Energy Transfer LP (ET) 2010 Q2 法說會逐字稿

Good day, Lange, welcome to the second quarter Southern Union Company earnings conference call. My name is Chris and I will be your operator for today. All participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would like to turn our conference over to our host for today, Mr. Jack Walsh, Vice President of Investor Relations. Please proceed.

Thank you, Chris, and welcome to Southern Union second 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 passcode 71830228. A replay of the webcast will be available through our website at www.sug.com.

Today we will be discussing our second quarter 2010 results significant events and outlook. This morning we issued a press released announcing our results, which is available on our website. 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 this morning contains reconciliations of those non-GAAP measures. We will be happy to address your questions. If you have further questions, 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 guaranteed as a future performance and involve risk.

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 by the Securities Act of 1933 and Securities Exchange Act of 1934. I would also refer you to the cautionary statement regarding forward-looking information in our earnings release.

At this point I would like to turn the call over to Mr. George Lindemann. George?

Good morning. I am pleased to report adjusted second quarter earnings of $53 million or $0.42 cents per share which represents an increase of 20% compared to last year. Our improved performance was largely driven by our two regulated business segments. Our transportation and storage segments benefited from Trunkline LNG infrastructure enhancement projects being placed in service during March of this year. At our distribution segment, increased rates and improved rate design served to further stabilize our earnings and cash flow.

We continue to see significant interest in production area surrounding our midstream assets. As producers continue to shift capital investment dollars and drilling rigs to areas with higher BTU gas, we believe we will be presented with opportunities to organically grow our gathering and processing infrastructure. At this point I am happy to reaffirm our 2010 adjusted earnings guidance of $1.75 to $1.95 per share.

I would now like to turn the call over to Eric Herschmann for comments on the quarter. Eric?

Thank you, George. On the financing front we have several positive accomplishments to discuss.

First we were able to redeem the remaining $115 million of our preferred stock last week. The preferred stock had a coupon rate of 7.55%. Because it was not tax deductible, it had an equivalent debt rate of over 12%. We used availability under our revolving credit facility to redeem those shares. At today's rate, the redemption will be approximately $0.05 accretive earnings per share on an annualized basis.

Next we recently entered into a $250 million three-year credit facility. The facility has a spread of 212.5 basis points over LIBOR. The $250 million facility up-sized and refinanced a $150 million term loan with the spread of 375 basis points scheduled to mature in 2011. The remaining proceeds were used to partially repay our revolving credit facility that has a spread of 275 basis points.

Finally, Florida Gas Transmission recently completed $850 million of senior notes offerings. The offerings consisted of a 10 year $500 million offering at a yield of 5.47% and a five-year $350 million offering at a yield of 4%. Proceeds from the offering are primarily being used for the phase 8 expansion and the repayment of $325 million of 7.625% notes that mature this December. Those notes are scheduled to be redeemed on August 19th.

The offerings complete the external financing required for the phase 8 expansion. The remainder of the funding for the expansion project will come from cash flows generated by FGT, liquidity under revolving credit facilities, and sponsor contributions. FGT is a wholly owned subsidiary of Citrus Corp, a joint venture between affiliates of Southern Union and El Paso. We serve as the operator of FGT. With that, I would now like to turn the call over to Rick Marshall, our CFO to give an overview of our second quarter results. Rick?

Thank you, Eric, and good morning.

For the quarter ended June 30, 2010 adjusted net earnings were $53 million or $0.42 cents per share. This compares to adjusted net earnings of $44 million or $0..35 cents per share in 2009. For the quarter, Southern Union had adjusted EBIT of $128 million compared with adjusted EBIT of $116 million in the prior year. In terms of segment results for the second quarter, transportation and storage, including our investment in Citrus, had EBIT of $111 million for the quarter compared with EBIT of $98 million in the prior year. The increase of $13 million was largely attributable to the Trunkline LNG infrastructure enhancement being placed in March of this year.

Our gathering and processing segment generated $9 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. Our average realized price on NGLs was $10.34 for the second quarter of 2010 and $13.25 for the comparable period in 2009. Our distribution business generated EBIT of $7 million for the quarter compared with a loss of $300,000 last year. Higher average rates and an improved rate design drove the year over year improvement. During the quarter we invested approximately $55 million into our operations. Growth capital accounted for $16 million while maintenance capital was $39 million.

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

Thank you, Rick and good morning.

We were pleased with the second quarter financial and operational performance of the transportation and storage group lead primarily by Trunkline LNG. This is our first full quarter with the infrastructure enhancement projection operation. During the quarter we received 11 cargoes and handled 35 billion cubic feet at Trunkline LNG. From a future growth perspective, Florida Gas Transmission continued to make good progress on the $2.4 billion phase 8 expansion. The phase 8 project is designed to add approximately 820 million cubic feet a day of incremental delivery capacity into Florida through the addition of about 500 miles of pipeline and over 200,000 horsepower of compression. Construction is well underway on the project and we expect it to be placed in service during the spring of 2011.

