Energy Transfer Equity, L.P. (NYSE:ETE)
Q2 2012 Earnings Call
August 08, 2012 09:30 am ET
Martin Salinas - Chief Financial Officer
Kelcy Warren - CEO and Chairman
Gabe Moreen - Bank of America
Good day, ladies and gentlemen and welcome to the second quarter 2012 Energy Transfer Earnings Conference Call. All participants are in a listen-only mode at this time. Later on, we will conduct a question-and answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. Martin Salinas, Energy Transfer's Chief Financial Officer. Please go ahead, sir.
Thanks, operator, and good morning everyone. Welcome to the Energy Transfer's second quarter 2012 earnings call.
With me today are Kelcy, Mackie, Tom Mason and John McReynolds along with other members of our management team who will be available to help answer your questions after our prepared remarks.
Today, I will start with a brief update on the pending Sunoco acquisitions and recently announced drop down of Southern Union into an ETP-controlled entity as well as other growth initiatives that we are pursuing. We will also discuss second quarter financial and operating results for ETP, ETE and Southern Union before going and taking your questions.
Our earnings releases which were released yesterday after the market closed are available on our website and we intend to file our quarterly reports on Form 10-Q today. I will also remind you that during the call, I will be making forward-looking statements within the meaning of Section 21E of the SEC Act of 1934 based on our belief as well as certain assumptions and financial information available to us today.
Before going into second quarter results, I would like to give you a quick update on where we stand with our pending acquisition of Sunoco and a subsequent announcement of the ETP HoldCo transaction.
We recently filed an amended S-4 proxy statement for the Sunoco transaction and expect to receive clearance soon. Once we receive clearance, the next steps will be to set the Sunoco shareholder record and meeting dates.
Assuming a favorable vote at the shareholder meeting, we expect that we will be able to close the Sunoco acquisition sometime in early to mid October, and we couldn't be more excited to get our hands on the these assets and deliver on the unitholder value that we believe these assets will bring to bear.
Also, as announced in June, contemporaneous with the Sunoco acquisition, ETP will contribute Southern Union to ETP HoldCo in exchange for a 60% equity interest in HoldCo, ETP will contribute its ownership of Sunoco to ETP HoldCo for a 40% equity interest, though Sunoco's equity interests in Sunoco Logistics will be transferred to ETP prior to the transaction and will not be owned by HoldCo.
Through this transaction, we resolved the timing of ETE's drop down of the Southern Union assets without the need for external equity or debt financing of these assets, and we substantially increased ETP scale of operations and ability to serve more customers in the rapidly expanding midstream marketplace.
The new HoldCo will be governed by a five person board of directors with three from ETP and two ETE, and HoldCo will be consolidated by ETP in financial statements. Sunoco and Southern Union will continue to operate as separate entity under HoldCo and that some board of directors will remain in place.
Now turning to projects update, and I would like to briefly comment on our portfolio of midstream and liquids-rich growth projects which will support both, in our distributable cash flow while continuing to diversify our business mix.
We continue to make significant progress on our projects in both, our Midstream and NGL segments. We should see our Justice NGL pipeline Phase II of a REM pipeline, and our Red River Gathering pipeline and our Karnes County processing plant go in service later this year on time and on budget.
We also expect phase one of our Jackson County processing plant and Lone Star's West Texas Gateway pipeline and first Mont Belvieu fractionator to go in service no later than January of 2013. In addition, we are actively evaluating more than $2 billion on growth capital projects in the midstream NGL and crude space, which could be announced over the next year or so and deliver additional distributable cash flow into 2008 to 2013 and into 2014, and we couldn't be more excited about our ability to execute on these projects.
Now turning our attention to results, and I will start with ETP's. ETP's adjusted EBITDA was $466.4 million, up approximately 20% from Q2 of 2011. Distributable cash flow for the quarter was $275.2 million, an increase of $51.9 million from this time last June. These increases are primarily due to our Interstate segment, which is seeing the benefits of the contractual ramp ups at FEP and Tiger, as well as our 50% interest in Citrus, one that we acquired in March of this year.
For the quarter, ETP will pay its unitholders $0.8938 for the quarter, or $3.575 on an annualized basis per unit on August 14 to our unitholders of record as of August 6.
Now from a segment level perspective, and I will begin with our Midstream segment. Our Q2 2012 adjusted EBITDA was $93.4 million. That's down slightly from second quarter of last year and was primarily driven by lower NGL prices as well as higher SG&A and operating expenses.
