Energy Transfer Equity's (ETE) CEO Kelcy Warren on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Energy Transfer (ETE)

Energy Transfer Equity, L.P. (NYSE:ETE)

Q2 2014 Earnings Conference Call

August 7, 2014 09:30 a.m. ET

Executives

Martin Salinas – Chief Financial Officer

Kelcy L. Warren – Chief Executive Officer

Marshall S. McCrea – President and Chief Operating Office

John W. McReynolds – President, Chief Financial Officer

Jamie Welch – Group Chief Financial Officer and Head of Business Development

Analysts

Gabriel Moreen – Bank of America/Merrill Lynch

Abhi Rajendran – Credit Suisse

Schneur Gershuni – UBS

Darren Horowitz – Raymond James

Helen Ryoo – Barclays

Michael Blum – Wells Fargo

Jeremy Toner – JP Morgan

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2014 Energy Transfer Partners and Energy Transfer Equity joint Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions)

I would now like to turn the conference over to your host for today to Mr. Martin Salinas, Chief Financial Officer. Sir, you may begin.

Martin Salinas

Thank you, operator and good morning everyone. Welcome to Energy Transfer’s second quarter 2014 earnings call. We thank you for joining us and appreciate your continued interest in Energy Transfer. As always I’m accompanied by Kelcy Warren, Mack McCrea, John McReynolds, Jamie Welch and other members of our senior management team, who are available to help answer your questions after our prepared remarks.

On today’s call, I’ll start with the few comments about the key accomplishments ETP achieved during the quarter followed by a brief update on our growth projects before concluding with ETP’s quarterly financial results. After that I’ll hand the call over to Jamie Welch to ETE’s activities and financial results for the quarter before opening up the call to take your questions.

As a reminder, we will be making 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.

I'll also refer to adjusted EBITDA and distributable cash flow or DCF, which are non-GAAP financial measures. A reconciliation of our non-GAAP measures can be found on our website.

With that let’s start with our distribution rate where we announced a fourth consecutive increase in our quarterly distribution to $3.82 per unit on an annualized basis that represent an increase of just over 6.5% from last year which be paid on August 14 to unitholders of record as of August 4. The increase demonstrates our confidence in growing unitholder or managing an appropriate distribution coverage ratio which was 1.1x for the quarter. This was another solid quarter for ETP of which I’ll go into more detail shortly and it definitely reflects the positive impact of our organic growth and continued expansion in prolific areas, coupled with our diverse asset footprint.

Now, onto some of our other key highlights for the quarter: In mid June we sold 8.5 common units for net proceeds of $377 million and earlier this week sold another 1.2 million units for net proceeds of $55 million that leaves us approximately 3.1 million AmeriGas units which replace into wholly-owned captive insurance (inaudible) this year. Those units were part of a larger portfolio management outside investing firm will be used to satisfy environmental liabilities primarily attributable to Sunoco’s legacy businesses. With that we’ve divested 26.4 AmeriGas units in the last year and have delivered on the commitment we made to our exit our position in AmeriGas in a financially prudent manner.

We’re also making great progress on our recently announced acquisition of Susser Holdings. The last remaining item is a Susser’s shareholder vote which is scheduled for August 28, and we intend to close the transaction on August 29. In the meantime, we remain focused on evaluating the most efficient and accretive way to carry out the series of dropdowns into SUSP and delivering on the $70 million or more of synergies that we believe can be derived from this acquisition. Our plan is to continue working on the dropdown and expect to have it announced and closed at the end of 2014.

We’re very excited about not just the business compliment Susser creates with our Sunoco retail segment, with the extremely talented team we look forward to growing a retail business with.

And moving onto some of our growth projects, we’ve made several exciting announcements a few weeks ago that I would like to highlight. Starting with the Rover pipeline, we received board approval to build Rover to transport natural gas from the prolific Marcellus and Utica shale areas to numerous market regions in the United States and Canada. To-date we’ve secured 2.95 bcf per day of binding, fee-based commitments under predominantly 20 year agreements, which is 91% of the 3.25 bcf per day of total design capacity, and we’re continuing to evaluate additional bids that were submitted during the open season. We’ve fully subscribed this project to the Dawn, Ontario hub at 1.3 bcf per day, with the balance of volume delivered to Midwest pipeline interconnects. We expect to be in-service (inaudible) by December 2016 and in-service to Dawn by July of 2017.

