Executives
Jack Walsh - Vice President of Investor Relations
George Lindemann - Chairman, President and Chief ExecutiveOfficer
Eric Herschmann - Senior Executive Vice President
Rick Marshall - Senior Vice President and Chief FinancialOfficer
Rob Bond - Senior Vice President of Pipeline Operations
Analysts
Harry Mateer - Lehman Bothers
Gordon Howald - Calyon
Sam Brothwell - Wachovia
Carl Kirst - Credit Suisse
Becca Followill - Tudor Pickering
Lasan Johong - RBC Capital Markets
Southern Union Co. (SUG) Q3 2007 Earnings Call November 9, 2007 2:00 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the ThirdQuarter 2007 Southern Union Company Earnings Conference Call. My name is Eric.I'll be your coordinator for today. At this time, all participants are in alisten-only mode. We will facilitate a question-and-answer session at the endof the conference (Operator Instructions). As a reminder, the conference isbeing recorded for replay purposes.
I would now like to turn your presentation over to your hostfor today's call, Mr. Jack Walsh. Please proceed sir.
Jack Walsh
Thank you, Eric, and welcome to Southern Union's thirdquarter 2007 earnings call and webcast. Presenting on today's will be GeorgeLindemann, Chairman, President and CEO, Eric Herschmann, Senior Executive VicePresident, Rick Marshall, Senior Vice President and CFO, and Rob Bond, SeniorVice President of our Pipeline Operations.
A replay of this call will be available for one week bydialing 888-286-8010 and entering pass code 51346116. A replay of the webcastwill be accessible through our Web site at www.sug.com. Today we will bediscussing results for the third quarter of 2007, significant events andoutlook.
Following our presentation, we will be happy to address yourquestions. If you have any further questions at the end of the call, pleasecontact me directly at 212-659-3208. Before beginning, I would like to remindeveryone that the information discussed on today's call pertains to thefinancial results of Southern Union Company as filed on its Form 10-Q.
Certain amounts and various explanations for theTransportation and Storage segment may vary compared to Panhandle EasternPipeline company's Form 10-Q due to consolidating adjustments. I would alsolike to caution you that many of the statements contained in our call may bebased on management's current expectations, estimates, and projections aboutthe industry in which the company operates.
These statements are not guarantees of future performanceand involve risks. The company undertakes no obligation to update publicly anyforward-looking statements as a result of new information, future events orotherwise. Such statements are intended to be covered by the Safe HarborProvisions of the Securities Act of 1933 and the Securities Exchange Act of1934.
I would also refer you to the cautionary statement regardingforward-looking information in our earnings release. In addition, in today'searnings release, the company announced its intention to move forward increating a standalone MLP for a portion of its Gathering and Processing assets.Any discussion of the proposed MLP during this call shall not constitute anoffer to sell or the solicitation of an offer to buy any securities.
Any offers, solicitations of offers to buy, or any sales ofsecurities will only be made in accordance with the registration requirementsof the Securities Act of 1933, or an exemption there from. This announcement isbeing issued pursuant to and in accordance with Rule 135 of the Securities Actof 1933.
I'd now like to turn the call over to Mr. George Lindemann.Mr. Lindemann?
George Lindemann
Thank you, and good afternoon. Today we would like todiscuss our third quarter earnings and update you on some key items since ourlast investor call. To start, we reported strong third quarter earnings of$0.34 per share. This compares to $0.06 per share in '06. Overall, we are verypleased with our performance in this quarter. Our Transportation andDistribution segments continued to meet or exceed our expectations.
Our Gathering and Processing segment showed greatimprovement over both the first and second quarters of this year, as well asimprovement over last year. We believe the investments that we made in oursystems over the first half of the year, are now paying off and that we arewell positioned to accept additional growth volumes in our North System as wemove into '08.
We are also happy with the progression of our capital projects,which Rob will talk about in a minute. We view ourselves as a long-term growthcompany and look to produce above average earnings relative to our peers.
