Enterprise GP Holdings Q2 2007 Earnings Call Transcript

Jul.30.07 | About: Enterprise GP (EPE)
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Enterprise GP Holdings L.P (EPE)

Q2 2007 Earnings Call

July 30, 2007, 10:00 AM ET

Executives

Randy Burkhalter - Director of IR

Michael A. Creel - President and CEO

W. Randall Fowler - Sr. VP and CFO

Dan L. Duncan - Chairman

Analysts

Mark L. Reichman - A. G. Edwards & Sons, Inc.

Gabe Moreen - Merrill Lynch

Sharon Lui - Wachovia Securities

John D. Edwards - Morgan Keegan & Company Inc.

Ronald F. Londe - A G Edwards & Sons, Inc.

Presentation

Operator

Good morning and thank you for standing by. At this time, all participants are in a listen-only mode, until the question-and-answer session of today's conference. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Randy Burkhalter. Sir, you may begin.

Randy Burkhalter - Director of Investor Relations

Thank you Jen. Good morning and welcome to the Enterprise GP Holdings' Conference Call to discuss earnings for the second quarter. Mike Creel Enterprise GP Holdings' President and CEO will lead the call,

followed by Randy Fowler, the company's Executive Vice President and Chief Financial Officer. Also included on the call today are other members of our senior management team including Mr. Duncan. Afterwards, we will open the call up for your questions.

Before we start the call, I would like to mention that this will be Mike's last conference call to lead as CEO of Enterprise GP Holdings, due to some recent management changes. Effective August 1st, Dr. Ralph Cunningham, will succeed Mike and will become serving as President and CEO of Enterprise GP Holdings, while Mike will begin his new role as President and CEO Enterprise Products Partners. Randy Fowler will continue in his role as Executive Vice President and Chief Financial Officer. Congratulations go out to both Mike and Ralph for their new appointments. And now turning to our forward-looking language.

During this call today, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, based on the beliefs of the company as well as assumptions made by, and information currently available to Enterprise GP Holdings' management. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest fillings with the Securities and Exchange Commission for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call.

With that, I will turn the call over to Mike.

Michael A. Creel - President and Chief Executive Officer

Thanks Randy. And thank you and good morning for joining us today to discuss our second quarter 2007 performance. We continue to receive strong cash flows from our ownership interest in the Enterprise Products Partners as they consistently grow earnings and distributable cash flow from their existing asset base, as well as from new capital projects recently put into service, such as the Independence Hub platform. We expect to have another $1.2 billion of capital projects begin the service this quarter. We also received $14.6 million of cash distributions from our new investments in Energy Transfer Equity and TEPPCO Partners.

Most of you saw our announcement in May regarding our acquisition of a 100% of TEPPCO as general partner, and 4.4 million TEPPCO common units as well as a 35% ownership interest in Energy Transfer Equity as general partner and approximately 39 million Energy Transfer Equity common units. These investment positions give Enterprise GP Holdings a reputation as being the only publicly traded GP holding company to own general partner interest in multiple MLPs. These partnerships diversify and broaden our sources of cash flow as they increase their cash distributions and issue equity to fund their own growth projects.

Based on current distribution rights, Enterprise GP Holdings would receive approximately $271 million of annual distributions, and that compares with $133 million that we received in 2006. These investments also expand our midstream exposure to refined products, crude oil, and natural gas transportation; and create opportunities for potential joint venture investments in complementary projects. Like all of our investments, these transactions fit our objectives of providing good long-term total returns for our limited partners, and increasing our distributable cash flow per unit. Our strategy is driven in part by the owner of our general partner and our largest unit holder who has a long-term view of his investment in Enterprise GP Holdings, and whose interests are truly aligned with those of our public unit holders.

In consideration for the TEPPCO interest, we issued 14.2 million Class B units and 16 million Class C units to EPCO. The Class B units have been converted into common units. The Class C units are not entitled to vote, and will not receive distributions until the second quarter of 2009. To finance the Energy Transfer Equity transaction and to refinance our existing revolver, we entered into a $1.9 billion interim credit facility. We completed the first step of permanently refinancing the interim credit facility by raising $750 million of equity in a privately placed equity securities transaction, earlier this month. Randy Fowler will give more details regarding our financing activities in a few minutes.