The total project will now consist of approximately 820 miles of predominantly 42-inch pipe at an estimated cost of $3.8 billion to $4.4 billion and currently third-party shippers have the right to acquire up to 49% of the pipeline. Regardless of the final ownership percentage ETP will construct and operate the pipeline.

We also announced that our Board approved to construct 100 mile pipeline to transport crude oil supply from strategic receipt points in the Bakken/Three Forks production area in North Dakota to Patoka, Illinois, where the pipeline will interconnect with ETP’s existing Trunkline Pipeline, which is being converted from natural gas service to crude transportation service. We now expect to build the pipeline to a capacity as high 570,000 barrels per day based on binding commitments received to-date and ongoing discussions with a number of key potential shippers. The pipeline is expected to be in service by the end of 2016 with an estimated cost of approximately of $4.8 billion to $5 billion.

And like our Rover project we’re in discussions with third-party shippers to potentially have the right to acquire up to 49% on the pipeline. Under all circumstances ETP and/or our affiliates will be the construction manager and operator of the pipeline. As always we continue to be very active on both the construction and commercial development fronts. From a construction perspective all of our projects are progressing and we expect these expansion assets to come online or ahead of the initial completion date and at or below our initial cost estimates.

On the development side, our commercial team continues to pursue a large number of potential organic growth opportunities and are also focused on select asset systems that are up for sale. And we’re very confident that our teams will deliver further growth and allow us to continue increasing unitholder value for many years to come.

And regarding growth capital expenditures, we spent just $970 million during the quarter including $627 million at Sunoco Logistics, and our gross capital expenditures for the full year of 2014 are now expected to be $3.3 billion to $3.7 billion on a consolidated basis that includes $1.9 billion to $2.1billion SXL sales.

Now turning to our second quarter 2014 results and I will reiterate what a great quarter it was. Consolidated EBITDA for the quarter totaled $1.17 billion that’s an increase of $100 million compared to the same period last year, while distributable cash flow attributable to ETP Partners for the quarter increased $55 million compared to the same period last year to $538 million. Excluding the EBITDA impact on the Trunkline LNG transaction and a one-time buyout for the customer contract, adjusted EBITDA for the quarter was actually $200 million higher with strong contribution from a majority of our operating segments delivering growth quarter-over-quarter.

Since we provided explanations to variances in our earnings release issued yesterday afternoon, I would like to highlight a few items. First, we had another strong quarter in both our midstream and NGL segments. We continue to increase our NGL barrels flowing out of the Permian Basin and Eagle Ford Shale through our West Texas gateway and just as pipeline systems and we continue to increase the volumes delivered to our processing plants compared to Q2 of 2013, our process volumes increased by over 600 million cubic feet per day. And we transported over 367,000 barrels per day on our NGL pipeline systems, an increase of over 60,000 barrels per day compared to the first quarter of this year, and an increase by over 93,000 barrels per day when you compare to the second quarter of 2013.

Additionally, our fractionated volumes increased by approximately 34,000 barrels per day, again compared to the first quarter of this year, an increase by over 92,000 barrels per day from the second quarter of 2013.

Regarding Interstate when you exclude the impact of non-recurring transactions, we saw pretty consistent results quarter-over-quarter given the fee based nature of our transportation pipelines. And we also experienced consistent results in our Interstate segment as adjusted EBITDA was only slightly down this quarter compared to 2013.

While the near term natural gas price outlook may continue to be soft with pockets of upsides from time to time as we experienced in the first quarter of this year, we’re extremely optimistic that our transportation pipelines will drive much stronger operating results as demand is expected to increase due primarily to commencement of LNG exports of the Gulf Coast, increased demand from Mexico by directionally flowing our pipeline systems to transport Marcellus and Utica gas to the Gulf Coast, further environmental pressure to convert coal-fired power generation to natural gas generation and increased petrochemical demand along the Gulf Coast. And we’re certainly very well positioned to provide substantial midstream services to our existing and new customers as this demand further develops.

Regarding our investment in SXL, we saw another strong quarter from them driven by the higher volumes as the SXL expansion projects come online and the associated ramp up causing margins across all segments to increase. And also from a favorable price environment which add a positive impact on a crude oil acquisition in marketing segment. And distributions from our equity ownership in SXL continue to grow significantly as SXL delivers on its 20% plus annual distribution growth.

And with respect to our retail marketing segment, we had another tremendous quarter as gasoline margins were captured during the quarter along with incremental margin and cash flow resulting from the MAX and Tiger Mart acquisitions.

And lastly, we made great strive managing our businesses and the cost cutting initiatives we embarked on for 2014 are proceeding at or better than what we expected and we’re well on our way to achieving our targets.

