think there would be some smaller projects maybe out of Jacksonville prior to a major expansion like that.

Okay. Thank you very much.

And your next question will come from the line of [Kevin Roach] of Barkley.

I have a question related to the Company's debt. The Company has I guess several maturities that will be occurring this year and next, and I guess if you lump that together with the various bank facilities, perhaps the Company could refinance up to maybe 50% of its total debt outstanding. How are you thinking about approaching that and how does the potential for dropping down assets play into your thinking on where you will refinance the debt when it comes due?

Well, as far as the first part of it, we do have a -- we're in the market right now with a 5 year bank term loan that will refinance $200 million of debt at the Panhandle lease from pipeline company level and $255 million at the Trunkline LNG level so that transaction we expect to close within a couple weeks and eliminate the refinancing needs -- short-term refinancing needs. In 2008, in relatively short order, we have some notes that are due in February that will be financed at the Southern Union Company level. There's another issuance of about $125 million at the Southern Union Company level as well later in the year and then we have some notes coming due at Panhandle Eastern Pipeline Company in August of 2008. Those will again be taken, those will be financed at the Panhandle Eastern Pipeline Company level. We haven't made any determination as to refinancing at different entities at this point in time.

Okay, and should we assume that the reason why you're going that route is it's probably more economic for you to accomplish your goals that way?

That's one of the things we're considering, yes.

Okay, thank you.

And your next question is from the line of [Harry McKear] of Lehman Brothers.

Hi, guys. Thanks for taking my question. Just trying to get a feel here, certainly good to see from a bond holders perspective the commitment to investment grade ratings. I'm just wondering if you have run the strategic plan by the rating agencies yet?

We have in our strategic plan, there are, it includes discussion materials that the rating agencies have absolutely seen in the past. It is a forward-looking outlook that we've presented to them and explained to them and that they are not surprised by. They aren't surprised at all by our commitment to investment grade rating either, and the difference with this plan as compared to what has been included in our discussions of late is the decision to move forward with an MLP drop down of some assets into an MLP.

Okay, is that--?

The majority of the strategic plan they've seen in the past.

Okay. Have you discussed the possibility of an MLP with them before?

Yes, we have.

Okay, and is that something they were generally constructive on?

I don't know that we had detailed discussions with them on the MLP structure simply because we didn't have any definitive plans.

Okay, thank you.

And your next question is a follow-up from Faisel Khan.

Yes, sorry, just a couple last questions here. On the LDC for 2006, what was the impact from weather?

About $9 million in margin.

Okay. And in terms of what you guys expect to pay out cash taxes for '07 and 08, do you guys have a date on that?

The plan that you see does not include any change to the dividend policy or an increase in the -- oh, I'm sorry, what was it?

Cash taxes like in terms of what you expect to pay in your tax? I know you talked about how you -- I think you're depreciating interest and assets on an accelerated basis so I think you are not -- you didn't expect to be a significant cash tax payer?

We're not prepared to discuss in any detail the cash taxes.

Okay, thanks.

And your next question is a follow-up from Rick Gross.

Yes, I thought I'd get back in the queue again. From a standpoint of West Texas, Barnett Shale, could you give us an update as to what you see the drilling at the end of your system and whether or not any of that might materialize in new business in the next 12, 18 months?

Yes. We're still seeing activity out there. It's still pretty tight although we are in the process of connecting up our first two Barnett shale wells in the southern end of our system. So, I think the activity is continuing and they are still doing evaluation, but they are drilling and we are now seeing connections to the systems, so that's a good thing.

And a lot of these areas where the operators don't give out a whole lot of information, they do make I'll call it earlier commitments as it were, kind of a tip off to giving you dedicated acreage to build we'll call it the trunk into the system. Do you sense that the coming year will be an opportunity for you or anybody to do that kind of build?

I think that this year may very well be the year that that type of commitment takes place, yes.

Okay, thank you.

And a couple different trunks.

Okay.

And your next question will come from the line of Steven Rountos of Talon Capital.

Good afternoon. I may have missed it. Did you disclose what the EBITDA was of the assets that you're considering putting in the MLP?

It was mentioned on the call. It would be in the neighborhood of 35 to 40 million for the Southwest Gas Storage assets.

Is that just existing or does that include any expansion projects?

Existing.

Of the projects that you have in your plan today, how much of those relate to the Southwest Gas Storage projects?

None today.

Is there an opportunity to expand that asset or those assets?

Yes, as well as other opportunities outside in the marketplace to examine and pursue.

Okay. That was it. Thanks.

And your last question is a follow-up from Lasan Johong.

Yes, thank you. Wondering if you guys intend to or what percentage of EMLP you really intend to retain as a limited partnership interest under Southern Union parent?

We don't know the answer to that. It's too early.

And what kind of tax consequences do you see coming from dropping down further assets? Is there any significant tax consequences?

We haven't gotten to that point yet, so we can't really answer the question.

Understood. Thank you very much.

If there are no more questions, I'd like to thank everyone for attending the call, and we'll see you next quarter, hopefully it will be a good one.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.