Energy Transfer LP (ET) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal 2010 Southern Union Company earnings conference call. My name is Chantrale, and I will be your facilitator for today's call. 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).As a reminder, this conference 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 of Investor Relations. Please proceed, sir.

Thank you, operator, and welcome to Southern Union's fiscal 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. Today, we will be discussing our 2010 results, significant events and outlook. This morning, we issued a press release announcing our results, which is available on our website. We also posted our 2011 financial outlook to our website. Our financial outlook contains select financial and operational guidance, as well as certain assumptions for 2011.

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 and financial outlook issued this morning contain 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 Company's standalone 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. At this point, I would now like to turn the call over to George Lindemann. George?

Good morning. I'm pleased to report adjusted 2010 earnings of $224 million, or $1.79 per share. I am happy to say that the underlying stability of our earnings and cash flows have greatly improved compared to prior year, as we go through the completion of our Trunkline LNG project during March of 2010. Our LNG project is supported by a 20-year firm agreement with an A-rated counter party.

Despite the weather conditions that plagued the Permian Basin at the beginning of the year, we are pleased to report that the final startup is underway with the first phase of our Halley processing plant. In the next few days, 60 million cubic feet per day of new processing capacity will be available for the growing supply coming out of the Avalon, Bone Springs, and Penn Shale formations. Work is also under way on the Halley Phase II expansion. This expansion will increase our processing capacity by an extra 50 million cubic feet per day. We expect Phase II to be in service during the third quarter of the year. In total, we have proactively increased our systems processing capacity by over 25%.

Over the last several months, we have been pursuing additional growth opportunities around our gathering and processing business. We have been focusing on the industry's need for additional gathering, creating, and processing infrastructure. We continue to remain confident that we will be successful in growing this business, and look forward to talking to you much more about this over the next few months, as things develop further. I would now like to turn the call over to Eric for comments on the quarter. Eric?

Thank you, George. I am pleased to announce that we have issued our 2011 adjusted earnings guidance of $1.75 to $1.95 per share. As this range is consistent with 2010, it is important to note that we will be converting a fair amount of it to cash earnings from equity AFUDC as a result of the Florida Gas Transmission Phase VIII project expected to go in service this April. As you will see from the free cash flow slide that we've included in our 2011 financial outlook, we expect to generate between $310 million and $380 million of free cash flow this year on a proportionally consolidated basis. Our focus continues to be on how best to utilize that capital in a way that will create the greatest value for our shareholders.

In the near term, we intend to internally fund ongoing growth projects. As our balance sheet improves due to debt reduction and internal equity formation, we will then have an opportunity to fund potential growth projects at our midstream business out of free cash flow. As free cash flow continues to grow on a longer-term basis, our preference will be to allocate capital to higher-returning organic growth projects. As always, we will continue to review acquisition opportunities as they arise in the market. To the extent that they are not available, or that available cash flow exceeds our internal requirements, we will look to return capital back to our shareholders through increased dividends for share repurchases. All of this will be done while remaining mindful of our investment grade ratings.

Another item I would like to discuss with you is the potential to export LNG from our Lake Charles terminal in Louisiana. Given the current fundamental outlook for natural gas supply and pricing in our country, it is apparent that the ability to export natural gas to higher value markets is becoming increasingly desirable. As such, we intend to apply for an export license with the Department of Energy within the next several weeks. We expect that we will seek permission to export not only foreign-produced LNG held in storage, but also domestically-produced natural gas.

Given the existing infrastructure we will be able to leverage, we believe we have a distinct competitive advantage over any greenfield project. From Southern Union's standpoint, we would be willing to undertake a substantial project like this if we could appropriately structure a long-term agreement that would minimize our risk. Because we are actively involved in discussions with our potential partner, we are unable to share much more information with you at this point. We will certainly keep you informed as more information becomes available. With that, I would now like to turn the call over to Rick Marshall, our CFO, to give an overview of our 2010 results and 2011 guidance. Rick?

