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

Q3 2012 Earnings Call

November 8, 2012 9:30 am ET

Executives

Martin Salinas - Chief Financial Officer

Kelcy Warren - Chief Executive Officer

Mackie McCrea - President and Chief Operating Officer

Brian MacDonald - CEO, Sunoco

Analysts

Stephen Maresca - Morgan Stanley

Curt Launer - Deutsche Bank

Ted Durbin - Goldman Sachs

Darren Horowitz - Raymond James

Helen Ryoo - Barclays

Ethan Bellamy - Robert W. Baird

Operator

Good morning, ladies and gentlemen and welcome to the Energy Transfer Third Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and answer session. Please note this conference is being recorded.

I would now like to turn the call over to Mr. Martin Salinas, Chief Financial Officer. Mr. Salinas, you may begin.

Martin Salinas

Thank you, operator, and good morning everyone. Welcome to the Energy Transfer's third quarter 2012 earnings conference call. With me today are Kelcy, Mackie, John McReynolds, Tom Mason and other members of our management team who are available to help answer your questions after my prepared remarks. We also have with us today, Brian MacDonald and Bob Owens from Sunoco.

Today, I will start with a few comments about our recently closed acquisitions and formation of ETP HoldCo, as well as a status update on some of our other growth initiatives. We'll then start third quarter financial and operating results for ETP, ETE and Southern Union before taking your questions.

Our earnings releases, which were issued yesterday after the market closed, are available on our website and we intend to file our 10-Q later today. I'd also like to remind you that during this call, I will make 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 information available to us.

I'll also refer to adjusted EBITDA and distributable cash flow or DCF, which are non-GAAP financial measures. Reconciliations of net income to adjusted EBITDA and DCF are provided on our website for your reference.

With that, let's talk about our recent acquisition of Sunoco and the formation of ETP HoldCo. As you are aware on October 5, we completed the acquisition of Sunoco for roughly $2.6 billion of cash and approximately 55 million ETP common units. Immediately following the acquisitions, ETP contributed Sunoco to ETP HoldCo a newly formed entity for a 40% equity interest and ETE contributed Southern Union to ETP HoldCo for a 60% equity interest.

In addition, I'd like point out prior to the formation of HoldCo, Sunoco's interest in Sunoco Logistics or SXL were transferred to ETP. As a result, ETP now owns the GP interest in IDRs of Sunoco Logistics and roughly 32% of Sunoco Logistics common units. With these transactions, we have positioned the partnership to better manage operations across our asset base and realize operating and cost synergies at both, Southern Union and Sunoco.

Now, our focus turns to the integrating and optimizing our portfolio of assets, a process that is well underway. We have already identified more than $80 million of annual cost synergies at Southern Union and are exploring numerous commercial opportunities. We've also started the exercise of integrating Sunoco into our system through an integration team comprised of members from both Energy Transfer and Sunoco. And, while we are in the early stages of this process, we are confident we will realize meaningful synergies once the integration is complete.

As we look at our current organizational structure, we believe there will be opportunities for simplifications, such as transferring assets from HoldCo into an MLP structure and evaluating these possibilities, we will consider both tax consequences and credit impact while ensuring transactions are accretive to our unit holders.

Now, I would like to briefly comment on our projects under construction in both our Midstream and NGL segments. These projects will support growth in our distributable cash flow while continuing to diversify our business mix. In our Midstream segment, Phase II of our Rich Eagle Ford Mainline, and our Red River Gathering Pipeline went into service during the third quarter of 2012, and we expect our Justice NGL pipeline and our Karnes County Processing Plant to go in service by December.

We also expect Lone Star's West Texas Gateway Pipeline and our first 100,000 barrel a day Mont Belvieu fractionator to go in service in December ahead of our initial timeline. Additionally, Phase I of our Jackson County processing plant is also expected to come on line in the first quarter of 2013. And we are proceeding nicely on the second fractionator, which is now expected to be in service sometime in Q4 of 2013, also ahead of schedule.

Since the fourth quarter of 2010, we have announced more than $3 billion of growth projects primarily focused in the rich gas shale plays in Texas of which approximately $2 billion will be in service by year end. Once the full fleet of announced projects are in service they are expected to contribute annual EBITDA of $400 million to $500 million when fully ramped up for the next couple of years.

Let's talk about the ETP's Q3 2012 results, where adjusted EBITDA was $482 million, up 19% from Q3 of last year. Distributable cash flow for the quarter was $340 million an increase of $73 million. And, for the third quarter of 2012, ETP will pay its unit holders [$0.8938] [ph] or $3.575 on an annualized basis per unit on November the 14th to our unit holders of record as of November the 6th.

