Energy Transfer LP (ET) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2011 Southern Union Company earnings conference call. My name is Janetta, and I'll be your Operator for today. At this time all participants are in 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 now like to turn the conference over to your host for today, Mr. Richard Marshall, Chief Financial Officer. Please proceed.

Thank you, Operator, and welcome to Southern Union's first quarter 2011 earnings call and Webcast. Presenting on today's call will be Eric Herschmann, Vice President, Vice Chairman, President and COO; Rick Marshall, Senior Vice President and CFO; Rob Bond, Senior Vice President of Pipeline Operations; Roger Farrell, Senior Vice President of Midstream Operations; and George Lindemann, Chairman and CEO. A replay of this call will be available for one week by dialing 888-286-8010 and entering passcode 31397775. A replay of the Webcast will be accessible through our website at www.sug.com. Today, we will be discussing our first quarter 2011 results, significant events and outlook. 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 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 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.

Before turning the call over to Eric Herschmann, I would like to report our adjusted first quarter earnings of $64 million or $0.51 per share. These amounts include certain adjustments that were identified in our press release. I'm also happy to reaffirm our 2011 adjusted earnings guidance in the range of $1.75 to $1.95 per share.

I'll now turn the call over to Eric Herschmann to discuss some promising news regarding our LNG export license application. Eric?

Thank you, Rick. I am pleased to report that Southern Union has joined with BG in filing an application with the US Department of Energy for long-term authorization to export liquefied natural gas. The application contemplates export of domestically produced natural gas over a 25 year term starting on the earlier of the date of first export for 10 years from the grant date, with volumes of 2 Bcf per day. While we are continuing to work with BG to develop a project plan to construct liquefaction and export capability at our Lake Charles LNG terminal and finalize a transaction structure, we believe that the filing of the application together with BG, a dynamic leading player in the world energy markets, represents an important step forward in pursuing this important market opportunity.

By order of magnitude as currently contemplated, the project is expected to cost approximately $2 billion to $3 billion. We expect to see substantial job creation in Louisiana when our applications are approved. Southern Union and BG have developed a significant business relationship over the past several years. Specifically, 100% of the send out and storage capacity at our LNG terminal is contracted with 3G through 2030. The trunkline LNG terminal infrastructure enhancement project, which was placed in service in March of 2010, is also fully contracted with BG through 2030. As you can imagine, we are excited to expand this relationship further through the LNG export market opportunity, given BG's portfolio of assets and its reputation, experience and industry leading performance across the natural gas and LNG value chain.

With that I'd now like to turn the call back over to Rick Marshall, our CFO, to give an overview of our first quarter results. Rick?

Thank you, Eric. 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. As I mentioned previously, for the quarter ended March 31, 2011, adjusted net earnings were $64 million or $0.51 per share. This compares to adjusted net earnings of $55 million or $0.44 per share in 2010. For the quarter, Southern Union had adjusted EBIT of $140 million compared with adjusted EBIT of $133 million in the prior year.

In terms of segment results for the quarter, Transportation and Storage, including our investment in Citrus, had EBIT of $122 million for the quarter compared with EBIT of $102 million in the prior year. The increase was primarily attributable to the LNG terminal infrastructure enhancement project placed in service in March 2010 and higher equity earnings from the Company's unconsolidated investment in Citrus, largely driven by higher equity AFUDC resulting from Florida Gas Transmission Company's Phase VIII Expansion Project. Our Gathering and Processing segment reported an adjusted EBIT loss of $7 million compared with adjusted EBIT of $1.3 million in the prior year. The decrease was primarily due to reduced throughput volumes from processing plant outages and producer well freeze-offs resulting from unusually cold weather in early 2011 and higher operating, maintenance and general expenses during the quarter. Notwithstanding the volume shortfall in the first quarter, the Company expects total process volumes to increase year-over-year.

Our distribution business generated EBIT of $24 million for the quarter compared to EBIT of $29 million in the prior year. This decrease was primarily due to higher operating maintenance and general expenses and lower net operating revenues largely attributable to the impact of the new customer rates at Missouri Gas Energy effective February 28, 2010, which eliminated the impact of weather and conservation for the majority of Missouri Gas Energy's revenues, resulting in lower reported revenues in the traditional heating season. Going forward, the new customer rates will result in net operating revenues being recorded more evenly throughout the year.

During the quarter, income taxes were $19 million compared with $31 million in the prior year. The decrease was primarily due to lower pre-tax earnings in the quarter compared to the prior year, state tax credits recorded in the current quarter, and higher income tax expense in 2010 resulting from the change in tax treatment of Medicare Part D subsidies. During the quarter, we invested approximately $53 million into our operations. Growth capital accounted for $32 million, while maintenance capital was $21 million.