And last comment regarding ETP before turning the call over to Jamie. As of June 30, we had no borrowings under the revolver and should have sufficient liquidity for the remainder of the year and into early 2015 without having to engage in any capital market transactions. We believe that excluding any acquisition announcements, our liquidity needs can be managed with our revolver borrowings, proceeds from aftermarket issuances and potential cash received as part of the retail dropdown (inaudible).

However, we’ll continue to keep a close eye on the broader markets and opportunistically access the capital market as we see fit, command our financial position and investment grade ratings.

That’s pretty much about my talking point about ETE, I’ll now turn the call over to Jamie to discuss management related to ETE.

Jamie Welch

Thanks, Martin. It was a busy quarter with all the partnerships continuing on from the strong performance in Q1 2014. It was also active for the large scale organic development program across the family including the recently announced two new ETP growth projects, Bakken and Rover.

The total growth CapEx to board approved projects across the family excluding any M&A activity and (inaudible) LNG currently exceeds $15 billion. From a financing perspective from January thru May ETE completed its $1 billion common unit buyback program. As a result there is a reduction of approximately $500 million in Partner’s capital on our balance sheet from December 31, 2013 to June 30, 2014.

ETE also amended its senior secured term loan agreement to increase the aggregate principal amount to $1.4 million and used the proceeds from this $400 million increase to repay borrowings under our revolving credit facility and for general partnership purposes. In May, ETE issued $700 million aggregate principal amount of its 5.875% senior notes due 2024.

And lastly, ETE purchased 14.4 million Regency common units for $400 million in June and shortly after purchased an additional 16.5 million Regency common units for another $400 million as part of the closing of the Eagle Rock transaction. Subsequent to these purchases, ETE and ETP own approximately 24% of the limited partner interest in Regency.

Switching over to LNG, we remain confident in our ability to achieve financial investment decision or FID in mid 2015. We continue to make progress on the overall project development and expect a notice of schedule for environmental review from FERC in September. A draft environmental impact statement in the full and the binding submissions from the select ETC consortiums for the construction of the project by the end of November. As we previously stated, this project is another step in our overall transformation. The emerging LNG business is expected to serve as a significant additional leg of the chair for the Energy Transfer family.

That wraps up what we’re doing from a financing and project perspective, which now brings me to ETE second quarter financial results. As a quick reminder, ETE’s principal sources of cash flow are from the general partner interests and IVRs received from both ETP and Regency. 50% of the economics for GP IDRs from SXL via the Class H-Units and ownership of Trunkline LNG.

Distributable cash flow as adjusted for the three months ended June 30, 2014 totaled $218 million, an increase of $38 million compared to the same period last year. The increase was attributable to high distributions from Regency, cash flow from T LNG and year-over-year interest expense reductions from refinancing completed.

And on the topic of T-LNG, we continue to see overall better than expected financial performance from T-LNG realized through active cost control. As a result, full year 2014 T-LNG cash flow is expected to be almost 5% higher than originally forecasted. I would also like to highlight ETE's seventh consecutive increase in its quarterly distribution to $0.38 per unit or $1.52 per unit on an annualized basis to be paid on August 19 to unitholders of record as of August 4, 2014. This is 16% increase in distribution per unit compared to the same time last year and our distributable cash flow coverage ratio comfortably exceeded our one time goal at 1.06x for the quarter and is 1.4x through the first six months of this year.

And lastly, on the credit side, we continue to see the overall debt to EBITDA ratio of ETE at or below 4x for the full year 2014. I would like to thank the talented group of employees who have worked so hard to drive these impressive results. I would also like to thank all of our customers and long-term unitholders for their continued support of the Energy Transfer family. In closing we are extremely proud of our second quarter accomplishments and looking forward seeing numerous opportunities for continued growth across the family.

Operator that concludes our prepared remarks, let's open the line for questions and thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gabe Moreen from BOA. Please go ahead.

Gabriel Moreen – Bank of America/Merrill Lynch

Hey good morning everyone. Jamie if you can just talk about where things maybe stand contractually with BG on Trunkline LNG and then also maybe talk about kind of your latest thinking on how you are approaching financing the project?

Jamie Welch

Sure Gabe. As far as BG is concerned, we have spent the last four or five months negotiating with them over the sort of fundamental terms of all the contracts. So between the construction management agreement, the ONM agreement and what we call facts and services and we are now fully agreed on all the terms with BG. They are going through their internal BG formal process that will lead to their board approval. We expect that will happen by sometime in September. And the terms are very consistent with the framework that we laid out last year at the Analyst Day as far as both, as far as the underlying economics as well as the term of the contracts, so we have term of the contract that right now we anticipate will take us out to 2046.

