Energy Transfer LP (ET) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your first quarter 2007 Southern Union Company earnings conference call. My name is Jean. I'll be your conference coordinator today. At this time all lines are listen-only mode, and towards the end of the conference call, we'll be taking questions. (OPERATOR INSTRUCTIONS)

At this time, I'll turn the call to your host, Mr. Jack Walsh, Vice President of Investor Relations. Sir, please proceed.

Thank you, Jean, and welcome to Southern Union's first quarter 2007 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, Mitch Roper, Senior Vice President of Gas Services, and Rob Bond, SVP of our Pipeline Operations. A replay of this call will be available for one week by dialing 888-286-8010 and entering pass code 79009605. A replay of the webcast will be accessible through our website at www.SUG.com. Today we will be discussing results for the first quarter of 2007, 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 language in our earnings release. I'll now turn the call over to Mr. George Lindemann. Mr. Lindemann?

Thank you, and good afternoon. Today I would like to discuss our first quarter earnings and update you on some of the key items we discussed in our last investors call. To start, we reported first quarter earnings of $0.62 per share. Excluding the $14.1 million gain related to the settlement of litigation at Citrus tradings, earnings were approximately $0.53 per share. This compares to adjusted earnings of $0.42 per share in 2006. Overall, we are pleased with our performance in the first quarter. Our transportation and distribution segments both met or exceeded our expectations.

In our gathering and processing segments, we experienced several unusual issues during the quarter that negatively impacted our margin and prevented us from posting even stronger results. Based on our review of April's preliminary operating results, we feel these issues have been resolved. At this point, we are comfortable that we can reaffirm our annual earnings guidance range of $1.60 to $1.70 per share. At this point, I would like to turn the call over to Eric Herschmann who will update you on our [MLP] strategy. When we are through with this presentation, we will be happy to address your questions. Eric Herschmann?

Thank you, George, and good afternoon, everyone. During our last call, we discussed our intent to form an MLP with our Southwest Gas Storage asset. As you are likely aware, there are two pending regulatory issues that influence the timing of this MLP offering. The first is a Santa Fe specific Pipeline case, which is [inaudible] at the D.C. Circuit Court of Appeals since December of 2006. This case challenges the ability of an MLP that contains a [FERC] regulated cost of service asset to collect a [inaudible] for this rate structure when it has in fact not paid those income taxes. Based on information from the parties and the court historical time period for issuing decisions, we had anticipated that a decision already would have been issued by the court. We continued to monitor the court's docket on a daily basis waiting for the decision. We still believe the outcome of this case could have a profound impact on the entire MLP sector, for FERC regulated assets.

The second regulatory issue pending is the ongoing Section 5 rate proceeding against Southwest Gas Storage. In a Section 5 rate proceeding, a third party, which does not have to be a customer, initiates a [first] proceeding to reduce rates by filing a complaint. Today, both sides have laid filings with supporting documentation. We expect a decision by the ALJ in December of 2007.

Since our last call, we have been on the road meeting with shareholders and potential shareholders to further discuss our strategic plans. During this time, we also received inquiries from strategic and financial investors about our Midstream business [SUGS]. Based on the level of unique interest displayed during those discussions, we have the ability to take one of three paths with SUGS. One, we could form our own stand alone MLP. Two, we could form a joint venture MLP. Or three, we could contribute our SUGS assets into existing MLP in exchange for a combination of GP units, LP units and cash. To put the potential size of this MLP into perspective, we expect to SUGS produce EBITDA of approximately $184 million in 2008, exclusive of any hedges, while Southwest Gas Storage has historically had EBITDA of approximately $35 million to $40 million. In the Midstream sector, we have seen transaction multiples in the 9 times to 13 times EBITDA range. SUGS has the further benefit of being unaffected by the Santa Fe specific Pipeline case or a Section 5 rate proceeding because it is not a FERC regulated asset.

I'm certain some of you are wondering what has changed during the past several months to now make SUGS a more attractive MLP prospect? At the time we issued our strategic plan and outlook, we saw two impediments to initiating our MLP strategy with SUGS. The first was the liquidity in the market and the ability of the retail market to absorb such a large offering. After discussions with our advisors, we are more confident that there is sufficient demand from retail and institutional investors for these types of assets and that an efficient offering could take place. The second issue relates to the tax efficient like-kind exchange we executed when purchasing those assets. As we continue to move through the process, we are gaining more confidence that our initial tax position will be upheld. A third factor, of course, is the keen interest and opportunities that have been discussed by third parties with us.

