Energy Transfer LP (ET) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2008 Southern Union Company earning conference call. My name is Tony, and I will be your coordinator for today's conference. (OPERATOR INSTRUCTIONS).

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

Thank you, Tony, and welcome to Southern Union's second quarter 2008 earnings call and webcast. Presenting on today's call will be George Lindemann, Chairman and CEO; Eric Herschmann, President and COO; 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 22885459. A replay of the webcast will be accessible through our website at www.sug.com. Today, we will be discussing results for the second quarter of 2008, significant events and outlook. This morning, we issue a press release announcing our second quarter results, which is 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 it 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 and Storage segment may vary compared to Panhandle Eastern Pipeline Company's standalone financial statements, due to consolidating adjustments. I would also 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 and Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking information in our earnings release. I'd now like to turn the call over to Mr. George Lindemann. Mr. Lindemann?

Good morning. I'm pleased to report solid earns for the second quarter, with adjusted earnings of $0.43 per share. This represents a 10% increase compared with earnings of $0.39 per share in the prior year. We are also reaffirming our annual earnings guidance for 2008 of $1.80 to $1.90 per share. Based on our year to date performance and our current outlook for commodity prices through the end of the year, we expect that the higher end of our guidance is well within our reach. Our goal has been and continues to be the creation of long-term value for all of our shareholders. This includes reinvesting in our business, effectively managing our capital structure and being opportunistic in the marketplace. Through this strategy, we have put together a portfolio with high quality assets with significant growth opportunities, and have consistently improved our company's Fundamentals.

As you know, my family and I own more than 18 million shares of the Company's common stock or 15%. My interests, therefore, are directly aligned with our shareholders and I am intensely focused on maximizing value. Our Board and management team vigorously reviews all available opportunity and meet frequently with our financial advisors to determine if these opportunities will fit with our financial and strategic objectives. I am sure you all are aware of a letter we recently received from Sandell Asset Management calling for a significant restructuring or sale of the Company. We always welcome investors' input and take shareholders' concerns very seriously. However, we have determined that Sandell's particular suggestions are short sighted and are not the right approach to achieving the best long-term value for all shareholders. We are puzzled by the shareholders' criticism of our decision to delay moving forward with a mid-stream MLP. Given the exceptionally challenging market conditions and the impact on the MLP universe, our advisors and investors agreed with our decision not to pursue an MLP at this time.

We are also troubled by some of the other claims in Sandell's letter, particularly comments about offers for the Company. These statements are simply not true. To conclude, we are generating more earnings and cash flow now than ever before, and our future is extremely bright. While we, too, are disappointed with the current valuation in the marketplace, I'm confident that the strategy we are executing is the right one for our Company and that ultimately it will result in building greater value for all shareholders. When we have completed our prepared remarks, we will address your questions. I would now like to turn the meeting over to Eric Herschmann to discuss our strong second quarter results. Eric?

Thank you, George, and good morning. To reiterate George's comments, we are very pleased to have reported solid adjusted earnings of $0.43 per share. This again represents double digit growth compared with last year. Additionally, we are confident that we will be able to deliver on the cash flow guidance that we provided as part of our 2008 strategic plan, and outlook and similarly expect that we will be in the high end of our range. I am especially pleased to report that Southern Union Gas Services, our Gathering and Processing segment, had one of its best quarters since we acquired it in 2006, posting adjusted EBITDA of $50 million. We posted this record amount of cash flow due to continued improvement in operating efficiencies and increased high margin volumes across our system.

We firmly believe that our decision to trade out of two of our low growth LDCs into this high growth, high free cash flow generating asset, is creating significant long-term value for all of our shareholders. We were also very pleased to hear Chesapeake Energy's remarks on their earnings call last week commenting on the success they had in, as they put it, cracking the code on their completion techniques in the West Texas, Barnett and Woodford shale plays. We are hopeful given the recent comments in our ongoing discussions with Chesapeake and others that we will see increased drilling and growth in the not too distant future. Also, unlike the single pay zone Barnett Shale activity in other regions, several our producers have had successful completions in shallower and richer gas formations, like the Wolf Camp in Bone Springs. As we have said in the past, given our system location and configuration, we are extremely well positioned to receive significant incremental growth volumes if this play continues to be successful. We are pleased to have announced yesterday that Roger Farrell has joined the Company as President of Southern Union Gas Services.