So, we feel pretty good about getting that element now behind us, focusing now on obviously getting on the regulatory side and also focusing on the EPC side. As it relates Gabe to the timing of – as it relates to an MLP IPO for LNG, I think since we had no real need for the proceeds, we have sort of put that to one side until such time as we had like (Charles), we think fully in the bag that FID was clearly inside and then we really would take this forward and then go through the IPO process. I think it was, that's a better road map and I think better industrial logic as we thought about the overall requirements and what we saw.

Gabriel Moreen – Bank of America/Merrill Lynch

Thanks Jamie. And then turning to, I guess, Rover and the crude oil pipeline projects, I am just curious in terms of your thoughts, I mean, it sounds like there will be shippers participating or potentially participating but also involving other members of the Energy Transfer I guess family of MLPs in those projects either one whether Regency or SXL?

Kelcy L. Warren

Hi Gabe, this is Kelcy. Sure at the present time we have nothing to announce, but it's as you know ETE does not really desire to be in the asset-only business, we have done that from time-to-time and as you know then we find the way to exit that within the family. So, I think the same thing can be expected here. I am hopeful we’ll have something to announce in a short period of time.

Gabriel Moreen – Bank of America/Merrill Lynch

Great, thanks Kelcy. And then, just last one from me, is on the Bakken crude pipe project, can you just talk about serve expectations on returns, long returns and just how those returns, I guess would ramp over time with volumes?

Marshall S. McCrea

Okay. This is Mackie. Yes, I guess I would start up saying how excited we are, lot of companies have worked for a long time to build a direct route out there combined with the conversion of our Trunkline that we worked on for a long time. We couldn’t be more excited and pleased with our team and glad to get that baseline is an exceptional project. We continue to have tremendous amount of interest as we showed in our press release and stated this morning. We expect to stand about $5 billion and it's about 7.5 to 8 multiple is what we anticipate end of the day.

Gabriel Moreen – Bank of America/Merrill Lynch

Great. And I should have let with the congrats, so congrats on that Mackie and I will jump back in the queue.

Operator

Thank you. Your next question comes from, apologizes to pronunciation (inaudible) please go ahead.

Unidentified Analyst

Good morning.

Kelcy L. Warren

Good morning John.

Unidentified Analyst

At last November’s Analyst Meeting, for the LNG, the L&G export project you provided some future cash flow forecast estimates and some project economics and you are touching on those a little bit when you were answering Gabe's question. As we sit here today are those largely unchanged or is there something that we should think about there that is any different?

Jamie Welch

Well, as we said at the analyst day and its actual fundamental terms of the contract stand John, we get an unlevered rate of return on an absolute amount of invested capital. So, it will fluctuate until such time as we hit FID and I think at that time last year we said 9.2 – $9 billion of EPC of an high cost in $200 million of our cost for development. I suppose we sort of go through that right now, we will know more as we go through EPC cost discovery. I would anticipate that we are still in that sort of zip code maybe somewhere between $9 billion and $10 billion. So it's at least what it show it maybe a little better, only time will tell when we will sort of have a better sense over the course of the next eight or nine months frankly.

Unidentified Analyst

Got it, and then separate unrelated question. Can you talk a little bit about the company's philosophy on diversification and how do you think about the economics and accretion dilution when you are looking at different opportunities?

Kelcy L. Warren

Yes, this is Kelcy. Diversification, we think it's, I mean, look at what’s happened to us over the last past seven years, it’s deliberate move to diversifying to different sectors primarily the movement of heavier or harder carbons, thank goodness we did that and then as we stand here today, finally we are seeing some relief with natural gas bases coming back. So, we believe in it, we think it's necessary, we are proud of what we have done to diversify. But it's also important to note that we must diversify across basins and geographical footprint. We have done that quite well and for example, when spreads are good, in Texas, they might not be bad to the northeast and vice versa. And so we are proud of what we have created and we will continue to look at diversification. We will try to participate in all of the active shale plays.

We tend to move our activities where rig count seems to be increasing and we will continue to do that. As it relates to accretive nature of acquisitions, it kind of depends. It's something just a straight forward acquisition then our expectations of the accretive nature of that would be greater. If something is defensive in nature or very strategic in other words it’s an entry into a new area, we would be a little more aggressive where we might do something approaching accretive neutral. That has worked out very well for us in the past and we will continue to view our M&A strategy that way.

