Energy Transfer LP (ET) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Southern Union Company second quarter 2007 earnings conference call.

At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

At this time, I will turn the presentation over to Jack Walsh, Vice President, Investor Relations. Please proceed, sir.

Thank you, Latisha, and welcome to Southern Union's second quarter 2007 earnings call and web cast.

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, and Rob Bond, Senior Vice President of our Pipeline Operations. A replay of this call will be available for one week by dialing 888-286-8010 and entering pass code 49938841. A replay of the web cast will be accessible through our website at www.SUG.com.

Today we will be discussing results for the second 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 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 second quarter earnings and update you on some of the key items since our last investors call. To start, we reported a second quarter earnings of $0.39 per share, this compares to earnings of $0.10 per share in '06. Overall, we are very pleased with our performance in the second quarter, our transportation and distribution segments both met or exceeded our expectations.

Our gathering and processing segment showed great improvement over the first quarter, however, it was still modestly below our expectations due primarily to higher than expected flare and unaccounted for gas volumes. On June 21, we completed construction and placed into service a new pipeline that will connect our Jal and Keystone processing plants. We believe this new line will help alleviate the treating capacity constraints that we faced during the first half of the year. We will discuss this more in a minute. At this point, I would like to reaffirm our annual earnings guidance in the range of $1.60 to $1.70 per share.

I will now turn the call over to Eric Herschmann who will update you on our MLP progress.

Thank you.

When we are through with the presentation, we'll be happy to address any questions.

Eric?

Thank you, George and good afternoon, everyone.

On our last call, we announced our decision to contribute our gathering and processing assets into an MLP structure. We want to emphasize now that we remain committed to that decision and are moving expeditiously towards a resolution. Since that time, we have received inquiries, and proposals from multiple parties and are continuing to review and negotiate those proposals.

At this time, we have not made a final decision about whether we will form our own MLP, contribute our mid-stream assets to an existing MLP, perform a new joint venture MLP. In each of these cases, we are evaluating the interest we would receive in the GP, LP units in cash. For transactions with a third party, we are also considering whether the GP is publicly traded, where they are, or would be in the split, what level of control we would have, veto rights, etc.

What is becoming increasingly clear based on this process is that the Sid Richardson acquisition was a very good one for Southern Union and its shareholders. Since any transaction would result in our receiving a large amount of units, we are also closely watching the IPO market. At a recent market event in the MLP sector and how existing entities have been impacted. I'm sure you can all appreciate the complexity of this evaluation process.

As soon as we come to a final determination or agreement, we will announce it. Before I turn the call over to Rick Marshall who will update you on our financial results, I would like to let everyone that Mitch Roper resigned from his position as head of our gas services division in June to spend more time with his family. Rob Bond, head of our pipeline business has assumed responsibility for managing the gas services division.

At this point, I would like to the 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 second quarter of 2007, Southern Union reported EBIT of $117.1 million compared to $87.2 million in the prior year. For the quarter, net earnings from continuing operations were $51 million or $0.39 per diluted share. This compares to net earnings from continuing operations of $16.3 million or $0.10 per share in 2006. Operating revenues for the quarter were $588 million, an increase of $35.7 million over the prior year. This increase is largely driven by growth in our transportation and distribution segments.

In terms of segment results, transportation and storage including our investment in Citrus had EBIT of $95.5 million compared to $76 million in 2006, an increase of 26%. This increase is attributal to higher transportation and storage revenue from Panhandle Energy, primarily a result of higher average reservation rates and increased parking revenue.

Higher trunk line LNG revenue largely a result of the Phase 2 expansion of our LNG facility being placed into service during July 2006 and higher equity earnings from our increased ownership in Citrus Corp. These favorable results were partially offset by $13.3 million of higher operating and maintenance expenses.

Our gathering and processing segment generated $12.6 million in EBIT for the quarter ended June 30, 2007 compared to $8.9 million in the first quarter of 2007 and $17.9 million for the second quarter of 2006. We estimate that our North system was negatively impacted by approximately $7.5 million of increased, flared, and unaccounted for gas in the quarter due to treating capacity limitations at our Jal plant causing system upsets.