Before I turn the call over to Randy, I would like to make a few comments regarding the investigation of Energy Transfer Partners, by the Federal Energy Regulatory Commission and Commodity Futures Trading Commission. Last week, the FERC issued a show cause order requiring Energy Transfer Partners to respond to allegations of discriminatory pricing and market manipulation by the natural gas marketing and trading businesses, between December 2003 and September 2005. The CFTC filed a complaint with the U.S. District Court alleging that Energy Transfer Partners made an attempt to surfeit [ph] prices. These issues were disclosed in Energy Transfer Partners' SEC filings and ahead the reserve for potential exposure, prior to the time we conducted due-diligence related to our purchase of interest in the Energy Transfer Equity.

In addition to public company due-diligence, we also held separate interviews with Energy Transfer's management, and we were assured that the trading and the transportation activities of Energy Transfer Partners during these periods complied in all materials respects with applicable rules and regulations. Consistent with those discussions and in response to the FERC and CFTC charges, Energy Transfer Partners issued a statement saying that they believe their business transactions during the times covered by the proceedings were conducted in a lawful and responsible manner, and that no laws or regulations were violated.

With that, I will turn the call over to Randy Fowler for the financial discussion.

W. Randall Fowler - Senior Vice President and Chief Financial Officer

Alright. Thank you, Mike. As Mike mentioned, this quarter we received $68 million in cash distributions from our investments in EPD, TEPPCO and Energy Transfer Equity. Approximately 56% of these distributions came from EPD, 22% from TEPPCO and 22% from Energy Transfer Equity. Together, this generated distributable cash flow of approximately $45 million, giving us one-time's coverage of our declared cash distribution rate of $0.38 with respect to the second quarter of 2007. This $0.38 per unit distribution is 4% greater than the $0.365 per unit distribution that we declared with respect to the first quarter of 2007, and 23% greater than the $0.31 per unit distribution that we declared with respect to the third quarter... second quarter 2006.

We would note a couple of things; Mike mentioned that we did complete an issuance of EPE Equity NGL through a private transaction. We issued 20.1 million units in this transaction. And if you would, the coverage that we have... the one-time's coverage was actually lower than it would have been otherwise, because given that the new units under the private placement were issued in the middle of July, before our July 31st record day, they actually participate in the full distribution of $0.38 per unit, and as a result again, coverage was a little lower. In effect what we are doing is doubling up on the cost of about $750 million of capital by approximately $7.5 million with respect to the second quarter of 2007. There will be a similar effect with respect to the third quarter of 2007, but it will only be about $2.3 million.

Mike mentioned on an annual basis, we...based on the current distribution rates, we would receive approximately $271 million from EPD, TEPPCO and Energy Transfer. If you burden that by approximately $4 million of G&A expense, that would... if you would estimate EBITDA at the EPE level of about $267 million. When you come in and you look at our debt balance at June 30th and again, applying the proceeds from the equity that we issued in July, we had about $1.1 billion of debt outstanding that would have a debt-to-EBITDA of about... a little over four times.

With respect to permanent financing, as Mike mentioned we did complete the first step in the refinancing of our $1.9 billion of interim credit facility through the $750 million private equity transaction. Again, the application of these proceeds reduced the outstanding balance under the credit facility down to approximately $1.1 billion. In mid-July, we began the second step of the refinancing by launching a syndication in the bank markets of a revolving credit facility and term loan that together should total approximately $400 million. That would leave the stub of approximately $700 million under commitments from the interim credit facility.

As Mike mentioned, we are excited about our investments that we have in EPD, TEPPCO, and Energy Transfer, and their prospects of future growth. And when we come in and we look at our current distributions of $271 million, just a quick analysis if we saw EPD, TEPPCO and Energy Transfer, each increased their cash distributions by about 5%, we could see our... the cash distributions that we would receive on an annual basis go from about $271 million to about $297 million. This is about a 13.5% increase. So, looking at leverage as a result to the incentive distribution rates of almost about three times, this would result if you would, based on the units that we are currently paying distributions on, of about a $1.76 per unit and at the current yield of about 3.7% implies a unit price of about $48.