Our decision as to which MLP structure to pursue will be dependent on market condition, the potential joint venture partner, the multiple we would receive, the percentage of the GP interest and our ability to quickly get into the high splits. Regardless of which path we choose, we are still proceeding with the preparation of audited financial statements for Southwest Gas Storage so that we have the flexibility to drop it into an MLP as part of the future drop down strategy. We expect that any proceeds from the MLP would be used to pay down debt and buy back stock in a manner that would allow us to maintain our investment-grade rating. At this time it is too early for us to discuss this specific use of the proceeds until we are further along in the process, have determined which alternative we will pursue and have met with the rating agencies. At this point, I would like to turn the call over to Rick Marshall, our CFO, to give an overview of the numbers. Rick?

Thank you, Eric, and good afternoon. For the first quarter of 2007 Southern Union reported EBIT of $160.8 million compared to $151.5 million in the prior year. Our results for the first quarter include a $14.1 million gain related to the favorable settlement of litigation in Citrus trading that was now announced earlier in this year. Excluding this item, EBIT would have been $146.7 million compared to $120.8 million in 2006. For the quarter, net earnings from continuing operations were $78.7 million or $0.62 per diluted share. Excluding the litigation settlement, net earnings from continuing operations were $68.5 million or $0.53 per share. This compares to adjusted net earnings from continuing operations of $52.8 million or $0.42 per share in 2006. Our operating revenues for the quarter were $780.2 million, an increase of $233 million over the prior year. This increase is largely driven by the addition of SUGS.

In terms of segment results. Transportation and Storage, including our investment in Citrus, had EBIT of $115.2 million including the previously mentioned gain of $14.1 million compared to $86.8 million in 2006. Excluding the gain, EBIT for the segment increased $14.3 million or 16% to $101.1 million. This increase is attributal to higher trunkline LNG revenue, largely the result of a Phase I and Phase II expansions of our LNG facility being placed in service during 2006. Higher transportation and storage revenues from Panhandle Energy, primarily a result of higher average reservation rates and increased parking revenue and higher equity earnings from our increased ownership in Citrus Corp. Our Gathering and Processing segment generated $8.9 million in EBIT for the quarter ending March 31, 2007, compared to $7.1 million for the month of March in 2006. Mitch Roper will go into detail on the unusual operating issues that negatively impacted margin in the first quarter. Our Distribution business generated EBIT of $33.5 million for the quarter as compared to $30 million in 2006. The $3.5 million increase is primarily attributal to a $6.3 million increase in operating revenue, attributal to a 14% year-over-year increase in [inaudible] days, offset partially by a $3 million increase in operating expenses.

As many of you are aware, we received the $27.2 million rate increase at our Missouri Gas Energy LDC that went into effect on April 3. We are very pleased with this outcome. Of particular note is the change to a straight fixed variable rate design for our residential customer class, which allows us to recover our fixed costs as well as our allowed return in a monthly fixed customer charge. This new rate design will serve to mitigate fluctuations associated with weather and conservation on our earnings and cash flow.

Interest expense was up $10 million in the quarter compared to the prior year. The increase is due primarily to the $600 million of junior subordinated notes that we issued in October to permanently finance the SUGS acquisition as well as $465 million of debt we incurred as part of the transaction to increase our ownership in Citrus Corp. This increase was partially offset by the retirement of the Bridge Loan in October of 2006 as well as lower average balances under our revolving credit agreement during the current quarter. During the quarter, we invested approximately $66.9 million in our operations. Growth capital accounted for $39.6 million and maintenance capital was $27.3 million. Panhandle Energy spent $46.8 million, $30 million for growth, $16.8 million for maintenance. Approximately $12.4 million has been invested in Gathering and Processing, with growth accounting for $6.8 million. We have reinvested approximately $7.1 million in our Distribution business with growth capital of approximately $2.8 million. Approximately $1 million has been invested in our Corporate and Other segment. For 2007, we continue to expect our total capital spending to be in the range of $560 million to $640 million.

Broken down by segment, we expect Panhandle Energy to spend approximately $480 million to $530 million, Gathering and Processing to spend approximately $45 million to $55 million, Distribution to spend approximately $30 million to $40 million, and Corporate and Other to spend $5 million 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 in Corporate. Notwithstanding the shortfall in our Gathering and Processing segment during the first quarter, we still expect 2007 earnings per share to be in the range of $1.60 to $1.70 per share. I'll now turn the call over to Mitch Roper, Senior Vice President of our Gas Services Operation.

