Energy Transfer LP (ET) 2010 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter, 2010 Southern Union Company earnings conference call. My name is Crystal and I'll be your operator for today. (Operator Instructions) I would now like to turn the call over to your host for today, Mr. Jack Walsh, Vice President of Operations Please proceed.

Thank you, operator, and welcome to Southern Union's First Quarter, 2010, earnings call and webcast. Presenting on today's call will be George Lindemann, Chairman and CEO, Eric Herschmann, Vice Chairman, President, and COO, Rick Marshall Senior Vice President and CFO, Rob Bond, Senior Vice President of Pipeline Operations and Roger Farrell Senior Vice President of Midstream Operations. A replay of this call will be available for one week by dialing 888-286-8010 and entering pass code 38812278. A replay of the webcast will be accessible through your website at www.sug.com.

Today we will be discussing our First Quarter 2010 results significant events and out look. This morning we issued a press release announcing our First Quarter results which is available on our website. Following our prepared remarks today, 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 variance explanations for the transportation and storage segment may differ compared to Panhandle Eastern Pipeline 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 risk. The Company undertakes no obligation to update publicly any forward-looking statements such as the results of new information, future events or otherwise.

Such statements are intended to be covered by the Safe Harbor Provisions 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. George.

Thank you, and good morning. I am pleased to report adjusted First Quarter earnings of $55 million or $0.44 per share. These amounts include certain adjustments that were identified in our press release. I am also happy to reaffirm our 2010 adjusted earnings guidance in the range of $1.75 to $1.95 per share. On March 11th, we placed our Trunkline LNG infrastructure enhancement project into service. Since IT was placed in service, we already received four cargoes at the terminal and have processed over nine million cubic feet of gas.

This project cost approximately $440 million and is expected to generate an EBITDA in the range of $67 million to $72 million. In current with this project being placed in service, we are happy to report we have extended all of the contracts on the facility with BG LNG services through March 2030. As we indicated in our last call, our annual guidance range contemplated a delay in placing the project in service. The two and a half month delayed that we experienced negatively impacted earnings in the First Quarter by approximately $0.04 per share. I would now like to turn the call over to Eric Herschmann for comments on the First Quarter.

Thank you, George. At Southern Union Gas Services, our gathering and processing business, our system and equity volumes fell short of expectations for the First Quarter largely due to well freeze offs and delayed producer well completions. Notwithstanding the volume shortfall in the First Quarter, we continue to remain excited about the growth potential that exists on and near our systems in west Texas and southeast New Mexico. As I'm sure you have heard on the earnings calls of many of the producers located in our region, they continue to increase their drilling rigs in our area as a target oil and NGL rich gas informations like Avalon, Bone Springs, Delaware and Wolfberry.

There was currently a backlog of wells dedicated to our system that have already been drilled and are awaiting completion. We expect that as field service crews become available to frack those wells, we will see an increase in system values. Roger Farrell will go into greater detail on our gathering and processing business in a minute. 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, adjusted EBIT and adjusted EBITDA, all non-GAAP measures. In accordance with Reg G, our press release issued this morning contains reconciliations of those non-GAAP measures. For the quarter ended March 31st, 2010, adjusted net earnings were $55 million or $0.44 per share. This compares to adjusted net earnings of $70 million or $0.56 per share in 2009. For the quarter, Southern Union had adjusted EBIT of $133 million compared to adjusted EBIT of $155 million in the prior year.

In terms of segment results for the First Quarter, transportation and storage, including our investment in Citrus had EBIT of $102 million for the quarter compared with adjusted EBIT of $109 million in the prior year. The decrease of $7 million was largely attributable to lower interruptible parking revenues at Panhandle as a result of market conditions. Our gathering and processing segment generated $1 million in adjusted EBIT for the quarter compared with $19 million in the prior year. The decrease was largely driven by lower realized natural gas and natural gas liquids prices and lower system volumes as a result of well freeze offs that occurred at the beginning of the year.

Our average hedged price on NGL's was $10.44 for the First Quarter, 2010, and $13.13 for the comparable period in 2009. Our distribution business generated EBIT of $29 million for the quarter consistent with the prior year. During the quarter, we invested approximately $65 million into our operations. Growth capital accounted for $39 million while maintenance capital was $26 million. I'll now turn the call over to Rob Bond who will discuss our transportation and storage segment.

Thank you, Rick, and good morning. As George mentioned earlier, we are very pleased to have placed the infrastructure enhancement project and Trunkline LNG into service this past March. We're confident this project will create value for both our shareholders and our customer over the next two decades and beyond. Continuing on the growth front, our main focus is the Florida Gas Transmission Phase VIII project. Southern Union has a 50% equity interest in and serves as the operator as Florida Gas transmission through its investment in Citrus Corp.