In addition to higher FF&U, the 2007 quarter saw higher operating expenses of $2.3 million, largely due to higher corporate allocations, increased depreciation expense of $1.1 million and lower processing margins of approximately $650,000 as a result of lower frac spreads. Positive variances for the quarter include $5.5 million of higher margin as a result of higher natural gas prices and $1.1 million of non-hedging derivative income.

Our distribution business generated EBIT of $6.4 million for the quarter as compared to a loss before interest and taxes of $6.4 million in 2006. The $12.8 million increase is primarily attributal to the impact of our recently approved $27.2 million increase in annual revenues at our Missouri LDC and a 3% increase in consumption volumes due to colder weather offset partially by a $3.6 million increase in operating expenses.

Interest expense was down $11.8 million in the quarter compared to the prior year. The decrease is due primarily to the retirement of $1.1 billion of a $1.6 billion bridge loan in August of 2006 that was used to temporarily fund the purchase of the Sid Richardson assets in March 2006. The August retirement of the bridge loan was accomplished using the proceeds from the sales of our Pennsylvania and Rhode Island distribution assets. The remainder of the bridge loan was retired in October 2006 with proceeds from a $600 million junior subordinated note offering.

During the quarter, we invested approximately $175 million in our operations. Growth capital accounted for $116 million, and maintenance capital was $59 million. Panhandle Energy spent $151 million, $108 million for growth, and $42 million for maintenance, including from compressor modernization, compliance, and integrity investments.

Approximately $11 million has been invested in gathering and processing with growth accounting for $5 million. We have reinvested approximately $12 million in our distribution business with growth capital of approximately $2 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 $630 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 at corporate. As George mentioned earlier, we still expect 2007 earnings per share to be in the range of $1.60 to $1.70.

I'll now turn the call over to Rob Bond who will discuss our gathering and processing and transportation and storage segments.

Thank you, Rick, good afternoon, everyone.

I'd like to begin by talking about our gathering and processing segment for the Union Gas Services. Subs produced EBIT of $12.6 million for the quarter compared to $17.9 million in the prior year. You may recall that we had several operational issues in the first quarter that resulted in EBIT of $8.9 million. As you can see, we've made significant progress compared to the first quarter.

While we have been experiencing growth in the high margin volumes on our North system, those volumes have contained higher than average concentrations of carbon dioxide. This growth has been straining the existing treating capacity at our Jal Plant and has resulted in numerous plant upsets. These plant upsets backed up the system and caused relatively high levels of flared and unaccounted for volumes as well as reduced total liquids produced during the second quarter.

To alleviate these constraints on the system, we've invested $6.1 million and constructed and placed into service on June 21st a new 16-inch high pressure pipeline that connects our Jal and Keystone processing plants. This should allow us to better optimize the excess capacity throughout the system, reduce our FF&U volumes, and position us to receive additional high margin volume into our North system.

Operationally, our total well head volume averaged 646,000 MMBtu per day for the second quarter compared to 598,000 MMBtu per day in the prior year. We processed an average of 420,000 MMBtu per day for the quarter as compared to 465,000 MMBtu per day in 2006. This has resulted in total product gallons per day of 1.3 million for '07 compared to 1.5 million gallons per day in 2006.

Our average processing spread for the second quarter was $0.43 per gallon compared to $0.46 per gallon in 2006. From a natural gas perspective, we realized an average price of $7.00 for the quarter on our unhedged volumes. As it relates to our existing hedge positions, we have made some changes since our last call.

We have subsequently exited our 17,000 MMBtu per day crude oil position for a modest gain relative to our last balance sheet mark. Given the strength of the underlying commodities that we were hedging with crude, we felt it made sense to capture the value of the put option while still being able to sell the underlying commodity at high (inaudible) prices. Our natural gas and natural gas liquids position remain in place and represent approximately 56% of the volumes through the end of 2007. These positions have a net price of $8.01 per MMBtu. Based on the strength of the forward market and our desire to maintain flexibility as we work through the MLP process, we have not purchased any additional derivatives to hedge our equity volume in 2008.

