Energy Transfer LP (ET) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 Southern Union Company earnings conference call. My name is Erica, 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, VP of Investor Relations. Please proceed, sir.

Thank you, operator, and welcome to Southern Union's third-quarter 2008 earnings call and webcast. Presenting on today's call will be George Lindemann, Chairman and CEO; Eric Herschmann, president and CEO, Rick Marshall, Senior Vice President and CFO; Rob Bond, Senior Vice President of our Pipeline Operations; and Roger Farrell, Senior Vice President of our Midstream Operations.

A replay of this call will be available for one week by dialing 888-286-8010 and entering pass code 97925208. A replay of the webcast will be accessible through our website at www.sug.com.

Today, we will be discussing results for the third quarter of 2008, significant events, and outlook. This morning, we issued a press release announcing our third-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 to remind everyone that the information discussed on today's call pertains to the financial results of Southern Union Company. Certain amounts and variance explanations for the transportation and storage segment may vary compared to Panhandle Eastern Pipe Line Company's standalone financial statements due to consolidating adjustments.

I would also like to caution you that many of the statements and 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 the 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 will now turn the call over to Mr. George Lindemann. Mr. Lindemann?

Good morning. I am pleased to report adjusted earnings for the third quarter of $0.29 per share. This amount reflects the negative impact of Hurricanes Gustav and Ike, which is approximately $0.11 per share. Adjusted earnings per share before the impact of the hurricanes would have been $0.40 per share.

Prior to the hurricanes, we were on track to exceed our previously stated adjusted earnings guidance of $1.80 to $1.90 per share. We now expect to come in at the low end of our range.

In addition to the hurricanes, the past several months have witnessed great volatility in the financial and commodity markets. The credit market, which our industry has been dependent on for many years, has also seen major turmoil. As it relates to the overall liquidity of our Company, I would like to emphasize that we do not have any significant short-term capital requirements and believe we have ample liquidity available to cover our near-term needs. Rick Marshall will discuss liquidity in greater detail in a few minutes.

Finally, I would like to welcome Roger Farrell to his first investor call as our new Senior Vice President of Midstream Operations. When we have completed our prepared remarks, we will address your questions.

I would like to turn the call over now to Eric Herschmann, to comment on the quarter. Eric?

Thank you, George, and good morning. We are pleased that in today's volatile markets, over 80% of our consolidated EBITDA comes from stable, regulated businesses with minimal direct exposure to commodity prices. These businesses primarily include interstate pipelines, storage, and LNG terminaling with long-term contracts.

This stability in earnings and cash flows helps our Company maintain a relatively low-risk profile, while at the same time providing ample growth opportunities, including our Florida Gas Transmission Phase VIII expansion, which is on schedule and on budget.

Even though we are experiencing extreme volatility in today's markets, we believe that the fundamentals of the natural gas industry remain sound. As natural gas continues to be the fuel of choice for America, we believe our Company is well positioned to grow and create long-term value for our shareholders.

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 September 30, 2008, Southern Union reported adjusted EBIT of $106 million compared with EBIT of $120 million in the prior year. The decrease is due to the impacts of Hurricanes Gustav and Ike during September. We estimate that the hurricanes negatively impacted EBIT by approximately $22 million during the quarter.

References to adjusted EBIT exclude the impact of select items. Select items for the third quarter of 2008 include a non-cash $14 million gain related to marked-to-market accounting on open commodity derivatives.

For the nine months ended September 30, adjusted EBIT was $408 million compared with adjusted EBIT of $385 million in the prior year. Again, we estimate that the hurricanes negatively impacted EBIT by approximately $22 million during the year to date period.

Select items in the current period include a mark-to-market loss on open commodity derivatives of $5 million. Select items in the prior period include a $14 million gain related to the settlement of a litigation at Citrus Corp.

For the quarter, adjusted net earnings were $36 million or $0.29 per share. This compares to net earnings of $41 million or $0.34 per share in 2007. For the nine-month period, adjusted net earnings were $166 million or $1.34 per share compared with adjusted net earnings of $152 million or $1.26 per share in the prior period.

As George mentioned earlier, we estimate that the hurricanes impacted both the quarter and nine-month periods by approximately $0.11 per share.

Our earnings release issued this morning sets forth the selected items used in calculating adjusted net earnings. In accordance with Reg. G, the release also contains a reconciliation of EBIT to adjusted EBIT as well as EBIT to net earnings.