I'll now turn the call over to Rob Bond who will discuss our Transportation and Storage segment. Rob?

Thank you, Rick. Good morning. I'm pleased to report that the Florida Gas Transmission Phase VIII project went into service on April 1, on time and on budget. As you may recall, this included the construction of approximately 500 miles of pipeline and the installation of 200,000-horsepower of compression. We are very proud of our Phase VIII team for this accomplishment. When the project is fully contracted we expect that it will generate EBITDA of between $290 million and $310 million.

Also at FGT, construction will soon begin on the Pascagula lateral project. 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 transportation 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 to generate EBITDA of about $11 million.

At Trunkline Gas Company we have received and accepted our FERC certificate on our 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 will also be making modifications to the system to allow it to be bi-directional. 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. Across all of our pipeline systems we continue to look for opportunities to expand. As a result of the EPA mandates on coal plant emissions, we believe there will be significant opportunities for additional gas-fired generation. We will pursue these opportunities with utility and power generation customers along our systems.

With that, I'd now like to turn the call over to Roger to discuss our midstream operations. Roger?

Thank you, Rob. Good morning, everyone. We had a challenging quarter, as indicated by the financial results. As discussed on our last call, February's significant cold weather events caused lengthy outages and some property damage at two processing plants, and significantly reduced throughput at two others. Operations have returned to normal. For the quarter, NGL equity volumes averaged 16,000 MMBtu per day, spread equity volumes averaged 9,300 MMBtu per day, and natural gas equity volumes averaged 26,700 MMBtu per day. As expected, equity volumes returned to normal during March and are expected to fall within our guidance range for the balance of the year.

2011 equity guidance and MMBtu per day includes NGL from 20,000 to 25,000, spread from 7,500 to 12,500, and natural gas for 40,000 to 50,000. As you may recall, spread equity volume, combined with light volume of natural gas equity, are NGL equivalents. February's issues resulted in a quarter-over-quarter decrease in total processed volumes from 428,000 MMBtu per day to 374,000 MMBtu per day. Despite those results, I am pleased to report that we have set NGL production records on a number of occasions since March and expect increasing process volumes during the balance of 2011.

We continue to see growth opportunities in the Permian Basin as drilling activity has increased and production from the new plays have steadily risen. Halley Phase I, a 60 million cubic feet per day processing expansion, was placed in service during the first quarter and will see increased volumes throughout the year as various infrastructure projects are placed in service. As noted in an earlier call, Southern Union has adequate NGL takeaway and fractionation capacities to accommodate Phase I volumes. Start up of the 50 million a day Halley Phase I/Phase II expansion project has been delayed to the first quarter of 2012 due to equipment delivery delays. Although the Company has fractionation capacity to accommodate most Phase II production, NGL takeaway continues to be an issue that we hope to resolve. The Company's aggressively pursuing significant processing expansion opportunities in the Permian. It appears that the need to commit to NGL takeaway capacity will dictate processing expansion timing as commitments to proposed NGL pipeline projects are expected in the next few months.

From a hedging standpoint, the recent increase in energy commodity prices afforded the Company an opportunity to increase its hedge positions for 2011 and to lock in 2012 equity prices well above 2011. For the balance of 2011, we have 25,000 MMBtu per day of NGL hedged at $11.63 per million BTU. And 20,000 MMBtu per day of natural gas hedged at $4.46 per MMBtu basis adjusted. For 2012, we have 15,000 MMBtu per day of NGL hedged at $13.66 per million BTU, and 10,000 MMBtu per day of natural gas hedged at $4.82 basis adjusted.

I would now like to turn the call over to George Lindemann. George?

Thank you, Roger. As Rick mentioned earlier, we are pleased today to be able to reaffirm our 2011 adjusted earnings guidance in the range of $1.75 to $1.95 per share. More importantly, as you can tell from earlier comments, these are exciting times for Southern Union Company. Considering the important opportunities that we see across our business segments, we are enthusiastic about the opportunities related to our proposed LNG export license and our new joint venture with BG. The proposed project contemplates export of domestically produced natural gas over a 25-year term with volumes of 2 Bcf per day. We believe there will be multiple opportunities for gas-fired generation across all of our pipeline systems as a result of the EPA mandate on coal plant emissions. And we plan to pursue these opportunities with existing and potential utility and power generation companies. In addition, we continue to remain excited about the growth potential that exists in West Texas and Southeast New Mexico. In addition to the Haley Phase II expansion, which is expected to be completed in the first quarter of 2012. The Company is aggressively pursuing other significant processing expansion opportunities in the Permian Basin.

At this point I would like to open the meeting up to questions.

(Operator Instructions) Carl Kirst, BMO Capital.