Thank you, Eric, and good morning. For the year ended December 31, 2010, adjusted net earnings were $224 million, or $1.79 per share. This compares to adjusted net earnings of $226 million, or $1.82 per share in 2009. For the year, Southern Union had adjusted EBIT of $538 million compared with adjusted EBIT of $536 million in the prior year.

In terms of segment results for the year, Transportation and Storage, including our investment in Citrus, had adjusted EBIT of $446 million for the year compared with adjusted EBIT of $414 million in the prior year. The increase of $32 million was largely driven by increased equity AFUDC on the Phase VIII project at Florida Gas Transmission and the completion of the Trunkline LNG infrastructure enhancement project being placed in service of March of 2010. Our Gathering and Processing segment generated $26 million in adjusted EBIT for the year, compared with $64 million in the prior year. The decrease was largely driven by lower hedged prices for natural gas liquids in 2010 relative to 2009.

Our distribution business generated EBIT of $64 million for the year compared with adjusted EBIT of $59 million last year. Higher average rates and an improved rate design primarily drove the year-over-year improvement. During the year, we invested approximately $287 million into our operations, down from $405 million in the prior year. Growth capital accounted for $105 million, while maintenance capital is $182 million. From a liquidity perspective, we have only $1 million of term debt maturing over the next year. As of February 18, we had $570 million of committed credit facilities, with $244 million drawn.

As mentioned earlier, we posted our $2011 financial outlook presentation to our website this morning. I would like to take a few moments to walk through some of the highlights. We expect adjusted earnings for 2011 to be in the range of $1.75 to $1.95 per share. We expect reported, or GAAP earnings for 2011 to be in the range of $1.87 to $2.07 per share. Adjusted earnings for 2011 reflect the impact of mark-to-market accounting treatment for our economic hedges. We expect consolidated adjusted EBITDA for 2011 to be in the range of $930 million to $1 billion. This amount includes our 50% interest in the EBITDA of Citrus Corp.

From a net capital expenditures standpoint, at Southern Union, we expect to spend a total of $305 million to $345 million in 2011. Of this, approximately $210 million to $230 million is for maintenance and $95 million to $115 million is for growth. The transportation and storage segment anticipates spending growth capital of $30 million to $35 million, primarily for the Trunkline Gas Company's South Texas project. Our Gathering and Processing segment is forecasting growth capital of $65 million to $75 million. Much of this amount is a carry-over from 2010, and includes the capital necessary for the restart of the Halley gas processing facility, plus capital for other gathering compression and treating infrastructure to handle growing shale volumes.

At Citrus Corp, our 50% share of the maintenance capital is expected to be in the range of $75 million to $85 million. Of that amount, there is approximately $23 million related to relocation issues or mandated regulatory upgrades. Our 50% share of the growth capital is expected to be in the range of $140 million to $150 million. The majority of the growth capital at Citrus is related to the completion of the phase VIII expansions, as well as the Pascagoula Lateral Project, which should be completed in the fourth quarter.

As Eric mentioned, we also included our guidance range for free cash flow. We define free cash flow as adjusted EBITDA less cash interest, cash taxes, and maintenance capital. At Southern Union, we expect free cash flow in the range of $234 million to $289 million. Our share of the Citrus free cash flow is expected to be $76 million to $91 million. On a proportionate consolidated basis, we expect total free cash flow to be in a range of $310 million to $380 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. I'm happy to announce we have executed a 15-year transportation agreement with DCP Midstream for the Trunkline Gas Company South Texas project. This project entails converting the first 185 miles of Trunkline into a rich gas pipeline system. As part of the project, we'll be isolating this section of the system from the rest of Trunkline. We'll also be making modifications to the system to allow it to be bidirectional. We're currently awaiting receipt of our FERC certificate, and expect to begin construction in the next few months. The South Texas project is expected to be in service during the third quarter of 2011 and generate EBITDA between $7 million and $9 million on an annual basis.