Though we often can't control the exact timing of theseprojects, given such things as weather, regulatory approval and constructionschedules, we are confident that our existing asset base will produce viablegrowth projects over the next several years.
At this point, I would also like to reaffirm our annualearnings guidance range of $1.60 to $1.70 per share. When we're through withour prepared remarks, we will address any questions you might have. I'd nowlike to turn the call over to Eric Herschmann, who will update you on our MLPprogress. Eric?
Eric Herschmann
Thank you, George, and good afternoon. After a thoroughprocess, we are pleased to announce that we have decided to move forward withforming our own MLP with a portion of our gathering and processing assets.During the last several months, we have received and evaluated numerous proposalsfrom many interested parties.
We were pleased that these proposals represented asignificant increase over our purchase price of $1.6 billion just 18 monthsago. We heard earlier today that some investors thought we would announce adeal with another company. Throughout the evaluation process, we focusedprimarily on four key areas. Valuation, governance, future growth prospects andhow the potential partners' MLPs have performed in the market.
At the end of the evaluation process, we determined that astandalone MLP would best capture value for our shareholders over the long-termand controlling the general partner will put us in the best position tomaximize value as our business continues to grow. From a timing perspective, wehave been diligently working on preparing audited financial statements andexpect to have them completed by the end of this year.
Upon completion of the audited statements, we expect toquickly move forward with the filing of our S-1. We expect this to occur in thefirst quarter of 2008. After receiving final approval from the SEC, weanticipate that we will commence the marketing of the unit and will likely havethe offering closed within the first half of next year.
With that, I would like now to turn the call over to RickMarshall, our CFO, to give an overview of the numbers. Rick?
Rick Marshall
Thank you, Eric, and good afternoon. For the third quarterof 2007, Southern Union reported EBIT of $120 million compared to $88 millionin the prior year. For the quarter, net earnings from continuing operationswere $45 million, or $0.34 per diluted share.
This compares to net earnings from continuing operations of$12 million, or $0.06 per share in 2006. Net operating revenue defined asrevenue less cost of gas and other energy, and less revenue related taxes was$260 million for the quarter compared to $223 million in the prior year. Thisrepresents an increase of $38 million, or 17%.
In terms of segment results, Transportation and storage,including our investment in Citrus, had EBIT of $90 million compared to $86million in 2006, or an increase of $4 million. This increase is largelyattributable to $5 million of higher equity earnings from our increasedownership in Citrus Corp. These favorable results were partially offset by $1million decrease in EBIT from Panhandle Energy.
During the quarter, Panhandle posted higher operatingrevenue of $16 million, driven by an increase in reservation revenue of $7million and an increase in parking revenue of $6 million. This was partiallyoffset by a $12 million increase in operating expenses, including a $4 millionincrease in third party contract storage costs and a $3 million increase incorporate service charges.
Additionally, depreciation expense increased by approximately$4 million, due to an increase in property, plants and equipment. Our gatheringand processing segment generated $20 million in EBIT for the quarter endedSeptember 30, 2007 compared to $12 million in the second quarter of 2007, and$17 million for the third quarter of 2006.
The $3 million year-over-year increase was driven by a $5million increase in gross margins as a result of higher average processingspreads, increased system volumes, and reduced fuel flare and unaccounted forvolumes. The gross margin increase was offset partially by a $1 millionincrease in operating expenses and other costs and a $1 million increase indepreciation.
As George mentioned earlier, the investments that we havemade in our North System to correct our treating limitations appear to now bepaying off. Our distribution business generated EBIT of $9 million for thequarter, as compared to a loss before interest and taxes of $5 million in 2006.
The $14 million increase is primarily a result of MissouriGas Energy's successful rate case resulting in a $27.2 million increase inannual base revenues, including a change in the company's residential customerclass rate structure to a straight fixed variable rate design.
