Energy Transfer LP (ET) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Southern Union Company earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator instructions). As reminder, this call is being recorded for replay purposes.

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

Thank you, operator, and welcome to Southern Union's second quarter 2009 earnings call and webcast. Presenting on today's call will be Eric Herschmann, President and COO; 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 passcode 22362491. A replay of the webcast will be available through our website at www.sug.com.

Today we will be discussing our second-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 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 variance 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 Eric Herschmann. Eric?

Good morning. George Lindemann is traveling today and is unable to join us morning. If there are any questions for George, he will be available early next week to discuss them.

I'm pleased to report adjusted second quarter 2009 earnings of $0.35 per share. This amount includes adjustments for mark-to-market accounting treatment on the processing spread hedges in our Gathering and Processing segment. I am also happy at this point to reaffirm our adjusted earnings guidance for 2009 in the range of $1.75 to $1.90 per share.

Rick Marshall will discuss the numbers in greater detail in a few minutes. Overall, we are pleased with the performance of our business segments during this quarter and the year-to-date period. However, results demonstrate the stability of our predominantly regulated business units. We will continue to grow those stable assets and cash flows as we place our Trunkline LNG Infrastructure Enhancement Project into service. Rob Bond will further discuss the status of the project shortly.

As you have likely read in our press release this morning, we successfully added hedges to our portfolio for both 2009 and 2010. At this point we're approximately 80% hedged on our projected 2009 equity volumes through the end of this year. We also hedged a significant portion of our natural gas exposure for 2010. Roger Farrell will provide you with greater details on our hedging program. When we finish our prepared remarks, we will address your questions.

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 the 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 earnings.

For the quarter ended June 30, 2009, Southern Union had adjusted EBIT of $116 million compared with adjusted EBIT of $134 million in the prior year. The decrease was 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 second quarter adjusted net earnings were $44 million or $0.35 per share. This compares to adjusted net earnings of $53 million or $0.43 per share in 2008. Reported earnings for the quarter were $31 million or $0.25 per share compared with $37 million or $0.30 per share last year.

As Eric mentioned earlier, net earnings and EPS include adjustments for the mark-to-market accounting treatment on our economic hedges. The adjustments for mark-to-market accounting include two components. 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 second quarter is equivalent to $0.07 per share. As you will recall, we removed the non-cash gain out of adjusted earnings last year, since it pertained to our 2009 hedges.

The second component is the revaluation of our 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 $0.03 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 EBIT of $98 million for the quarter compared with EBIT of $99 million in the prior year. The decrease of $1 million was largely attributable to higher depreciation expense at Panhandle Energy. Panhandle's operating revenue increased by $5 million during the quarter, largely due to higher average rates realized on Panhandle and contributions from smaller expansion projects, partially offset by reduced transportation volumes on the Sea Robin Pipeline following Hurricane Ike. Operating expenses increased to $2 million compared to the prior year, largely due to a $2 million fuel recovery credit in 2008.

Depreciation expense increased $3 million year-over-year due to a $216 million increase in property, plant and equipment placed in service after June 30, 2008. Our Gathering and Processing segment generated $19 million in adjusted EBIT for the quarter compared with adjusted EBIT of $34 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 ongoing cost-cutting measures being applied throughout the Company.

Our Distribution business generated a loss before interest and taxes of $300,000 for the quarter compared with EBIT of $1 million in the prior year. The decrease was largely due to an increase in property taxes. As a result of recent legislation, MGE's stored gas in Kansas is now subject to property taxation. We are seeking recovery of this new tax in our ongoing rate proceedings in Missouri.

During the quarter we invested approximately $85 million into our operations. Growth capital accounted for $37 million, while maintenance capital was $48 million. From a segment standpoint, our Transportation and Storage segment invested $53 million, $24 million for growth and $29 million for maintenance. Our Gathering and Processing segment invested $6 million, $2 million for growth and $4 million for maintenance. Our Distribution segment invested $16 million, $1 million for growth and $15 million for maintenance. Finally, our Corporate and Other segment invested $10 million of growth capital.

On August 5 the Company replaced its maturing $150 million term loan facility at Southern Union with a new two-year $150 million term loan facility. As of August 5, the Company had $420 million in committed credit facilities with $110 million outstanding.

