Energy Transfer LP (ET) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 Southern Union Company earnings conference call. My name is Steve and I will be your operator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's call. (Operator Instructions). As a reminder. This conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Jack Walsh, Vice President of Investor Relations.

Thank you. And welcome to Southern Union's third 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 Chief Financial Officer; 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 576-026-39 a replay of the webcast will also be accessible through our website at www.sug.com.

Today we will be discussing our third quarter 2010 results, significant events and outlook. This morning we issued a press release 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, and non-GAPP measures. In accordance with GregG our press release contains reconciliations of those non-GAAP measures. 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 various explanations for the transportation and storage segment may differ, compared to Panhandle Eastern Pipeline companies and compared to 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 our cautionary statements regarding forward looking information in our earnings release this morning. I would now like to turn the call over to George Lindemann. George?

Good morning. I am pleased to report adjusted third quarter earnings of $50 million or $0.40 per share, which represents an increase of 18% compared to last year. Each one of our business segments showed improved performance over the prior year. We continue to see a high-level of interest and activity in the Bone Springs and Avalon shale play adjacent to our gathering system. As you are aware, we are currently in the process of restarting our Halley processing plant. Phase I of the Halley expansion will increase our production capacity by 60 million cubic feet per day. Phase I is on track to be in service by the end of the year. We are pleased to announce today that we are also moving forward with the Phase 2 expansion of the Halley processing plant. Phase II will another 50 million cubic feet of processing capacity to our and is expected to be available in the second half of 2011. The Phase II expansion is expected to cost less than $10 million to construct.

Beyond the Halley restart, we believe there will be additional opportunities to invest in infrastructure throughout the value chain in the Permian Basin. We anticipate the area will need additional gathering, processing, and treating capacity, as well as addition NGL line to move the product to mount Bellevue. We are exploring opportunities to help provide solutions to the infrastructure constraints found throughout the basin. I would now like to turn the call over to Eric Herschmann for comments on the quarter. Eric?

Thank you, George. Our transportation and storage segment continues to benefit from the Truckline LNG infrastructure enhancement project being placed in service in March of this year. The contributions from IAP have more than offset the weaker markets for parking, and short-term firm and interruptible transportation services that are being seen throughout our industry. At our gathering and processing segment, growth in system and process volumes, as well as lower operating expenses helped drive our year-over-year improvement. As most of you have seen by now, last week we announced that we had signed an agreement with DCP Midstream to convert a portion of Truckline Gas Company's pipeline in south Texas in to a rich gas line. DCP will use the line to supply its processing plants with NGL-rich volumes from the Eagle Ford shale.

The south Texas project will allow us to better utilize our existing pipeline system as well as position us to capture future growth in the area. We expect the project to add to the stability of our earnings and cash flow starting next year. We continue to look for similar organic growth opportunities like this across our system as plays like the Haynesville and Fayetteville Shale and the Granite Wash continue to increase production. At this point I'm happy to reaffirm our 2010 earning's guidance range of $1.75 to $1.95 per share. With that I would now like to turn the call over to Rick Marshall, our CFO, to give an overview of our third quarter results. Rick?

Thank you, Eric, and good morning, for the quarter ended September 30, 2010 adjusted net earnings were $50 million or $0.40 per share. This compares to adjusted net earnings of $43 million or $0.34 per share in 2009. For the quarter Southern Union had adjusted EBIT of $131 million, compared to adjusted EBIT of $114 million in the prior year. In terms of segment results for the third quarter, transportation and storage, including our invest in Citrus, had EBIT of $112 million for the quarter, compared with adjusted EBIT of $97 million in the prior year. The increase of $15 million was largely attributable to equity, AFEDC on the Phase 8 project, at the Florida gas transmission and the Truckline LNG infrastructure enhancement project being placed in service in March of this year.

Our gathering and processing segment generated $10 million in adjusted EBIT for the quarter compare with $8 million in the prior yearThe increase was largely driven by higher system volumes and lower operating expenses. Our distribution business generated EBIT of $6 million for the quarter, compared with $5 million last year. Higher average rates and an improved rate design primarily drove the year-over-year improvement. During the quarter, we invested approximately $83 million into our operations. Growth capital accounted for $16 million, while maintenance capital was $67 million. From a liquidity perspective, we have less than $1 million of term debt maturing over the next year.