The straight fixed variable rate design mitigates the impactof weather and conservation on earnings and cash flows, and normalizes marginthroughout the year.
Interest expense was down $6 million in the quarter comparedto the prior year. The decrease is due primarily to the retirement of $1.1billion of a $1.6 billion bridge loan in August of 2006 that was used totemporarily fund the purchase of the Citrus assets in 2006.
The August retirement of the bridge loan was accomplishedusing the proceeds from the sale of our Pennsylvania and Rhode Island distributionassets. The remainder of the bridge loan was retired in October 2006 withproceeds from the $600 million junior subordinated note offering.
The lower average balances on our revolving credit facilityaccounted for the remainder of the decrease offset somewhat but the interestassociated with the junior subordinated notes and higher average debt balancesat Panhandle Energy. During the quarter we invested approximately $204 millionin our operations.
Gross capital accounted for $128 million, and maintenancecapital was $76 million. Panhandle Energy spent $182 million, $123 million forgrowth and $59 million for maintenance, including compression monetization,compliance and integrity investments.
Approximately $10 million has been invested in Gathering andProcessing with growth accounting for $2 million. We have reinvestedapproximately $12 million in our Distribution business, with growth capital ofapproximately $3 million. For 2007 we continued to expect our total capitalspending to be in the range of $605 million to $675 million.
Broken down by segment, we expect Panhandle Energy to spendapproximately $525 million to $575 million, Gathering and Processing to spendapproximately $45 million to $55 million, Distribution to spend approximately$30 million to $40 million and corporate and other to spend approximately $5million.
Of the total capital expenditures, maintenance capital isexpected to be approximately $155 million at Panhandle, $15 million atGathering and Processing, $30 million at Distribution, and $5 million ofcorporate. I'll now turn the call over to Rob Bond, who will discuss ourGathering and Processing and Transportation and Storage segments.
Ron Bond
Thank you, Rick, and good afternoon. I'd like to begin bytalking about our Gathering and Processing segment, Southern Union GasServices. SUGS produced EBIT of $20 million for the third quarter compared to$17 million in the prior year. This also compares favorably to EBIT of $12million in the second quarter of 2007.
As you can see, we've made great progress on the operationalissues that we faced during the first half of the year. As we mentioned on ourlast call, we built a new 16-inch high-pressure pipeline to connect our Jal andKeystone plants so that we could better utilize our treating capacitythroughout the system. We also rebuilt the treating units of both Jal andKeystone.
The investments that we have made will allow us to continueto accept additional growth volumes into our North System. Operationally, ourtotal wellhead volume averaged 665,000 MMBtu per day for the quartercompared to 589,000 MMBtu per day in the prior year.
We processed an average of 422,000 MMBtu per day for thequarter as compared to 448,000 MMBtu per day in 2006. This has resulted in totalproduct gallons per day of 1.3 million for 2007 compared to 1.4 million gallonsper day in 2006.
Our average processing spread for the third quarter was$0.62 per gallon compared to $0.52 per gallon in 2006. Average natural gasprices at Waha were $5.72 for the quarter compared to $5.70 in the prior year.As it relates to our existing hedge positions, we continue to be approximately56% hedged on our equity volumes through the end of 2007.
These positions have a net price of $8.01 per MMBtu. Nowthat we have made a decision regarding which MLP structure we will moveforward with, we are evaluating the forward market and will determine whatlevel of hedging and what instruments will be appropriate for our new MLP.
I'd now like to talk about our Transportation and Storagesegment of our business, which continued to perform well during the thirdquarter. EBIT was up over $4 million compared to the prior year. The increasewas driven by a $5 million increase in equity earnings from unconsolidatedaffiliates as a result of our increase investment in Citrus Corp.
Panhandle Energy was essentially flat for the year-over-yearperiod. Panhandle saw operating revenue increase by $16 million, offset by a$12 million increase in operating expenses and a $5 million increase indepreciation and other costs.