I'm pleased to report that the Florida Gas Transmission Phase VIII project is nearing completion. There is very little pipe remaining to be installed and testing has begun on the majority of the project. When fully contracted, we expect that the project will generate EBITDA of $290 million to $310 million. At FGT, initial work on the Pascagoula Lateral project is well under way. This project involves the installation of approximately 25 miles of pipe from the Gulf LNG terminal, to interconnects with FGT and TransCo. The project is supported by a 20-year firm agreement for 340 million cubic feet per day of capacity. The project, which is planned to be in service during the fourth quarter of this year is expected to cost approximately $60 million and generate EBITDA of $11 million. With that, I'll turn the call over to Roger. Roger?

Thank you, Rob. Good morning, everyone. For the year, we averaged approximately 55,000 MMBtu per day of total equity volumes. Of that amount, approximately 35,000 per day was comprised of NGL equivalent equity volume, and approximately 20,000 MMBtu per day was natural gas.

Total processable well head volumes increased to 431,000 MMBtu per day, up from 401,000 a day in the prior year. Much of this increase has come from the connection of new supplies from the Bone Spring, Avalon, and Penn Shale plays. From a contracting standpoint, we expect volumes under spread or keep-whole contracts to decline over time, driven by natural production declines, and producer preferences for percent of proceeds contracts. As you can see from the monthly equity volume breakout in the 2011 financial outlook, equity from spread contracts range from 10,000 to 12,000 MMBtu per day in November and December, down from about 17,000 a day in prior months.

As stated in a prior call, this decline was a result of a conscious decision to release a significant volume of spread production to create processing space for higher margin shale production in 2011. As existing spread contracts expire, we expect some to be replaced with percentage of proceeds contracts with an associated increase in our physical natural gas and natural gas liquids equity. From a hedging 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. We have also added another 10,000 MMBtu per day of natural gas for the period April 1 through December 31, at $4.42.

As I'm sure many of you are aware, the Permian Basin and other production areas were hit with severe weather during the first two weeks of February, with a number of facilities incurring downtime and damage. Southern Union experienced lengthy outages and some damage at two plants, and significantly reduced production at two others. At Keystone, ERCOT, the independent system operator for the electrical grid for Texas, initiated rolling blackouts that knocked the plant offline twice in a two-hour period. Once Keystone cooled down, we lacked sufficient heat to restart and suffered damage to water handling systems. At [Jow], a frozen instrument caused the plant to lose steam, resulting in damage to water handling systems in the main stream boiler. I am pleased to say that as of this past week, all the plants were back online and volumes appear to have returned to pre-event levels.

As stated in our 10-K filing, the Company estimates a negative impact to February 2011 EBIT of approximately $7 million. As George alluded in his opening remarks, we are exploring opportunities to expand Southern Union's gathering, treating and processing capabilities into West Texas shale plays. We are pleased with the increasing drilling activity, and believe the 110 million cubic feet a day processing capacity at Halley, combined with other infrastructure enhancements, will provide a solid platform to grow the business in 2011 and beyond. With that, I would now like to turn the call back over to Eric.

Thank you, Roger. Before we open up the call to questions, I would like to announce that after seven years in Investor Relations, Jack Walsh will be leaving Southern Union to pursue an opportunity very close to his home in Pennsylvania. Jack will be with us through the end of next week. We would like to thank him for his time with us, and wish him well in his next career. At this point, we would like to open the meeting up to questions.

(Operator Instructions). And your first question comes from the line of Steve Maresca. Please proceed.

Good morning, everybody. My first question is on the midstream opportunities. What are the level of discussions that you're having right now with producers and what sort of time line do you think there is for you getting some commitments?

Thank you, Stephen. The discussions are substantive, to say the least. We really think that there are opportunities out here, and I will say that the timing appears to be being driven by the NGL pipeline takeaway and fractionation projects that are being proposed out of the Permian. I think the timing of those are such that projects in the Permian Basin -- ours being certainly the one that I'm most familiar with, are probably going to have to be contracted and moving forward within the next six months.