In terms of segment results, transportation and storage, including our investment in Citrus, had EBIT of $89 million for the quarter compared with EBIT of $90 million during the same quarter last year. The current quarter's results include expenses of $10 million for the expected cost to repair damages to our offshore systems as a result of the hurricanes. The results also include approximately $1 million of lower revenues as a result of reduced volumes following the hurricanes.

Panhandle's operating revenue increased by $14 million in the quarter, largely due to the inclusion of the Trunkline Field Zone project, which went into service earlier this year.

Operating expenses, including expenses associated with the hurricanes, were up $9 million in the quarter. Depreciation expense increased $4 million in the quarter due to an increase in property, plant, and equipment.

Our gathering and processing segment generated $13 million in adjusted EBIT for the quarter compared with EBIT of $20 million in the same period last year. The decrease was driven by the unavailability of third-party fractionation capacity at Mont Belvieu following Hurricane Ike.

We estimate the hurricane negatively impacted gross margin by approximately $11 million in the quarter. Unusual items during the quarter also included a $3 million bad debt reserve for a customer that filed bankruptcy, plus a $1 million provision for the settlement of litigation.

Our distribution business generated EBIT of $4 million for the quarter compared with $9 million in the prior year. The $5 million decrease is primarily a result of increased operating expenses and lower net operating revenue. Notwithstanding the year-over-year results, this segment continues to remain on budget, and we expect it to meet its full-year targets.

During the quarter, we invested approximately $112 million in our operations. Growth capital accounted for $70 million, and maintenance capital was $42 million.

Broken down by segment, our transportation and storage segment invested $75 million, $52 million for growth and $23 million for maintenance. Our gathering and processing segment invested $19 million, $10 million for growth and $9 million for maintenance. At our distribution segment, we invested a total of $12 million, $2 million for growth and $10 million for maintenance. Our corporate and other segment invested $6 million for growth capital.

Southern Union does not have any refinancing obligations due until the third quarter of 2009. From a liquidity standpoint, we have approximately $160 million available under our $400 million revolving credit facility, which is a fully committed facility that matures in May of 2010.

Based upon our currently anticipated cash needs, we expect borrowings under this facility to be relatively flat through the remainder of 2008 and to decrease slightly during the first six months of 2009.

During the third quarter of 2009 -- or earlier, if market conditions provide a favorable opportunity -- the Company will refinance or repay the obligations coming due in 2009 with cash flows from operations, borrowings under our revolving credit facility, or proceeds from bank or debt capital market transactions.

Specifically, obligations coming due in 2009 include $61 million of debt maturing at Panhandle Eastern Pipe Line Company and a $150 million short-term bank loan at Southern Union.

As we work towards finalizing our 2009 budget, you can be assured that our focus will be on managing both operating expenses and capital projects so they fit within our cash flow generation capability.

Citrus Corp, our joint venture with El Paso and the owner of Florida Gas Transmission, will need to access the debt capital markets sometime during the second half of 2009 to fund the ongoing Phase VIII expansion. The exact timing and amount of the offering is yet to be determined and will be based on cash flow needs as the project progresses. Since the project is secured by 25-year contracts with high-quality counterparties, we are confident in our ability to finance the project.

We will closely monitor the markets throughout next year and may opportunistically pre-fund part of the capital if market conditions provide a favorable opportunity.

I will now turn the call over to Rob Bond, who will discuss our transportation and storage segment.

Thank you, Rick, and good morning. Barring the impacts of the hurricanes which Rick just described, the third quarter was a solid quarter for our transportation and storage businesses, both operationally and financially. At this point I would like to spend a few minutes updating you on the key growth projects that are currently underway.

At Trunkline LNG, our infrastructure enhancement project continues to progress with a second-quarter 2009 in-service date. Because of the delays associated with the two hurricanes, we now expect the project to come online toward the end of the second quarter. The estimated cost of this project, which is fully contracted to BG LNG Services for 20 years, is now approximately $400 million, excluding capitalized interest. The increase in cost compared with our prior estimate of $365 million is due to higher labor costs, including the reduced productivity as a result of the hurricanes, as well as generally higher material costs.

Because our negotiated rate is based on a formula of capital invested, we now expect the project to generate EBIT of $55 million to $60 million and EBITDA of $65 million to $70 million on an annual basis.

Our other major project underway is the Florida Gas Transmission Phase VIII project. As you know, we have a 50% interest and service operator of Florida Gas Transmission through our investment in Citrus Corp. The Phase VIII project is designed to add approximately 820 million cubic feet of incremental delivery capacity into Florida through the addition of 500 miles of pipe and over 200,000 horsepower of compression.