Seventy-four percent of the expansion capacity is contracted under 25-year agreements. Given our confidence in the long-term viability of the Florida market, we expect we will be able to sell the remaining capacity under long-term agreements. Until we are able to accomplish that, we will sell the available capacity on the interruptible or short-term firm basis. We estimate that the project when fully contracted will generate operating EBITDA of $290 million to $310 million.

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

Thank you, rob and good morning, everyone.

For the second quarter we averaged approximately 54 thousand MMBTU per day of total equity volumes. Of that amount, approximately 37,000 a day was comprised of NGL equity volume and approximately 17,000 MMBTU was natural gas. The weakened month of June, we saw significantly reduced ethane recoveries. NGL equity averaged 39,000 MMBTU per day. During June, plant operating issues resulted in lower ethane recoveries with a corresponding approximate 5,700MMBTU per day reduction in NGL equity offset by offer natural gas equity.

Despite the ethane recovery issues in June, we were still able to meet our financial expectations for the quarter. Based upon our year to date volumes, we expect NGL equity to be in the 35,000 to 40,000 MMBTU per day range, and we expect natural gas equity to be in the 15,000 to 20,000 MMBTU per day range. We were pleased to see a quarter over quarter increase in processible well head volumes from 406,000 MMBTU per day to 436,000 MMBTU per day. This increase was due in part for a connection of new supplies from the Bone Spring shale play which, as we discussed in a previous call, prompted the first quarter restart of our (treater) in the expected late fourth quarter restart of the Halley processing plant. To remind everyone, the Halley plant will be initially capable of processing 60 million cubic feet per day and expandable to 110 million cubic feet per day with a modest capital investment. We believe we will need the additional expansion from Halley to accommodate this NGL good shale play. From a heading standpoint for 2010 we were hedged on 40,000 MMBTU per day of processing spread and 45,000 MMBTU per day of natural gas. When you combine those hedges, the practical result we were hedged on 40,000 MMBTU per day of natural gas liquids at $10.44 and 5,000 MMBTU a day of natural gas at $5.33. For 2011 we have 25,000 MMBTU per day of processing spread and 25,000 MMBTU a day of natural gas hedged at a combined natural gas liquid equivalent price of $11.63.

With that 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). Our first question comes from the line of Carl Kirst from BMO Capital. Please proceed.

Thank you, good morning, everybody. Roger, if I could maybe better understand, what specifically was going on that kind of reduced the efficacy of the volumes in June? And is that -- have those logistics been worked out now? Or when should we think they will be?

A couple questions there. First of all the June specific issues occurred at two of our plants and they both related to compression. And even though our throughput was maintained, our ability to get a deep cut on our ethane was compromised and we left in about 40,000 barrels a day of ethane in the gas stream because we were not able to cool the plant sufficiently. By far the majority of the problems have been resolved and our current operations reflect that.

Okay. And so with the ethane being left in the stream, that's why the gas volumes were so much higher?

That's partially it. We are also seeing -- and we expect to see some higher or more -- a disproportionate increase in natural gas equity relative to NGL equity.

Great. And last question on midstream is, and they mentioned the Halley restart, is that still on track for fourth quarter?

It is on track.

Great, thank you. And then one quick question for Rob or maybe actually two quick questions. First, can you say what your park and loan was for second quarter and in general what you see as your outlook for the rest of the year? And then two, is the heat in Florida -- I mean I think we saw Florida City Gate yesterday touch $12 -- is that having any bearing on the utility's interest in signing up the remainder of phase 8?

On park and loan, I think compared to the previous year we were down $2.5 million, $3 million, I think the market was not nearly as robust as it was last year. So we are -- we still have capacity available and we will continue to watch that market on a daily basis. On phase 8, I think what we said previously, Carl, is we do continue to watch the siting plans that the utilities have. We continue to talk with all the utilities, investor owned utilities in the state of Florida. Clearly capacity has been tight this summer. We expect as we move through the next couple years that we will see some additional generation capacity built in the state of Florida, and we believe that will primarily be natural gas driven. And we certainly will have -- we are well positioned to be able to serve any power plant growth that occurs in the state.

Great, thank you.

Our next question comes from the line of Greg Scheer, (inaudible) Brothers Investments. Please proceed.

Thanks. Roger, a couple questions. Because of the new connections to your G&P business with the new expansion of processing capacity, do you think that you are going to fill up that 60 million a day real quickly, or how do you see that utilization ramping in as you bring on the expansion? And then separately, can you comment about your outlook for ethane pricing?

Okay. Thanks for the questions, Greg. A couple of, I guess, angles on the volume, our first expansion at Halley is 60 million a day, and it's not only Halley that will be -- that will drive the volume. It will also be gathering infrastructure. So what our expectation is is that over the first six months of the year, we expect it to take about that long to fill the plan up if producers continue with the drilling plans that we expect. The second phase takes six months to implement when we give the go ahead. If the Bone Springs play continues with the pace that the producers have stated to us that they want to see drilling take place, then phase 2 will be needed at some point, and that would be I would say at earliest we would start filling that up in the second half of 2011, and it may take to the early part of 2012 to fill it.

