Energy Transfer LP (ET) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2008 Southern Union Company earnings conference call. My name is Chanel, and I will be your coordinator for today. 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)

I would now like to turn the presentation over to your host for today's call, Mr. Jack Walsh, Vice President of Investor Relations. Please proceed, sir.

Thank you Chanel, and welcome to Southern Union's first quarter 2008 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, 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 passcode 19378937. A replay of the webcast will be available through our website at www.sug.com. Today we will be discussing results for the first quarter of 2008, significant events and outlook.

Last night, we issued a press release announcing our first quarter results which are available on our website. 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 remind everyone that the information discussed on today's call pertains to the financial results of Southern Union Company. Certain amounts and various explanations for the transportation storage segment may vary compared to Panhandle Eastern Pipeline Company's stand alone financial statements due to consolidating adjustments. I would like to caution that you that many of the statements contained 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 and Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking information in our earnings release.

Any discussion during this call of a proposed NLP shall not constitute an offer to sell or the solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy or any sales of securities will only be made in accordance with the registration requirements of the Securities Act of 1933 or an exception therefrom. This announcement is being issued pursuant to and in accordance with Rule 135 of the Securities Act of 1933. I'd now like to turn the call over to Mr. George Lindemann. Mr. Lindemann?

Thank you and good morning. This morning I would like to discuss our first quarter earnings and update you on some of the key items since our last call.

To start, we are very pleased to have reported strong earnings of $0.64 per share. This represents a 21% increase compared to adjusted earnings of $0.53 per share in the prior year. We are also pleased to reaffirm our annual earnings guidance for '08 of $1.80 to $1.90 per share. We are very happy with the strong performance of all of our business segments during the quarter. We are especially pleased that our gathering and processing segment, Southern Union Gas Services, has continued to show quarter-over- quarter improvements since last year.

We believe that the operational issues that we encountered during the first half of '07 are largely behind us and we expect solid performance from the business going forward. We are currently working on several projects including the completion of an acid gas injection well which will position us to bring additional high margin volumes into our north system. We expect this project to be completed this fall. Additionally, we are happy to report that we have continued to add positions in our hedging program at SUGS. The remainder of '08, we are now fully hedged, approximately 75% of our commodity exposure. We have also added selected positions to our '09 program. Rob Bond will discuss our hedge in greater detail in a few minutes. When we are through with our prepared remarks, we will address any questions you might have. I'd now like to turn the call over to Eric Herschmann Eric?

Thank you, George, and good morning.

We are excited to announce that we are making significant progress on the Florida Gas Transmission Phase VIII expansion. We currently have approximately 75% of the expansion capacity contracted for 25 years and expect to sign additional contracts prior to the filing of the first certificate in the fall. We believe this project will create significant long-term value for our company and its shareholders. I want to emphasize one point regarding the financing of this project. Southern Union does not expect to issue any common equity to finance this project. We are also making strides on the infrastructure enhancement project at trunk line LNG. This project remains on track for a second quarter 2009 in service date. Rob Bond will go into greater detail on both projects in a minute. These organic growth projects are a good representation of how we believe we can create value for our shareholders over the long-term. We feel that investing in organic projects with the enterprise value to EBITDA multiples of 7.5 times or less will be accretive to the value of our company. We are continuously pursuing growth opportunities, both organic and in the market, to profitably grow our company and reward our shareholders. To the extent that we determine that these projects are not available and we realize our expected growth in cash flow, we will look to return value to our shareholders through increased dividends.

To reiterate George's earlier comments, we are very pleased with the performance of all of our business segments this quarter. We are also optimistic that we have positioned Southern Union to achieve its 2008 earnings guidance and we look forward to continued growth and success into the future. With that I would now like to turn the call over to Rick Marshall, our CFO, to give an overview of the numbers. Rick?

Thank you, Eric, and good morning.

For the quarter ended March 31, 2008, Southern Union reported EBIT of $171 million compared with adjusted EBIT of $147 million in the prior year; representing an increase of 16%. All references to adjusted EBIT and adjusted net earnings remove the impact of selected non-recurring items. Our earnings release issued this morning sets forth the selected items for 2007 and in accordance with Reg G, contains a reconciliation of EBIT to adjusted EBIT as well as EBIT to net earnings.