Maybe if I could first ask on the LNG project, and understanding here that there's still a long way to go towards getting something in place with BG. But I just want to reconcile and make sure I understand the current cost, this very early phase that you've outlined, this $2 billion to $3 billion, with the 2 Bcf a day. And my question is, the 2 Bcf a day, is that the working intent at this point in time? Or is it up to 2 Bcf a day, keeping yourself dry powder for possible expansion potential years down the road, for instance?

It's going to be up to 2 Bcf per day. And I think some of it, as I'm sure you know, will go along with who are the end customers at the end, and BG's ability to market that. But that's where our estimate is currently. We're expecting 4 trains at the facility.

So the $2 billion to $3 billion, does that cover all 4 trains?

I think that's a function of the size of the trains. There's different scenarios that are proposed, Carl, at this time, so we're still evaluating what the facility itself, how it will be constructed and the footprint that it would have.

It struck me as low for 4 trains, but appreciate that. And then just last clarifying question on that. The $2 billion to 3 billion is for the entire project, for instance? It's not necessarily net to SUG, is that correct? And then last question and I'll let somebody else jump in queue. Rob, can you just comment as far as my pet question of the quarter, what the parking loan was?

It was in line with 2010, Carl. I think it was in the $2 million range.

Steve Maresca, Morgan Stanley.

My first question on the LNG project, and I know you've been asked this many, many times in the past. But with this being material funding, how are you guys thinking about possibly funding this? And what are updated thoughts on the possibility of doing something like an MLP that could help with the funding of something like this?

As far as funding, most of the capital costs would probably not materialize until 2014-2015 time frame. Internally, after we get through this year with our cash flow position, it looks like we're throwing off a lot of free cash flow so we'll build some capacity in our balance sheet to fund a good portion of a project like this internally.

We would certainly have to make decisions as to what type of capital structure we would put in place come 2014 and 2015, but our goal would be to certainly maintain the investment grade rating of the Company in connection with the ultimate financing for this type of opportunity.

And how should we think about next steps in this LNG process? What's the next data point that we should be looking for over the next couple quarters?

I think a lot of it is going to be generated, we have a lot of discussions and work to do with BG, and that's really what's going to take it. We've been working with them, obviously, consistently since our last call but we'll be in constant discussion with them and we'll update everyone as we move forward.

And then my final one is on -- Roger spoke about the opportunities in midstream and in the Permian and the need to commit to takeaway is going to dictate the timing. Just some more color on that? Is it something sooner rather than later that you're seeing producers need to get that take away?

No. We're in the classic chicken and egg situation here. I think it's well known that NGL takeaway is problematic for the Permian, and there are a number of projects proposed. And expansion on the upstream end, that were certainly highly preferable in the gathering processing treating side. We really can't put our projects together unless we have certainty around the NGL takeaway.

As I said in my prepared script, we expect those decisions driven by the NGL pipeline projects or takeaway projects to be front and center over the next few months. But sooner rather than later. And I think once those things are announced or once the gathering processing projects are more formalized and locked in, then I think you'll see announcements here the next few months.

Craig Shere, Tuohy Brothers.

Congratulations on the JV. I apologize. I was off for a brief couple minutes on the call, if you already commented on this. Did you have some rough time frame anticipated for when you thought FERC feedback would be there on the export filing? And also a time frame, are we talking weeks, months, for the BG discussions?

The BG discussions are ongoing. I think FERC is months. But we have been in constant discussions with BG. And if you want, we could provide you a copy of the application which lays out some of the things that we need to be doing with them.

But we're in the process of developing plans to install the liquefaction. And we're obviously going to have to work on additional service agreements between us and BG. So I think we're months away from FERC and we'll update everyone as we get more solid information and agreements with BG.

Just to be clear, that's the DOE. We have not yet filed at FERC.

And what would the time frame be for the FERC?

We would have to file an application and that ultimately is a function of where we end up with the commercial agreements with BG.

A couple minor odds and ends here. Notice that combined maybe over $3 million of higher legal expense, in pipe and distribution, and also pipeline integrity expense up $2 million from first quarter last year. Can you speak to if the legal expense is recurring for the near future? And if the pipeline integrity expense is a function of ongoing higher costs in the industry in response to some of the focus on safety and maintenance following some of the tragedies elsewhere?

As to the pipeline integrity cost, I think some of that was the completion of some projects that were ongoing. I don't anticipate our integrity budget to be up significantly over the previous year, but slightly. It's really a function of the projects that are identified in each and every year. And then as to legal expense, I don't think there's anything significant. There's some litigation that's ongoing but I don't think anything newsworthy or noteworthy or recurring.

I would now like to turn the call back over to George Lindemann for any closing remarks.

Thank you. I'd just like to thank everyone for attending the call. And we hope to have you all at the end of next quarter. So thanks again and see you all soon.

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