To remind you, Phase VIII project is designed to add approximately 820 million cubic -- MMbtu per day of incremental delivery capacity into Florida through the addition of 500 miles of pipe and over 200,000 horse power of compression. We have recently begun the construction on the project and expect it to be placed in service in the spring of 2011. We continue to have 74% of the expansion capacity contracted under 25-year agreements. We previously had one chipper with an election to increase its capacity. That chipper did not exercise its election.

Given our confidence in the long-term viability of the Florida market, we expect that we will be able to ultimately sell the remaining capacity under long-term agreements. Until we are able to accomplish that, we'll sell the available capacity on an interruptible or short-term firm basis. We estimate the project will cost approximately $2.4 billion and when fully contracted generate operating EBITDA of $290 million to $310 million. With that, I'll turn the call over to Roger. Roger.

Thank you, Rob, and good morning, everyone. For the First Quarter, we averaged approximately 49,000 MMbtu per day total equity volumes Of that amount, approximately 36,000 a day was comprised of high value NGL equity volumes and approximately 13,000 MMbtu per day was natural gas. As Eric mentioned earlier, NGL volumes during the quarter were well below expectations, primarily due to the impact of production freeze offs in the service area and also due to new well completions coming in slower than we originally anticipated. Our producers experienced delays in securing well completion for fracking services due to a shortage of resources within the Permian basin.

As a result, supply attachments were below expectations for the quarter, although we currently have a backlog of oils dedicated to our system that have already been drilled and are awaiting completion. We continue to remain optimistic that we will be able to grow plant through put and equity volumes during 2010 because we see significant NGL direct drilling activity occurring along or in close proximity to our systems and we have secured dedications from a number of producers. As we discussed on our last call, we restarted our Mi Vida treater this past February and expect to restart our Halley processing facility later this year to handle the expected increase in system volumes.

To remind everyone, the Halley plant will be able to initially process 60 million cubic feet a day of this new NGL-rich production. With a relatively nominal additional capital investment, Halley will be expandable to 110 million cubic feet a day to match the capacity of the Mi Vida treater. From a hedging standpoint for 2010, we are hedged on 40,000 MMbtu per day of equity NGL through a combination of processing spread and natural gas swaps, an average realized price of $10.44 per million BTU. We're also hedged on additional 5,000 MMbtu per day of natural gas at $5.33. We expect average NGL equity volumes for 2010 to range from 40,000 to 45,000 MMbtu per day and expect average natural gas equity volumes for 2010 to range 7,000 to 15,000 MMbtu per day. For 2011, we have 25,000 MMbtu per day of NGL hedged at $11.63.

We continue to actively monitor the forward markets and will consider adding hedges to our portfolio as opportunities present themselves. Actual equity volumes may be influenced by the drilling activities of our producers, the performance of our systems and the structure and terms of contract with our producers. We will continue to update you quarterly as more information becomes available. The 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) And your first question comes from the line of Carl Kirst with BMO Capital Markets. Please proceed.

Thank you. Good morning, everybody. So some challenges in the First Quarter. Can we maybe look at where volumes are running today sort of toast the well freeze off so Roger, in particular, the NGL volumes.

Are we back in the 40 million a day range and, Rob, could you also perhaps address the current state of the interruptible volumes on Pepple and perhaps we can quantify what the parking and loan impact was for the Second Quarter '09 as we're looking to make our comparisons going forward. Thank you.

Carl, this is Roger. Thank you. The answer is NGL output from our plants have increased significantly since the First Quarter. And even -- I don't have April numbers yet, but I would expect the equity volumes to approach the 40,000 a day.

To approach. But not yet be in the range?

I fully expect us to get there.

Okay.

Rob, on the interruptables as far as any color you might have.

Quite frankly we had a really big First Quarter in 2009 on the park and loan business comparable in 2009 for the Second Quarter it was about $7 million. So we fully expect that we'll be certainly more in line with the Second Quarter of 2010 compared to the Second Quarter of 2009. Quite frankly, there were opportunities that we would have taken advantage of in the First Quarter of 2010 that we chose not to because we believe that there is higher valued opportunities in the subsequent months.

Yes. I caught that in the press release as far as how you're limited decision. Can you actually explain that a little more so we better understand what those opportunities are? I mean, is this around -- well, what specifically is that around?

I mean, obviously you can only use that capacity once. And given the structure of the forward curve, it just made more sense to us to hold that capacity and seek higher value opportunities in subsequent months.

Okay. So this isn't daily interruptible then? You're looking at more selling short-term for a specific span?

Correct.

Okay. All right. Thank you.

You bet.

And your next question comes from the line of Jonathan Lefebvre with Wells Fargo. Please proceed.

Good morning, guys. Just following up on the question about the interruptible. Can you remind us how much you had baked into your guidance for the year for interruptible?