Again, if you come in and if you take a look at assuming EPD, TEPPCO and Energy Transfer Partners increasing their cash distributions by 10%, that would increase the distributions that we receive on an annual by about... to about $323 million, which is about a 27% increase from where we are today at the annualized rate of $271 million. And so, again almost about a three times multiple based on the current cash distribution bearing units at, gets a DCF [distributable cash flow] per unit almost up to a $1.97, and so we are really excited about that.

The other way to look at things is, as far as... since January 1, 2005 on a combined basis EPD, TEPPCO and Energy Transfer Partners have issued an aggregate $3.8 billion worth of equity. If we come in another way, just assume that each of these underlying partnerships raise $500 million of equity, that would increase our annual distributions by about $3.7 million or about $0.11 per unit.

With that, I'll turn the call back over to Mike to close things out.

Michael A. Creel - President and Chief Executive Officer

Thanks Randy. Enterprise GP Holdings really is unique among GP Holdco's because of the diversification of our cash flows. We get cash flows from investments in three investment grade partnerships with collectively about $26 billion of assets and about $26 billion in combined equity market cap.

Cash flows come from investments in partnerships with approximately 60,000 miles of natural, NGL refined products and crude oil pipelines, over a 100 Bcf of natural gas storage, over 200 million barrels of NGL refined products and crude oil storage, 39 natural gas processing and treating facilities and 13 fractionation facilities.

Based again on the current distribution rates, we received an annualized cash distribution of $271 million, with 78.5% of that originating from investments in Enterprise Products and TEPPCO which we control. We receive incremental cash flows whenever a partnership issues equity or increases our cash distribution rate on common units. To put it in perspective, these partnerships have a history of raising equity. They've raised approximately $3.8 billion of new equity since January 2005, and again that means more cash flows to us.

So in closing, we're pleased with our second quarter results. We're excited about the prospects for future growth, and also from our recent acquisitions. And we look forward to increases in cash flows as Enterprise Products, TEPPCO and Energy Transfer grow their businesses. And with that, we're ready to open it up for questions.

Randy Burkhalter - Director of Investor Relations

Alright Jen, we're ready to take questions.

Question And Answer

Operator

Thank you, Sir. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Mark Reichman of A.G. Edwards. Sir, you line is open.

Mark L. Reichman - A. G. Edwards & Sons, Inc.

Good morning. I just... I really have two questions; the first question is a follow-up from Friday's Enterprise Call, and that is the strategy of increasing exposure to interstate pipelines, and I guess Enterprise Products has the potential to join in a venture with Boardwalk on Gulf Crossing, and then EPE has made the investment in Energy Transfer Equity, and I just thought if you could may be clarify your strategy on increasing the GP and the partnership's exposure to the interstate pipeline segment?

Michael A. Creel - President and Chief Executive Officer

Sure, Mark. We looked at the business of Energy Transfer Partners as being really an excellent fit for us. They have got a great position in interstate pipelines which we do not. We have got a couple of small FERC-regulated pipelines. But certainly with their position in Texas, their Transwestern acquisition they have made recently, the Houston Pipeline they have got a great position that we think has good long-term growth potential. With respect to potential projects to move gas from East Texas to Alabama, we have been in discussions. It's not clear what's going to happen with that, if we are going to forward or not. But irrespective of that, we have got an exciting project that we have for our Texas intrastate pipeline to expand capacity there. And we would expect to have capacity rights on any pipeline that gets built moving gas out of East Texas. So, we think we will benefit whether we are participating in that or not. I really can't tell you the status of Energy Transfer's project. We really aren't privy to any non-public information there. But certainly have confidence in their ability to grow their business.

Mark L. Reichman - A. G. Edwards & Sons, Inc.

Thank you. And the second question is on, how do you differentiate in terms of whether the general partner makes the investment or EPD? Is the general partner strictly making investments in the other GPs and how do you think about making those investments, or for that matter, divestitures? Is it based on increasing the leverage of the distribution growth like you mentioned during this call, or are you looking for stability of buying a GP that's adding stability to those cash flows? How do you think about managing that portfolio of investments at the GP level? And also, how your decision process for deciding whether the GP makes the investment or the operating partnership?

