Energy Transfer LP (ET) 2012 Q2 法說會逐字稿

Welcome to Sunoco, Inc and Sunoco Logistics Q2 2012 joint earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has any objections you may disconnect at this time. I would now like to turn the call over to Mr. Brian MacDonald, President and CEO. You may begin.

Thank you, and good evening, welcome to the quarterly conference call for Sunoco and Sunoco Logistics Partners, where we will discuss our second quarter results that were reported earlier today. With me are Mike Hennigan, CEO and President of Sunoco Logistics Partners, Mike Colavita, our Chief Financial Officer, Pete Gvazdauskas, Sunoco Logistics Partners VP of Finance, and Clare McGrory, Manager of Investor Relations for Sunoco. As part of today's call, I would direct you to our website, www.sunocoinc.com and www.sunocologistics.com where we have posted a number of presentation slides which may provide a useful reference as we progress through our remarks. I would also refer you to the Safe Harbor statement referenced in Slide 2 of the slide package, and as included in this afternoon's earnings release.

Now, I will begin by providing an update on the strategic actions of the company. And then, we'll move into the earnings and business update for both Sunoco Logistics Partners and Sunoco. As most of you are aware, on April 30, 2012, Sunoco announced that it had entered into a merger agreement to be acquired by Energy Transfer Partners LP. We continue to move forward with this merger process as seen by ETP's filing of the first amendment of Form S-4 registration statement, last week. We are on track and working towards closing this transaction in the early part of the fourth quarter.

In July, we also announced an agreement to form Philadelphia Energy Solutions, a joint venture with The Carlyle Group at the Philadelphia refinery. Sunoco will be contributing the Philadelphia refinery assets in exchange for a non-operating minority interest of approximately 33%. Sunoco will receive cash proceeds for the liquidation of working capital related to the refinery. These cash proceeds are in line with expectations when we announced the exit from refining. Sunoco will have no ongoing capital obligations with respect to the refinery. We believe that this structure provides the best opportunity for the success of the Philadelphia refinery and look forward to closing the transaction with The Carlyle Group, which we anticipate to be in September.

Now, moving on to the results from the second quarter. As you can see from Slide 4, Sunoco reported net income before special items of $129 million, or $1.22 per share for the second quarter. I will summarize our results in three areas. Our Logistics business continues to deliver strong results and execute on growth opportunities. Sunoco Logistics is progressing well on projects to grow their fee-based earnings and anticipates $350 million to $400 million in organic growth projects for 2012. Mike Hennigan will provide an overview of the results of Sunoco Logistics Partners in a few moments.

Our Retail business also delivered strong results as margins expanded related to declining wholesale gasoline prices during the quarter. As we have said before, this business does see quarter to quarter volatility as evidenced in the first half of 2012 performance. But, as our trend shows, the business tends to deliver consistent and stable earnings and cash flows year after year. Lastly, Refining & Supply delivered strong results this quarter. I want to commend our refinery employees for achieving excellent operating results, and capitalizing on strong market conditions during what was a time of considerable uncertainty for everyone at the Philadelphia refinery. As long as we are the operator, we continue to work hard to realize the potential market opportunities through a continued strong operation and sharp focus on optimization of the product supply. At this time, I'm going to turn the call over to Mike Hennigan who will provide an update on Sunoco Logistics Partners' strong business results.

Thank you, Brian. Sunoco Logistics continues its momentum with another strong performance in the second quarter of 2012. We had record distributable cash flow of $166 million compared to $106 million in 2011. All the areas that are part of our strategic focus are delivering results.

The main driver of results continues to be our crude oil business. Demand for West Texas Crude continues to be at a very high level translating into tremendous demand for our transportation services, including our proprietary pipelines, our West Texas Gulf and Mid-Valley pipeline joint ventures, and our trucking services. The expansion of our West Texas system continues on track to meet the market needs and is expected to start up in the first quarter of 2013. We've completed three successful open seasons which will deliver 110,000 barrels to the market.

We also announced our fourth West Texas open season called Permian Express, a new project to transport West Texas Crude oil to Gulf Coast markets. Phase I of the project will have a capacity of approximately 150,000 barrels per day. Permian Express can be expanded to at least 350,000 barrels per day. For Permian Express Phase I, we're offering approximately 150,000 barrels a day of crude oil service from Wichita Falls, Texas, to the Nederland/Beaumont, Texas markets. We will reverse our Wortham to Wichita Falls pipeline to create continuous pipeline service from Wichita Falls to Nederland, including utilizing excess capacity on the southern leg of the West Texas Gulf pipeline system.