Thank you, Rick. And good afternoon. Southern Union Gas services produced EBIT of $8.9 million for the quarter excluding a $2.5 million unrealized mark to market loss on certain hedge positions. Adjusted EBIT was $11.4 million. We estimate that our first quarter margin was negatively impacted by approximately $9.3 million. That amount is comprised of the following. $3.6 million related to higher than anticipated levels of fuel flare and unaccounted for gas, principally on our stop system. A nonrecurring loss of $1 million related to a compressor engine destroyed by fire, $2.5 million due to released -- reduced well head volumes, related to producer operational issues as well as delays in anticipated drilling programs, $1.1 million related to lower commodity prices associated with the unhedged volumes and $1.1 million in higher operating expenses. Our initial review of April's preliminary operating results indicate that these issues have been offset or resolved.

Operationally, our total well head volume averaged 589,000 [MMBtu] per day for the quarter compared to 543,000 MMBtu per day in the prior year. We processed an average of 447,000 MMBtu per day for the quarter as compared to 437,000 MMBtu per day in 2006. This has resulted in a total product gallons per day of 1.4 million for 2007 consistent with the same period in 2006. Our average processing spread for the first quarter was $0.29 per gallon compared to $0.32 per gallon in 2006. Throughout the remainder of the year of 2007, we expect a processing spread of approximately $0.33 per gallon, which is indicative of the current foreign market.

We have not added any additional derivatives to hedge our equity volume since last July. We continue to monitor the market on a daily basis and do not feel the net price available after premium cost is reflective of what the market will ultimately produce. Over the last several months, we have watched the market strengthen its natural gas, and propane inventories have been reduced. To remind everyone, we are approximately 80% to 90% hedged on our expected equity volume through 2007 using a combination of natural gas, natural gas liquids and crude oil as a proxy for the heavy end of our barrel. Our combined hedge position has the practical effect of allowing us to sell our equity Btus at a net price of $9.12 in 2007. With that, I would now like to turn the call over to Rob Bond, Senior Vice President of Pipeline Operations. Rob?

Thank you, Mitch. Good afternoon, everyone. The transportation and storage segment of our business performed very well for the quarter. Excluding the gains at Citrus trading, EBIT was up $14.3 million, or 16% over the prior year. The increase was driven in part by $13.3 million of increased revenue from our recently completed Phase I and and Phase II expansions at Trunkline LNG. Panhandle Energy also showed improved performance as revenue from the Transportation and Storage segment increased by $12.4 million. This was partially offset by operating and maintenance expenses of $9.9 million. Our increased investment in Citrus Corp. is also contributing as expected to our EBIT growth. Our equity earnings increased by approximately $4.7 million year-over-year, excluding the previously mentioned gain. I'm pleased to report that Florida Gas Transmission commenced deliveries to its customers under its Phase VII Expansion on May 1. This project adds $100 million a day of additional capacity into the Orlando area. The project costs approximately $60 million and will contribute approximately $8 million in annual EBIT to Citrus Corp., half of which is for the benefit of Southern Union.

Focusing now on our ongoing growth projects, the infrastructure enhancement project at Trunkline LNG continues to be on track for second half 2008 in service. This project, which is fully contracted to BG LNG services through 2028 is expected to cost approximately $250 million and is expected to contribute $30 million to $35 million of annual EBIT once completed. Finally, our Trunkline Gas Company [fuel zone] expansion project, which will expand our system from East Texas into Louisiana, has been approved by FERC and initial construction will commence within the next few weeks. This project will [inaudible] one [Btf] of capacity into the [Henry Hubb]. A majority of this capacity has already been contracted under long-term agreements. The project is expected to cost approximately $200 million and generate EBIT between $20 million and $27 million. This expansion is expected to be in service by late 2007. I would now like to turn the call back over to George Lindemann. George?

Thank you, Rob. At this point, we'd like to open the meeting to any questions you might have.

(OPERATOR INSTRUCTIONS) We'll take our first question from Carl Kirst of Credit Suisse.

Good afternoon, everybody. If I could just follow-up on SUGS and the MLP, Eric you'd mentioned that next year's targeted EBITDA is in the $140 million range. Can you refresh us what the commodity price is and system through-put is behind that number? And really kind of the secondary question of this is as you look more towards an MLP, whichever option you wind up choosing, does it incent you to hedge out longer term not just maybe a little bit in '09, but actually taking maybe multi-year positions? If you just could comment on that.