I will 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 business continued to perform well during the second quarter of 2009. As Rick described, our results were stable compared to last year. We were able to grow our top line through higher realized rates and small growth projects sufficient to offset the increase in depreciation due to our increased PP&E and the lingering effects of Hurricane Ike on our Sea Robin system. We are several weeks away from placing our Trunkline LNG Infrastructure Enhancement Project into service. The project, which is fully subscribed by our customer, BG LNG Services for 20 years, is expected to cost $430 million and generate EBITDA in the range of $67 million to $72 million. We have completed the construction phase and have sought regulatory approval to place the facilities into service. We are well along in the commissioning process and are hopeful to have the project in service later this month.

Our other major capital initiative is the Florida Gas Transmission Phase VIII project. We have a 50% equity interest in 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 per day of incremental delivery capacity into Florida through the addition of 500 miles of pipe and over 200,000 horsepower of compression. We expect to receive our FERC certificate this fall, which puts us on target to meet an in-service date, spring 2011.

We have 74% of the 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 up 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 $290 million to $310 million when fully contracted. We remain optimistic that we will have the remaining capacity contracted prior to the pipe going in service.

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

Thank you, Rob, and good morning, everyone. For the second quarter of 2009 we continued to average just over 40,000 MMBTU per day of high-value equity NGL volumes. Our equity natural gas volumes also remained consistent at nearly 8000 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 equity natural gas volumes to range from 2500 to 7500 MMBTU per day.

In spite of the significant reduction in rig count seen across the country, we have been successful in connecting new gas supplies to our system and in maintaining processing plant throughput. We continue to see opportunities in our north system to attach new supplies of sour but NGL-rich gas from a number of active oil-related plays.

The expanded training capability of our Jal 3 facility, including an acid gas injection well, has placed us in an excellent position to compete for those volumes. We're becoming more optimistic that we will be able to maintain and possibly grow plant throughput and equity volumes.

As Eric mentioned earlier, we added several more hedges to our portfolio for 2009 and 2010. For the second half of 2009 we are now hedged on 35,000 MMBTU per day of equity NGLs through a combination of processing spread and natural gas swaps at an average realized price of $14.27 per MMBTU. This represents over 80% of our equity NGL volumes.

We were also hedged on an additional 5000 MMBTU per day of natural gas to the end of this year at $3.90 per MMBTU. We were pleased that we were able to mitigate some of our earnings volatility at favorable prices.

For 2010 we have entered into swaps on 25,000 MMBTU per day of natural gas at $5.42 per MMBTU. We continue to monitor the 2010 market and will look to add additional hedges as opportunities present themselves.

As you will see in our 10-Q, we experienced a fire at our Keystone plant on July 17, and were down for approximately 2 weeks. We are currently operating at about 75% of capacity. Our preliminary estimates of the financial impact to the Company's third-quarter results included reduction in gross margin of $4 million to $5 million, charges of $2.5 million to $4 million for the abandonment and writeoff of damaged property and capital replacement expenditures of approximately $12 million net of insurance proceeds.

With respect to the commodities markets, we saw some significant improvement in NGL prices in the latter part of the second quarter. Crude oil strength relative to NGLs appears to be making NGLs a favored petrochemical feedstock. Natural gas, on the other hand, appears to be under significant pressure with records storage levels and reduced demand. Reduced rig count and lower prices will eventually bring supply and demand into balance, most likely in 2010.

I would like to turn the call back over to Eric. Eric?

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

(Operator instructions) Carl Kirst, BMO Capital.

Good morning, everybody, and nice quarter. My question is really more on 2010. And I apologize, Roger, if you mentioned this. The hedging for natural gas next year, given the amount that was hedged -- does that potentially portend any shift in the NGL natural gas mix you anticipate for next year as far as your equity molecules?

Carl, thanks for the question. The answer is no, it doesn't portend any shift. As you know, we hedge our NGLs through a combination of frac spread swaps and natural gas swaps. So we took the opportunity based upon where we thought values were headed to lock in the natural gas piece. The frac spreads we thought were undervalued, so we just took the natural gas piece of the NGL equity component off the table.

So this is just basically the base of the NGLs. That's -- I understand; I just wanted to make sure I wasn't reading too much into that.

And then, perhaps as a follow-on to the extent that we now have probably [Cal 10] closer to $6. We've had a little bit of rally in oil. Do you see any more layering in of hedges in the third quarter, or do you expect it to perhaps wait more for year end, getting either trenchcoat rally or perhaps economy helping liquids?

Well, you quoted $6, Carl. Is that Nymex?

Yes. So you are talking net to --

Net to Permian/WAHA. So we are seeing Permian and WAHA right around the same levels that we hedged at previously, and that's in that $5.45 range.

And the only thing I'll add is that we do have some equity volumes, as well, that relate to natural gas. So arguably, a portion of that $25,000 per day that we put on is covering the nat gas equity volumes that we do have.