Many of you will remember that Roger was formerly the President and CEO of Enogex. We are confident that Roger's experience and leadership will add value to our mid-stream operations and we are happy to welcome him aboard. With that, I would now like to turn the call over to Rick Marshall, our CFO, to give an overview of our results. Rick?

Thank you, Eric, and good morning. For the quarter ended June 30, 2008, Southern Union reported adjusted EBIT of 134 million compared with EBIT of 117 million in the prior year, representing an increase of 15%. All references to adjusted EBIT and adjusted net earnings remove the impact of selected items. Selected items for the second quarter of 2008 include a non-cash 13.8 million after-tax charge related to mark-to-market accounting on open commodity derivatives and a 2 million aftertax charge related to the repurchase of 49 million of preferred stock during the quarter. Our earnings release issued this morning sets forth the selected items, and in accordance with Reg G, contains a reconciliation of EBIT to adjusted EBIT, as well as EBIT to net earnings. For the quarter, adjusted net earnings available to common stockholders were 53 million or $0.43 per diluted share. This compares to net earnings of 47 million or $0.39 per share in 2007. Net earnings per share increased by 10% compared with the prior year.

For the six months ended June 30, adjusted EBIT was 305 million compared with 264 million in the prior year, an increase of 16%. Adjustments in the prior year included a 14 million pretax gain related to the settlement of litigation at Citrus Corp. Adjusted earnings per share for the year-to-date period were $1.07 compared with $0.92 in the prior year. Again, an increase of 16%. In terms of segment results, Transportation and Storage, including our investment in Citrus, had EBIT of 94 million for the quarter compared with EBIT of 96 million during the same quarter last year. The 2 million decrease was primarily attributable to 5 million of nonrecurring gains at Citrus Corp in the prior year, partially offset by a 3 million increase in EBIT at Panhandle Energy during the current quarter. Contributing to Panhandle's improved performance was an increase in operating revenue of 7 million and a decrease in operating expenses of 2 million. These were partially offset by an increase in depreciation expense of 5 million.

Our Gathering and Processing segment generated 34 million in adjusted EBIT in the third quarter compared to 13 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. Our Distribution business generated EBIT of 3 million for the quarter as compared to 6 million in the prior year. The 3 million decrease is primarily a result of increased operating expenses. At our Massachusetts division, we have recently filed for a 5.6 million annual rate increase. We would expect new rates to be in place by February 1st of 2009. Similar to Massachusetts, we continue to prudently monitor Missouri Gas Energy to determine the most appropriate time to file a rate increase request if necessary.

During the quarter, we invested approximately 118 million in our operations. Growth capital accounted for 61 million, and maintenance capital was 57 million. Broken down by segment, our Transportation and Storage segment invested 91 million -- 51 million for growth and 40 million for maintenance. Our Gathering and Processing segment invested 15 million -- 7 million for growth and 8 million for maintenance. At our Distribution segment, we invested a total of 11 million -- 2 million for growth and 9 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 continue to remain on track to deliver those results; and similar to our EPS guidance, we expect to be at the higher end of the range with respect to our EBITDA guidance. That presentation is available on our website for your review. I will now turn the call over to Rob Bond, who will discuss our gathering and processing and transportation an storage segments.

Thank you action, Rick, and good morning. I would like to begin by talking about our Gathering and Processing segment, Southern Union Gas Services. We're pleased to report that the second quarter of 2008 was one of our best operational and financial quarters since we purchased the business in 2006. Our equity volumes for the quarter averaged approximately 44,000 MMBtu per day of natural gas liquids and 4,000 MMBtu per day of residue gas. For the year-to-date period, we have averaged approximately 42,000 MMBtu per day of natural gas liquids; and again, 4,000 MMBtu per day of residue gas. As you recall, our equity volume guidance for 2008 is for 40 to 45,000 MMBtu per day of natural gas liquids. As it relates to our hedging program for 2008, we continue to be 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 swap contracts on natural gas and processing spreads.

For 2008, we have entered into additional processing spread swap on 10,000 MMBtu per day at $7.10. To calculate the impact on our gross margin related to the additional 10,000 MMBtu per day swap, you have to remember to add the underlying natural gas price to the $7.10 to arrive at a total price at which we are selling our product. For 2009, we are hedged on 20,000 MMBtu per day at a net price of 16.40. Again, this was done through a combination of swaps on natural gas and processing spreads. We have also entered into an additional processing spread hedge on 10,000 MMBtu per day at 8.37. Again, you need to add the underlying natural gas price to arrive at our total net price. 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 warrant.