As of October 29th, we had $570 million of committed credit facilities with only $160 million drawn. We are pleased to say all of the external financing for the Phase 8 has been completed. Each of the sponsors will begin making contributions in the fourth quarter of this year. We expect each sponsor's contribution to be up to $250 million. From Southern Union's standpoint, our contribution will be made using cash on hand or proceeds from our revolving credit facility. Once the Phase 8 project goes in service next year, we expect that we will resume taking distributions from Citrus Corp. 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 Eric mentioned we are pleased to have signed an agreement with DCP last week to convert a portion of Truckline gas companies south Texas system into a rich gas pipeline system. As part of the project, we'll be isolating this section of the system from the rest of Truckline. We'll -- also be making modifications to the system to allow it to be bidirectional.

Last week, we filed the project certification application and proposed tariff modifications. Once we obtain the necessary approvals for the project, we will enter in to a 15-year transportation agreement with DCP. The south Texas project is expected to be in service during the third quarter of 2011, and generate EBITDA of between $7 million and $9 million on an annual basis. Florida Gas Transmission, continues to make good progress on its $2.4 billion Phase 8 expansion. Construction is well underway, and we expect it to be placed in service during the spring of 2011. When fully contracted, we estimate the project will generate EBITDA of between $290 million and $310 million. With that, I'll now turn the call over to Roger. Roger?

Thank you, Rob, and good morning. For the third quarter we average approximately 57,000 MMBTU per day of total equity volumes of that amount approximately 36,000 in MMBTU per day was comprised of NGL equity, and approximately 21,000 MMBTU a day was natural gas. Based upon our year to date volumes we continue to expect full-year NGL equivalent 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 an increase in process able well head volumes from 436,000 MMBTU per day in the second quarter, to 444,000 a day in the third. Much of this increase has come from the connection of new supplies from the Bone Springs, and Avalon Shale plays. We continue to be focused on keeping our processing plants full with the highest margin volumes possible. In that regard, we are allowing certain contracts to expire, and are replacing those volumes with production under higher margin percentage proceeds contracts.

From a heading standpoint for 2011, we have 25,000 MMBTU per day of processing spread, and 25,000 MMBTU per day of natural gas hedged at a combined natural gas liquids equivalent price of $11.63 per million BTU. With that 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 back up to questions.

Certainly, sir. (Operator Instructions). And your first question comes from the line of Carl Kirst with BMO Capital.

Thanks, good morning, everybody. A few questions, if I could, maybe Rob, a couple for you. Can you tell us or give us an indication of what park and loan EBIT was in fact for the third quarter? And maybe more importantly, since first and fourth quarter tends to be the bigger quarters, as we sit here in early November, fairly flat curve, how are your thoughts shaping up for park and loan, you know, for this winter?

In the third quarter alone, I believe we did right at $5 million, just slightly less I believe -- or right at $5 million. You know, and the curve has looked a little better, Carl, there's a lot that we do both in the cash market as well as in the forward markets. So obviously cash has been fairly weak relative to the (inaudible) so that has created some opportunities for us. I think we're on track to do a fair amount and get us, I think, kind of back to what we are originally expected for the year.

Okay. No, I appreciate that, and one other question, just -- I want to make sure that the DCP, the $79 million dollars of EBITDA, should we be thinking of that as an uplift or should we be thinking of that in the broader context of -- in a sense, firming up the long-term returns on capital on Trunkline? You know, basically help the take-away-basis risk, et cetera, et cetera? How should I be vow viewing that DCP project?

I think relative to the south end of the system it's truly incremental. There are some capital dollars being spent on that, and there are some non capital costs being that are included in that project but I think largely those dollars would be incremental to the Truckline gas company ---- incremental relative to the having not done the project.

Okay. Fair enough. And then maybe last question, if I could, and I'll jump back in queue. Obviously, a resurgence here going on in the Permian -- it's great to see you guys going after it. You and DCP are sort of the two big independents out there. As you look at the chain of infrastructure -- and you mentioned that sort of almost everything is needed across the chain, about at what point does the basin tap out? I mean, when do we actually need to get infrastructure in place so that guys like (inaudible) et cetera can do what they need to do? And I guess I'm trying to ultimately back into a sense of timing of when -- might we see new activity, new deals being announced, perhaps?