For the quarter, net earnings available to common stockholders were $79 million, or $0.64 per diluted share. This compares to adjusted net earnings of $64 million, or $0.53 per share in 2007. Net earnings increased by 21% year-over-year. In terms of segment results, transportation and storage, including our investment in citrus, had EBIT of $109 million for the quarter, compared with adjusted EBIT of $101 million during the same quarter last year, representing an increase of $8 million, or 8%. This increase is primarily attributable to an $18 million increase in operating revenue at Panhandle Energy, partially offset by a $5 million increase in operating expenses and a $4 million increase in depreciation expense. Our gathering and processing segment generated $29 million in EBIT for the quarter, compared to $9 million in the same period last year. The marked improvement was driven by a combination of higher operating efficiencies resulting in increased equity volumes as well as higher realized commodity pricing offset partially by a $5 million increase in operating expenses and a $1 million increase in depreciation.

Our distribution business generated EBIT of $30 million for the quarter as compared to $33 million in the prior year. The $3 million decrease is primarily a result of an increase in operating expenses coupled with a change in the company's residential customer class rate structure to a straight fixed variable rate design that has the effect of normalizing margin throughout the year. Interest expense decreased $2 million compared to the prior year. The decrease was due primarily to higher capitalized interest costs related to increased capital expenditures, lower LIBOR based borrowing rates on floating rate debt and lower outstanding balances at Southern Union, offset somewhat by higher outstanding balances at Panhandle Energy. During the quarter, we invested approximately $207 million in our operations. Growth capital accounted for $151 million, and maintenance capital was $56 million. Broken down by segment, our transportation and storage segment invested $182 million, $138 million for growth, and $44 million for maintenance including compressor modernization, compliance and integrity investments, our gathering and processing segment invested $17 million, $10 million for growth and $7 million for maintenance at our distribution segment, we invested a total of $6 million, $2 million for growth and $4 million for maintenance, our corporate and other segment invested $1 million of growth capital.

As many of you have already seen in March, we issued our 2008 outlook which included annual EBITDA and capital expenditure guidance. We are reaffirming that information and it is available under the Presentation section of our website for your review. 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.

I'd like to begin by talking about our gathering and processing segments, Southern Union Gas Services. We are pleased to report that the first quarter of 2008 was our best operational and financial quarter since we purchased the business in 2006. As Rick mentioned, we posted EBIT of $29 million for the quarter. This shows consistent improvement over the last several quarters. From an equity volume perspective, we averaged 40,000 MMBTU per day of natural gas liquids and 4,000 MMBTU of residue gas during the quarter.

As you will recall, our equity volume guidance for 2008 was 40,000 to 45,000 MMBTU per day of natural gas liquids. As it relates to our hedging program, we have been active in the market over the last several weeks. For the remainder of 2008, we are now fully hedged on 30,000 MMBTU per day at a net price of $15.02. We have arrived at this price through a combination of put options and floating to fixed swap contracts on natural gas and processing spreads. Also for 2008, we have entered into an additional processing spread swap of 10,000 MMBTU per day at $7.10. For 2009, we have entered into floating to fixed natural gas swap on 10,000 MMBTU per day at $8.19, and have recently entered into processing spread swaps on 15,000 MMBTU per day at $6.76. We continue to watch the market and expect that we will enter into additional hedge positions on our equity volumes for 2009 as market conditions permit.

I'd like to talk about transportation and storage segment of our business. Our infrastructure enhancement project at trunk line LNG continues to progress with an in service date of some time in the second quarter of 2009. The cost of this project, which is fully contracted to do BG LNG Services for 20 years is approximately $365 million excluding capitalized interest. We expect the project to generate EBIT of $50 million to $55 million, and EBITDA of $60 million to $65 million on an annualized basis.

Finally, I'd like to talk about the Florida Gas Transmission Phase VIII project. As you may know, we have a 50% interest in Florida gas Transmission through our investment in Citrus Corp. Our partner in Citrus is El Paso. The project -- as the project currently stands, we expect to add approximately 580 miles of pipeline in 217,000-horsepower compression to increase FGT's delivery capacity into Florida by approximately 800 million cubic feet per day. We have currently contracted for approximately 75% of the expansion capacity with 25 year terms. We will continue to negotiate with other potential shippers to determine the ultimate scope and cost of the project. Based on our current expectation for the project, it is estimated to cost approximately $2.1 billion and generate operating income of $230 million to $250 million and EBITDA of between $270 million and 290 million. As Eric mentioned earlier, Southern Union does not expect to issue any common equity to fund this project. As we further develop and refine the scope of the project, we will make sure that we keep you all updated. With that, I would now like to turn the call back over to George. George?