Focusing now on our ongoing growth projects, our TrunklineGas Company field zone expansion project, which will expand our system fromEast Texas into Louisiana, has been approved by FERC and construction is underway.
The project will create approximately $625 million a day ofincremental capacity from Texas to Louisiana, and will also create up to 1 Bcfper day of capacity into the Henry Hub. A majority of this capacity has beencontracted under long-term agreements.
The project is currently estimated to cost approximately$250 million, up from our previous revised estimate of $230 million and isexpected to generate EBIT between 20 and $30 million and EBITDA between 30 and$37 million on an annual basis.
A portion of the increased costs is due to the heavy rainsthat we experience and the impact the weather had on our construction schedule.We remain optimistic that the project can be in service by the end of 2007.
Finally, the infrastructure enhancement project at TrunklineLNG is scheduled for a late 2008 in service. This project, which is fullycontracted to BG LNG Services through 2028, is now expected to costapproximately $335 million, an increase over our previous revised estimate of$280 million.
The increase is largely due to the complexity of the projectengineering, as well as a general increase in materials and skilled laborcosts. Because our negotiated rates are calculated based on the amount ofcapital spent, we now expect the project to generate EBIT of between 40 and $50million and EBITDA of 50 to $60 million on an annual basis.
With that, I'd like to turn the call back over to Mr.Lindemann. George?
George Lindemann
Thank you, Rob. At this point, we would like to open themeeting to any questions you might have.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from theline of Harry Mateer with Lehman Brothers. Please proceed.
Harry Mateer - Lehman Bothers
Hi, guys. I have a couple of questions here from the fixedincome side of things. First of all, I know in the past you've committed toinvestment grade ratings publicly both at the Southern Union level as well asPanhandle. But beyond that, can you give us a sense for your target leveragemetrics and by that I mean debt to EBITDA, debt to cap at the actual SouthernUnion Company level?
Rick Marshall
Well, right now we're at a debt to EBITDA ratio of a littlesouth of four times. We're from a target standpoint; we don't expect that tomaterially, to get better in the short-term simply because of the capitalexpenditure projects that we have lined up for 2008.
But ultimately, we see over time as these projects fall off,we see the ratio dropping to like the 3.5 times range and I think that thatputs us squarely in, it shows improvement to the rating agencies and I think itputs us where we need to be to certainly maintain our rating and hopefully havethe negative outlooks removed and perhaps get an upgrade.
As far as the EBITDA interest coverage ratios, we seeourselves somewhere in the neighborhood of 3.5 times eventually. Again, to putus in squarely where our ratings are today. And from a total capitalization,account equity to capitalization ratio, not taking into consideration equitycredit for some of the hybrid securities, we're looking at a range of 35 to 40%equity.
And one thing that will occur early in the year is there isan equity convert that comes on in February and that's going to help thickenour equity ratio, along with the earnings that we retain on an ongoing basis.
Harry Mateer - Lehman Bothers
Okay. And so, even with the MLP formation, you guys stillexcite leverage to drop down a little bit? Because I know one of the keyconcerns for the rating agencies was with the formation of the MLP and puttingassets down at that level and presumably some debt as well, you're going to bestripping some assets from the Southern Union level.
And so all else being equal if you need something of a lowerleverage metric at SUG to compensate for the fact, that you have lower assetlevels at that entity, so is that something you've run by the agencies?
Rick Marshall
We haven't specifically talked to them about the structureof this MLP. We talked to them about the MLP and what our beliefs are. I mean,essentially at the onset, we're going to use any proceeds from an equityoffering, an IPO to pay down debt at Southern Union Company.
So in a way, it could be viewed to be credit-positive forSouthern Union Company.
Harry Mateer - Lehman Bothers
Okay. And then can you just update us, I know you brought upPanhandle Pipeline bond deal a couple of weeks ago, just what was the thoughtbehind bringing that deal at the Panhandle level to pay down debt at SouthernUnion Company?