On the first part of the question, I'll let Mitch address and then I'll answer the second part of your question.

As far as the commodity price for that, it was about a 760 [WAHA] price. The forward market, I haven't looked at it today, but it was about 830 in 2008 for the natural gas, WAHA. And then it's our normal processing spread. We would assume $0.20 to well $0.30 processing spread for 2008 and that's consistent with what we're seeing in the forward market right now.

And Carl, I think on the second part of your question, right now we're unable to determine whether we would hedge out '08 or '09 because it's dependent on which strategy we would end up taking going forward. If we form our own MLP, then that would obviously indicate one format or one structure for hedging. If we did a joint MLP, that would obviously depend on who our joint venture partner was and what policies would be joined between the two entities. And if we were dropping it down into an existing MLP, then we would probably leave that decision up to the MLP. But do our pricing off of an unhedged position.

Okay. Fair enough. If I could just follow-up with a question on timing. I know clearly you guys are trying to move on this as fast as possible. But with respect to, I guess evaluating all of the options and thinking and moving expeditiously as you say, is that something where you think we might know something, say for instance before the next earnings call? I know you don't want to get pegged down, but is that something you feel comfortable enough answering?

In my expectation is, we will know something before the next earnings call.

Great. I'll jump back in queue. Thanks, guys.

And we'll take our next question from Gordon Howald of Calyon.

Thanks. I think Carl kind of addressed my first question. But I'll just see if I can ask it a little bit differently. I mean how do you handle the commodity price exposure inherent at SUGS if you go out there and create an MLP with assets like that? Traditionally, assets with [keephole] type of contracts weren't, or less steady cash flows, weren't normally put into MLPs. I mean, how do you address that issue today? Is it just that the market is so hungry for MLP assets that it would work? So I'm just trying to get a little bit of understanding of your thought process there.

One of the -- this is Mitch, one of the issues is our -- we don't really have keephole contracts in our system. We've pretty much done away with all of our keephole contracts on our system. And a large percentage of our income is generated off of the percentage of proceeds contracts. [Inaudible] have the volatility of needing huge processing spreads to generate our margin on the business.

Do you think those -- and I guess people who advise you thought this is certainly well within reason to put within an -- into an MLP?

Yes.

Got you. Thanks. And if I could ask one other question on the quarter. Thank you for that. I think that's a huge announcement by you guys, by the way. Could you describe in a little more detail the fuel flaired and unaccounted for gas issue? That was a $3.6 million issue. Is that one that you guys refer to as being resolved? And secondly, the producer issues that cost $2.5 million, that one's been resolved, as well. Is that one -- did I understand you guys correctly?

On the fuel flair and unaccountable issue. On the south system, and that's mainly where we had the issue. We manage that issue all the time on our system. However, it was unexpectedly high on the south system. And a large portion of that was on a system that we've owned for about nine years now. And that's the first time we've ever had this type of issue. It was really a measurement issue that by the time we checked the lines, made sure there weren't leaks, got back to the measurement stations and started looking at them, it had resolved itself. And that's, like I said, the first time in nine years that we've ever had an issue like that on the system.

And that's been resolved?

And the system's back in balance today.

Got you. And then the producer -- the producer issues?

Well, the producer issues. There are a variety of issues. Some are delays in drilling programs or delays in completions, problems with completions. The other issue that impacted us in late February and March was we had a producer that had gas that they owed back to their partners in the unit. And that gas left our system as an imbalance. It will come back to our system. But the indications are, we saw the volume fall off in March. And in April, the volume on that part of the system had been replaced.

Got you. Thanks, Mitch. Thanks, guys for the color here.

And we'll take our next question from Mike Heim of A.G. Edwards.

Thanks. Could you talk a little bit about the low tax rate this quarter and just remind us what your expectations for the year are?

Yes. The lower expected income tax rate is the result of a higher dividend received deduction benefit to the company that is the result of the expectation of the higher level of dividends that will be received from our unconsolidated investment that is the Citrus Corporation. So the rate that you see in the first quarter of 27.5% is the expected income tax rate that we're going to realize throughout the entire year.