Now I'd like to talk about the transportation and storage segment of our business which continued to perform very well during the second quarter. EBIT was up almost $20 million or 26% over the prior year. The increase was driven in part by $27.6 million increase in revenue at Panhandle Energy, of that $10.2 million came from Trunkline LNG as a result of our Phase 2 expansion going into service in July of '06.

We're proud to say that with both Phase 1 and Phase 2 now complete, Trunkline LNG set several operational records in the second quarter, including unloading 18 cargos in June of this year and a record peak day sendout of 1.9 BCF per day on June 14th. Panhandle Energy also showed improved performance as revenue from transportation and storage increased by $18.9 million. The strong revenue growth at Panhandle was accompanied by a related increase in operating and maintenance and general expenses of $13.3 million, which includes $4.4 million of higher LNG power costs, $4.1 million of higher third party storage, and $3.4 million of additional corporate services charges.

Our increased investment in Citrus Corp. is also contributing as expected to our EBIT growth, our equity earnings increased by approximately $10.3 million year-over-year. Of this amount approximately $4.6 million was related to the settlement of bankruptcy claim receivables and litigation and is considered one-time in nature.

Focusing now on our ongoing growth projects, our Trunkline Gas Company Field Zone Expansion Project which will expand our system from East Texas into Louisiana has been approved by FERC and construction is underway. This project will create approximately 625 million cubic feet per day of incremental capacity from Texas to Louisiana and will also create up to 1 BCF per day of capacity into the Henry Hub.

A majority of this capacity has been contracted under long-term agreements. The project is currently expected to cost approximately $230 million, up from our previous estimate of $200 million and generate EBIT between $20 million and $30 million and EBITDA between $30 million and $37 million on an annual basis. A portion of this increased cost is due to the heavy rains that we've been experiencing in East Texas and the impact that the weather has had on our construction. Assuming that we can get rainfall to return to normal, we're optimistic that this project can be placed into service by the end of 2007.

Finally, the infrastructure enhancement project at Trunkline LNG is scheduled for a late 2008 inservice. This project which is fully contracted to BGL&G Services through 2028 is now expected to cost approximately $280 million, an increase over our initial estimate of $250 million, but because of the negotiated rates--because of the--excuse me, because the negotiated rates were calculated based on the amount of capital spent, we now expect the project to generate EBIT of $35 million to $40 million and EBITDA of $42 million to $47 million on an annualized basis.

With that, I'll turn the call back over to George. George?

Thank you, Rob.

At this point, we'd like to open the meeting up to questions.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line Carl Kirst with Credit Suisse. Please proceed.

Good afternoon, everybody. Eric, if I could start with the MLP for a second. Is it possible, I know you're working expeditiously, are we kind of in the final detail stages where this is really just sort of more a matter of weeks or is this still possibly months, and is there any one specific thing that is being harder to evaluate, or is this just the length of the process, if you will?

Well, let me answer it this way. First, I want to assure you that and assure everyone, we remain committed to an MLP transaction involving our mid-stream assets.

Because we're considering both the stand alone and third party structures, the analysis is complex. It's not a cash sale where proposals are easily evaluated. Rather, we have been considering first, obviously, who is the potential partner, the value of their GP and LP units, our percentage interest in the resulting entity, whether the GP is publicly traded or not, where they are on the split, the opportunity for future dropdowns, the counter party's management team governance issues and the list goes on.

We believe we've taken a disciplined approach to considering proposals and have narrowed the range of options we're considering. I can assure we've been working non-stop since the time of our last call and we'll continue to focus our energies on this project to reach the conclusion that we think it's in the best interest of the shareholders. I'm reluctant to tell you whether it's--I think it's more likely weeks than months. But once we make the decision, still it has to be papered and other details have to be worked through.

I understand, thank you. One other follow-on question to that is it sounds like with everything that we're evaluating, principally with the assets at Southern Union that can be put into an MLP, over time, it sounds like we're really kind of evaluating one vehicle. There have been some thoughts by others of using separate vehicles for midstream and pipes, but I'm just looking to clarify that if possible.