There are obviously a number of infrastructure issues, but I guess using your term of tapped out, the Permian Basin is tapped out today on NGL take away.

Okay.

Okay? So that problem has got to be solved before the rest of the infrastructure can be effective. There are certain things that we can do operationally to -- some methane rejection to help it out, but from the processing standing point, plants are full, treating is full. Other than our expansions that we have announced, but all in all across the board, there needs to be infrastructure built.

Great. Thanks, guys.

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

Good morning. On the contract mix at Southern Union Gas Services, just wondering how we should be thinking about that in terms of will that offset some of the growth we're seeing at -- out of the Halley expansion projects? And maybe can you just elaborate on what is happening there?

Can you elaborate on your question, I really don't understand --

Well, it sounds like some of the big contracts are changing from more NGL to more gas exposed and just wondering how that might impact you going forward, and the growth at -- that we're seeing with the Halley expansion? If it's a one for one, if it offsets some of that growth, and just trying to get your outlook there.

Okay. What -- the practical effect of what is happening is that -- we have contracts that have certain margins, and they may be margin type of contracts where we share the processing spread, some modified keep hold-type contracts that --, are -- were expiring, and some of them were competitive, so we basically -- we make a decision financially. Do we keep those or don't we? And we have -- since we have alternative volumes to come in we have made some decisions to take in new center proceeds gas production and to let the other contracts expire and go elsewhere. The practical effect is that you -- that you -- if you just look at the makeup of the gas from a NGL versus natural gas, oh, comparison, under a preventive proceed contract, there's about four times the natural gas equity as opposed to the natural gas liquids equity. So what you will see is a rapid lengthening, as we're able to flow more gas and get our infrastructure issues resolved, but you'll see a rapid lengthening of our natural gas portfolio equity and a -- at least probably near-term some shrinkage of the NGL equity.

Okay. And does that change in the contract mix effect your margins at all, and, you know, how should we be thinking about that?

Well, we're making decisions on -- economic decisions. We're making decisions to increase our margins.

Okay. And maybe we can just jump over to the Halley 2 expansion. I know last call you said you had enough capacity on the pipeline for Phase I to take away the processing capacity. Do we have enough for Phase II?

Let me go back to the Phase I. The Phase I coverage is taken care of over time. It's not immediate. There are projects underway to be able to take out -- take aware more capacity. So clearly in 2011, we expect that to be -- to happen. However, Phase II is more problematic at this point in time, but it does -- once again as I said, we can do some things operationally to lower our Ethane output, we're looking at other ways of moving barrels, but having excess capacity is always nice.

Okay. And then finally, maybe this is a question for Rick. You have an equity-linked security out there that rolls in November of 2011, just wondering if you have any thoughts on what you might do with that, and what your options are?

Well, it's certainly on our radar at this point in time, and as you point out, it is -- it converts to a floating rate security, LIBOR plus 301 basis points on November unless we either refinance the obligations or -- well, we refinance the obligations. We certainly have alternatives. One of our alternatives is to take advantage of the low interest rates that currently exist today and do some -- do a forward swap. And based on today's markets, we're probably looking at something that a percentage point inside of what the current coupon is. We can certainly let a portion of it roll in to a floating-rate security, and take a additional floating-rate exposure, and we can certainly refinance the securities. We have a replacement capital covenant that's associated with that security, so we'll have to take that in to consideration with any alternative that involves a refinancing. We haven't made any firm -- decision, but we like the different alternatives that we do have.

Okay. I appreciate the time, guys, thanks.

Thank you.

(Operator instructions). And your next question comes from the line of Tim Schneider with Citi Group.

Hey, guys. Most of my questions have already been answered. I guess this one is more theoretical. You said that there's opportunities for NGL infrastructure to go down from the Permian to Bellevue. Is that something you would be looking at in NGL pipeline or to be part of, or are you guys planning to stay more on the GNP side?

I think at this stage, we're considering all of the opportunities, just have not made a decision yet.

That's it. Thanks.

And that concludes the Q&A portion of today's conference. I would like to turn the presentation back over to management for closing remarks.

I would like to thank you all for participating in today's call, and we hope to see you the next call at the end of next quarter, and again, thanks a lot. And good having you. Bye.

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