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

(OPERATOR INSTRUCTIONS) We will take a moment while we compile a list of questions. And your first question comes from the line of Harry Mateer of Lehman Brothers. Please proceed, sir.

Hi, guys. A couple questions for you on the financing side. Back in late 2006, you issued those junior subordinated hybrid securities, and despite the fact that the credit market has obviously been very volatile that market might not be there for you right now, how do you do you think about potential future hybrid issuance as pertains to financing SUG's capital spending plans? And related to that, those hybrids are callable in 2011. As it stands right now, what's your thought process around potential extension there or calling them to maintain access to that market going forward?

Well, the first part of your question, we are not looking to, currently looking to the hybrid markets in the short term to refinance -- as a refinance vehicle for any of our debt that's coming due or for -- or to finance the, any additional capital expenditures we have at Southern Union Company. We'll have to think about that a little bit as we move forward into the permanent financing that gets put in place for at FGT and Citrus, but right now we are not looking to the hybrid markets. One of the reasons is that as a percentage of our overall capitalization, the $600 million is bumping up against the level that the rating agencies basically allow you to have in order to get the equity credit that we currently receive with respect to the issuances that are outstanding. As far as callability, they are supposed to be refinanced in -- or -- refinanced in 2011. I don't know that they are callable. And we have a replacement capital covenant included in that -- in connection with that transaction that in 2011, would require us to issue a security that is -- has the same or a greater than or equal to the equity credit content that we currently have. Does that answer your question?

It does. I mean, as I look at it right now, obviously, you get more LIBOR is and the step up, it doesn't look all that punitive to extend, so I was really just trying to get a sense --

That's right. And I would say we are not ruling them out completely, but right now, this is our focus.

Okay, and in terms of the debt you have coming due later this year, I notice in your 10-Q the expectation there is to refinance in the bond market or the bank market?

That's correct. I mean, we have the $300 million of Panhandle Eastern Pipeline Company notes coming due in August of this year, and we plan to refinance those in the bond market.

Okay, and then last --

-- $25 million that we have coming due, we have liquidity -- currently have liquidity to refinance those with borrowings under our bank facilities.

Okay. And then last, just on the credit ratings, can you just mark us to market on where your discussions with the agencies stand right now and any progress on getting those negative outlooks in Moody's and S&P turned around? I guess related to that is really where you currently stand on the MLP process, because I think that's really the focus of them.

That's part of it. I think, the last -- we have met with the rating agencies already this year, and I think what they are focused on is execution in 2008. I think once we show some -- we remove some of the volatility that we have in our business that relates to the gathering and processing segment, complete the refinancings that we have currently outstanding and show progress through 2008, we can make a good argument to get those negative outlooks out there. But I think based on our conversations, that we have an understanding with the agencies as to our future financing plans and our future business model and we are comfortably -- or comfortable with the investment grade rating that we currently have.

Thank you very much.

Your next question comes from the line of Brooke Glenn Mullin of JP Morgan. Please proceed.

Yes, thank you. You've obviously had a good response to the FGT Phase VIII. Is there any potential to up size that expansion?

I think, as we mentioned, we continue to negotiate with potential shippers and to the extent that there is sufficient demand, and I think there is an opportunity to up size the project. But that will be a function of the timing of when we can get those commitments and when those volumes would ramp up. But, yes, there is an opportunity to up size the project.

And also, how are you looking to protect yourself from inflation? Are you starting to buy pipe now, now that you have the 75% commitment?

Yes, we are. We are in the negotiation progress -- process right now on our pipe orders and expect to also be negotiating with potential construction companies, pipeline contractors in the next month or so.

Okay, and then just separately on Panhandle, the compression modernization and the east end expansion -- or I guess replacement of the east end, are you -- is that something you think you'll have to go back in to get rate relief to recover, or how are you thinking about those dollars?

No, I mean it will go into our current rate base. Any decisions that we make as to whether or not to file a rate case would be really kind of independent of those two individual investments. But we have seen our rates on Panhandle increase in our negotiated rate -- or our discounted rate transactions have -- we have seen the rates increase across panhandle.

Thank you.

Your next question comes from the line of Lasan Johong of RBC Capital Markets, please proceed.

Yes, thank you. George, can I ask you a kind of a global macro question? There's a lot of discussion about LNG flows in the market potentially going from a demand pull to a supply push market. Do you see that happening? When do you see that happening? And how does Southern benefit from that?