Unidentified Analyst

Got it. Thank you.

Operator

Thank you. Next question apologizes again for pronunciation, this one is from Abhi Rajendran from Credit Suisse, please go ahead.

Abhi Rajendran – Credit Suisse

Hi! Good morning guys. Couple of quick questions on ETP distribution growth accelerated a bit from 1.5 cents to 2 cents, I mean, is this sort of a level that you guys think is sustainable going forward or do you think there are opportunities to kind of step that up further given kind of all the projects that are coming down the pipe. Any color there would be helpful?

Martin Salinas

Yes Abhi, this is Martin. As we said, the management team for the course of last couple of months think now only about in the distribution rate for this quarter, but what it means going forward as we said in our prepared remarks, really strong quarter on top of the first quarter that we had. The visibility and transparency of growth that we see coming to ETP not only of the course six to nine months, but certainly longer term as we think about the continued growth in the Eagle Ford, what we’re doing on the Permian. The Rover and Bakken projects that start to come online in '16 and '17. And then you factor that in with the Susser transaction and what that could do for ETP, just had a strong conviction of what we can deliver to the marketplace from a distribution rate, growth perspective and we decided to take that next step up this quarter compared to last quarter and we certainly believe that we can sustain that type of growth certainly on the next two to five years.

Abhi Rajendran – Credit Suisse

Okay. Got it. And then, and on some of those newer projects can you touch on whether you have any preference on your ownership of these projects if you prefer to have shippers take on greater stakes or you’re fine with them kind of doing them on your own any thoughts there would be helpful?

Martin Salinas

The way we struck these end returns that we expect we are pretty happy, very happy to 100% own them. However, the nature of our negotiations and the negotiations that we had with the shippers brought the opportunity to them to participate in equity, in some type of equity involvement. And so, we are neutral if they elect to be in for the rights on these projects, then we certainly will welcome them in. if they are not, we are very excited about funding them ourselves and own them outright.

Abhi Rajendran – Credit Suisse

Okay, got it, thanks. And then, last quick one from me on the LNG area, we obviously seen kind of a shift in some of the regulatory landscape and in terms of who is approving what and the order of where kind of the focus is, can you just talk a little bit about your thoughts on just kind of where you think, maybe aggregate capacity approved over the next couple of years trend, I mean I think it seems like now a threshold till – would be around 12 bcf per day, I mean with DOE kind of looking beyond at the 12 to 20 range. So any color there will be very helpful?

Jamie Welch

Abhi, it’s Jamie. I think, our view is with 12 sort of approved now, I’m going through that, the update for the nearer of you, I think our expectation is that there may be several more, but obviously at some point there you have to be balancing where you think the public interest is and that’s obviously for the government to make the decision. And I think it will mean that we won't to see endless number of liquid fraction projects. The short answer is, by the way even on the commercial side, we just don’t see this being enough sustainable support for an endless amount. But those projects that are well structured that have good commercial foundations, have access to gas, which is one of the critical things, I think Mackie, Kelcy and the rest of us spend a lot of our time talking about that probably get done. They make a lot of good, they make good logical sense, but we want to see endless numbers of these.

Abhi Rajendran – Credit Suisse

Okay, got it. Thanks very much guys.

Jamie Welch

Thanks Abhi.

Operator

Thank you. Next question comes from, again apologies for pronunciation, Schneur Gershuni from UBS, please go ahead.

Schneur Gershuni – UBS

Hi, good morning guys.

Jamie Welch

Hi, good morning Schneur.

Schneur Gershuni – UBS

Just a quick question, sorry going back to the projects again and the ownership potential of the shippers, is there a kind of a limit as to how much, I understand there is a 40% limit, does their level of participation sort of impact, the level of participation of other Energy Transfer Partner family entities, do you want to keep 60% specifically at ETP and then if the shippers don’t take their stake, then you would be considering others. I just wondered if you can sort of talk about the dynamic there a little bit?

Kelcy L. Warren

Okay, let me talk about each one individually with Rover its 100% ETP, if the shippers elect to participate for equity position, they can go as high as 49% but the remaining 51% would be owned and operated by ETP. On the (inaudible) Pipeline, our Bakken project we’re in negotiations and there is not a chance that we’ll have a shipper or shippers that have the right to participate up to the 49% as we’ve stated publicly. The remaining 51% remains to be seen, we certainly have will have some involvement at a minimum from a shared services operating perspective from our SXL brothering and as was mentioned on SXL call this morning they do have an interest in participating in the project and we do have ongoing dialogue around those discussions.