Okay. And moving to the MLP, if you choose the option of doing an IPO, I guess I was kind of reading between the lines when you talked about the potential size. It sounds like you would put all the assets in an IPO right off the bat as opposed to trying to drop stuff down later? And I'm not talking about the [exit], the Southwest Gas part.

Mike, it's Eric Herschmann. I think that it would really depend on the circumstances. But that is clearly an option that we have now.

Are these assets that can be kind of split apart and it might make sense to put some in to begin and some later?

I think that is a possibility. But we haven't made a decision yet.

Okay. And also on the idea of doing an MLP, I guess I was kind of under the impression that because of the in-kind transfer, it had a pretty low tax basis that might have to be recognized within IPO. Is that true and you're just willing to pay some of those taxes? Or am I misinterpreting things?

I think the issue with the taxes is the like-kind exchange time period of the Safe Harbor is two years. And within the two-year time period, there is a burden shifting from the IRS to the party. And that is something that we are in consultation with our tax council and feel confident that on the time periods that we're looking at, it will not impact us negatively.

Okay. Thank you.

We'll take our next question from Lasan Johong from RBC Capital.

Yes. Following up on Mike's question. Since you guys did a like-kind exchange on the SUGS transaction, if you take money out of it unless you can redeploy that capital to a similar business, my understanding is you do have to pay taxes on that transfer. Is that not correct? In other words, would you go after another asset to blunt the potential capital gains tax and trigger another like-kind exchange?

I'm not sure I understand your question. Are you talking about if we took cash out of a --

The MLP.

Out of the MLP, would we be --

Then be able to redeploy that within another two-year time frame to try and blunt the capital gains tax issue.

We haven't -- we're not that far along. We haven't got the term exactly what we're going to do with the proceeds. We're looking at ways for it to be as tax efficient as possible.

Okay. And then help me understand why you guys would want to form your own MLP and especially in particular drop down the entire SUGS asset into that single MLP when the MLP valuation in the public market is dependent upon the precept or the concept that you would be able to maintain your tax advantages by either, A, doing acquisitions or continuing to somehow organically grow your business. So that if you dropped down the entire asset, that means that the only way you can accomplish that tax neutrality going forward is to acquire more and more assets. And is therefore, then, Southern Union prepared to do that? Or is there something of this strategy and option that I'm not quite understanding?

I think there may be some level of confusion. I think that there are two issues. We can drop it in a forming of our own MLP, piecemeal. Right?

Right.

And we have a tax basis there. And the proceeds from the MLP or the IPO could be used to service debt and buy back stock. Which percentages we'd obviously need to be in consultation with the rating agencies. As far as a lifetime exchange issue, I think you may be confusing apples and oranges on that issue. We have a lifetime exchange, because we sold assets and we used the proceeds to acquire SUGS. So therefore we're in that time period. The issue as to Safe Harbor is just a statutory time period that applies.

No I understand that completely. But I'm now separating the two issues. I understand your lifetime exchange issue. What I'm saying is if you drop down the entire asset base into an MLP, into an IPO, the reason why you would do that or the reason why an IPO would be favorable is if you got very strong valuation for doing this. The premise is that the retail people who buy this MLP would then assume that -- SUGS, SUG, the parent will be able to maintain a tax advantage by continuing to drop assets into it and or grow organically or buy other assets. Be able to maintain a tax advantage. So the point is then, is Southern Union prepared to go out and make this a business that they will continue to grow either the acquisitions or organic growth to be able to maintain the tax advantage? And if not, why do that, why not just sell it to another MLP who needs to have the assets to be able to maintain that favorable valuation?

I think that's exactly the optionality we're looking at. And the determinative factors are going to be, if it's another MLP, what multiples do we receive, how many units, how much cash and how much of the GP.

So if you drop it down into your own MLP, and you IPO that, then that's to me a fairly clear signal that SUG is willing to go into that business longer and deeper and would pursue further acquisitions or organic growth.

I think that would be true of any MLP that we had, that we would seek to obviously grow it.

Unless you sold it entirely to an MLP and wash your hands of it completely.

Right. But the units that came to us would be tax free.

Yes, that's correct.

So those are the options that we're considering. And in light of the interest that we've received, we're evaluating our options.

But you won't get into specifics of how you think about that at this point?

Not at this time. We hope to be doing that before the next earnings call.

Okay. I understand. Thank you.

We will take our next question from Faisel Khan of Citigroup.

Good afternoon. Just to follow-up on the volumetric question at SUGS. Without the expansion projects you guys have talked about at the Midstream business, what would you see volumes kind of doing over the long run?

