Energy Transfer LP (ET) 2009 Q1 法說會逐字稿

Welcome to the first quarter 2009 Southern Union Company earnings conference call. My name is Francine and I will be your coordinator for today. At this time all participants are in 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.

Thank you, Francine, and welcome to Southern Union's first-quarter 2009 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 16283492. A replay of the webcast will be accessible through our website at www.SUG.com.

Today we will be discussing our first quarter 2009 results, significant events and outlook. This morning we issued a press release announcing our results, which is available on our website. Following our prepared remarks we will be happy to address your questions. If you have any further questions after the call, please contact me 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 variant explanations for the Transportation and Storage segment may differ compared to Panhandle Eastern Pipe Line Company's stand-alone 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 Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking information in our earnings release.

I would now like to turn the call over to Mr. George Lindemann. Mr. Lindemann?

Good morning. I'm pleased to report adjusted first-quarter 2009 earnings of $0.59 per share. This amount includes adjustment for market to market accounting treatment on our processing spread hedges and an increase to our provision for repair and abandonment costs at our Sea Robin Pipeline.

As you will recall, Sea Robin was damaged during both hurricanes Gustav and Ike. Rick Marshall will get into greater details on the numbers in a few minutes.

I'm also pleased to reaffirm our adjusted earnings guidance for 2009, in the range of $1.75 to $1.90 per share.

Continued strong performance in our regulated business segments which represent over 80% of the consolidated cash flow of our Company is helping drive our performance in spite of soft commodity markets. We are cautiously optimistic that we are near the bottom of the commodity price cycle. Roger Farrell will address what we're currently seeing in the commodity markets in a moment.

When we have completed our prepared remarks, we will address your questions. I would now like to turn the call over to Eric Herschmann to comment further on the quarter. Eric?

Thank you, George, and good morning. As many of you are aware, our Florida Gas Transmission affiliate recently completed a 10-year, $600 million senior notes offering with a yield of approximately 7.9%. The offering was many times oversubscribed, a fact we believe is indicative of the pent-up demand investors have for investment grade paper from our sector. The proceeds of the offering will help fund Florida's Phase VIII expansion project and together with the proceeds of prior financings and internally generated funds and allow us to meet the majority of the funding needs for the project.

In general, we are pleased with the improvement we have seen in the capital markets and are confident that we will be able to access both the bank and debt capital markets to refinance our obligations coming due this summer. Rob Bond will update you on the progress we're making with our other major organic growth project at Trunkline LNG in a few minutes.

Finally, at the end of last year we began the process of rationalizing the cost structure throughout our entire Company. This includes consolidating and renegotiating vendor contracts where appropriate, aggressively pursuing efficiencies throughout the purchasing process and the elimination of what should be considered noncritical items during difficult economic times. During the first quarter we began to see the benefits of this initiative in our results. As we continue to closely monitor and evaluate all expenses, we are confident that we will see further benefit well into the future.

With that, I would now like to turn the call over to Rick Marshall, our CFO, to give an overview of our first-quarter results. Rick?

Thank you, Eric, and good morning. Before I begin I would like to point out that our discussions today will focus on adjusted net earnings and adjusted EBIT, both non-GAAP measures. In accordance with Reg G, our press release issued this morning contains reconciliations of the adjusted metrics as well as EBIT to net earning.

For the quarter ended March 31, 2009 Southern Union had adjusted EBIT of $161 million compared with EBIT of $171 million in the prior year. The decrease is primarily due to lower realized natural gas and natural gas liquids prices on the unhedged equity volumes in our Gathering and Processing segment.

For the first quarter, adjusted net earnings were $73 million, or $0.59 per share. This compares to net earnings of $79 million or $0.64 per share in 2008. Reported earnings for the quarter were $44 million or $0.36 per share. As George mentioned earlier, net earnings and EPS have been adjusted to remove the impact of mark to market accounting on economic hedges and to exclude the current quarter's charge to increase a provision for repair and abandonment costs associated with the damage hurricane Ike caused on the Sea Robin Pipeline system.

The adjustments for mark to market accounting include two components. The first is the inclusion of a portion of the $0.30 per share gain booked during 2008 that related to our 2009 processing spread hedges. The portion being added back in the first quarter is equivalent to $0.07 per share. As you will recall, we removed the non-cash gain out of the adjusted earnings last year, since it pertains to our 2009 hedges.

The second component is the revaluation of the open processing spread hedges based on future expected commodity prices through the end of the year. The amount being added back related to this component is $0.08 per share. This is also a non-cash item that will reverse over the course of 2009 as the hedges settle.

In terms of segment results, Transportation and Storage, including our investment in Citrus, had adjusted EBIT of $109 million for the quarter compared with EBIT of $114 million in the prior year. The decrease of $5 million was largely attributable to increased depreciation expense at Panhandle Energy. Panhandle's operating revenue increased by $5 million during the quarter, largely due to increased parking revenue and increased reservation revenue as a result of the trunk line field zone project which went into service in early 2008 with a second, smaller phase going into service this past November.