We remain currently contracted for approximately 90% of the capacity under 25-year agreements. We estimate the project will cost approximately $2.4 billion and generate operating income of $240 million to $260 million and EBITDA of $290 million to $310 million when fully contracted.

At this point, we have locked in the cost of our pipe, ordered our compression, begun procuring valves, regulators, and other necessary equipment, and lastly have finalized the commercial terms with our pipeline contractors.

With that, I would like to turn the call over to Roger. Roger?

Thank you, Rob, and good morning, everyone. Up until Hurricane Ike hit on September 11, the third quarter was shaping up as a very good quarter for us. The hurricane did not damage our system; however, it did cause damage and power outages in Mont Belvieu, Texas, where we fractionate our natural gas liquids. Because much of the gas in our system is higher BTU gas and must be processed to meet pipeline quality standards, we ended up being shut in for approximately one week, and then operated only 30% capacity through the end of the month.

As Rick mentioned earlier, we believe this cost us approximately $11 million of gross margin during the quarter.

As of October 1, we were back to pre-hurricane production models. On October 10, our third-party fractionator went down for a previously scheduled 30-day turnaround. During this turnaround, we have been fractionating approximately one-third of our NGL production at another facility, while storing the remaining two-thirds at Mont Belvieu. The NGLs in storage will begin to be fractionated and sold once the turnaround is completed in the next week or so.

At this point we do expect that there will be some level of NGLs in storage at year end which will not be sold until the first quarter of 2009.

Prior to the hurricane on September 11, our equity volumes for the first two months of the quarter averaged approximately 43,000 MMBtu per day of natural gas liquids and 6,000 MMBtu per day of residue gas. As you will recall, our equity volume guidance for 2008 was for 40,000 to 45,000 MMBtu per day of natural gas liquids.

As it relates to our hedging program for the last quarter of 2008, we continue to be hedged on 30,000 MMBtu per day at a realized price of $15.02. We achieved this price through a combination of put options and swap contracts on natural gas and processing spreads.

Also for the balance of 2008, we have entered into an 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 in the then-current natural gas price to the $7.10 processing spread swap, to arrive at the total value we are realizing from the sale of our product.

For 2009, we are hedged on 20,000 MMBtu per day at a realized price of $16.40. Again, this was done through a combination of swap contracts 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 in the then-current natural gas price to arrive at our total net price.

I would now like to turn the call back over to George.

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

(Operator Instructions) Carl Kirst.

Good morning, everybody. A couple of questions on the pipes first. Rob, with respect to the Florida Gas, and I assume the interest expense of whatever project financing is raised next year, is that kept at the Citrus level? Or are any of those interest expenses passed on to customers?

I.e., if you don't get the interest expense you are thinking relative to your budget, relative to what presumably the fixed contract was signed at.

Yes, go ahead, Rick.

The fixed contract assumed a level of indebtedness in today's markets. We are still comfortable that what we will ultimately finance the project at will provide the returns that we are expecting for that project.

As far as the question as to where the interest expense will remain, it obviously depends on whether the financing is done at the Citrus level or the FGT level. But most of that financing, most of the finance will be done at either the Citrus or the FGT level.

Okay, but wherever it is raised, any -- say for instance, elevation in the interest expense, that is borne by you guys in El Paso, right? I mean, that is not a pass-through to --?

That's correct. It's not --

Okay. That's what I thought; I just wanted to clarify. I appreciate that.

The second question, it sounds like there really is no additional lingering impacts from the hurricane on the midstream. Is that going to be the case for the pipes? Or are there going to continue to be some lingering repair expenses, if you will?

I think the only lingering piece, Carl, is we've got a bit of work left to do on Sea Robin particularly, to get some of those volumes flowing again. So we will see some reduced volumes on Sea Robin, and that will impact us slightly going forward. We expect to have most of that work completed by the end of the year.

Rob, can you kind of estimate what impact we are talking about right here, between the -- and I understand Sea Robin is not a very big part of the business. But just with respect to the reduced volumes and the increased expense, is it something in the neighborhood of $5 million, less, more?

Yes, I think in the third quarter, we showed revenue was down by about $1 million. I would expect that in the fourth quarter, it would be similar.

Okay, and then -- appreciate that. Last question. Rick, can you care to sort of throw out what a preliminary budget might be for 2009? Or 2009, barring that, what you think the timing is on coming forward with the 2009 outlook?

I'm not prepared to do that at this point in time, Carl, from an earnings per share guidance number.