I'm not sure we benefit, taking it in reverse, because our facility is totally contracted out to British Gas. If a lot of ships and a lot of LNT comes in, we gain something in the off loading onto our pipes. But on the amount that comes into the facility, we do not gain. And as far as projecting how much LNG is going to flow into America, I think it's impossible. If Europe has a cold winter,they will out pay us. If Japan, Korea and China need gas and are willing to pay more, we are not going to get any. So, I think that's a hard question to answer.

Well, what about during the summer when they cannot take the cargos?

There's a lot of gas in this country and I don't know what the rate that was used during the winter of this year in reserves and how much fill up there is. Rob, have you got an indication of gas yet?

I mean, I think our expectation for 2008 is that we will receive very few cargos. I think it looks brighter in 2009 as some of the liquefaction projects around the world get completed. But I don't expect to see a high utilization rate at Lake Charles during 2008.

Okay. That's fair enough. Next question is on SUGS, the LLP situation there is a little tenuous at this point, but I was wondering if you guys are thinking about maybe selling the SUGs business to an MLP and taking limited partnership shares in SUGS as a plan B to forming your own MLP?

It's Eric. I think that currently, we are not considering that. As you know, we had negotiated potential opportunities with other parties, and the issue that we look towards was the valuation that we would receive from an MLP, the GP interest that we would receive. Obviously, their assets and their liquidity of their units and how they were trading and after doing this. Our own analysis, we believe that when the market conditions improve, we would move our own MLP with a portion of SUGS.

It is my understanding that the attractiveness of having the MLP structure in your own portfolio is that you can receive incentive payments on the GP interest, is that kind of what I'm hearing?

Yes, we would be able, we think, to grow the asset and get into the higher splits controlling our own destiny than what we looked at going in with other parties.

And the other parties would not allow to you split the GP interest with them, is that what you are saying?

Well no, they would allow to us split the GP interest. It's a question of where they were on the splits and how they were valuing their assets compared to ours.

I see.

Compared to how we thought -- how quickly we thought we could grow into the high splits.

I see. So if it was a relatively new MLP that was still the low end of that split, that would be something that you would consider, then?

I think each deal stands by itself, and we did a fair amount of due diligence and consultation with our financial advisors and at the end, came to the conclusion that we would be better off going it alone.

Understood. On the truck line expansion program, I missed the CapEx number on that and on the Phase VIII of the FGT. It sounds like it was slightly -- sounds like didn't change, is that right?

That's right, the CapEx on the high EP project remains the same at $365 million dollars, and the (inaudible) project is -- has not changed.

Great. Thank you.

And your next question comes from the line of Faisel Khan of Citigroup. Please proceed.

Hi, it's Faisel, good morning. On the -- on your CapEx number for this quarter, how much of the CapEx was related to the IEP?

I have that in front of me Faisel, if you just give me a second. It's about $50 million related to the IEP project.

Is that going to be kind of consistent throughout the next six quarters, kind of $50 million a quarter until --

No, I don't believe so, no. It should be -- it should start to tail down, you said next six quarters? It comes on in the second quarter of '09, I recollect -- It does, but the -- a good portion of the remaining CapEx to be spent will be spent in 2008.

Okay. Got you. And on FGT, with some of the rising prices in iron ore and continued increase in steel prices, you still feel comfortable with the project cost of around $2.1 billion?

Yes, Faisel, we do. We are watching that very closely as well and working as diligently as we possibly can to get our steel and pipe order secured so that we can take that exposure off the table.

Okay. When should we expect you guys to kind of lock in those materials costs?

Hopefully within a few weeks.

Okay, got you. And on the processing side, just looking at the volumes quarter-over-quarter, kind of 440 million cubic feet a day -- 444,000 million cubic feet a day in the first quarter of '07 down to 408,000 million cubic BTUs a day in 2008. Any reason for that lower processed volume quarter-over-quarter?

It's primarily from the Atoka field that we gather from. It's a field largely developed by Chesapeake and Anadarko, and there's just been some decline there and some reduced drilling on their part, although I think there is still plenty of acreage there for them to drill. That is leaner gas in general, and so while it does show a decrease to us in processed gas, it really hasn't reduced our liquid recovery significantly.

Okay. And I also noticed your NGL sales volumes were up pretty substantially, quarter-over-quarter. What was the result of that?

Yes, I -- on some of the -- some of the transport, downstream transport is done through a buy/sell and I think that's why you see it looks like the volumes are higher.