Yes, we haven't guided around interruptible services.

So there's nothing in your numbers for the year based on that?

Well, there is some number baked into what our expectation is for the year, but I don't think we've got it around that number.

Got you And then just in terms of the Halley restart, can you give us a sense of what type of impact that might have if you continue to experience these delays and if it doesn't get started in the Fourth Quarter you just due to the well completion constraints?

I'll talk about them separately. The delay in the well completions, although they haven't been solved, what we do know is that we have a number of producers that have scheduled frack dates on wells and we have a fairly lengthy list of wells that are completed or drilling or to be drilled and with scheduled frack dates they will be fracked and we are laying line as we speak to some of the wells.

So even though I think we will continue to see some issues with well service companies, at least for our producers we do see them being successful and getting the services. As far as Halley goes, right now we have some excess capacity in existing plants and we will fill that up first. And we're fairly confident that Halley will be ready in the Fourth Quarter.

Now, you have to remember, Halley was already an existing plant. We are just going in and refurbishing and updating control systems and the like, so it's not like we have a massive construction project. There's a lot going on. But it's not like a new facility.

Okay. But just if you don't fill it right away and there is no reason to start it immediately, what type of impact would that have if it gets delayed to the First Quarter of 2011?

Since we have known all along that it won't be started until the Fourth Quarter, we do not need Halley to be running this year or for where our expectations are.

Okay. And then just one more. In terms of the preferred , any thoughts around that? Interest rates remain low. Has your thinking changed around keeping that out

We haven't made any firm decision as to whether or not we're going to call the preferred securities at this point in time. As you know, they are callable at par. We certainly have to take into consideration the R rating and how the rating agency views the preferred securities and we continue to evaluate that.

Okay. Thanks a lot. I appreciate it.

Your next question comes from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Thank you. I'm a little confused. If you're projecting 40 ,000 IMBTUs per day for NGL for hedging for this year and you did something less than that in the First Quarter, don't you have a hedging deficit?

Yes. We were overhedged in the First Quarter.

What was the impact of that overhedge?

About $1 million.

Oh, so it wasn't that bad at all?

No.

Oh, okay. Second question is volume wise how much do you have to make up to hit your 40,000 MNPGs per day.

The 40,000 a day is -- there are many, many factors that go into it other than just volume. It's recovery efficiencies. It's the quality of the gas. It's a host of factors .

Does that mean that the deficit you suffer in the First Quarter volume wise wasn't that big?

Clearly we had a volume -- our process volumes were not off by about 2 or 3%, I think, from a quarter of a year earlier. The issue is the liquids that were recovered during the quarter were lighter. There was more ethane and more consate.

I see. I see. Okay. You said there was some delay in hooking up lines and completion of wells. Is that anything to do with increases in service costs recently or do you think that service cost will have an impact going forward?

Not being a producer, I don't know how the service costs factor into it, but I can assure you that producers who have drilled wells and are waiting on completions they need to get completed or they have no revenue stream.

Okay. Last question is there anything wrong with the Trunkline LNG processing plant?

No.

The new one that was installed?

No.

Okay. That's it for me. Thank you.

Your next question comes from the line of Craig Shere with Tuohy Brothers Investments. Please proceed.

Hi. Following up on a couple questions. One on Lasan's questioning here . It sounds like the mix of NGL may have had a greater impact than the volumes in the quarter, and it's kind of logical that if we had some freeze offs and some delays on finishing wells that volumes would come back later. But I'm not sure I understand how the NGL mix will change later as a result of those things

When it gets very cold, the volume of consate that gets to our system decreases. And the reason it decreases is because in cold weather the consate falls out prior to being received in our system and it's a function of what we call the dew point and the dew point is a temperature at which a particular component in the stream, the case the consate and when it gets cold enough the temperature falls below the dew point, the liquid fall out and reduce the separators and do not come to our system.

I got it So the weather is impacting both volumes and the mix and you can expect both to return given normal seasonal and the absence of winter weather?

We would expect recoveries to return to normal levels.

Okay. Great. And on FGT's Phase VIII with the shipper election and exercise and we're still at 74% contracted, you all were pretty confident on the last call about getting this contracted up eventually. Can you speak to your confidence level now and any expectation about timing relative to the conclusion of that construction project and can you also speak to the timing and sourcing of the $150 million to $250 million of incremental equity investment that you plan to inject?

Okay. Well, I'll let Rick speak to the financing side of it. But as it relates to the capacity, clearly we have a presence state-wide. We're connected to all the major electric generation facilities in the state of Florida. We have examined the site plans that were published for all of the utilities on April 1st. And while we've seen a delay in generating capacity growth or seen that maybe pushed out a year or two, I think we're still very confident that the state of Florida is going to return.