Marshall S. McCrea

If I might add, but in all instances we will be the operator, let me add, we will consider reducing our ownership in letting other people come in that we believe their volumes can enhance the project. In all instances where we not be the operator that’s a very, very important point, we are not investors, we think we have a lot of value about being the operator, somebody in the Energy Transfer family to operate.

Schneur Gershuni – UBS

Great. And just a sort of a quick follow-up on that, is there kind of go or no go kind of deadline on when they have to decide they are going to take in equity participation, like once the shovel hits the ground, either they’re in or they’re out from an equity perspective?

Kelcy L. Warren

Of course, those kind of details are highly confidential and that we are bound by confidentiality agreement. But, yes there is a limited term on Rover, but they had the right to auction and is an extended term.

Schneur Gershuni – UBS

Okay, great. And one quick follow-up kind of on the structure side, there has been some chatter about up see structures in the past, I was just wondering if it’s something you are still thinking about or pursuing as financing option?

Jamie Welch

Kelcy loves that sea structure by the way.

Martin Salinas

The short answer is we have had so much going on in the second quarter and we have spent a lot of time, I would say on the legal, the tax and the structuring side. So we kind of got it on the shelf, if we decide that it makes sense in particular Kelcy decides it sort of make sense from our standpoint then we will move forward but right now we don’t see a pressing need sort of move forward with it.

Schneur Gershuni – UBS

And then just one final question crossing the (inaudible) ice a little bit. I just wondering if you can just sort of elaborate on the income tax impacts that we are seeing, it seems some of it is related to the AmeriGas sale, but I just want if you can sort of give us a little bit color and how that would be added on a go forward basis?

Martin Salinas

Yes, you better know this is Martin. You are right, we are seeing some noise regarding taxes, given some of the things that we are doing to show up our balance sheet and obviously enhance our liquidity, I think when you look at the run rate for the quarter it probably a good benchmark for what I think, we’ll see the next couple of quarters as we get to the last half of the year, as we get into ’15, ’16 yes, some things that are kicking in that we should manage our income tax a lower number than that but that kind of what’s going on for this year.

Schneur Gershuni – UBS

Great. Thank you very much guys, that’s all from me.

Martin Salinas

Thanks Schneur.

Operator

Thank you. We have another question for you. This one is from Darren Horowitz from Raymond James. Please go ahead.

Darren Horowitz – Raymond James

Good morning guys. Mackie a quick question for you on the Bakken project that $4.8 billion to $5 billion cost estimate that you mentioned does that include a rail term and a facility in Illinois to move product and also as you think about it, is there any additional CapEx with regard to infrastructure build out at Sunoco Logistics, facility that’s going to be necessary to handle those additional barrels moving south?

Marshall S. McCrea

The answer to your first question is no, that the rail facilities are not included in that CapEx albeit that it wouldn't be a large CapEx issue. As far as (Inaudible) any kind of facilities for storage or moving barrels to that facility will be managed and handled by SXL, as the barrels are delivered to them. So that is not part of the project either.

Darren Horowitz – Raymond James

Okay. And then quick follow-up question around the taxable ramifications, just with regard Jamie did a commentary around the retail drop down in the (inaudible) and you guys mentioned that target for the first drop down to be closed by the end of this year. I realize it's important to structure that cash piece to amortize any sort of gain over 10 or 15 year period so you are obviously incentivize to accelerate the drop down so I am just wondering do you expect that first drop to be larger in size or more of a series of consistent drop down in order to establish that tax shield and manage the cash tax piece that way?

Jamie Welch

Darren, I think as far as the first one is concerned, whether we do one of the legacy Sunoco businesses which obviously have a lower tax profile or we do something that's more recent some of the recent acquisitions, we still sort of making that debate, we need to go through internally as a management team and obviously through a special committee process. I think it's quite possible just given as we look at it and we look at the markets, it's possible that we end up doing maybe a larger size deal than maybe the market we are heading and participated, in the course of the balance of 2014 as we do the drop down.

Darren Horowitz – Raymond James

Okay. Thanks Jamie.

Operator

Thank you. We have another question for you. This one is from Helen Ryoo and she is from Barclays. Please go ahead.