Michael A. Creel - President and Chief Executive Officer

Sure. Let's kind of take it in a couple of bite size pieces. First we have some rules in our corporate governance provisions that specifically deal with business opportunities. And some of those date back to the time when Enterprise Products Partners went public in 1998. The way that those provisions work currently is that, if one of the partnerships, whether it's TEPPCO or Enterprise, if becomes aware of a business opportunity, they are free to pursue it on their own. If EPCO or the general partner becomes aware of a business opportunity, then we are obligated to show that to Enterprise Products Partners first, and if they elect to pass on it then we can either do it at the general partner level or show it to TEPPCO. We did have a provision that, when we took Enterprise GP Holdings public that Enterprise GP Holdings would have the first right to acquire interest in other general partners. And that was... really made sense because of the economics of buying a GP or one of the underlying partnerships to buy GP interest; it would be dilutive in the short run. It might take a while for that actually to become accretive. And really that was more of the business purpose performing Enterprise GP Holdings was to potentially acquire interest in other general partners. So we think that the way that we have the governance provision, setup the business opportunities that are available to all of the partnerships including Enterprise GP Holdings and the underlying partnerships that we really do preserve the value for the different groups of unit holders that they have the same advantages and business opportunities they had before. We are not taking anything away from any of the unit holders.

Dan L. Duncan - Chairman

Mark this is Dan. Let me give you a couple of comments from my side of the deal. Number one, the reason we are investing in other type of partnership is the diversification of assets. And we are basically... the Enterprise started off as a natural gas liquid company, it got into some crude oil offshore like we did, we got Terra deal [ph], we've got crude oil onshore now, that really is the diversifications of assets on different categories of assets. The reason we invested basically in Energy Transfer is because of their longhaul pipeline. I think I have mentioned over the last year, one of the areas we were looking to go into would be longhaul pipelines, and the deal with a FERC-regulated pipeline and it's really a diversification of cash flow. It's also hard nowadays to start something new in the industry because of the cost of capital... not the cost of capital, the cost of assets going so higher today on anything brand new. So, basically we are trying to broaden our footprints within different categories, which is in the natural gas, crude oil derivative-type deal, refined products. In all of these that we invest in the other partnerships is a diversification of the assets, and I think that's where Mike has talked about all the time, the Enterprise GP Holding is a place that we would use as diversification.

Mark L. Reichman - A. G. Edwards & Sons, Inc.

I see. Thank you very much Dan and Mike.

Michael A. Creel - President and Chief Executive Officer

Thanks mark.

Operator

Our next question comes from Gabe Moreen with Merrill Lynch. Your line is opened, sir.

Gabe Moreen - Merrill Lynch

Hi. Good morning everyone. Have a quick question on the permanent financing for the ETE and TPP GP acquisitions, and if I hear... heard you correct Randy, you talked about $700 million still being left on the interim credit facility after raising some term loan debt. Just trying to think about... I guess how we should think about that debt at the interim credit facility? Whether it's going to just kind of stay there?

W. Randall Fowler - Senior Vice President and Chief Financial Officer

I guess. Yes, Gabe that credit facility matures in May of next year. So, we'll come in and we'll execute another step of financing and go ahead in terms of rest of that out at the appropriate time.

Gabe Moreen - Merrill Lynch

Alright.Is that just a view point of yours in terms of the market conditions potentially being more favorable at a later point or --?

W. Randall Fowler - Senior Vice President and Chief Financial Officer

Yes, things are little choppy right now. So, we'll... yes, we'll continue to watch things and go ahead and step out and execute the third step, when things have settled down a bit.

Gabe Moreen - Merrill Lynch

Great. I appreciate it.

Operator

Our next question comes from Sharon Lui with Wachovia. Your line is open ma'am.

Sharon Lui - Wachovia Securities

Hi. Good morning. I was wondering how you guys evaluate EPE's exposure to liabilities tied to the underlying MLPs for example, in the case of Energy Transfer?

