Energy Transfer LP
Q2 2011 Earnings Call Transcript

Published: 6 Aug 2011

[Operator:]

Good morning and welcome to the Energy Transfer Conference Call. 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 call is being recorded for replay purposes. I would now like to turn the call over to your host for today Mr. Martin Salinas, Energy Transfer’s Chief Financial Officer. Please proceed, sir.

[Martin Salinas:]

Thank you and good morning all. Thanks for joining us today. It has to be a very busy quarter for us and we have a lot to talk about so let’s jump right in. I’ll talk about providing an overview of the ETP and ETE’s financial results for the second quarter and give an update on our pending Southern Union acquisition along with some of our growth initiatives before opening the line for questions. I’d also like to encourage you to get into our website to access the earnings releases we issued yesterday after the market close. As always during the call I’ll make forward-looking statements within the meaning of Section 21E of the SEC Act of 1934 based on our beliefs as well as certain assumptions and information available to us. As always, I’m joined by Kelcy, Mackie, John McReynolds and other members of our senior management team to answer your questions after our prepared remarks. Let’s start by reviewing ETP’s second quarter 2011 results. And we’re pleased to report that adjusted EBITDA for the quarter was $388.1 million up approximately 15.6% in the second quarter of last year largely as a result of contributions from our Tiger and SEC pipeline plus the acquisition of LDH Energy's NGL assets, for Q&A Lone Star NGL. As you recall Tiger was placed in service in December of 2010 and SEC was placed in service in January of this year. Both pipelines have contractual ramp-ups of demand fees of the course of the year. So we expect to see continued growth in not only in the third quarter but also in the fourth quarter of this year. I’d also like to remain everyone that year-over-year growth in our Intrastate segment was offset by the sales of NEP to ETE in May of last year which contributed $12.4 million of adjusted EBITDA to ETP in the second quarter of 2010. Adjusted EBITDA from our other segments as a group was more or less flat year-over-year as modest growth in our Intrastate transportation and Midstream segments was offset by similar decline in our retail propane segment. We also experienced distributable cash flow growth of $23.3 million with distributable cash flow for the quarter of $222.3 million compared to $200 million in the second quarter of last year. From a distribution rate perspective ETP will pay its unit holders $89.38 or roughly $3.575 on an annualized basis per unit on August the 15th. And based on our how assets are performing the continued execution of placing assets in service not only on time but also within budget and increased distributable cash flows from these projects we’re confident that we’ll increase ETP’s distribution rate in the very near future. So let’s look at our business segments and I’ll start with our Interstate business. Our Interstate operating income for the quarter was $135.7 million compared to $127.8 million in 2010 and was affected by several factors. First we experienced an increase in transportation fees of $2.9 million over the second quarter of last year due to demand fee increases offset by a decrease in fees earned on interruptible transportation services. The declines in interruptible volumes resulted from the weak basics differentials we continue to experience across Texas. In addition, margins from sales of our natural gas and other activities increased $2.4 million in the second quarter of 2011, primarily reduced in increase in sales of NGLs offset by lower margins from system optimization activities. We also saw our storage margin recognized under fair value accounting increased $7.6 million primarily driven by unrealized gains on natural gas inventories during the quarter adjusting for non-cash gains and losses on derivatives and inventory between the two periods our storage margin actually decreased $10 million primarily due to lower withdrawal rates, tighter storage spreads this year compared to last year. And as it relates to our storage facilities we had just over 50% of storage capacity roughly 39.5 Bcf contracted under fixed-fee contracts with the remaining contract terms of one to three years. And as of June 30th we had approximately 38.5 Bcf in the ground for our own accounted Bammel for expected withdrawals during the 2011 and 2012 winter season. Now looking at our Intersate Segment where we achieved operating income $ 49.8 million for the quarter as an increase of 17.6 million from second quarter of last year and was primarily driven by higher transportation revenues from our Tiger pipeline. And as I mentioned earlier we expect to see additional revenue increases from Tiger over the course of the year due to contracted demand fee ramp-ups. In terms of volumes we saw an increase of 1.2 Bcf a day for the quarter again primarily driven by volume shift in the new Tiger pipeline offset by slightly lower volumes on the Transwestern Pipeline compared to the same period in the prior year. For FET, which is our 50

[Operator:]

Thank you. (Operator Instructions) And your first question comes from the line of Darren Horowitz with Raymond James. Please proceed.