Rick Marshall
Well, the pay down of debt at Southern Union Company istemporary. I mean basically, what we did is we issued the notes to fund ourongoing capital expenditure program at Panhandle, which includes the field zoneexpansion, that Rob spoke of earlier and the Trunkline LNG infrastructureenhancement project and for general corporate purposes at the Panhandle level.
Essentially, the use of the proceeds to pay down debt or tobe loaned or advanced to Southern Union Company was just the most efficient useof the proceeds at the time. Those monies will be repaid to Panhandle as neededto complete its construction program.
Harry Mateer - Lehman Bothers
Okay, and then last, I know you have some bonds maturing in'08. I know it's early days with the MLP, but as you look through it initiallyat least are you thinking you're going to take those out with any MLP proceedsor do you plan to refinance those maturities?
Rick Marshall
I think it's too early to tell. I would expect that for themost part to refinance them though, at this point.
Harry Mateer - Lehman Bothers
Okay. Thank you.
Operator
Your next question comes from the line of Gordon Howald withCalyon. Please proceed.
Gordon Howald - Calyon
Thanks, guys. Could you break out the benefit of the newrate design at Missouri? Maybe this is a question for -- versus the benefitreceived from the higher rates? Just trying to get a better understanding…
Rick Marshall
Yes, I understand your question. Since we've, essentiallythe new rate design shifts revenues from the peak winter months, the peak usagemonths to other months in the year, you do …
Gordon Howald - Calyon
How much was that benefit versus the …
Rick Marshall
Yes, I'd say in this last quarter …
Gordon Howald - Calyon
Yes.
Rick Marshall
About $11 million benefit for this.
Eric Herschmann
Quarter-over-quarter.
Gordon Howald - Calyon
$11 million benefit for which piece?
Rick Marshall
Relative to the new rate design produced approximately $10million, $11 million more in this quarter.
Gordon Howald - Calyon
Got you.
Rick Marshall
Than it would have in the prior quarter.
Gordon Howald - Calyon
Okay. Great.
Rick Marshall
I'm sorry. In the prior year, the comparable quarter in theprior year.
Gordon Howald - Calyon
Perfect. Thanks, guys.
Operator
Your next question comes from the line of Sam Brothwell withWachovia. Please proceed.
Sam Brothwell - Wachovia
Hi, good afternoon.
George Lindemann
Good afternoon.
Eric Herschmann
Good afternoon.
Sam Brothwell - Wachovia
Hi, Guys, Sam Brothwell with respect to your MLP that you'reforming, you alluded to some of the midstream assets. Clearly, you've got otherthat would qualify for that type of structure. Would you contemplate, you know,setting up another MLP down the line, perhaps once the Trunkline expansion isfinished?
Eric Herschmann
I think at this point it's premature for us to say exactlywhat we'll be doing with the remainder of the assets. As you pointed out, it isobvious that we have a significant portfolio of assets that qualify for the MLPstructure or as part of a drop down strategy.
I think, once we've executed successfully on the Gatheringand Processing MLPs, then we'll be able to evaluate whether or not we woulddrop additional assets in or potentially form another MLP with our pipelineassets or others.
Sam Brothwell - Wachovia
Okay. Thank you.
Operator
Your next question comes from the line of Carl Kirst withCredit Suisse. Please proceed.
Carl Kirst - Credit Suisse
Hi, guys, its Carl Kirst. With respect to the MLP same ashere in one of my strategy question, let me just follow that with the hedging.I know that's kind of under evaluation right now.
Is that something that hedges, I mean, however much wedecide to put on, are we going to have to wait really closer to perhaps an IPObefore significant amounts of hedges would happen or would that happenindependently?
Eric Herschmann
No, I don't think necessarily that it will have to wait. Ithink it'll be a function of, number one, the cost of whatever instrument wechoose to hedge with and what the underlying margin that will be hedged.