Permian Express Phase I offers customers speed to market, as it will be operational within six to nine months with an initial capacity of 90,000 barrels per day. Full capacity of 150,000 barrels per day is expected within 12 to 18 months. In addition, commitment terms of three, five, or seven years are available to offer customers flexibility. The open season for Phase I launched on June 25 and is expected to close on August 7. Permian Express Phase II would increase the take-away capacity at Colorado City by an additional 200,000 barrels per day and provide further market access east of the Nederland area. We also continue to look for other opportunities to complement these projects as crude production outlook remains robust.

In addition, our crude oil and marketing business continues to deliver excellent results. In the second quarter, market conditions continued to be favorable for our business with the WTI-LLS spread widening considerably in April and May from levels seen in the first quarter. However, they have come in tighter for July and August business. On the refined products side of our business, we've been pleased with the acquisition of the controlling interest in the Inland pipeline system in Ohio. This system serves multiple Ohio refineries providing gasoline and diesel to many markets and is synergistic with our existing pipeline system.

As a complement to this acquisition, we launched an open season on July 19 for a project called Allegheny Access. Midwest refining expansion -- Midwest refinery expansions and strong economics have been driven by low-cost crude from the shale plays. This has created a surplus of refined product and an opportunity to broaden our refined product pipeline network to be able to move Midwest barrels into the eastern Ohio and western Pennsylvania markets. This project is designed for 85,000 barrels per day expandable to 110,000 barrels per day. We're encouraged by the early response to this open season and engineering is underway with an expected start-up in the first half of 2014.

In our NGL business, our Mariner West project, the first ethane pipeline solution in the Marcellus area that will deliver ethane to the Sarnia marketplace is on schedule for a mid-2013 start-up. We also remain excited about the potential conversion of our eastern pipeline related to the growing development of the Marcellus and Utica shale areas. Our Mariner East project could initially move approximately 65,000 barrels a day of ethane and propane to the US east coast with the ability to scale capacity higher as needed. We're confident this project meets a growing market need to export natural gas liquids.

On our distribution, we've announced an increase to $1.88 per common unit on an annualized basis which is a 10% increase quarter-over-quarter and a 16% increase year-over-year. The quarterly distribution of $0.47 per common unit will be paid on August 14 to unit holders of record as of August 8. This represents our 29th consecutive quarterly distribution increase. We are pleased with the open season success and commitments on our first set of West Texas projects, our Mariner West project, and the overall growth of our rateable earnings as we're executing $350 million to $400 million of organic growth capital this year. These significant accomplishments are enabling us to make a step change in our distribution for our unit holders.

In addition, we continue to have tremendous balance sheet capacity to fund our ongoing expansion capital program. We finished June with a debt to EBITDA of 2.3 times. As we continue to implement our plan, we remain committed to sustainable competitive distribution growth. We're confident our strategy is on track and we're committed to growing our cash flows over the near and long term. I also want to mention that we expect to have a new general partner in the near future, and we at Sunoco Logistics are excited to be part of the Energy Transfer family of partnerships. I will turn it over, the discussion over, to Mike Colavita who will continue the update on Sunoco business results and financials.

Thanks, Mike. As Brian noted earlier, for the second quarter Sunoco reported net income of $129 million attributable to Sunoco shareholders excluding special items. Pretax income from special items totaled $207 million, including a $213 million LIFO inventory gain. Regarding 2Q pretax business unit results attributable to Sunoco Inc shareholders, I direct to you Slide 10.

SXL reported earnings of $152 million during the quarter and our Retail Marketing business reported pretax income of $73 million. Sunoco's share of SXL earnings, driven by our GP ownership and LP holdings, are reported to our Logistics segment which earned $82 million during the quarter. As Mike Hennigan outlined, SXL continues to deliver strong results, execute on its growth strategy, and also maintain financial flexibility in a strong balance sheet. Retail Marketing reported second quarter income of $73 million as wholesale gasoline prices were declining through the quarter, providing a lift to gasoline margins which averaged $0.125 per gallon for the quarter. However, across the industry, gasoline demand was weak in the second quarter, reflecting the continued challenges in the economy. Refining & Supply reported income of $87 million pretax, in the second quarter of 2012. Realized margins expanded from the first quarter, averaging over $7 per barrel as benchmark margins were supported by sharply declining crude oil prices. The refinery performed well, capitalizing on the market opportunities.