Well, actually, we are watching the volumes grow quarter to quarter. We saw actually early indications for April our volumes are -- we had average volumes of 589 in the first quarter. Our volumes in April offer preliminary estimates look like they're 630 plus million a day. And we're seeing favorable growth in our volumes.

Is that from increased drilling activity? Is that what you're saying?

It is increased drilling activity. We've seen some of the producers in the area that have learned better completion techniques on their wells. And so they're having better results on the completions on their wells. So that's been favorable. And then we're seeing other opportunities pop up that we hadn't seen out there in the first quarter.

Okay. And then at Missouri Gas, was there any impacts from weather? Was weather kind of normal in the territory or was it colder than normal?

For the quarter?

The quarter.

It was a bit warmer than normal. And we did see a short fall in margin of about a little more than $2 million.

Okay. And then, on the hedging activity at the Midstream business. I know in the past you basically had talked about how it was more difficult to hedge out '08, '08 volumes because the premiums on the hedges were fairly expensive. And I think now you're saying that until you come to a conclusion on your strategic outlook for those assets, you want to keep those -- you want to keep -- you want to refrain from hedging out those volumes. Is that fair to say?

I think the answer is that we're continuing to watch it. We had people say why aren't we hedging 2008 a quarter ago and a quarter before that. And the reason is that we didn't -- are exactly what you said the premiums associated with having to hedge that early were expensive. They've obviously come down, but we've continued to watch the market rise. And the market conditions that are causing that rise are continuing to improve. So we're -- we have a belief in the commodity of price continuing to move up throughout 2007 for the year 2008.

Okay. And what do you guys expect for cash taxes this year? You have some shields against cash taxes. Is there any update in terms of what you guys expect for this year from that side of the cash flow statement?

I don't think we're prepared to provide any additional estimates or updates.

Okay. On the -- at the LNG facility, when -- what -- I guess is peak send out around 2 [BCF] a day? Is that right, Rob?

About 2.1 BCF per day. Right.

And right now, how many cargoes -- how many cargoes is that -- are you able to take -- take? What's the basically the off-load and on-load time in terms of getting a cargo in the facility and out of the facility right now?

We think we can do 18 to 19 cargoes per month. In fact I think we did 18 last month. And we saw peak day send out last month of 1.975, I think.

Okay. And have you seen any constraints farther up stream the pipe in terms of getting that gas into the other systems into storage?

No, no, not really. I think the downstream assets have performed admirably. Obviously there's a lot of swing associated with that. So there's a fair amount of one day you'll be doing 1.9 and the next day you'll be doing a BCF. It has been quite amazing to watch the downstream markets adjust to that volatility.

And have you seen any issues with interchangeability of gas?

No, not really there either. We've been getting a fairly wide mix. Some Nigerian, some Algerian, as well as cargoes from Trinidad. And the Btu has been somewhat variable, but have not had any trouble with variability or making deliveries into the pipelines in south Louisiana.

Okay. Great. Thanks for the time, guys.

I'll take our next question from Sam Brothwell of Wachovia.

Hi. Good afternoon. Can you just update us on your thoughts vis-a-vis the remaining gas distribution utility, especially as you're contemplating some of these other rather sizable strategic transactions?

If you're talking about Missouri at this stage --

Yes.

Right now we just finished the rate case, we're happy with how Missouri is performing. We think it helps our risk profile. And at this time, we have no intention of exposing of the asset.

Okay. Thank you.

I'll take our next question from Craig Shere of [Scottwood] .

Hi. I kind of want to take off on the question that Carl and Gordon got to, which had to do with dividend and cash flow stability inside an MLP. You all have been pretty successful at sustaining margins by kind of nimbly jumping between gas based hedges and [NGL] or oil based hedges. You've also got apparently some natural growth from increasing production in the fields that you service and you've got good growth from organic investment opportunities. So I'm trying to get a sense of, do you all just feel that the commodity price sensitivity of this business is really not that great? And it is definitely something that can fit into the traditional MLP model? Or is there a sense that the market is just simply willing to accept more dividend risk and cash flow volatility in the MLP space?

It may very well be a combination of the two. I think the market is willing to absorb certain amounts of greater risk and the issue with hedging really depends on what the structure is that we pursue. And it's too early for us to determine because number one, we wouldn't know who the joint venture partner would be or if it was contributed to an -- another MLP what strategies they would have in place. But I think is a combination of the two factors right now.