For the quarter, NGL produced volumes increased 63% from the prior year to almost 82,000 barrels per day, primarily driven from growth projects in the Eagle Ford Shale, which resulted in increased fee based revenues of roughly $16.1 million.
Non-fee based contracts and processing margins declined approximately 9% from last year as the impact of lower NGL prices was partially offset by increase in equity NGL volumes with the large portfolio of fee based growth projects expected to be online over the next 6 to 12 months. We expect our Midstream segment to represent a larger portion of our overall business mix and contribute significantly to cash flow growth in late 2012 and into 2013.
Turning to our Interstate Transportation segment, adjusted EBITDA for the quarter was $184.4 million, a 121% increase from this time last year and was primarily driven, as I said before, by contractual ramp ups with FEP and Tiger, as well as the addition of a 50% interest in Citrus.
As I mentioned in our first quarter earnings call, both Tiger and FEP have completed their contractual ramp-up periods and are now collecting the full amount of demand fees under the long-term contracts we have with our shippers on each three pipelines. For the quarter, adjusted EBITDA attributable to ETP share of FEP increased $5 million to $18.5 million and adjusted EBITDA attributed to Citrus was roughly $77 million for the quarter.
Now looking at our NGL Transportation and Services segment, where adjusted EBITDA was $39 million for the quarter. That's a 58% increase from Q2 of 2011, primarily driven by the results from Lone Star, but also wholly-owned and JV pipelines that were recently placed in service. Our NGL transportation volumes averaged 176,000 barrels per day for the quarter at a 37% increase as compared to last quarter of 2011 and this was primarily driven by increased volumes transported on our wholly-owned NGL pipeline as a result of more production in the Eagle ford area.
Average NGL transportation volumes were also up increasing 35% to roughly 21,000 barrels per day for the quarter. This is due in large part due to increased production at our Geismar, Louisiana fractionation facility as a result of less refinery downtime for turnarounds. We also expect to see our volumes and margins in our NGL segment continue to increase, as recently or soon to be completed projects contribute to an already solid platform of NGL services we provide our customers.
Now, looking at our Interstate Transportation and Storage segment. Adjusted EBITDA for the quarter was $156.9 million, down approximately 8% from Q2 of 2011, primarily due to lower transported volumes as a result of continued unfavorable natural gas price environment. Our transportation volumes in Q2 averaged 9.9 Bcf a day. That's down about 1.4 Bcf a day from Q2 of 2011, and driven primarily by the continued low natural gas price environment and narrower basis differentials.
Our transportation fees were down $20.3 million. That was primarily due to a change in customer contracts and impact due to timing of recording our demand fees as well as unfavorable impact from the decline in transported volumes of roughly $4 million. Our retained fuel was also down $20 million for the quarter, primarily due to lower gas prices and slightly lower volumes, but realized gains on commodity derivatives about $50 million were recorded in other natural gas sales and other, which helped to offset the decline.
To mitigate our exposure to lower natural gas prices, we have hedged approximately 50,000 MMBtus per day at an average price of $3.60 for the remainder of 2012, and have hedged approximately 20,000 MMBtus per day for 2013 at an average price of $3.24.
Margin from sales of natural gas and other activities increased $14.3 million and was primarily driven by favorable mark-to-market impact associated with our commercial optimization activities of $22.3 million offset by a decline of $11.4 million in margin where we utilized third-party processing.
We also experienced a $3.5 million decrease in natural gas cost compared to the same period of 2011. Our storage margin was $35.1 million for the quarter an increase of $16 million, primarily driven by an increase in inventory valuation and derivatives settled during the period due to higher gas prices during the quarter end, and as of June 30th we had approximately 50,000 Bcf in the ground managed for our own account that we now expect to withdraw in late 2012 or early 2013.
Lastly, in our Propane segment, which now only consists of our equity investment in AmeriGas. Our adjusted EBITDA for the second quarter was $1.7 million, a decline of $10.5 million from Q2 of 2011. This was primarily driven by the contribution of our propane operation to AmeriGas in January of this year. Also, we recorded equity and losses related to AmeriGas of $36.4 million. However, we have received cash distributions from AmeriGas of $23.7 million in the second quarter. That's an increase of $1.1 million from the first quarter of this year.
That concludes our remarks on our results of quarter. I will now move over to our CapEx, wherein second quarter of 2012, we invested a total of $690 million with the majority of that spent in our Midstream and NGL segments, primarily on our Eagle Ford Shale related projects and NGL pipeline and fractionation project at Lone Star.