I'd now like to talk about the transportation and storage segment of our business. Our infrastructure enhancement project at Trunkline LNG,continues to progress, with and in-service target in the second quarter of 2009. The cost of this project, which is fully contracted to BG LNG Services for 20 years, is approximately 365 million, excluding capitalized interest. We expect the project to generate EBIT of 50 to 55 million and EBITDA of 60 to 65 million on an annualized basis. Finally, I would like to talk about the Florida Gas Transmission Phase VIII project. As you may know, we have a 50% equity interest in Florida Gas Transmission through our investment in Citrus Corp. Our partner in Citrus is El Paso. The project's final scope is nearing completion; and as it currently stands, we expect to add nearly 500 miles of pipe and over 200,000 horsepower of compression. This will allow us to increase FGT's delivery capacity into Florida by approximately 820 million cubic feet per day, an increase of 20 million cubic feet per day above the original scope.

We are currently contracted for approximately 90% of this capacity under agreements with 25-year terms. Based on our current expectation for the project, including the additional capacity, we expect the project to cost approximately $2.4 billion and now generate operating income of 240 to 260 million and EBITDA of 290 to 310 million when fully contracted, an increase of 20 million over our previous estimate. We are pleased to report that we have now ordered all of our (inaudible) steel pipe for the project. Since we started the budgeting process for the project, we did see steel costs increase significantly relative to our initial expectations. Our current estimated cost for the project does still include an appropriate level of contingency and escalation. With that, I would now like to turn the call back over to George. George?

Thank you, Rob. At this point, we'd like to open the meeting up to your questions.

(OPERATOR INSTRUCTIONS). Also, we would like to thank you for your patience as we structure a list. Your first question comes from Lasan Johong with RBC Capital Markets. Please proceed.

Good morning. George, you mentioned that the offer being -- or the deal that's been done, suggesting it is probably not in the best interests of long term shareholders. We understand -- or at least I understand generally how your strategy is (inaudible), but could you give us a bit of an insight into king of how you're thinking about Southern Union Gas Services, what your thoughts are regarding the kind of small distribution assets that you own? Is there an opportunity -- or where do you see an opportunity to potentially pile more CapEx or take strategic initiatives that would enhance shareholder value going forward?

Well, I think the answer to your question is we have always looked at enhancing shareholder value. We have traded out our Texas LDC in a lifetime transaction. We did the same with our Pennsylvania ones. And we did the same with our Rhode Island ones. So we are always looking to move assets around to gain better assets when they become available and at that time.

Where do you see the opportunities going forward?

I don't see one tomorrow morning, but that doesn't mean I won't see one next week.

Okay. Right now as of late, LNG flows have not exactly been what you would call robust. Does that alter your thinking about the future of LNG?

Our LNG facility, as Rob Bond said, is leased out for 20 years. So it really matters little to us whether we receive LNG or we don't. We receive the same amount of money from British Gas one way or the other.

Right. Rob, you had mentioned the Florida Gas Transmission CapEx was $2.4 billion Phase VIII. What was that an increase in?

I think the original -- we had originally estimated it to be $2.1 billion.

Okay. And you went over the numbers on the OP income and EBITDA, and the OP income was 240 to a range of what?

260, and EBITDA of 290 to 310.

EBITDA of 290 to 310.

Correct.

Great. Thank you very much.

Thank you.

With BMO Capital, your next call comes from Carl Kirst. Please proceed.

Morning, everybody. Rob, maybe stay on Florida Gas for a second. You mentioned an adequate level of contingency. I didn't know if maybe there was perhaps some additional color you could put around that, given the cost increases. Also, perhaps answered in that same vein, as we look to have locked in now the large diameter pipe, where do you see the largest risk labor, small diameter pipe? You know, where that contingency might come into play?

Well, I mean, we have locked in the vast majority of the pipe that we will need for the project. We have locked in our valves and other equipment. We have ordered our compression. So Carl, I think -- obviously you have to get it in the ground and that is where, I think, we still have what we believe to be an appropriate level of contingency and where the last risk remains on this project.