When you all first -- as a follow-up. When you all first bought SUGS -- I remember you mentioned that for every dollar delta and gas prices there's a $20 million delta in the EBITDA. And you all were quick to highlight the commodity sensitivities so that people wouldn't underestimate what you're buying. And -- I guess my question is has there been an internal change of perception since you've owned it that maybe you're able to manage this more consistently than relative to commodity risk than originally thought that it's just not as volatile an animal as what you originally thought when you bought it?

No, I think -- it's Mitch -- the reason we haven't gone out and hedged 2008 up until this point is because we had a belief in the fundamentals of the market -- where the fundamentals of the market were taking us and the cost of 2008 earlier in the year. As Eric said, depending on what we decide to do with the MLP, depending on what assets, if we were to combine with somebody, they may have offsetting assets that provide a natural hedge to our commodity exposure. And so you don't want to get into hedging our commodity that takes out that natural expose -- natural hedge between combined assets. And at this point in time, we've got -- we think we've got the time related to 2008 pricing to let the pricing continue to move up for us while we pursue these opportunities.

Okay. So there's some potential buyers out there that you feel have a natural synergy with your assets in terms of commodity exposure and that would increase the value of the assets?

Absolutely.

Yes.

Thank you.

I'll take our next question from [Shar Paresa] of [Planned Securities].

My question's been answered. Thanks.

I'll take our next question from Ross Payne of Wachovia Capital Markets.

How you doing, guys? Two quick questions. First one, the $184 million in EBITDA that could be moved into an MLP. Is that inclusive or exclusive of Southwestern Gas?

Exclusive.

Okay, so I need to add those two together there. Second of all, if you do a JV or move -- sell these assets to another MLP, is it safe to assume that will be somebody in the 50% splits already?

I think that's hard for us to predict. But clearly, it would be beneficial to us if we took that unit to ensure that they were either there or our combination would put them close to there or at that level.

Right. Okay. All right. Are there -- in terms of these two EBITDA numbers you gave us, can those EBITDA numbers for assets grow?

We're having trouble hearing you.

All right. I'm sorry about that. In terms of these two EBITDA numbers, $184 and $35 to $40, are there any other additional assets that could be moved toward an MLP in addition to that?

LNG.

Okay. That would be the total there?

Well, I think as we talked about a minute ago, we're still looking at the outcome of the regulatory process, the Southwest Pacific case, and the applicability of FERC related assets to fit into an MLP structure.

Okay. That's it for me, guys, thanks.

I'll take our next question from Carl Kirst of Credit Suisse.

Hey, just a few quick follow-ups, if I could. First, Rick, just wanted to clarify the tax rate now for the full year, you're saying is 27.5%. That lower tax rate is basically what's helping to offset a little bit of the first quarter Midstream shortfall?

You're fading -- you faded out, I'm sorry.

I'm sorry, the full-year tax rate you're looking at 27.5%, did understand that correctly?

That's the estimated rate, yes.

Great. Thanks. Mitch, on the system rate, I heard you say we're up to roughly 630. That's correct here in April. I think maybe on the last call, we talked about possible year-end exit rates or perhaps where we might be 12 months from now. We were thinking something in the 685 to 700. Is that something that's possible? Is that being primarily fueled by a [atoka] gas? Can you comment on that?

Sorry. Yes, I think a large portion of the volume increases will be as a result of atoka gas. Seen quite a bit of volume come in on that system in the last month or so. It also potentially is fueled by Gray Ranch. We've gotten the Gray Ranch plant issues resolved and we're seeing the volumes grow down there, as well. But then we also have opportunities on our north system. It just doesn't take as much volume on the north system because of higher margins related to that business. So we get our huge volume growth on the leaner gas and the margin growth is really from the richer gas on the north end of the system. And we're -- we're basically we just completed two projects on the north system. One was a project increase capacity on a system up in the [Jale] area. And then we're also -- should be completing here in the next week or two a transfer line between our Jale plant and our Keystone plant to better utilize our processing and treating capacity between the two plants.

I hope this answers most of the questions. If you have any special question, you can get a hold of Jack Walsh and he'll be happy to answer it for you. And I want to thank you all for being in attendance and hope you'll all be at our next call. And we hope earnings will be even better. Thanks all for attending. Bye.

Ladies and gentlemen, thank you for joining us on the call today. You may now disconnect your phone lines.