Our maintenance CapEx for the second quarter was $38.4 million, $19.5 million was spent on our Midstream Intrastate and NGL segments, $8.7 million spent on our Interstate segment and the remainder spent in other segments. As we plan for the remainder of 2012, we expect to spend between $1.15 billion and $1.3 billion of growth CapEx, which includes $450 million to $500 million in our Midstream segment, $700 million to $800 million our NGL segment, and these numbers do not reflect the impact of $200 million to $250 million in contributions from Regency for their 30% share of Lone Star-related growth projects.
We also expect to spend between $50 million to $60 million on maintenance CapEx for the remainder of 2012, which includes intrastate pipeline integrity and well connects, interstate pipeline integrity and maintenance in our Lone Star JV.
For our Southern Union assets, we expect to spend between $50 million and $100 million of growth CapEx for the remainder of 2012, and roughly $100 million to $120 million on maintenance CapEx.
As it relates to ETP's liquidity, on July 3, ETP completed an equity offering of 15.5 million common units. The net proceeds of roughly $670 million were used to repay outstanding borrowings under ETP's revolver, providing for approximately $2.45 billion of revolver availability as of July, 27 which leaves us enough liquidity to fund, planned trend capital expenditures for at least the next 12 months. However we will continue to keep a close eye on the capital markets and opportunistically raise debt and equity to fund our growth CapEx needs, maintain sufficient liquidity and certainly manage our credit metrics to maintain our investment grade credit metrics.
Now moving onto Southern Union's results, adjusted EBITDA for the second quarter was $162.2 million. That compares to $254 million in the second quarter of 2011. The quarter-over-quarter results were lower largely due to the sale of Citrus to ETP in March of 2012, the impact of lower realized NGL prices in the Gathering and Processing segment, and acquisition related expense of roughly $2.3 million at Southern Union during the second quarter.
In the Gathering and Processing segment, adjusted EBITDA was $22.4 million. That compares to $39.5 million from the second quarter of 2011, as lower average NGL prices offset increased NGL produced volumes. Within the Transportation and Storage segment, adjusted EBITDA was $115.9 million in Q2 of 2012. That's down $87.4 million from last quarter of 2011, primarily driven by lower contributions from Panhandle of $14 million and lower adjusted EBITDA of $73.3 million, due to the sale of Citrus to ETP.
Within the Distribution segment or the LDC business, adjusted EBITDA increased approximately $11 million from Q2 2011 to Q2 of 2012, primarily due to a decrease in operating, maintenance and general expenses as well as increases in net operating revenues, which resulted from the impact of new customer rates at [renewable] gas companies.
Now looking at ETE, distributable cash flow was $158.2 million after adjusting for certain acquisition related cost for the second quarter. That compares to roughly $125 million for Q2 2011. ETE's cash distribution from ETP, before the impact of IDR relinquishments was $170.7 million for the quarter. That compares to $153 million this time last year.
Net of the IDR relinquishment, which ETP agreed to, as part of the ETP's acquisition of Citrus cash distributions from ETP were $157 million for the second quarter. For the same period, ETE's cash distributions from Regency was $15.5 million, a 7% increase from this time last year, and distributions to ETE unitholders will be $0.625 per unit on a quarterly basis at $2.50 on an annualized basis as we will be paid on august 17 to unitholders of record as of August 3.
From and ETE perspective its chance to benefit from not only the ETP-Sun merger, but also the ETP-HoldCo transaction as the transaction will create a best-in-class natural gas crude oil, NGLs and refined products to logistics platform, but also for the Energy Transfer's long-term initiative to expand its business mix, diversify and grow its cash flows, while also providing for numerous commercial opportunities to Sunoco Logistics' complimentary asset base and significant inventory of attractive high accretive growth projects.
In closing, we are very proud of what we have done over the last several years, particularly in light of headwinds we have endured in the commodity markets and the continued volatility in the capital markets. We have not only significantly increased our size and scale, but we have also expanded our suite of midstream services that are bar none.
We don't say there's midstream company out there that could provide the same amount of servicers that we can in so many prolific producing basins across the U.S. and Sunoco HoldCo transaction will only enhance that. While we continue to pursue significant growth opportunities across areas where our assets are, or where we intend to be a significant player, we are committed to simplifying our structure. We intend to take steps in the not too distant future to put the assets we have acquired in the right places while continuing to deliver on unitholder value, primarily through increased distributable cash flow growth across the entities under Energy Transfer's control.