Excluding the $16 million provision for Sea Robin repair and abandonment costs, operating expenses increased $6 million compared to the prior year including a $2 million increase in contract storage costs and a $1 million charge for a lower of cost or market adjustment for system gas. Depreciation expense increased $3 million year-over-year, due to a $222 million increase in property, plant and equipment placed in service after March 31, 2008.

Our Gathering and Processing segment generated $19 million in adjusted EBIT for the quarter compared with EBIT of $29 million in the prior year. The decrease was largely driven by lower realized natural gas and natural gas liquids prices, offset partially by a reduction in operating expenses as a result of the initiatives Eric mentioned earlier.

Our Distribution business generated EBIT of $32 million for the quarter compared with $28 million in the prior year. The $4 million increase was largely due to an increase in other income, primarily the result of an insurance settlement. During the quarter we invested approximately $102 million in our operations. Growth capital accounted for $62 million, while maintenance capital was $40 million.

From a segment standpoint, our Transportation and Storage segment invested $78 million, $47 million for growth and $31 million for maintenance. Our Gathering and Processing segment invested $11 million, $7 million for growth and $4 million for maintenance. Our Distribution segment invested $7 million, $2 million for growth and $5 million for maintenance. Finally, our Corporate and Other segment invested $6 million of growth capital.

As of May 1, the Company had $420 million in revolving credit facilities. Of that amount, approximately $262 million was available. During 2009 we have $61 million of senior notes maturing at Panhandle which we expect to repay. We also have a [$160] million short-term facility at the Southern Union Company level that we expect to refinance in the bank market.

I'll now turn the call over to Rob Bond, who will discuss our Transportation and Storage segment.

Thank you, Rick, and good morning. Our Transportation and Storage businesses continued to perform well during the first quarter of 2009. Our optimization group did an excellent job capitalizing on opportunities in the market, as evidenced by our strong results from interruptible services. Our reservation revenue, which provides the high level of stability to our earnings and cash flow, also improved year-over-year, largely due to our trunk line field zone expansion, which was placed in service about a year ago. The field zone expansion also had a smaller phase 2 component that was completed and placed in service this past November.

The quarter results were achieved in spite of the volumes that remain shut in on our Sea Robin system. As you all know, Sea Robin was damaged during both hurricanes Gustav and Ike last year. As we were conducting repairs on the Sea Robin system during the first quarter, we became aware that we had damage to company-owned facilities located on a third-party platform and that several hundred feet of the pipeline on the ocean floor had been moved and exposed. The incident may have been caused by an errant third-party vessel or a rig that had broken loose from its mooring during hurricane Ike.

The MMS requirement that we re-bury the exposed pipe primarily drove the need to increase our provision for repair and abandonment costs this quarter. We do expect that we will recover a significant portion of these costs through insurance and future rate proceedings.

I would now like to spend a few minutes updating you on our key organic growth projects. First, we continue to move forward with our trunk line LNG infrastructure enhancement project. The project, which is fully subscribed by our customer, BG LNG Services, for 20 years, is nearing completion. We expect the project to be complete and in service in late July or August. Capital cost of the project is expected to be $430 million, and the EBITDA is to be in the range of $67 million to $72 million.

Our other major capital initiative is the Florida Gas Transmission Phase VIII project. We have a 50% equity interest in and serve as the operator of Florida Gas Transmission through our investment in Citrus Corp. The Phase VIII project is designed to add approximately 820 million cubic feet per day of incremental delivery capacity into Florida through the addition of approximately 500 miles of pipe and over 200,000 horsepower of compression. We have 74% of the expansion capacity contracted under 25-year agreements. We have one shipper that has an election to increase its capacity to a level that would take us to 83% contracted.

We estimate that the project will cost approximately $2.4 billion and generate operating income of $240 million to $260 million and EBITDA of between $290 million and $310 million when fully contracted.

At this point we have a high percentage of our materials and labor locked in, which gives us confidence in our budget numbers. We expect to receive our FERC certificate sometime in late summer or early fall, which puts us on target to meet an in-service date of the spring 2011.

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

Thank you, Rob, and good morning, everyone. We are very pleased that the first quarter of 2009 showed a quarter-over-quarter increase in total equity volumes. For the quarter we averaged just over 40,000 MMBtu per day of high-value equity NGL volumes, up from 35,000 MMBtu per day last quarter. Equity natural gas volumes fell slightly from 8400 MMBtu per day to 7900 MMBtu per day.

As you will recall, for 2009 we expect equity NGL volumes to be in the range of 40,000 to 45,000 MMBtu per day and our equity natural gas volumes to range from 2500 to 7500 MMBtu per day.

Despite the downturn in drilling, we have been able to connect sufficient new gas supplies to maintain processing plant throughput. The expanded treating capability at our Jal #3 facility, including an acid gas injection well, had placed us in an excellent position to attach new supplies of sour but NGL-rich gas from a number of active oil-related plays. We remain cautiously optimistic despite the drilling downturn that we will be able to maintain plant throughput.