[Darren Horowitz:]

Good morning guys. Just a couple quick questions, Martin, first as it relates to the Lone Star pipe that you were talking about the 130,000 barrels a day, how much of that capacity right now is subscribed and, more importantly, as you're looking at the scale and the scope of possibly expanding that line or leveraging off of that line for additional services throughout the supply chain how do you think of about the first move that you should make?

[Mackie McCrea:]

Hi Darren.

[Darren Horowitz:]

Just a couple of quick questions. Martin, first as it relates to the Lone Star pipe that you were talking about the 130,000 barrels a day. How much of that capacity right now is subscribed and, more importantly, as you're looking at the scale and the scope of possibly expanding that line or leveraging off of that line for additional services throughout the supply chain how do you think of about the first move that you should make?

[Mackie McCrea:]

This is Mackie. As we announced in our press release we originally had signed about 65% to 70%. We are very close to expanding that to north of 85% to 90% and back of – have decided to order 16-inch pipe of that project because of our ongoing negotiations.

[Darren Horowitz:]

Mackie, do you still think that you're going to be at $700 million or you think you can do a little bit better?

[Mackie McCrea:]

Definitely

[Darren Horowitz:]

At the estimated cost of the project didn’t it.

[Mackie McCrea:]

No, we do anticipate to be under that because we have offered our route. So are very optimistic that we’ll be under that number.

[Darren Horowitz:]

Okay. From a bigger picture perspective and I know that Kelcy’s talked about this a good bit. When you guys think more not just about NGL takeaway from the Permian and West Texas, but more importantly about crude oils and condensates, how do you think about gaining greater exposure there to moving a lot of that product to east?

[Mackie McCrea:]

Well, we are – announcement and hopefully we’re able to announce that project is being built here soon and with multiple negotiations we have gone on throughout the Eagle Ford and also some amount in West Texas we do believe that with this very significant potential for growth and our partnership. There has been a number of announcements on crude oil and condensate lines about the Eagle Ford but there’s also a need for significantly more infrastructure. We are having ongoing negotiations and hope to get in that business soon.

[Darren Horowitz:]

Okay. Thanks for the color, Mackie.

[Mackie McCrea:]

You bet.

[Operator:]

And your next question comes from the line of Yves Siegel with Credit Suisse. Please proceed.

[Yves Siegel:]

Thanks good morning, everybody.

[Mackie McCrea:]

Hi.

[Yves Siegel:]

Just on the Darren’s question by going to a 16-inch pipeline, how much more capacity does that enable you to do or to get to?

[Mackie McCrea:]

Yves, similar to transporting natural gas it depends but instead of compressors of course you use pumps for liquids, so depending on how many pumps and how closely spaced they are but it could range anywhere from a 150,000 barrels to a 300,000 barrels per day.

[Yves Siegel:]

Okay, wow. And then in terms of how should we think about the capacity on the fractionator? Is that basically fully subscribed as well, based on what you're doing with the pipeline here, or how should we think about that?

[Mackie McCrea:]

Yeah, it’s fully subscribed. We are contemplating the next fractionators.

[Yves Siegel:]

Alright. Good for you. And then my last question really high level here and based on Martin's last commentary. How do you all think about the risk profile of the company going forward if you're successful in terms of executing the business plan?

[Mackie McCrea:]

Yeah, Yves. This is Kelcy here and I’m pleased correct me if I’m giving if I didn’t exactly get the questions right but the Southern Union acquisition as Martin said in this closing remarks it creates a great amount of diversity, it gives us access to areas that we previously did not access as Mackie was talking about our Lone Star loan but there’s really the Southern Union Gap Service’s assets are very, very complementary to grow in that business. So, we only see that we’re going to be less vulnerable to this basis it’s just really hammered us. You know that, Yves I mean if you looked at the basis that exist today it is very difficult during the pure natural gas business to make much money. It’s just very, very good for. And this gives us more exposure to margins that we really need some partnership.