Okay. Fair enough. Is that project still expected to be funded at the Citrus level?

Yes, it is.

Okay. Also, just to look on midstream for a second. Can you give us a sense of actually where system volumes are running, recognizing that the Atoka volumes I'm sure still in decline; you know, and I guess does that -- even as our equity volumes ramp because of the improved efficiency, at what point does kind of a reducing of system throughput give you pause?

Well, I think on the -- particularly on the north end, Carl, where that's our highest margin gas, we remain full at gel. In fact, we were moving a little bit of excess gas out of that area down to Keystone for processing. So on the north end of the system, we remain relatively full. That's where we have talked about in the past we were adding additional treating capacity to allow us to take additional high margin gas in that area and bring it down to Keystone for processing. The volumes on the south end, which are primarily fee-based business and lower margin business, does fluctuate up and down with, as you said, the Atoka production and other gas production. So I think we are generally pleased with what we have seen; and as Eric mentioned earlier, we are also excited about what the prospects for production out of the shale in Culberson County will potentially mean for us.

Okay. Do you actually -- Rob, do you have that system number for the second quarter?

I don't have it right in front of me, Carl.

I can follow up with Jack. No worries. Last question, if I could, and sort of following up on phones with the strategic initiatives. I guess the only thing I might ask is is that certainly over the last three years stock being up, stock being down but roughly in the same place, yet the cash flow -- so let's take out the earning noise -- the cash flow is up per share -- up 25%, so clearly there has been good execution. I know you guys are in the market right now buying back a little bit of the preferred, can understand that. You know, are there any opportunities -- being cognizant of the rating, the debt rating -- are there any opportunities to do any share buy back as we sit here today, whether it is in 2008 or 2009?

I think it is pretty clear that there are no opportunities to buy back shares. I mean, the rating agencies have both specifically identified that as an event that would jeopardize the Company's credit worthiness at the Southern Union Company level. That's not to say out into the future as things change we have that option to use free cash flow in that way; but in the near term, I'd say no.

Okay. Thank you.

With Lehman Brothers, your next question comes from Rick Gross. Please proceed.

Good morning. In regard to the Delaware basin, have you guys done any -- I don't know, kind of scoping out of what the relative costs of building out into that region or maybe what the threshold volume or acreage dedication contract might entail before you would be willing to commit capital in that direction?

We have done some initial work and are obviously talking to the producers in the region, but I think it is too early to speculate on what those potential costs or dedications would be.

Okay. From the standpoint of going back to kind of East Texas moving west, we continue to see increased demand and a lot of proposals and activity to move gas west to east. Within the corridor that you're involved in, is there anything you're looking at -- either expanding from the east or moving things farther west -- interconnectivity beyond what you have today? Are there any opportunities there on Trunkline?

Well, as you recall, we did complete a project at the end of last year beginning this year in which we expanded our capacity out of Texas by a little over 600 million cubic feet per day. Actually, we have a small project ongoing as we speak which will add a bit more capacity, about 60 million cubic feet per day, out of Texas. But I think at that point, we are soon to reach a point where it's going to take another significant project to be able to access additional production out of Texas. So we continue to watch it. Obviously, those differentials are what drive our business. As we develop additional projects, we will keep you informed.

Okay. And then one last question. If I did the math right, the EBITDA multiple on the Florida Gas expansion is plus or minus 8; and we have just gone through a number of calls -- either (inaudible) or El Paso or others with other big projects -- and they seem to be falling in the 6.5 to 7 range. Is there an element here of -- whether it is the 2.4 billion cost contingency or there is some adaptability to rates as we actually get this thing done -- that this project might come in closer with plus or minus 7, or is there a nuance here as to why it is 8?

Well, I mean, I think there is an opportunity to beat the 8 by some, but I'm not sure that we can drive it down as low as 7. But I don't think there is any particular nuance other than it is just a very large project.

8's not bad, it's just that it's a little bit different. Okay. Thank you.

Ladies and gentlemen, this concludes the Q&A portion of your conference. I would now like to turn the call over to Mr. Lindemann for closing remarks.

I would like to thank you all again for participating in this call, and we hope to have you all at our next quarterly report, and we hope it will even be better. So thanks for coming. Bye.

Thank you for your attendance in today's conference. This concludes your presentation. You may now disconnect. Good day.