Depending on the circumstances and if we did a joint venture or dropped into an existing MLP would I think impact our decision whether to go with one or multiples, and that is something that we're also trying to factor in now in this process.

Okay. Fair enough. Just lastly if I could. Rob, can I get some additional color on where we are as far as capacity and utilization of the treating constraint? Now that the pipeline is in place, what, perhaps, is our new capacity for treating what are the current volumes, how much head room do we have, and as kind of a follow-on, if that pipeline were indeed--had been in place if you will proforma on April 1st, would that $7.5 million of flared gas,would that have been captured?

The vast majority of the 7.5 did come from the upsets that were a result of us basically overrunning our treating capacity at Jal. Combining both Keystone and Jal together, we're currently running at about 80% utilization of the (inaudible) triggers that we have in those. So we have done some additional rework on the (inaudible) units and have not--have not had any upsets over the last several weeks. We do look forward to being able to run a more stable operation and continuing to grow our high margin business there.

Great. Thanks, I'll jump back in the queue. Thank you.

From the line of Calyon Securities with the next question, we have Gordon Howald. Please proceed.

Thanks, hey, guys. If I could follow-on on Carl's first question, or group of questions, I would assume the formation of an MLP would result in a significant tax event. How are you handling that, and I guess, why is lifetime tax treatment no longer an issue as it relates to those assets?

There is a percentage of proceeds from any deal that we did that would come out tax free, and we've contacted our tax counsel and worked out-- I'm not prepared at this time to tell you the amount exactly, but there's a ratio that gets calculated out depending on the transaction. So there is a percentage that we can take out tax free and the rest, if we did a joint venture would be in LP units and GP interest.

Does that issue go away at all as you go a little bit further down the road, or is it just something that it is what it is and this is where you stand on that?

At a certain point, some of it goes away, but the majority of it eventually, if you're going to monetize your LP unit, it becomes a taxable event.

Got you, and if I could ask a follow-up with Rob on a question here. You kind of said in Carl's answer running a more stable business going forward. Where could--what could the flared gas figure decline to in the future quarters? The carbon issue is kind of an interesting one, that's not really the capacity constraints per se, or are you able to totally handle the higher carbon content issue now that you have this pipeline in place, or are we going to continue to see results that include a larger than historical norm for flared and unaccounted for gas?

Well, we are certainly hope not. The reason that we made the investment and connected--built the line between the two plants was that we could clearly stabilize our treating capacity issues between Jal and Keystone, and then as we had higher CO2 volumes come in at Jal and what the Jal Plant could handle, we would utilize the capacity in the new line to move that higher CO2 gas down to Keystone where we had treating capacity available.

Clearly we hope that that has solved our CO2 issues, FF&& is of course a function of a lot of different things, but we work very diligently to keep those things under control, and we certainly hope that we'll see considerably improved performance in the quarters to come.

Since we're almost half way through this quarter and I think the new line went in place in June, where do you stand, or how would you characterize the first half of this third quarter?

As I said a bit earlier, we've seen the plants run stable now for the last several weeks. So still early for us to predict, we're still closing on July, so the FF&U numbers aren't completely out yet, but certainly--and part of July, we spent working on the aiming units themselves, as well. But over the last several weeks, we've certainly seen improved performance at all of our facilities.

Great. Thanks, guys. Appreciate it.

And your next question comes from the line of Sam Brothwell with Wachovia. Please proceed.

Hi, good afternoon. Two quick questions. Rick, I think you mentioned a one-timer and I didn't catch it if you could just repeat that real quick?

I don't know if I've mentioned a one-timer, but in the first quarter of this year, we did have earnings that were attributal to our settlement of litigation with Spectra Energy had to do with the termination of natural gas purchase and sale agreement arrangements with Citrus Trading.

I'm sorry, maybe I misheard. Did you mention any for the current quarter?

No I did not.

Okay, my misunderstanding.

Secondly, with respect to your current guidance that you've affirmed, can you give us any sense of how sensitive that might be to changing commodity prices, crude or NGLs and natural gas going forward?