As shown on Slide 11, at June 30 we had approximately $1.9 billion of cash on Sunoco's balance sheet. In the second quarter, we saw a net reduction in cash of $76 million at the Sunoco parent level. Cash used during the quarter was driven by refining exit costs, including a contract penalty payment of approximately $130 million related to the Marcus Hook refinery closure, as well as $50 million in share repurchases made in April. I will now turn the call back to Brian for final comments.

Thanks, Mike. In closing, we are pleased with the strategic actions that are underway at Sunoco and the value that has been returned to shareholders through a number of actions over recent years. We now have two strong high-return businesses in Logistics and Retail. We continue to focus on ensuring these businesses are positioned to deliver strong results and to execute on their respective growth opportunities.

In regards to the Philadelphia Energy Solutions joint venture, as we have said before, we believe that this is the best possible outcome for the Philadelphia refinery and all of the stakeholders. We are working towards a closing of this transaction in September. For the company, we are very excited to join forces with ETP. As we move towards closing and thereafter, we will be working hard to ensure a smooth integration and to capture synergies through this combination. With that, I will ask the moderator to open the line for questions -- for any questions you have.

Thank you.

(Operator Instructions)

Brian Zarahn, Barclays Capital.

Good afternoon.

Hi, Brian.

On the -- congratulations on a strong quarter. On the distribution, like you said, it was a big step change. Can you give a little more color on your thought process around the distribution? And, any thoughts on talking about updating your sustainable growth rate on the distribution?

Yes, Brian, I would tell you that several factors came into our thinking. The main ones of which were, we were just recently successful with three open seasons in West Texas. As you know, we've also been successful on Mariner West, and we're looking to implement it. And, our organic program, we've updated the guidance there up to $350 million to $400 million. And at the end of the quarter we have a balance sheet that's got a 2.3 times debt to EBITDA. So, we're very confident in what we've achieved so far, the major points I've mentioned, and we thought it was a good opportunity to return cash to the unit holders.

And, in terms of the -- your assumptions on future sustainable EBITDA, any assumptions embedded on crude oil price differentials within that? Do you think that will continue to remain wide, or is that not -- it doesn't impact your assumptions regarding DCS?

I don't think that comes into our thinking at all, Brian. At the end of the day, we're very confident our growth prospect and our balance sheet is very strong. So, we'll be in a position to increase our distribution at a very competitive level, and we've made a step in that direction today. I think that's the thing that's driving us more. The projects that we have in the queue that we believe will be successful and the strength of our balance sheet.

Appreciate the update to 2012 expansion CapEx. Given you have some backlog of projects, any preliminary thoughts on 2013 expansion CapEx?

No, we usually talk about that a little later in the year. We've had the same theme that we've been working on, Brian. We have a large focus in West Texas. Our Mariner projects are active We continue to expand our butane business. Our Nederland terminal continues to expand. We've mentioned previously that we've put some effort in at Eagle Point in the Philadelphia Harbor. All those factors come together as we've been trying to deploy the strategy that we've been talking about over the last couple of quarters.

Okay, last one for me. We're seeing a pickup in propane export activity out of the Gulf Coast. Can you talk about anything that -- opportunities for you on the East Coast?

Yes, we're still very encouraged that we're going to get Mariner East to the finish line. We don't have anything to report at this point, but as we mentioned to you previously, we have morphed the project from an ethane only to an ethane and propane solution. We're working through some more details along those lines. There's definitely interest in the market for both ethane and propane, and that's morphed the project a little bit for us. And, again, we're hoping to give you some more color on that very shortly, but we are confident in the project. We think the market needs it, and we're just looking forward to coming out a little more firm.

Thanks, Mike.

You're welcome, Brian.

Brad Olsen, Tudor Pickering.

Hi, good afternoon, Mike.

Hi, Brad.

Just a couple of questions on, I guess, starting out with your terminals business. It looks like you experienced a step change in EBITDA in that business. Is that associated with getting the Eagle Point asset more thoroughly contracted or are there other moving pieces there?

Yes, Brad, that was one piece of the puzzle. In that segment, we report out our butane business, which has had a very healthy run here in 2012. Eagle Point, as you mentioned, East Boston, we also made that acquisition. Nederland continues to expand. The one anomaly, we reversed a $10 million write-down that we had taken previously, related to some tank cleaning if the Philadelphia refinery did not run. As Brian mentioned, we're now looking forward to Philadelphia being serviced by Sunoco Logistics, so we've reversed that $10 million issue. So, that was a one-time even, but the others, we believe, are just showing the strength of our terminal segment.