Michael A. Creel - President and Chief Executive Officer

Well we don't have exposure per se. I mean, if you look at what our crew exposure is at, as related to cash flows that we receive from Energy Transfer Equity. Energy Transfer Equity owns a substantial number of Energy Transfer Partners common units and owns a general partner. But we don't expect that any subsequent settlement with the FERC and CFTC would reduce the distributions that Energy Transfer Partners pays. And therefore, we don't expect any reduction in the cash flow that we receive from them. So we think our exposure is pretty limited.

Sharon Lui - Wachovia Securities

Okay. And I guess in terms of house keeping; can you just I guess provide a good run rate for SG&A expense going forward?

W. Randall Fowler - Senior Vice President and Chief Financial Officer

As far as... Sharon, I still think as far as public company SG&A, I still think we are in the ballpark of... in the $4 million range. There is some expense for the underlying GPs, but that's fairly nominal.

Sharon Lui - Wachovia Securities

Okay. And what was the rate under $400 million term loan?

W. Randall Fowler - Senior Vice President and Chief Financial Officer

On the... well what we have the outstanding right now, is under our... under the interim credit facility. Again, because the $400 million is we are in the process of putting that facility in place right now. Under the interim credit facility our borrowing right there is currently at LIBOR plus 175, and then in the... later in the third quarter that would go to LIBOR plus 200 and then it would stay flat at that level throughout the last of the interim credit facility.

Sharon Lui - Wachovia Securities

Okay. Thank you

Operator

[Operator Instructions]. Our next question comes from John Edwards with Morgan Keegan. Your line is opened.

John D. Edwards - Morgan Keegan & Company Inc.

Yes, hi everybody. And if I am asking a question that's already asked, I apologize. We just had a fire drill, basically we had to exit momentarily for. Just following up on Sharon's question on the run rate that's $4 million annual run rate for the SG&A. Was that what you said?

Michael A. Creel - President and Chief Executive Officer

Yes, John it was.

John D. Edwards - Morgan Keegan & Company Inc.

Okay, great. And then could you... as far as the total parent company expenses plus interest this quarter, you were at 22.8. Did you already cover out of that? What portion was the... or could you talk about what portion was the G&A, what portion was the interest?

Michael A. Creel - President and Chief Executive Officer

John I'll be honest. I do not have that information at my finger tips right now.

John D. Edwards - Morgan Keegan & Company Inc.

Okay.

Michael A. Creel - President and Chief Executive Officer

If you don't mind Randy could probably follow-up with your later on that.

W. Randall Fowler - Senior Vice President and Chief Financial Officer

JohnI'll call you after the call.

John D. Edwards - Morgan Keegan & Company Inc.

Okay, fine alright. And the other thought I had, do you guys have any thoughts or is there anything you can share regarding the situation between ETP and FERC?

Michael A. Creel - President and Chief Executive Officer

No, that is a matter for Energy Transfer Partners.

John D. Edwards - Morgan Keegan & Company Inc.

Okay.

Michael A. Creel - President and Chief Executive Officer

We are not investing in Energy Transfer Partners and as you know, our investment in Energy Transfer Equity is a minority position.

John D. Edwards - Morgan Keegan & Company Inc.

Right.

Michael A. Creel - President and Chief Executive Officer

We really don't have any...

John D. Edwards - Morgan Keegan & Company Inc.

Okay.

Michael A. Creel - President and Chief Executive Officer

Information. All we know is, what we have heard.

John D. Edwards - Morgan Keegan & Company Inc.

What they've said. Okay.

Michael A. Creel - President and Chief Executive Officer

Exactly.

John D. Edwards - Morgan Keegan & Company Inc.

Alright, fair enough. Okay, thanks a lot guys.

Operator

[Operator instructions]. Our next question comes from Ron Londe with A. G. Edwards. Your line is open sir.

Ronald F. Londe - A G Edwards & Sons, Inc.

Thanks. May be this is a question more for Dan and Mike. Given some of the changes that are going to go on in the pricing and the direction of natural gas over the next couple of years, given the Rockies Express coming on-stream; do you perceive that that there is more risk involved in gathering, processing and building pipelines in the various regions of the country? Can you give us some perspective on what your view is with regard to the risk-reward relationships, given the Rockies Express coming on?