With that, operator, that concludes my prepared remarks. Let's open up the line for questions. Thank you.
(Operator Instructions). Our first question has come up from the line of Gabe Moreen, Bank of America.
Gabe Moreen - Bank of America
A couple of questions, Martin, on the ETE results and just thinking about cash taxes, cash interest expense, whether the second quarter numbers were a good run rate to use going forward for those items? Then also in terms of where you guys feel you are in terms of synergies with the legacy Southern Union assets and how much of that showed up in the quarter? How much do you think still has to show up, or still will show up?
On ETE, are you referring to just the standalone results for ETE, or on a consolidated basis?
Gabe Moreen - Bank of America
Standalone, yes. I think for cash interest expense, this quarter probably represents a good quarter going forward. We picked up the entire period on the term loan. Obviously you have the existing senior notes in place. I think that's a good number. From a tax perspective, we don't see a lot of being paid at the ETE level, so that really should be minimal going forward.
With respect to synergies, we are going to continue to see those as we integrate those assets. As we said before, I think it's going to take a good 18 to 24 months to get that into our system and start seeing those results.
Gabe Moreen - Bank of America
Got it. Then if I can ask maybe on first HoldCo transaction, the level of leverage you are contemplating at the HoldCo when that's ultimately formed and then also a bit more maybe about the strategic rationale just hopefully minimizing cash taxes for taxable subs. Is it possibly effectuate asset sales a little bit easier. If you could maybe touch on some of those?
Yes. You bet. With respect to leverage at HoldCo, when you drop in the Sunoco assets, the debt comes with when you drop in the Southern Union assets, the debt drops in the with that. We are putting on some internal leverage at HoldCo that offer some additional synergies to be had there. I need to go back and look and see what that ultimately would end up but what I can say is if that all that consolidated up into ETP.
So whatever in our company financing we are doing at the HoldCo level, when we reported out to the street, it will be on a consolidated basis. We don't intend to put any additional external leverage at the HoldCo level. So all that you see there, what's existing today is the Sun debt. Once they get consummated, when that transaction get consummated and then the Sun debt following down into HoldCo.
With respect to strategy and the rationale behind HoldCo, there were a number of things that we were focusing on. I think it was clear when we attempted to acquire Southern Union, we would have preferred it to be at the ETP level, principle but Southern Union saw it little bit differently and in order to get a transaction done, we ultimately agreed on ETE being the currency to acquire that acquisition with the thought that down the road we would move MLP assets into the operating MLPs whether it would be ETP or Regency.
The HoldCo transaction really pushes the control of those assets down into ETP, which we are pretty excited about. That gives our commercial teams the ability to go out and talk to our customers and really provide a very exceptional and robust suite of midstream services across many geographic placements, which is key in this competitive environment. So that was the key strategy.
We also, from a investment grade perspective, with HoldCo being consolidated up to the ETP gives us, from a credit perspective, ETP increased size, scale, but also the diversification that the rating agency will certainly would look at, and based on the feedback we got from the agencies, it was very favorable. Then there are also additional synergies within the HoldCo structure that we think we will be able to take advantage of, of which some of them are arguably taxes.
Gabe Moreen - Bank of America
Okay, thanks, Martin. That's helpful. Last one for me is just latest thinking in terms of assets divestitures, whether legacy Southern Union assets or prospectively any of the Sunoco assets?
Gabe. This is Kelcy. Sure. I think that there has been speculation that Missouri and Massachusetts services at some point not be part of the divestiture, and I would say that that's a very reasonable possibility, very reasonable. So we are considering that. Also, we believe that it would be more distributable cash flow generated if, in fact, I will still refer two assisted rich in assets that I think they are subject to Southern Union services. If those assets were to find their way into our MLP structure, we believe that that makes more sense, or just more operating synergies that can't be taken advantage of with those assets remaining where they are. So I do believe that those were two obvious ones that I would not be surprised to see as move on something with those two assets in near future, and quite possibly others as well.
Gabe Moreen - Bank of America
Got it. Thanks, Kelcy. Thanks, Martin.
At this time, I'm showing now further questions in queue. I would like to turn the call back over to Mr. Martin Salinas for any closing remarks.
Great. Thanks, everyone for being on today's call. We will talk to you at (Inaudible) conference here in not too distant future. Thank you.
Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.
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