Okay, great. And, on the acquisition and marketing business, have you seen improving performance from Texon? That's another business that no matter how high it goes, it seems like each quarter you set a new record in that business. I guess I'm trying to understand, is the demand for the West Texas crude coming more from the midwestern end of Mid-Valley? Or is it coming from the Gulf Coast refiners? Or is there more of the Texon marketing volumes driving that business?

I think it's a little bit of all of the above. First off, we are very happy with the Texon acquisition. We're very happy to have those employees on our team, and it's going very, very well. That gave us some more geographic diversity compared to what we had previously. But, even our existing system, I think we're just in a good position as each of these shale plays continues to grow, our exposure in west Texas has been helpful. Eagle Ford, Bakken, each of these areas, I think, has been good for us. And, as you've seen in the results, we've been increasing our margin and our volume in that segment of our business.

Great. One last one, if I may. The Inland Allegheny access project that you announced. Obviously, you guys, having -- with your refining heritage are very familiar with what a game-changing development it would be if a crude pipeline were built from the Midwest out to the East Coast to serve as pad one refineries. As you evaluate the prospects for Allegheny, have you given any consideration to using some of your legacy pipeline assets that extend from the Midwest all the way out to the East Coast? And converting any of those to move crude?

We've looked at it, Brad, a little bit. But, at least our first priority has been on NGLs. And, that's why you saw Mariner West and East developed as projects on our existing assets. On our Inland acquisition, when we made that acquisition we were hopeful, but we weren't sure, that they had a section of pipe in Ohio that it was out of service. That we were hopeful that we could bring that back to service and put it in another source. And, at least in the short term, we still think the best opportunity is in refined products for that. And, that's what developed Allegheny Access. We're very bullish that Midwest margins will continue to be good.

Crude pricing will be such that those Midwest refiners will continue to run hard. And we thought it was a good opportunity to expand our system into Pennsylvania from the Ohio spot. Now, with that said, we still continue to look at crude growth in those areas. We're very aware, as you know, we still have some existing assets and a lot of right of way capability in the area. So, we're continuing to look at it. But, our first focus was on NGLs, and then Allegheny Access became our second focus. So, at this point we don't have anything to report on crude, although we continue to look at that possibility.

All right. Great. Thanks a lot for the color.

You're welcome.

Elvira Scotto, RBC Capital Markets.

Hi, good afternoon. Just on -- going back to the terminal segment. So, if we back out the $10 million that you mentioned as the reversal of the tank cleaning, and we get to that $50 million run rate, how much of the terminal's operating income is ratable, versus some of the shifting market dynamics, or market opportunities?

Elvira, what I would say, is there is a couple of things in the terminal segment. Like you said, once you remove the one time thing, the -- probably the most important thing to keep in your mind as you're thinking about it is the seasonality of the butane business. We've talked about that being more of a fall and winter, spring type of business, so in the summer you are not going to see the ratability from that segment. But all the other segments I would tell you I would think are pretty ratable. Our Nederland terminal is very consistent with its flows, although the market has been changing down in that area. Same type of thing we've seen on all of our product terminals. Pretty ratable business overall, when you step back. There might be a little variability quarter to quarter with the normal seasonality that you see with gasoline and diesel. But, as a general rule, I'd say very ratable overall, when you step back. And then, you have to put the seasonality of butane on top of that.

Okay, thanks for that. And then just a follow-up on the Mariner East project. What needs to get them to get this to the finish line? It seems like a project that makes a lot of sense. What's been the holdup, I guess?

Yes, Elvira, I mentioned previously, we're really still very excited about it. And, we're very, very close in our mind. But, what makes it always difficult is there's multiple parties that are involved, expressing interest, and in our mind, we just want to make sure that we're providing exactly what the market needs. Early on, as you know, we started off with an ethane project, and it's now morphed into an ethane and propane. And we're just trying to put some, what I would call the final touches on how that project will show itself from an ethane versus propane standpoint. But we're hoping to be very, very close to getting the closure on being able to move forward with that.

Okay, thank you.

You're welcome.

Thank you. At this time I show no further questions.

Thank you for joining us this evening. Pete and Clare will be available for follow-up questions tonight and tomorrow. Thank you, Brian.

Thank you. That concludes today's conference. You may disconnect at this time.