This is Rob, I think another reason was that we had some producers that were receiving in kind liquids that have actually flipped over into a percent of proceeds arrangement.

Okay, and the swap agreements you guys have entered into for the processing spreads, those are all net of the costs of those swaps. Is that correct?

That is correct.

Okay. Thank you, guys, for the time.

And your final question comes from the line of Rebecca Followill of Tudor Pickering. Please proceed.

Good morning. Two questions for you on the midstream side of the business. Are you guys still looking for someone to help and rub out and head that business? Where does that stand?

Rebecca, the answer to that is yes, we are continuing to talk to potential candidates.

Okay, any timing to get somebody on board?

We are not prepared to announce any timing, but we are looking forward as we speak.

Okay. And then, just so I'm clear on where you stand with the gathering and processing business, is the plan at this point just to wait and see what happens with the MLT markets and just run the rest of the business status quo and look for growth opportunities, but just kind of wait for the MLT market to return?

I think until recently we had not seen any improvement in liquidity of the market as it related to the new MLP offerings. As I'm sure everyone knows, Western Gas Partners, the gathering and processing business of Anadarko priced at $309 million, offering a yield on 7.3%. That's a good data point for us. From our limited knowledge of the assets that were placed into the MLP, we understand that they were predominantly fee based, long-term contracts, and were largely supported by Anadarko's equity production. So, we are working with our financial advisors to review this offering to try to determine how it correlates to our specific assets and what the strategy will be going forward. ,

I want to add that we are also looking to increase our midstream business. Both in capital costs and we would look at acquisitions in our area.

In west Texas?

Yes.

Okay. Thank you.

And your next question comes from the line of Rob Mullin of Dakwin Capital.

Hi, it's Zach Schreiber from Duquesne Capital Management. Hi, guys, thanks for your time. Just a quick question on the LNG imports. I recognize that spreads between Europe, U.K. national balancing points and the U.S. are negative now and appear that way for the foreseeable future and have the strong Asian bid. But these things can change quickly. What has to change and by how much and by when in order to sort of change the situation as you see it with respect to LNG imports into the U.S., specifically your terminals, and do we need to have some sort of a $0.50 or $0.75 premium to U.K. European prices in order to cover the transportation and the freight, and I guess, at the higher risk of divesting cargos to the U.S.?

I think a couple of things are driving it this year in particular, and one is that there were several liquefaction projects that have been delayed in getting online. And so, I think there was an expectation that there would be more LNG supplies available this year than there actually have been. There's also been a -- the Far East is buying a lot of LNG. They buy typically on an oil basket, and you can imagine what the oil basket looks like with crude over $120 per barrel. So, I think it looks brighter in the future, but I -- as I said earlier in the call, I don't think that we should expect to see things improve dramatically in 2008.

How about specifically through the end of October, if there is an improvement in 2008, will it be beyond the summer injection season and more so November, December, or would it be in the latter part of the summer?

Well, I don't think the U.S. is typically a strong market in the winter. I think George was right earlier when he said it's very difficult to compete with Europe and Japan and Korea when -- in the winter. So, we've primarily been a summer market for LNG, and I just don't think we are going to see that this summer.

Are the things behind it structural or are they sort of one off? You have the Japanese nukes issue, the you have the quarry nukes, you have coal disruption, so some of it appears one of, but then you have part of it tha appears sort of structural and ongoing and we are have having difficulty understanding what is ongoing versus what is one off. I'd be curious on what your view is?

No, I think you're just going to have to get some of these liquefaction projects completed and online and see the supply increase. But at the end of the day -- I think that some of the it is one off, I think you're definitely right that the demand in Japan and Korea has been driven by nuke turn around and what have you, but it's fundamentally going to be a supply -- I think a supply driven event to get us back to where we need to be.

Great. Thank you.

I guess I'd like to reiterate what George said earlier in the call, in that we are a straight fixed variable rate design at TLNG, so ultimately at the end of the day in 2008, it won't impact our financial perform. We do, if we have a preference, we certainly have a preference toward receiving those cargos because it does give us opportunities on the downstream pipelines. But I don't think it's going to impact our performance whatsoever.

Great. Thanks so much.

There are no further questions. I would now like to turn the call back over to George Lindemann. Please proceed.

I just want to thank you all for getting up and being here so early in the morning to listen to us, and we hope next quarter is even better and you will all be back again to see us. So thanks again. So long.

Ladies and gentlemen, that concludes the presentation. Again, thank you for your participation. You may now disconnect. Have a great day.