As we sit here and watch the market today, it continues toimprove for us. So, we watch it every day and we'll execute when we think itcreates the greatest value for the shareholders.
Carl Kirst - Credit Suisse
Fair enough. Now that you guys have decided to go down thepath that you have, how should we think about midstream as far as management isconcerned? Is there going to be a move to, I guess, expand management at SUGS,or are you comfortable with the structure you have now?
Eric Herschmann
We're considering both internal and external options, but atthis time, we're not prepared to make a formal announcement as to what we'redoing.
Carl Kirst - Credit Suisse
Okay. Maybe if I could turn to the budget for a second, andI apologize if you had already said this, but do we have kind of a first lookat the '08 budget right now considering the cost inflation at Panhandle?
Rick Marshall
We're going through the budget process at this point in timeand are not ready to make any type of announcements.
Carl Kirst - Credit Suisse
Okay.
Rick Marshall
Specific announcements.
Carl Kirst - Credit Suisse
The field zone expansion, that's kind of been creeping upover the last 12 months, 200, 230, 250 now. There was kind of a comment in theQ thing whether from here could impact that further. Who is on the hook for anyadditional cost inflation at this point? Is that you guys or Energy Transfer?
Rick Marshall
No, that would be us.
Carl Kirst - Credit Suisse
Okay. And then lastly, looking at midstream, is it possibleto say with the Keystone plant having been out for five days, is it possible toquantify that impact?
And also was hoping now that everything is kind of back upand running, has there been any increase as far as processing volume, say, forinstance, where we are now, we're in an expected exit rate for year-end, tryingto see if we're going to essentially have a rebound in processing volumes thatwould otherwise match 4Q '06?
Ron Bond
Yes, right, Carl. You did point out that we were downslightly quarter-over-quarter. sp, and Keystone plant shutdown, our turnaroundwould attribute for the vast majority of that. I think, we were technicallydown for almost six days in August, and that did impact our ability to, it didreduce our processed volumes and the gallons that we recovered.
We also had a little bit of high CO2 gas shut-in in theearly part of the quarter prior to the work over at Keystone and the treatingwork that we did at Jal. So, yes, since the plant turnaround, I think we haveseen recoveries in our processed volumes returned to the normal levels and I doexpect to see improvement in the subsequent quarters.
Carl Kirst - Credit Suisse
Okay. So the $1.4 million range is still sort of good to useright now?
Ron Bond
Yes, sir.
Carl Kirst - Credit Suisse
Okay. And then, last question, appreciate the time. As we kindof sit here in mid-November, the full-year number is still a rather wide rangeand can understand not wanting to get tied down into any single number. Butwith respect to fourth quarter of last year, that was roughly a $0.44. I thinkthe range for this year, kind of implies something more anywhere from $37 to$47.
And I guess my question is, as we sit here with what we knowtoday in mid-November, are there any things in specific that we should be onthe lookout for that might impact 4Q '07 to be lower than last year?
Rick Marshall
Nothing specific, but the bottom line is that we do have acertain level of variability to our earnings for items such as ultimate capitalspend, commodity price exposure on unhedged midstream volumes and there is a certainamount of weather, albeit it's been mitigated significantly in Missouri, butwith respect to commercial, industrial customers and residential customers atour other LDC, I mean there is some weather sensitivity. So, right now at thispoint we're simply comfortable with the range that we've given.
Carl Kirst - Credit Suisse
Great, appreciate the color. Thanks, guys.
Rick Marshall
Thank you.
Operator
Your next question comes from the line of Becca Followillwith Tudor Pickering. Please proceed.
Becca Followill - Tudor Pickering
Hi, it's Becca Followill with Tudor Pickering. Any update onthe Section 5 on Southwest Gas Storage?
Eric Herschmann
Yes, actually, we've reached an agreement in principle withthe FERC staff and with some of the complainants and we hope to be filing asettlement certainly by the end of the year.