But just to give you some color on capital, the capital budget that we put out this year was in the mid-$500 million range and you can expect that we will see a capital budget much less than that in 2009. We are still in the process of fine-tuning that.

But as you can imagine, there are some significant expenditures that relate to the infrastructure enhancement project that aren't going to be repetitive, although we do have some expenditures to complete IEP into 2009 -- will be in the 2009 budget, but not to the level that we had in 2008.

And there were additional capital projects. Specifically there were some amounts related to the field zone expansion that aren't recurring in 2009. So what you will see is that from a cash flow standpoint, Southern Union Company will have free cash flows. We will be free cash flow positive from $75 million to $100 million in 2009, which also helps us out with our short-term liquidity needs for 2009.

Very helpful. Any thoughts on timing as far as coming out with the 2009 outlook? Should we think about it early next year, or --?

Again, I'm not sure, but I would think that that's within the realm of possibility.

Appreciate the color.

Faisel Khan, Citigroup.

Good morning, guys. It's Faisel from Citi. A question on -- to follow up on FGT, in terms of where you guys are with regards to procurement of steel, labor, rights of ways, can you talk about how the capital plan or the budgeted amount to complete the expansion is affected by the current market situation?

Meaning I know you guys locked in a lot of your steel, but what about the labor and right-of-way costs and all that sort of other stuff that is embedded in the construction?

We are well underway with -- in fact, I hope to sign the contracts within the next couple of weeks on our pipeline contractors. We have negotiated unit price contracts there so that we don't really have any exposure to labor costs, or even weather delays, quite frankly. So we are very happy with what we've negotiated with our pipeline contractors.

Our steel prices, as you mentioned, are locked in. Our right-of-way acquisition has begun. I think we are well on target to complete it on time and on budget, as I believe Eric mentioned earlier in the prepared remarks.

Do you think there is any sensitivity to some of those costs in the current market?

I don't think so. I think, obviously, you still have to get it constructed; but I feel very comfortable with where we are, with the amount of contingency that we have left in the project, that we will complete it, as I said earlier, on budget.

Okay. Can you just talk about how much contingency you have in that budget? Or is that something you guys are --?

No.

Okay. Got you. Thanks for the time.

Sara Nainzadeh, Millennium Partners.

Good morning. It's actually Mark Caruso. I just had a few quick questions. You know, in the quarter, you were impacted by the ONEOK fractionator being down. I know it was down for maintenance. Is it currently back up?

Can you give us a sense of the current environment in midstream? Because I know we've seen [Finedell] take down some of their plants because it's not currently economic. I just want to get a sense of how things are playing out around your system.

The ONEOK fractionator, my intelligence as of this morning was they would not be coming back on until late this week. We expected them to come on this weekend, but due to a permitting issue I think it's going to be later on in the week.

As far as generally, the processing environment, product prices continue to be weak. At this point in time, we are still in full recovery mode, although we watch daily what the processing spreads are and are certainly in a mode that we can quickly go to at least partial ethane rejection if need be.

Long term, it is difficult to tell on the processing side, but we are hopeful that when the petrochemical complex gets back up and running, after they get the repairs done from the hurricanes, and hopefully we will see some improvement in the NGL pricing.

Got you. Then, are you seeing any impact of volumes? A lot of the MP companies are talking about laying down rigs because of commodity prices. Have you seen any impact of volumes yet?

We haven't seen anything acute. Certainly, we do have some intelligence that there are some companies that are planning on reducing their drilling. But without saying names, a couple of them actually are talking about maybe not drilling in the first couple months of the year, until rig prices come more in line with commodity prices.

But so far, we haven't seen a significant impact on drilling in our area. There are some areas, actually, where we are seeing an increase, because they found a particularly nice little oil play that is very good for our business. So right now, we haven't seen any material impact on the drilling situation.

Okay. Sorry, just one last question. As far as -- you had mentioned sort of the timing. Can you give us a better sense of how that will work out, the timing of the NGL barrels that are in storage? Are you able -- so you don't recognize any revenue until those are sold? Or just how the mechanics of that work.

Well, obviously the longer the fractionator is down, the more difficult it will be for them to be fractionated. Right now, we were expecting the majority to be fractionated before the end of the year. However, there a not insignificant number of barrels we expected to be left unfractionated to the first quarter.

Got you. Thanks so much.

Ella Vuernick, RBC Capital Markets.

Thanks very much. Actually, those were just my questions and they have been answered.

There are no further questions. I would now like to turn the call over to George Lindemann for closing remarks.

Thank you. I would like to thank everyone again for participating in today's call, and we hope to see everyone again at year-end.

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.