Do you envision that this is an opportunity that you can take on solely yourself or something where it's big enough that you think you may need a partner or would like a partner?

The first phase that we're looking at certainly is one that we can do on our own. Beyond that, I don't know.

Okay. Switching to FGT, just an update on how you guys envision the contract status for the next 12 months on that expansion.

I think the next major growth in Florida is going to come with the modernization projects that Florida Power and Light is doing at its Canaveral and Riviera plants and we expect that to really be in the 2013 to 2014 range, so I think in the near term, between now and then, we will likely be selling that capacity on a shorter term, on a shorter term basis.

What's the level of confidence I guess that you have that the remaining that's unsold, you can do on a shorter term basis?

Well, that's just going to be a function of the power demand in the State of Florida, and I don't know really how to answer that question specifically.

Okay. Thanks a lot.

Yes.

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

Actually good morning, it's Faisel from Citi. First question on the LNG, liquefaction process that you guys are going through right now, did you say you filed, or you already filed a request for approval of the DOE, or what exactly -- could you go over those comments one more time? Because you went through them pretty quickly.

Sure. Faisel, we have not filed. We expect to file for an application to export not only imported, but also produced LNG, and -- I'm sorry, produce natural gas, converted. We expect to file the application within the next several weeks.

And understood, and that would be in conjunction with your partner, is that right?

That's correct.

And do you guys have enough land in and around your facility to be able to, to be able to build a liquefaction train?

Yes.

Understood. How many acres does your entire facility sit on?

Well, we own land at the property, or the existing plant sits on, but we also both own an equity and lease from the Lake Charles, or from the terminaling district, a fair amount of land across the street. I don't know exactly how much it is, but it's over 50 acres, I think.

Okay, understood. And just on FGT, does any of your guidance include interruptible capacity on the excess capacity that hasn't been sold yet on the expansion?

Yes, there is some interruptible -- there is some interruptible transportation in there, but I don't think we necessarily distinguish it between the Phase VIII capacity and the existing capacity.

And with your guys' guidance for 2011, can you also give us guidance for what you expect your equity distribution to be from FGT, the actual dividends from FGT, or Citrus to the C Corporation?

Faisel, we haven't provided that type of guidance, but you can expect that once the project does go into service, and we're certain that we've satisfied the credit metrics for FGT, that we're going to increase or reestablish the dividends that will be paid to Southern Union Company and to El Paso.

Okay.

So there is an expectation that there will be some return of capital to the sponsors sometime in 2011.

Okay. Is it fair to say that would be something similar to net income for FGT?

On a go-forward basis, sure.

Okay, great. Thanks for the time.

Your next question comes from the line of Carl Kirst of BMO Capital Markets. Please proceed.

Thanks. Good morning, everybody. Eric, maybe if I could start first by following up on the LNG, and understanding there's only so much detail we can provide right now. But perhaps two questions. One, can you give us a sense of the size of export license that you might be looking to file? And two, is this something that, like the others, we should be looking for, a request for free trade and non-free trade agreement countries? Let me stop there.

Carl, at this stage, we have -- are not prepared to address the size or the counter parties as much as we've been studying this for an extended period of time.

Okay. We'll keep our eyes out, then, for that filing. A couple of clarifying questions, if I could, then. The first is, Roger, with respect to the weather impacts, that $7 million EBIT impact, thank you for quantifying that, is that currently in the guidance numbers, or is that excluding right now?

No, that's currently in the guidance. (inaudible)

This is actually in the guidance. Okay, thank you. And then the second, this kind of goes back to the Permian potential growth projects here, and you were talking about the NGL pipeline and fractionation projects sort of driving the timing. And what I just wanted to make sure I was clear on, is this -- are you basically saying the projects that you're looking at, i.e., gathering and processing, that those projects are more contingent on the timing of when these other downstream projects move forward, or are you guys also actively involved on the pipe and fractionation discussions as well?