Helen Ryoo – Barclays

Thank you. Just a couple of quick follow-up. So on the Bakken project, I guess the right way to think about it is whatever stake that stays within the family the Energy Transfer family ETE and ETP will have 60:40 ownership and then ETE would probably drop down or have other members of the family participate in their stake?

Kelcy L. Warren

Helen, this is Kelcy. That is correct. Presently 60:40 with as you know, E owning part of that as a legacy transaction of the southern union acquisition. I do not see ETE staying in that position. I think that that will be moved into the family hopefully probably soon.

Helen Ryoo – Barclays

Okay. Great. And then the 570,000 barrels per day is that – it looks like an increase from the 320 that you put out earlier, so just wondering is all of that 570 currently contracted out and if so what’s sort of the mix of the customers mostly producers, or do you have some end customers, end users?

Kelcy L. Warren

Yes. We have a mix of everything. We have marketing companies, we have producers, we have markets. It's quite a number of shippers on the project. And right now we have 320,000 that we are building to. We are very close to another large amount of volumes that we hope to announce very soon and we are very optimistic that ultimately the design capacity will be 570,000 barrels a day, all the way down to need one.

Helen Ryoo – Barclays

So, you current contracted capacity is 320, but you are expecting that you are going to get to 570 in terms of contracting? Do I understand that correctly?

Kelcy L. Warren

Yes. We are in negotiations right now, we will add a large chunk on top of 320,000 a day and in addition to that we have other negotiations going on that would increase the size to 570, the initial size to 570.

Helen Ryoo – Barclays

And then the $4.8 billion to $5 billion cost is based on the 570 capacity?

Kelcy L. Warren

That's correct.

Helen Ryoo – Barclays

Okay, great. And then just on Rover, how much of your backhaul capacity on Trunkline has been contracted out and would this require you to expand the 36 inch line based on what's been contracted?

Jamie Welch

Helen, I think Mackie will answer this question, but I would like a little clarity. When you talk about a Trunkline capacity are you referring to the eastern top line that will be connected to this, is that?

Helen Ryoo – Barclays

Yes. So, I was just referring to the trunk, that the 36 inch Trunkline that you will use to move Marcellus, Utica gas down to the Gulf Coast, whether that line needs to be expanded based on the backhaul capacity you contracted out?

Marshall S. McCrea

Yes it does. Well, even today we have already contracted some of the capacity from a strictly backhaul basis on volumes that move from the south to the north, but as part of our Rover project we are making the entire 36 inch pipeline bidirectional, we will have a capability of moving 750,000 a day down to the Gulf Coast.

Helen Ryoo – Barclays

Okay. And the cost of that Rover project with the new built now firmed up, new built to Dawn firmed up what's the cost looking like there?

Kelcy L. Warren

As we stated publicly, it’s between $3.8 billion and $4.4 billion.

Helen Ryoo – Barclays

Okay. Okay. Great. And then, just lastly on the LNG side, I guess, in the past you have talked about starting some financing discussions during the summer and maybe Jamie could you talk a little about what you are hearing in terms of the – from your commercial bankers?

Jamie Welch

Sure Helen. So now we are done with BG, we are off to the right, we are going to get started in earnest with the banks. We – it's like a never ending (inaudible) between whether they come to our places or we go and see them. But we are I think going to undertake the financing in earnest and up our intent and hope is that we can get that framed up by the end of the year that will actually know exactly what our debt financing looks like and then we will just have at that point, just the formal process and just the equity to be raised and that should then allow us to achieve FID.

Helen Ryoo – Barclays

Great. Thank you very much.

Operator

Thank you. We have another question for you and this one is from Michael Blum from Wells Fargo. Please go ahead.

Michael Blum – Wells Fargo

Hi good morning. I guess, just staying on LNG for a second. So just Jamie just to your earlier comments so what is the latest in terms of timing for an IPO?

Jamie Welch

Michael, I would say at the earliest it's probably end of this year beginning of early next year, I would probably say right now if you ask me most likely the beginning of next year because I think that will coincide nicely with the timing around FID and we will know where everything stands. We obviously need to do the IPO to raise we think the equity required for (inaudible) the external third-party equity that we will be seeking. So I think that probably dovetails well with how we are looking at the overall project because then it will be fully formed, right.

We will know what the EPC number is because while bonding submissions in November we know where the draft statement is, we will know what our debt financing looks like. So I think by that point we will really, really know exactly what our project looks like and which case it's the ideal time to then I think go to market and start talking about.