For 2009 we remain hedged on 20,000 MMBTU per day of NGLs at a realized price of $16.40. This was accomplished through a combination of swap contracts on natural gas and processing spreads. We also have an additional processing spread hedge on 10,000 MMBtu per day at $8.37.

As it relates to the processing spread hedge, you need to add to the spread value the then-current natural gas price to arrive at the total net price at which we would be selling our product. We remain open on the remainder of our equity volumes but continue to monitor the markets and would look to add additional hedges to our portfolio for 2009 and beyond when opportunities present themselves.

From a market perspective, NGL demand appears to have improved as most hurricane-damaged refineries and petrochemical facilities have restarted. Crude oil inventories have fallen from levels not seen in nearly 20 years, and ethane inventories have also dropped, possibly indicating the beginning of an economic recovery. Ethane prices have improved to $0.40 per gallon, while crude prices have recently risen above $55 a barrel. Prices for our heavy-end NGLs, which are primarily used at refinery feedstocks, generally track swings in the price of crude.

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

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

(Operator instructions) Carl Kirst, BMO Capital Markets.

Actually, Roger, I missed the number you had thrown out on the first-quarter NGL volumes as I was taking my notes. Could you repeat that, please? The equity volumes?

We had 40,000 MMBtu per day of equity NGL volumes.

Okay. Have you seen and understand -- we're just kind of here in the beginnings of May and not sure what your real-time data is. But have you seen any downturn just in the last 45 days or so, or from what you are seeing right now we are seeing a current run rate, if you will?

As my remarks said, we remain optimistic, given the connect -- well connect activity, that we can maintain equity volumes, certainly in the short-term future.

Okay. Rick, a couple of finance questions. Just the first in the $150 million bank facility that comes due later this year. Is there an opportunity to go out, especially as more of SUG's composition becomes more fee-based, with the Trunkline LNG expansion coming on, to do more of a multi-year -- a long-term three-to-five-year facility? Or is kind of one-year facility still you guys are gunning for?

I don't think that the market is being receptive to the three-to-five-year facilities that we've seen historically. We are optimistic that we could put together a multi-year facility, a two-year facility. So I don't think that you'll necessarily see a 364-day facility with this $150 million term loan that's coming due. We're optimistic that we can get a two-year facility done.

Okay, appreciate the color there. And then just on FGT, will with the $600 million of debt now effectively done, how much -- or, is there another slug that we have to do in 2010 before the actual project comes in service, and then we do long-term financing? Or, how should we think of the next step as far as FGT's financing?

Well, I view the $1.1 billion that we've raised thus far is long-term financing, 20-year paper and 10-year paper. We will most likely access the debt capital markets in 2010 for another tranche to fund the project. A lot of that depends on timing of capital expenses -- when we access the market depends on the timing of our capital spend. But if you look at the financing thus far, we need probably another $800 million or so for the project, and most of that or a good percentage of that will come from internally generated funds. So we're probably facing another debt capital markets deal of the $300 million, $400 million range in 2010.

(Operator instructions) Mark Caruso, Millennium.

I know you just went through this, but I didn't get all the -- it sounds like you guys layered on some more hedges. Is that correct?

No, that's not correct. We have hedges that we put on last year for 2009, but we have not layered on any additional hedges.

Okay. And I think I had heard you mention earlier that you think that -- be able to keep up the volumes despite the fall in rig count. Is that correct also?

Yes, that's our belief. We are seeing some oil-related drilling that appears to be pretty promising, and we are cautiously optimistic that we're going to keep the volumes up for Processing.

And where are we on the carryover volumes from last year from the hurricane?

All the inventory has been fracked out, so there's no inventory left over.

Carl Kirst, BMO Capital Markets.

Just a couple of quick follow-ups. First off, is there any regulatory calendar we should be aware of with respect to Missouri as far as any notable dates? Or is it just a matter of, I guess, waiting to year-end and seeing what the ruling is, shall we say?

I don't have a calendar in front of me, but there's nothing of any significance that you should be aware of. Most of the cases -- the last few cases that we had in Missouri went the full process, where you went through the discovery period from the intervener rate -- related to then intervening parties, and there was testimony filed by the intervening parties as well. But we fully expect that this will run its course, and sometime in February we'll have a final result. But February of, obviously, 2010.

Great, and then just a last question. Just noticed there was an environmental settlement in kind of the other EBIT, and I was just wondering exactly what that was.

The environmental settlement was -- we settled with an insurance company that in exchange for a payment they were released from certain potential environmental liabilities in the future.

And that was with respect to the pipelines or the LTDs, or --?

It's with respect to the LDCs.

Okay, thank you.

That concludes the Q&A portion of the presentation. I would now like to turn the call over to Mr. Lindemann.

I'd like to thank you all again for participating in today's call, and we hope to see you all next quarter. God willing, it will be even better. So thanks very much. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.