[Yves Siegel:]

Great. You I guess where I was going with that is having a diversified footprint and thinking about fee-based versus commodity-based. I don’t want to lead you in terms of saying lower risk profile, but I would think that somebody could come to that conclusion?

[Kelcy Warren:]

Yeah, we certainly have. I mean, we have been very aggressive in the Southern Union acquisition for good reasons we don’t believe that anybody else in the world, but I think we know that. And so however it’s been hard yet where we are, but we’re very very excited about what that acquisition does for us and what all these projects do for us moving into the transportation of natural gas liquids was a big step for us. We were two ends out it. We were missing business opportunities with our customers, because we did not provide all of the services that we’re requiring. So, Yves, we’ve made a lot fixed steps here in the last several months and we’re very excited about our future.

[Yves Siegel:]

Good luck, guys.

[Kelcy Warren:]

Thank you.

[Martin Salinas:]

Thank you.

[Operator:]

And your next question comes from the line of Ross Payne with Wells Fargo. Please go ahead.

[Ross Payne:]

How are you doing, guys?

[Martin Salinas:]

Hey Ross.

[Ross Payne:]

Martin, first of all, can you just kind of talk to us a little bit about your ideas on staying investment-grade. You've said that for some time, but just kind of reinforcing that maybe for some of the bondholders. And secondarily, as it relates to Southern Union, are you still thinking that that stays investment-grade based on the current plan of action on the acquisition?

[Martin Salinas:]

Yeah Ross, I mean absolutely in terms of commitment and our continuing thoughts on the remaining investment-grade at ETP and certainly from an ETE perspective supporting regency in that endeavor as well. I think as we sell back in ‘08 and ‘09 while we were not out of the capital market, it was costly, but we were able to do it. It was just important for us as we continue to move forward not only with Southern Union merger, but supporting Mac and his team in terms of growing the business in the various areas where we’re focusing. So, doing a lighter amount of equity and debt ensure our leverage metrics are appropriate for our risk profile size of business or scale of operation, and certainly keeping close contact and communication with the rating agencies to ensure that they have a good feel for our plan at this paramount. So, that remains with respect to the Southern Union as that settles and we do the dropdown of Citrus and we look at other potential transactions occurring from larger Southern Union ETE merger, our intend is certainly to right-size or recalibrate the credit metrics across the entity and the volunteer to support the credit metrics where we think that’s important as well as we move forward here.

[Ross Payne:]

So you’re also thinking Southern Union stays investment-grade here, Martin?

[Martin Salinas:]

That’s certainly I mean we’ve had a lot of discussions with the rating agencies. They’ve given us somewhat of a path. Playbook obviously to work to and we’re going to have to be keen on that.

[Ross Payne:]

Okay. And finally, two other things, intuitively, given Williams’ absence here and coming back with another offer, do you think they'd kind of back away here? And finally, how do you – how should we look at this right of first offer on the gathering system if Williams were to come back in?

[Martin Salinas:]

Yeah, we can’t comment on Williams. I think from my understanding – my prepared remarks, we’re moving forward as this transactions belongs to us. We’ve filed the S4. We’ve gotten through HSR. We’re looking forward to getting through shareholder approval which we hope will occur and we expect to incur in late September. So, we’re moving forward as this Southern Union will be a part of the Energy Transfer. What was the second question?

[Ross Payne:]

The right of first offer.

[Martin Salinas:]

Oh, right of first offer, right. Yeah, Energy Transfer Partners does have a right of first offer and again we’ll look at what ETP can do from a capital markets’ perspective again back to my comment of maintaining the investment-grades, they’re right now, if the rating agencies said “Martin, that's going to cause a downgrade of ETP and ETP doesn’t do it. And that’s plenty simple because of our commitment to keeping ETP investment-grade. So, we’re going to work on that. We’re going to sharpen the pencils again around that potential dropdown and other potential transactions coming out of the larger merger and we’re going to do what’s right for all unitholders here.

[Ross Payne:]

Great. Thanks so much, Martin.

[Martin Salinas:]

Yep.

[Operator:]

And your next question comes from the line of Helen Ryoo with Barclays Capital. Please proceed.

[Helen Ryoo:]

Thank you. Good morning, Martin.

[Martin Salinas:]

Good morning, Helen.