Michael Blum – Wells Fargo

Okay. Great. And then, on the Bakken pipeline project, I guess a couple of points of clarification for me, the shippers, their option to take the 49% -- up to a 49% interest in the project, is that on the entire project overall or is that just the Bakken piece does that include Trunkline just want to make sure, I understood that?

Kelcy L. Warren

Let me clarify, right now we do not have any shipper that has the right to bond the equity we do anticipate that it could be as high as 49%. But it would be in the entire project, the (inaudible) in the conversion, and the connection to one.

Michael Blum – Wells Fargo

Okay and then when you talk about the 7.5 to 8 multiple, was that also on the entire project?

Kelcy L. Warren

Correct.

Michael Blum – Wells Fargo

Okay, got it. All right, that’s all I had, thank you.

Operator

Thank you. We have another question for you, this one is from (inaudible) from Deutsche Bank. Please go ahead.

Unidentified Analyst

Good morning. Jamie, ETE completed 1 billion share buybacks, are you contemplating on the next program?

Jamie Welch

No, we are not contemplating the next program at this time.

Unidentified Analyst

Okay then Martin, on the growth CapEx, you increased by 200 million this quarter what contributes to that increase?

Martin Salinas

The lion share Valerie was, if you recall our first quarter call, we increased the scope of our Rover project to take it to the full capacity to have the big piece of that and then we have got some smaller expansion projects that are occurring around our systems primarily in South Texas or on the Eagle Ford, so that contributed to the increase from our last quarter to this quarter.

Unidentified Analyst

Okay then on the natural gas pipeline how much lower, do you anticipate the volume in crude go before the LNG and Mexico kicks this?

Kelcy L. Warren

It’s part of our Interstate pipelines, they type of leveled out pretty well regardless of what the results look like the volumes have only slightly fallen on our Interstate network and the volumes are Interstate network predominantly were declining on the Tiger system which as everybody probably knows we’ve full demand charges regardless of what flows. So it didn’t have a significant financial impact and then on our Interstate pipelines we do continue to see decline in the Port basin, however, we will see volumes continue to increase from Oklahoma, from Woodford into that Barnet shale area and with the rest of volume will be transported on our downstream hypes. But in summary, we continue to believe it’s a (inaudible) it can get, the declines have leveled off and we think over especially beginning in 2015 and board will see growth and the increases in our volume through our systems.

Unidentified Analyst

Okay. Thank you. That’s it from me.

Operator

Thank you, we have another question for you this one is from Jeremy Tonet from JPMorgan, please go ahead.

Jeremy Toner – JP Morgan

Good morning, it’s Jeremy Tonet from JPM. Just a question on the up sea team. I was wondering is down the road is there a preference if there was going to be an up see structure for let’s go to an IPO process or if the rate M&A opportunity came along would that also be a possible avenue to gain that type of structure, just wondering for any thoughts you might be wanting to share there?

Kelcy L. Warren

Yes, Jeremy this is Kelcy, that C is not even on our radar screen at this point. So, we can speculate if we were to look at this again, we can speculate of what we might do, but it’s not – this is not something that is even, it’s not on our roadmap at all.

Jamie Welch

Jeremy, you can do, but to answer your question you can do either, you could do it as part of an M&A transaction, you could do it as an IPO, I mean if that makes sense, helpful.

Jeremy Toner – JP Morgan

Okay, thanks and then just one last question, I realize gas storage is a much, much smaller portion of your business at this point, but I was just wondering if you could share any thoughts there on market trends you see, it seems like it was a tough quarter, but just wondering if you had any visibility to things improving there?

Kelcy L. Warren

We do, once again it’s tight to counter future storage spreads or bass they’ve ever been, but with all the growth along the Gulf Coast, the market demand especially the LNG, we believe the value of storage will be nothing but increase overtime, so similar to the basins across our pipelines we think it about as bass they can get and its only upside from here.

Jeremy Toner – JP Morgan

That’s it from me, thank you very much.

Kelcy L. Warren

Thanks Jim.

Jamie Welch

Thanks Jeremy.

Operator

Thank you. I have no more questions at this time. So now I’d like to hand the call back over to Martin Salinas for closing remarks.

Martin Salinas

Great again, thanks everyone for your time this morning and look forward to more exciting news to come from the Energy Transfer family. Everybody have a good day.

Operator

Thank you ladies and gentlemen that concludes your conference call for today, you may now disconnect. Thank you for joining and enjoy the rest of your day.

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Energy Transfer Equity (NYSE:ETE): Q2 EPS of $0.30 misses by $0.04. Revenue of $14.14B (+17.2% Y/Y) beats by $1.12B.