Becca Followill - Tudor Pickering
Great. Thank you. And then on the question of management, Iknow the question's been asked, but at what time do you anticipate havingsomebody in place to run the business? On the midstream?
Rick Marshall
I think it's too early for us to predict exactly when thatwill occur.
Becca Followill - Tudor Pickering
Okay. Thank you.
Operator
Your next question comes from the line of Lasan Johong withRBC Capital Markets. Please proceed.
Lasan Johong - RBC Capital Markets
Good afternoon. I'm wondering about the MLP structure in alittle bit more detail. You said that was a part the SUGS assets. I'm wonderingif that means you're taking certain pieces out of SUG in its entirety andpushing it down to the MLP, or if SUGS as an entire entity is going to betransformed into an MLP and a piece of that will be then spun off to the public.Could you clarify that, please?
Eric Herschmann
Sure. We're currently working with our financial advisors tofinalize the structure of the MLP and the appropriate percentage of the assetsthat we contribute, and we're also working with them to finalize the optimalsize of the offering.
We'd expect the initial offering to be, obviously, taxefficient for Southern Union, as well as appropriately sized for the debt andthe liquidity of the market and to be consistent with other offerings that we'veall seen in the market recently.
And as, Rick mentioned, we'd expect to pay down debt withthe proceeds from the initial offering.
Lasan Johong - RBC Capital Markets
So are you saying that you take the whole SUGS entity andshove it down as an MLP, or do you think you're going to take pieces of theSUGS assets and put that into an MLP?
Eric Herschmann
Our expectation is we begin by contributing a percentage ofit into the MLP.
Lasan Johong - RBC Capital Markets
Percentage of the whole SUGS?
Eric Herschmann
Yes.
Lasan Johong - RBC Capital Markets
I see. So then if that's the case, then you'd expect togenerate growth by continuing to peel percentages of SUGS off and putting itinto the MLP. Is that how you intend to create the growth in distribution?
Eric Herschmann
That is definitely one option.
Lasan Johong - RBC Capital Markets
And then there's obviously the acquisition option as well?
Eric Herschmann
That's correct.
Lasan Johong - RBC Capital Markets
Okay. And do you guys have a mind, something in mind interms of incentive distribution payments, where that split will be and kind ofwhat percent of increase you would have to see before you get there?
Eric Herschmann
We have not finalized that with our financial advisors yet.
Lasan Johong - RBC Capital Markets
Okay. And then lastly, you had mentioned that SUG had gottenoffers for the SUGS business and it was above the 1.6 billion purchase pricethat SUG had received, which is great. So the question then becomes, how muchabove was it that the bird-in-hand principle didn't apply here?
Eric Herschmann
We obviously can't answer that question specifically, whichoffers we receive for what amounts.
Lasan Johong - RBC Capital Markets
Okay. Then, what kind of a discount rate did you apply tothe cash flow stream relative to the price that you were receiving to analyzeand compare?
Eric Herschmann
I don't think I could say that without violating some of ourCAs.
Lasan Johong - RBC Capital Markets
Okay. Was it at least substantial, like, people would belike, yes, the difference is really nice or people will say, oh, the differenceis not very big at all?
Eric Herschmann
I think what I said was it represented a significantincrease over our purchase price. That's about as far as we can go.
Lasan Johong - RBC Capital Markets
And the rational that you're rejecting that offer is becauseyou think you can create more value on a standalone basis.
Eric Herschmann
That's correct.
Lasan Johong - RBC Capital Markets
Okay. Thank you.
Operator
Ladies and gentlemen, this concludes our question-and-answersession. I'd like to turn the call over to management for closing remarks.
George Lindemann
I want to thank you all for attending the meeting, and wehope that you'll all be on our next conference call and that we can report evenbetter earnings than we did this time. Thank you, all. Bye.
Operator
Thank you for your participation in today's conference. Thisconcludes our presentation. You may now disconnect. And have a good day.
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