[Helen Ryoo:]

A couple of clarification question on the West Texas NGL line. So I think you mentioned that you're currently running close to 90% subscription on your original 130, so I guess you're subscribed almost up to 120 at this point, and since you're ordering a bigger pipeline, your minimum capacity would be about 150? Is that correct?

[Mackie McCrea:]

No, let me correct a little bit of what I’ve said or clarified. We’ve been at press release where we have got 65 to 70% signed of the neighbor made in press release. On other contracts that we’ve signed and ongoing negotiations, we’re highly optimistic we’ll have 85 to 90% of that capacity in the near future subscribed. As part of the 150,000 a day, that was the low end of what an 16-inch would move from West Texas to Houston.

[Kelcy Warren:]

You know I’ll take this on this. I think West Texas to Houston you’re going straight to the expansion. And I’d like to talk about the existing line what capacity is running at and then the expansion, because Helen is grouping the two.

[Mackie McCrea:]

Okay. We have the existing line and most of our line today is moving about a 140,000 barrels a day. And then we do….

[Helen Ryoo:]

Right.

[Mackie McCrea:]

Sorry…

[Helen Ryoo:]

Right. Yes. And if you were to install the 16 line, you would add another 150 at least?

[Mackie McCrea:]

Yes, yes. Everything worked well. Everything I’ve just talked about as far as our new pipeline project is the 106,000 and 300,000 a day in that topper, there would be additional volumes on top of the existing assets that we have today. So, yes, ultimately we anticipate moving 300,000 plus barrels minimum in both of our platforms the existing one and our new platform project.

[Helen Ryoo:]

Right. But just to clarify, since the 16 line could add another up to 300, then that means with the existing 140 that that would give you 440?

[Mackie McCrea:]

Ultimately, yes.

[Helen Ryoo:]

Okay. Got it. Got it. There's another competing pipeline from DCP. Do you think there's room for both your project and DCP lines to come to fruition, given what you see from the supply profile out of West Texas?

[Kelcy Warren:]

Helen, this is what we know. We know our line is being built. It’s not – we really – we see a lot of announcements in our industry where people say that they’re considering, they almost announced something. We know our lines being built, we know we’ve upsized it to 16-inch, but the facts that you just saw just a month ago we’re going to have a very large amount of capacity. We believe that that will be sufficient to address the customers’ needs however if the DCP does in fact build their San Jose line to the Permian Basin, very likely there will be more pipeline capacity than there is, they don’t stipulate. And therefore we’ve got to do our job and likely do customer commitments for a long-term that makes us somewhat immune to that overcapacity situation.

[Helen Ryoo:]

Okay. I appreciate that. And then just what you give – I think in the past you've talked about potentially increasing distribution in the third quarter, if I'm not mistaken. Is that still on the table?

[Martin Salinas:]

Yes certainly is, I mean Helen we came to the second quarter we’re very happy with the results. I think when you look at the diversification of our cash flows we’re seeing some weaknesses in part that we have experienced over the last couple of years. The good news is in fact it doesn’t get worse than that when you got a penny basis across Texas. We lifted the low gas price environment. We’re seeing a lot of upside in our midstream business with the acquisition of LDH. We’re seeing healthy margins there and as I mentioned in the call better than what we had budgeted or estimated from a deal of phenomenal perspective. So, they get a lot of credit and a lot of confidence going into latter half of this year. FEP and Tiger are working by the way they should be and that’s continuing to bring the Tiger expansion on sooner than we expected. And we thought that would happen in the first part of October and here we are in the first part of August. And then it’s online and going through the additional volumes. So, a lot of confidence going into the latter half of this year that we resume distribution rate.

[Helen Ryoo:]

Okay, great. Thank you very much.

[Martin Salinas:]

Thank you.

[Operator:]

And at this time there are no further questions in queue and I’d like to turn the call back over to Mr. Martin Salinas for closing remarks.

[Martin Salinas:]

Great, thanks Jason. All thanks again this morning. A lot of great things happening here at Energy Transfer and a lot to look forward to. And thank you for your time.

[Operator:]

Ladies and gentlemen this concludes today’s conference. Thank you for your participation and you may now disconnect. Have a wonderful day.