Carl, we're -- we've been involved in discussions at every level, but what I will say is that this is a typical chicken and eggs situation, because the NGL take-aways certainly are going to want commitments in order to pull the trigger, and the midstream players, Southern Union being one, are certainly one, will need capacity or customers will need capacity, so there will be a necessary commitments on the midstream side by way of the producers before we would have comfort level taking capacity out. So all these things have to mesh together in a fairly short period of time.

Faisel, this is Rob. I want to correct one thing I said. Tommy Stone just sent me a note and reminded me we only lease about 400 acres over in Lake Charles. I just want to be sure I corrected my earlier statement.

Rob, could I ask just one last question. If you could provide some color on what park and loan was for the fourth quarter, and in general, if you don't want to provide a number for 2011, kind of where you see that either relative to 2010 or relative to kind of the five-year average.

It was about $15 million for the fourth quarter.

Okay, and then with respect to kind of how you're seeing 2011 in general, something that looks similar to 2010, better, worse?

I think what our expectation is that 2011's going to look more like 2010 than it did like 2009.

Sure, sure. All right. Thanks, guys.

(Operator Instructions). Your next question comes from the line of Craig Shere of Tuohy Brothers. Please proceed.

Hi, thanks for the call. On the LNG export opportunity, I think a couple others have talked about starting that as early as 2015. Do you have a rough timeframe that you're thinking of, if all goes well?

That would be around the same timeframe. That's what our expectation is now.

Roger, looks to me like the guidance for NGL equity volumes, including the spread equity exposure is a little soft, given the Halley startups. There's a lot of issues I know that have been going on, you all mentioned the weather and power issues, freeze-offs that happened last year even, and I don't know if that's becoming the norm. Limited off take capacity's been discussed and the limits on your capacity there, the need to convert, more profitable keep-whole as a percent of proceeds as those contracts come due. Can you talk about what's going into the NGL equity numbers for 2011 and the trends with the existing business, including the Halley start ups?

There are a lot of factors that drive the equity, obviously but let me first talk about timing. Halley Phase I is a 60 million a day plant and it will be online here next few days. Remember that there are other, or there are other projects in the field, infrastructure projects, and I think Rick alluded to them in his comments, that are part and parcel to filling up that plant, and those projects come online at various times during 2011. So those phase in, and then secondly, we have the NGL take-away issues that will ultimately probably create a cap for us, later on in the year, until we can secure more capacity. So those things all factor into the guidance.

So until the expansion of the take-away capacity -- let's say we used existing infrastructure to its maximum. How much capacity would you have left at Halley at that point?

Let me answer it this way. We have adequate NGL take-away and fractionation for all of the existing infrastructure in Halley Phase I. We become constrained on NGL take-away at Halley Phase II.

On the whole thing, or you think maybe half of it?

Probably the whole thing. There are -- there may be, there may be operational decisions that we can, that we might be able to make in terms of some methane rejection that could allow us to process more gas, and as you get into winter months, next winter, typically NGL production falls, so there may be space anyhow to move additional volume. So the NGL take-away will clearly be the issue. We are adequately contracted on the fractionation side to handle almost all of Halley Phase II.

Great, and last question, guys, is there any interest as FGT phase VIII comes to completion in adjusting the ownership tax structure at Citrus to make it easier for partners to contribute their respective ownership in MLPs?

We have not had that conversation with our partner, although we are aware of their covenants on the earnings call.

Okay, thank you.

Your next question is a follow-up question from Mr. Carl Kirst of BMO Capital Markets. Please proceed.

Thanks. Sorry, guys, just a very quick clarification with respect to the guidance and specifically the EBITDA guidance for Citrus. And Rob, it looks to me like that's excluding AFUDC and I just wanted to confirm that.

It is excluding AFUDC.

Great. Thanks, guys. And good luck.

Thank you.

Thank you.

At this time, there are no further questions in the queue. I would like to turn the call back over to management for closing.

I want to thank you all for attending and hopefully we'll see you all the next quarter. And again, good luck to all.

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