(Operator instructions) Lasan Johong, RBC Capital Markets.

First of all, you briefly mentioned that rig counts coming down should rebalance the natural gas markets. And we don't disagree, but kind of wondering what impact that is having now, in the third quarter, so far, and how far you think that impact will go into this year and next year.

We continue to see very good opportunities, particularly in our North system. And despite the fact that we have seen a significant reduction in rig count in our operating area, we continue to believe, based upon the producers' drilling activity and the success that we've seen heretofore, that our volumes are staying flat, at least, and we also believe there's a good opportunity to grow volumes in the near-term.

So I guess the short answer is yes, rig counts are down. But for us, we think that it's just not going to have the impact, a proportional impact.

What about this full storage situation? There's a little over [3.1] TCF in storage, but getting pretty close to what people had historically viewed as full storage, [3.2]. Obviously, we've built storage since then, but there's a lot of discussion around line pressures building up and having a forced shut-in of gas wells. And I'm wondering if that will have an impact or if you have a minimum threshold payment that producers have to make.

I can't speak to what the producers might have, but as far as the storage situation that's one of the reasons why we elected to put hedges on for the balance of 2009 and into 2010, just because we believe that natural gas will be under severe pressure, maybe not today, but it won't be too long.

As far as high pressures in the pipeline, obviously, the pipelines have very strict rules about how they operate. And if there's not markets, obviously people will have to shut in. But we feel good about our situation as [SGS] just because a lot of our production is associated with oil. And oil may be the most valuable commodity that the producers are getting. The gas that we're getting is more of a byproduct from the production of oil, and we think that we have as a very good opportunity, that the gas in our system will continue flowing even during difficult times.

Understood, one last question. On Trunkline LNG, the throughputs have been extremely low, like averaging 12 million BTUs a day or so. What's driving that? Do you know?

Just -- BG is the one who nominates what they want to delivered into and out of Trunkline LNG. They've had very few cargoes for the first half of 2009, and what inventory they do have they have elected not to send out.

So they are storing gas on site, or storing LNG on site?

There is LNG in the tanks; that's correct.

Okay, great, thank you very much.

The only additional comment I would make is that -- and I think we've said this on a number of calls. But we are not really impacted by throughput through the terminal. We basically get ours through demand charges, and BG utilizes the terminal in whatever fashion they see fit.

I was wondering if there was a technical difficulty.

No, no, no, not at all.

Ross Payne, Wells Fargo.

Nice quarter, guys. I just got a question, a sideline question, to some extent. What are your thoughts on FPL's new pipeline and why they are building it, vis-a-vis somebody else like yourself?

Well, I can't speak to what their particular motives are. We obviously believe that we can provide that service and meet that power demand as well and have protested that line being built in the PSC.

And where does that hook into your -- does it offload in northern Florida off you guys, or where does it start and what is their source of gas, I guess?

Yes, it will connect to us at our station -- near our station 16, up in the northern part of the state of Florida.

All right. And, did this impact at all your thoughts on your expansion program and Phase VIII, I guess?

No. This line, even if it is ultimately approved by the PSC, would not come online until several years after Phase VIII is in service. And so we don't believe that it will impact Phase VIII.

Jonathan Lefebvre, Wells Fargo.

Just a quick question on Panhandle. I was wondering if you were seeing any opportunities, given the recent discoveries in the Granite Wash, either for expansion or additional contracting. Can you just remind us what the average term life is on that pipe?

Yes. For those folks who don't know, the Granite Wash is a play in the Texas Panhandle and Oklahoma Panhandle. We do have pipeline assets that run through the area. It has been active in leasing, and there have been some successful wells drilled there. However, I don't think we've seen a proliferation yet of drilling activity in that prospect. We're obviously hopeful that it does mature, and we will likely be a good source of transportation capacity out of that area.

I'm sorry; what was the second question?

Just in terms of the contract life.

Oh, contract life? I think we are showing almost 6 years on Panhandle. We have had a number of recent contract renewals on Panhandle that have seen terms extend out 15, 18, 20 years. So average life is often skewed by shorter-term, field zone type transportation. But I think our long-haul capacity has seen a significant increase in duration.

So you haven't been impacted essentially by [Rex] displacing any of the contracts on that?

No, not at all.

This concludes the question and answer session of this conference. I will now turn the presentation back over to Mr. Eric Herschmann, President, for your closing remarks. Please proceed.

Thank you again for participating in today's call, and we will speak with you all next quarter. Thank you.

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