It's going to be -- electro generation is going to be primarily driven by gas and we're going to be there and available to serve them. We noted that FDL has announced they're going to repower the Cape Canaveral and Riviera Beach in 2013, I believe. So clearly on a long-term basis we're still bullish Phase VIII. We look at it in a much -- for a very over the long life of the project. So I think our confidence is still fairly high. We obviously would like to get it done sooner rather than later but like the position we have. Rick, do you want to address the financing side of it?

Sure. As far as the sourcing of the equity investments as you may know from our 10-Q that the total amount we're expecting to contribute as a sponsor , this is our contribution, El Paso would make the similar contribution, between a range of $150 million to $250 million as far as our ability to source those dollars, they will come from borrowings under our resolving credit facility.

As you may recall, we increased the capacity of our revolving credit facility from $400 million to $500 million earlier this year. But we have the capital available to make that contribution. With regard to the timing, the expectation is we'll start to make contributions throughout this year, but probably starting in the Fourth Quarter of this year. Maybe a little earlier depending on how we finance the remaining portion of the construction expenditures for

And then once all that is complete on FGT and you start getting dividends again, would you then just pay down the revolver with some of those distributions?

Sure. We would distribute the monies to Southern Union Co., one of our alternatives would be to pay down borrowings under the revolver or a term loan or wherever else we deem it to be appropriate.

Great. I appreciate it. Thank you.

Your next question comes from the line of Rebecca Followill with Tudor, Pickering and Holt.

Good morning, Going back the park and loan transaction on Panhandle Eastern. I'm still a little bit confused. You said the decrease was primarily due to market conditions for parking transactions. Does that just mean relative to a year ago?

Yes. Exactly.

And the management decision to limit the activity relates to you think that things are going to be -- you're going to get better pricing later in the year?

Yes. I mean, there were opportunities that we could have elected to park gas in the First Quarter that we decided not to do in expectation of a higher value transaction in subsequent months.

Is there something that you see on the horizon or I guess what makes you think that that is going to be the case?

We see storage continuing to build.

Okay.

At a rate greater than even last year and certainly much greater than the five-year average and believe that's going to put a lot of pressure on natural gas prices in the near term.

Okay.

And there will be some significant parking opportunities later this year.

Okay. And then, Rob, can you help us on the plan for the FTG phase expansion. How many spreads? Where are you in the process so we can kind of track this.

Yes. There are -- remember that we divided the pipeline construction up into three major contractors. Sheehan, Price Gregory and US Pipeline. Each of those guys has divided their work up into several different what we call loops. All three of the main line contractors are under way. And then progressive is also doing some of the work on the laterals and they, too, have begun construction on the lateral.

In fact, we expect the manatee lateral to be completed and placed into service mid summer. On the compression side, there are nine compressor stations, eight of which need -- are existing stations that will need modification and one of which is it a new station that is being built on the Greenville loop which goes across just north of Lake Okeechobee. That 's been divided up amongst three contractors as well and work has commenced on all of compressor stations.

Thanks. That's very helpful. And, finally on the mid stream side, how many wells do you anticipate attaching to your system this year to try to get a feel if there is delays in completions but you think there are going to catch up during the year, total what do you expect any well connects to be?

I hate to venture to guess on that just because of the fact that the wells we connect range -- have a significant range in deliverability . We have some that come on at 100 MCFD, others come on several (inaudible) a day. Obviously if some of this Avalon play and there are several wells schedule. Many wells scheduled from that particular play. We're seeing rates into the several million cubic feet a day. So it doesn't take a whole lot of those to make an impact. But the number of wells it's hard to

But you don't have visibility from producers who have come to you where you can say that I've got these lined up in the queue?

Yes, we do have visibility.

Okay. Thank you.

And your final question is a follow-up from Carl Kirst with BMO Capital Markets. Please proceed.

Thanks, guys. Just a couple of follow-ups actually on FGT. Rob, as we're looking out on possible interruptible volumes on FGT Florida basis is somewhat of an (inaudible) market from what we found trying to track it, is there a specific place we should be looking at in try to gauge basis differentials that would help us get close to what the tariff would be on FGT.

If there is, I haven't found it. It is very difficult, as you know, to see what the spread across FGT is. It's really just an availability capacity issue, Carl.

Okay.

It's just pure demand driven, I guess is a better way of saying that.

Okay. I appreciate that. And then Rick, I suspect this is in the 10-Q, but if you happen to have this at your fingertips, how much of the current capacity is of the current credit facility is drawn?

We've got about $185 million drawn currently out of the $50 million.

So for most of the First Quarter then, you didn't have a big component of your facility drawn?

That's correct.

Okay. Great. Thanks, guys.

Thank you.

That concludes today's question-and-answer session. I would now like to turn the conference back to George Lindemann for closing comments.

Thank you everyone for attending and hopefully we'll see you all at the end of next quarter's call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.