As Rob mentioned, we do have a certain portion of our equity volumes at SUGS that are sensitive to prices, but I haven't done a sensitivity analysis as it relates to the $1.60 to $1.70 guidance range, but beyond the SUGS entity, I don't see that there's much sensitivity that we have to changing prices in either (inaudible).

(Inaudible)--we're 56% hedged throughout the rest of 2007.

What was that number, again, Rob?

56%, at $8.00--effectively $8.01 all on an MMBtu basis.

Okay. Thank you very much.

You're welcome.

From the line of Citigroup with the next question, we have Faisel Kahn, please proceed.

Hi, it's Faisel from Citigroup. On the lost and unaccounted for gas, what was the actual volume of gas that was lost and unaccounted for?

I don't have that number. I'll certainly be happy to get it to you later, but I don't have it available to me.

Okay, and then on the first quarter, you had the same sort of issue, but that was on the South system, and this issue if I'm right was on the North system, is that correct?

That is correct. In the first quarter, what we had was pulsation from field compression that was affecting our measurement on the south end of the system and we have gotten that rectified.

Okay, and you talked about upgrading some of your treating facilities to solve this problem. Is that correct, or was it just by adding this new lateral or gathering line that should improve the ability to solve this problem?

Yes, we have done both. We've both put in a new line so that we can access unused treating capacity at Keystone, and we have also just finished maintenance on the aiming units of those plants.

Okay, and what's the--how old is this Keystone plant? What's the vintage on this sort of facility?

I honestly don't know the answer to that. Neither of these facilities--both of these facilities are fairly old. Neither of these have been built in the last 10 years.

Okay. Shifting to the pipeline segment for a second. How much capacity on Panhandle is there would you say is there left to kind of recontract at kind of higher rates?

Well, we have completed our recontracting for '07 and the vast majority for 2008. We will have--it is customary for us to have contracts in the 3 to 5 year to life cycle. Our most recent renewals have seen those extend to 5 to 8 year type contracts. So we're very pleased with the increasing duration of our contracts. We've also seen significant rate increases over the last 3 or 4 years as has been reflected in our results. I don't think there's a tremendous amount left of upside between our current rates and tariff rates, but were still approximately 80% discounted. Does that answer your question?

It does, yes. Thanks for the time. Appreciate it.

You bet.

With AG Edwards, you have a question from the line of Mike Heim. Please proceed.

Thank you. Regarding the unrolling of the hedges, can you remind us what is left for hedges?

Remember, we had used crude to hedge the heavier hydrocarbons, we still have ethane and propane hedges in place today as well as about 25 million a day of puts on natural gas. Actually, we have puts on ethane and propane as well as puts on natural gas.

And this is all 2007, right?

Yes, through the remainder of 2007, that's correct.

Okay, and on the tax rate last quarter, you kind of talked about expectations somewhere in the high 20s for tax rate for the year and we had another quarter come in much below that. I assume that's just the expansion in Citrus and dividends again. Is that high 20s number still a good number to use for the year?

Yes, it is, Mike. We're still looking at about a 27% rate for the year.

Okay, and finally, on the distribution with the shift to a straight fixed variable, I imagine that moves some earnings into the summer quarters, is that any way to quantify how much this quarter benefited from the shift to SFB?

Yes, I don't have that number. It did--it would have acted to shift some in for the--as it related to the residential class, but I don't have the exact number. I could possibly get back to you on that one.

Okay. Fair enough. Thank you.

And your next question comes from the line of Lasan Johong representing RBC Capital Markets. Please proceed.

Thank you. Good afternoon. Couple of questions still on the MLP thing, right now the credit markets aren't really functioning very well. Would it be prudent to maybe delay formation or decision on the MLP a couple of months for the market settle down before proceeding? Would that be something you would consider doing?

As I said before, we've been watching the markets, obviously very carefully, and especially when you're talking about having a partner in a transaction, you carefully watch what is happening to their MLP. I don't think at this stage we'd say we would be prepared to delay it, but it is obviously--the timing of things is critical to this process. So I can't give you a greater answer that that, but it's not our intent currently to delay.

And you wouldn't consider an outright sale because you think the MLP structure still has more value?

That's correct.