As to ethane prices, there are obviously bears and bulls on pricing -- certainly today the margin has been squeezed and our belief is that given the fact that there were a number of steam trackers that were running either off or running at reduced capacity, I think that impacted demand somewhat in the second quarter, and we think demand will come back. Long-term, I think it is primarily going to be driven by certainly the United States economy and probably the world economy. So I really am not an economist so I can't speak to what will happen. We are certainly hopeful that we'll maintain the spread that we have today, and given the low NGL accrued ratio, I think that is certainly a possibility.

Since those ethylene plants in the second quarter came back on-line from extended outages, are you seeing material improvement in pricing and storage levels, and do you have any sense from that consuming market? What we hear from others that are heavily exposed to this is that obviously ethane's the cheapest feed stock relative to products from crude, and that ethylene plants can sell all that they can produce. So until much larger volumes come off shale plays in a couple years, it sounds like there should be a recovery. I don't know if people are just talking their book or if this makes sense.

I think it makes sense. We certainly saw an increase in the storage levels of it. I guess the good news for us is that we're fully hedged for the balance of this year, and I would say probably 50% hedged for 2011. So we're not going to be as affected by the changes as some might be.

Can you remind us what percentage ethane is of your NGL bucket?

I think it is 40 -- about 43%.

Great. I appreciate all the help.

Sure.

Our next question comes from the line of Tim Schneider of Citigroup. Please proceed.

Hey, guys. First question in distribution, how much did the fixed fee go up per customer?

Sorry, what was the question?

The fixed fee per customer given the new rates assigned?

I don't have the detail behind the actual customer charges, you know, the actual fees, the residential fees are somewhere in the say $25, $30 range, but I am not positive on that. What did happen with the new rate design is that the -- in addition to having a fixed fee for our residential customer group, we now have a fixed fee for our small general service group as well.

Got it. And of that rate case that went through, that $16.2 million, how much -- what affect did that have in Q2?

Most of the increase quarter over quarter was the result of the rate increase. So the $16.2 million was the annual increase, but what you have to remember is that we get an extra bump in the second quarter because the rates that were previously charged to the small general service customers were charged on a throughput basis. Where most of your revenue would come in the first and fourth quarter because of some impact by weather. So in the second quarter based on a new rate design, you are actually getting more revenues from that customer group than you would have otherwise received by the old rate design. So we get an extra kicker for the second quarter in the summer months with regard to those customers.

Okay, got it. And real quick on the gathering processing side, how much pipeline capacity do you guys have signed up for to get your volumes down to Bellevue?

We have a certainly -- historically we have a shipper history which our history of delivering entitled us to certain capacity. With the Halley expansion, we would be needing somewhere between 40,000 and 45,000 barrels a day of NGL take away. It is our expectation that we will have that volume covered.

Got it. Thank you.

Our next question comes from the line of Jonathan Lefebvre of Wells Fargo. Please proceed.

Good morning guys. On the midstreams. I just had a question. In Q1 you talked about there being a backlog of wells that had been drilled but not completed. Are you still seeing tightness on the completion and services side for getting these wells on line or have you worked through that backlog yet?

We've worked through a fair amount of that backlog. Wells did come on starting in earnest I would say in May, and accelerating. But we still have not -- still have not been able to connect every one of them. And part of it now is the gathering infrastructure and compression infrastructure has to keep up, and that's -- those are longer lead times. But the shorter answer is we have seen a remarkable increase in volume from the shale play.

Okay, thanks. And just wanted to clarify the 40,000 to 45,000 of take away NGL capacity needed. That's for the expansion of Halley to the 110,000? Or is that when you bring Halley online? I just wanted to clarify.

45,000 would cover phase 1 Halley and part of phase 2 Halley.

Thanks, appreciate it.

Our next question comes from the line of Ella Vuernick of RBC Capital. Please proceed.

Good morning. Most of my questions have been addressed. I was wondering if you could comment a little bit -- you mentioned that you received 11 cargos this quarter at Trunkline LNG. Could you give us some color as to your outlook of LNG imports so far in 3Q and the remainder of this year?

I believe we received one cargo at the first of July, but then it has been remarkably quiet since then. You know, I don't think there is anything scheduled to come in today through August, and then we will see what September, October and beyond holds. But I think obviously pricing is better in Europe, and so most of the cargos that can be will be diverted to the continent.

Okay. And was that 11 that you received last quarter in line with your expectations?

I think that was right on what was expected. I need to remind you that at Trunkline LNG we are a fixed rate variable design. We are not impacted by how many cargos come through. And likewise, the NGL facility we built there, we don't profit more or less from what NGL spreads may be. So we are just a landlord in a different way. So whether or not BG uses the facility or not, we make roughly the same amount of money.

Understood. Thanks very much. I appreciate for the clarification.

That concludes our question and answer session for today. I would now like to turn the call back over to Mr. Lindemann.

Thank you, everyone for attending our meeting. We hope to see you all next quarter and hopefully everything will be just as good as it was this. Thank you, bye.

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