Michael A. Creel - President and Chief Executive Officer

Ron are you talking primarily about... on natural gas pipelines, the shift in values...

Ronald F. Londe - A G Edwards & Sons, Inc.

Yes.

Michael A. Creel - President and Chief Executive Officer

Well certainly as new gas comes online and new transportation capacity becomes available, the pricing is going to be different and the demand for transportation is going to be different for some of these pipelines. I think that traditionally what you have seen a lot of pipelines moving gas from the Gulf Coast up into the Chicago and the Michigan markets. That could be displaced by gas coming out of the Rocky Mountains and certainly that may affect the transportation volumes through those pipelines. You may see others that may decide to do something different with pipelines that are currently serving one market that may have value and changing directions and going someplace else. From the processing side, what it really means we think... is that it gives producers the ability to produce more gas and gives us more gas that we can process. We think that net-net that's a positive for us.

Dan L. Duncan - Chairman

And we look at... I'll add a little more color to it. We look at it on a long range basis that the Rockies gas would probably be somewhere in the $0.50 to $0.70 on Mcf basis differential between that and that's a self-regulated gas [ph]. It may swing up a little bit more than that but it won't stay in this $2 plus range that everybody is looking at right now. So we feel, we are going to take away natural gas liquids from the Rocky Mountains area along the...all the way to Texas on our takeaway liquids. We think our takeaway in natural gas liquids will not hold up any of the new gas coming on, which will come on in the Permian basin and the Opal-Ferndale area of Wyoming. So we think it as when there's lot of opportunities coming in through the Rockies, and they are the benefit on the Enterprise total picture. Here again I think this is just one area that we invested in the Energy Transfer for all their Transwestern position and also their longhaul pipeline deals that will broaden our footprints to a great extent than any other company out there. And also that one of the other reasons, if they invest tighten up pretty good, we basically should have the lowest cost of capital because of our 25% higher split and also because of Duncan Energy with just the 2% GP. But we think as we go down this road in changes, we are in a position to be... in better position than anyone else for that cost of capital. And I think cost of capital will rule the day as we go forward over the next three, five, ten years. It may not one year may not make a difference, but I think when you look at 5, 10, 15 years, your cost of capital is going to be the ruling issue of the real assessment of a company's inner growth.

Ronald F. Londe - A G Edwards & Sons, Inc.

Thanks Dan.

W. Randall Fowler - Senior Vice President and Chief Financial Officer

Okay. If I could just follow up a minute, John Edwards' going back to your question on G&A expense; G&A expense public company, G&A expense for the second quarter of 2007 was $630,000. When you take that and then again there were some expenses associated with the EPD and TEPPCO general partner. Those totaled about a $143,000. And then, when you come in and look at for the first six months of 2007, public company G&A at EPE was about $1.5 million and then the GP expenses associated with the TEPPCO and EPD, GP were approximately call it $335,000.

Operator

[Operator instructions]. John Edwards with Morgan Keegan, your line is open.

John D. Edwards - Morgan Keegan & Company Inc.

Yes, hi. Thanks for providing that detail. And I... could you talk a little bit about where things stand? I forgot to ask you about Gulf Crossing; I don't know you have talked already, but could you... if you take could you repeat that?

Michael A. Creel - President and Chief Executive Officer

Yes, John we talked about and frankly there was nothing really to update. I don't have any new news on that. It's still something that we are in discussions. But frankly, I think it's a further handicap to us a large, going forward.

John D. Edwards - Morgan Keegan & Company Inc.

Okay. Great thanks.

Operator

[Operator instructions]. And we show no further questions at this time.

Randy Burkhalter - Director of Investor Relations

Okay Jen. Would you go and give our guest the replay information for the call please?

Operator

Certainly. The replay dialing information for today's call is 1800-945-9344 with no pass code.

Randy Burkhalter - Director of Investor Relations

Okay. Thank you. And thank you for joining us today, and have a good day. Bye.

Operator

Thank you for participating in today's conference call. You may disconnect at this time.

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