I see. Could you convey the new--I missed it when you talked about the infrastructure enhancement project with the Trunkline what the new CapEx amount is. Is still 250?

280.

280.

Right.

And you said the cost increase was due to what? I didn't quite catch that?

In that case, it's just--some of it is just timing, some of it is high pressure valves, etc. I can't point to one particular thing, but I would remind you that we do have a negotiated rate agreement with our customer there that is--that really pays as a function of the capital revenue.

Understood. That's it. Thank you.

You bet.

And your next question comes from the line of Rebecca Followill representing Pickering Energy Partners. Please proceed.

Good afternoon. On your hedges, if I'm seeing this correctly at the first quarter you were 80% to 90% hedged at around $9.00 and now you're 56% hedged at $8.01. Is all of that delta due to exiting the crude position?

I think--I didn't think it was quite that big a difference, Becca, to be perfectly honest.

I think I have the transcript here in front of me from the--

Right. So let me--

So it's not all --

Let me double check on that, I do know the 56% is correct, and it may be a function of what the equity production net to our interest was from the first quarter to the second quarter, as well. So it may be both.

Did you guys realize a gain from exiting that crude oil position?

Yes we did.

How big was that gain?

About $500,000.

Okay, so fairly small.

Second on, just the problems at midstream, in May, you talked about at your earnings call you talked about fixing the problems on the south end of the system, and this new line went into service, I guess at the end of June. So when did you guys start to see these problems in the north end of the system, did it happen pretty quickly?

Well, we actually had been obviously working on this line for sometime, and we were maybe a victim of our own success to some degree. The volumes that we have been attracting to the north end of the system actually came on at rates greater than we expected, which is obviously a good thing, but it came on before we completed the new 16-inch line. So it was just a timing issue.

So if we go back and look at the run rate in the second through the fourth quarter of 2006, you guys expect to get back up to that run rate to--in the third and fourth quarter?

Yes, we do.

Okay. Great. I think that's all I have. Thank you.

Thank you.

And your next question comes from the line of Craig Shere representing Scott Wood Capital. Please proceed.

Hi. George, a couple top-level questions for you. You've done a fantastic job a decade plus creating value through nimble and opportunistic M&A activity, but now we've got some years of meaningful known growth projects.

We've got the first cash dividends in a decade plus, we've got an MLP discussion going on. So in terms of looking at the portfolio, should we now be thinking about it as a group of assets that have clear and transparent line of sight on accretive investment and also value of harvesting? Or can we still consider that you'll be thinking about this portfolio as something that still you're prepared to be significantly nimble and opportunistic with ongoing M&A around?

And then the second question has to do with the senior staffing and your comfort level with what's going on there. Just in general through the years, we might have had a little more activity at SUGS than some others between Panhandle, Cross Country, Sid Rich, and CFO positions. Just want to get a comfort with where you're looking at with your senior staff.

Let me try to answer your question in reverse. When you have a lot of acquisitions, which we had early on, some people don't get along with other people, some people had opportunities to go to other companies and wanted to, lots of things play a part. Some people don't want to move if the acquisition means that you have to move to another city.

So I think the turnover that we had in many cases was due to causes other than just working in a company straight away. So that might be a confused answer, but it's normally in dealing with people, it's not always as simple as you would like it to be. As far as our assets are concerned, I think we have excellent assets, which we attempt to grow at as fast a pace as we possibly can, and look at all opportunities that exist both from the acquisition standpoint and from the standpoint of making them grow.

So we are constantly looking at all kinds of different things. It's an ongoing project. So I don't think our assets are ripe at all, I would say they're in the infancy to high school years with plenty of growth left in them.

Well, that's fair. I guess the main question is some of your activities such as acquiring through the many years and then exiting very profitably, I might add, LDCs and then moving into midstream. Some of this is kind of like 90-degree turns from the path.

Would you say, hey, we got a great set of assets and we're developing those. They're in their kind of youth still, some of them, and have room to run, but what we got on our plate is what we're comfortable with and we want to grow, or do you still feel like we could take a 90-degree turn here or there?

I think we always want to grow. We originally thought that if you put LTC assets together with other LTC assets they were savings, this was all true. Unfortunately the [saints] wanted to take all the savings back. So that wasn't true in the end. So you made a turn.

You have to look at all the things that are possible and then try to make the best decision you can as to where your growth can be and which piece of growth will be the most profitable. I just think we keep looking at it and it changes all the time.

Okay. Fair enough. I appreciate the answers.

(OPERATOR INSTRUCTIONS)

And your next question comes as a follow-up from the line of Carl Kirst representing Credit Suisse. Please proceed.

Hey, sorry. Just two quick follow-ups, please. Rick, we've got about $525 million of debt coming due in 2008 relatively low-cost debt, and given what we're seeing in the credit markets, how are you looking at that right now, and do you think there is what you would consider significant or not significant interest rate risk?

Well, interest rate risk as it relates to the refinancing?

The refinancing and kind of where--it looks like that that weighted average cost of debt is roughly in the 5% range. Didn't know kind of what you're seeing right now if you were, not that you're going to forced to do that soon, but I'm just trying to figure out how if we get an MLP, I don't know if there's going to be some cash we can take out even if it's just a moderate amount of cash, I don't know if you're looking at refinancing all of that, paying it down. Just any color you can give right there.

Yes, I mean we do look at the markets obviously and the spreads that would be spreads that are consistent with our investment grade rating. We saw a couple of deals come out at about the 155-165 range as far as a credit spread.

So if I look at replacing, for example, the 4.80% notes due in August of 2008 with a 10-year security, I would assume the treasury staying the same at the 4.75%, 4.80% range, we'd be looking at an increase from the 4.80%, but that is all factored into our long-term plans that doesn't surprise us that when we take this debt out it's going to be at a higher interest rate.

As far as the risk that's in our current portfolio, we've got about $600 million of floating rate debt as a component of our capitalization, a 25 basis point change in floating rate debt either way is about $1.5 million per year I don't view that as a significant risk. We did take away some of the floating rate risk by swapping the interest rate on $455 million of a term loan that we had.

So we do manage it, we look at it, I'm not overly concerned with the ability to refinance these obligations as they come due. But certainly we do watch the capital markets and have certain expectations.

Okay, and I appreciate that.

And then lastly, Rob, just as the market--as we get closer and closer to January 1st and people are focused on how Rex is going to shift around some of the basis differentials. I know we've talked in the past about what--and correct me if I'm wrong, you're kind of looking at [Pebble] perhaps even benefiting from this and I just wanted to readdress that issue since it's been a few months and see if your thoughts are still the same or if the fight over the midcontinent basis market is somehow going to put Pebble at a disadvantage?

No, I think in general we are--we believe that it's number one, going to be short-term in nature, we do believe that Rex East is going to get built and that it will follow Rex West by a year or eighteen months. We think in the meantime we are fully contracted throughout that whole period on Pebble, or the vast majority of it.

What we've seen since Rex West has been announced is that our customers on Panhandle have continued to buy 100% of full long haul. That they like the optionality of owning both the midcontinent as well as the impact delivery that the (inaudible) interconnect will allow. So our experience has been that it has done nothing but create value with our current shippers.

We do believe that clearly yas that gas comes on, it will allow us an incremental opportunity to move gas from that point downstream. So our current experience has been that it will be beneficial in the near term for us.

Appreciate the thoughts. Thanks, guys.

And your next question comes as a follow-up from the line of Becca Followill representing Pickering Energy Partners. Please proceed.

Thank you. On leadership for the midstream unit, I know Rob has taken over that. Is that a permanent move or are you going to do an outside search, and I hope Rob, they've given you greater compensation as a result of it?

Thank you.

Thanks, Becca.

You're welcome.

I don't think we're going to answer that question, especially the second half.

We'll talk about that after the call.

Oh, the compensation.

But the first part of it, are you going to search for an outside?

I think right now in light of our discussions on the MLP, it's premature to make a determination one way or the other.

Okay. Thank you.

Okay, I thank everyone for attending our conference call, and we hope to see you all again at the next one in three months. In the meantime, have a good summer. Bye.

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect, and have a good day.