Now, turning to our segment results starting with the Midstream segment, where our Q3 2012 adjusted EBITDA was $105 million, up slightly from Q3 of 2011. Our fee based margin increased $20 million from the prior year, primarily due to increased inlet volumes at our La Grange and Chisholm plants as a result of higher production out of the Eagle Ford Shale play.

Offsetting this increase, margins from our non-fee based contracts and processing activities declined 18% from Q3 of 2011, primarily due to lower NGL prices and slightly lower equity volumes. And with a large portfolio of growth projects expected to come online over the next 6 to 12 months, we expect our Midstream segment to grow significantly and represent a larger portion of our overall business mix. The majority of the increase cash flows will come from long-term fee-based contracts.

Turning our attention to the Interstate segment, where adjusted EBITDA was $204 million for the quarter. That's double from Q3 of 2011. Increased demand fees from our Tiger pipeline expansion accounted for roughly $17.5 million of the increase. Also, adjusted EBITDA attributable to ETP share of FEP increased $6 million to $20 million for the quarter and adjusted EBITDA attributable to ETP's 50% share of Citrus was $81 million. And from a cash perspective, ETP received distributions from FEP of $17.3 million and Citrus of $37.5 million for the third quarter.

Now, onto our NGL Transportation and Services segment, for Q3 2012, adjusted EBITDA was $36 million. That's a 19% increase from Q3 of last year. That's primarily driven by the result of our Lone Star JV which is 70% owned by ETP in addition to Freedom and Liberty pipelines which were recently placed in service.

NGL Transportation volume averaged about 174,000 barrels per day for the quarter. That's a 31% increase, compared to the last period in 2011. That's primarily driven by the increase in volumes transported on our wholly owned NGL pipeline as a result of higher production again coming from the Eagle Ford.

Average NGL fractionation volumes were 11,500 barrels per day for the quarter, down due to lower production at our Geismar, Louisiana fractionation facility due to refinery closures as a result of hurricane Isaac and refinery downtime.

And, similar to Midstream, we also expect our volumes and margins in our NGL segment to continue increasing significantly as the new project I mentioned earlier contributed to the already solid platform of NGL service that we provide our customers.

Now, looking at our Intrastate Transportation and Storage segment, adjusted EBITDA for the quarter was $121 million, down 29% from Q3 of 2011, primarily due to lower transported volumes.

Transportation volumes average 9.9 Bcf a day in Q3 of 2012, down approximately 1.2 Bcf a day from Q3 of last year due to the continued low natural gas price environment and the narrow basis differentials that continue to exist. However, if you look sequentially, our volumes quarter-over-quarter were flat signaling to us that producers have reacted to the low natural gas price environment and we are seeing volumes that are leveling up.

And from a margin perspective, our transportation fees decreased $9 million, primarily due to lower demand fees of $8 million. Our retained fuel revenues were also down $11 million for the quarter as a result of lower gas prices and slightly lower volumes. Margins from our sales of natural gas and other activities also decreased $21 million, primarily due to a smaller realized gain from derivative activity of $15 million and a decline of $8 million in margins where we utilized third party processing.

And as it relates to Storage, our margins for these activities were $10 million for the quarter, a $6 million increase from Q3 of 2011, primarily driven by an increase in inventory valuations and derivatives settled during the period. And as of September 30, we had approximately 46 Bcf of natural gas in storage for our own account that we continue to expect withdrawal in late 2012 and early 2013.

That pretty much covers our results for the quarter. Let's move on to the growth CapEx, where in the third of quarter 2012, we invested a total of $583 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 projects at Lone Star. Our maintenance CapEx for Q3 was $27 million, $17 million of it spent in our Midstream, Intrastate and NGL segments, $9 million on our Interstate segment and the remainder in other segments.

Fourth quarter of this year, we expect to spend between $550 million and $625 million of total growth CapEx, including $200 million to $225 million in our Midstream segment, roughly $350 million to $400 million in our NGL segment. For a share 30% share of growth CapEx at Lone Star, we also expect to receive between $100 million and $120 million in contributions from Regency in the fourth quarter. As it relates to maintenance, we expect to spend between $30 million and $40 million in the fourth quarter of this year.

Turning our attention to 2013, we expect to spend between $750 million and $900 million of total growth CapEx that includes $350 million to $400 million in our Midstream segment, $400 million to $500 million in our NGL segment. That does reflect $100 million to $150 million of expected contributions from Regency for their 30% share of Lone Star's growth CapEx. We also expect to spend between $125 million and $145 million on maintenance for 2013.

With respect to liquidity, ETP has approximately $2 billion on availability on its revolving credit facility at December 30th, which was subsequently reduced by $620 million of borrowing to fund the Sunoco acquisition in early October. And as always, we continue to keep a close eye on the capital markets and plan to opportunistically raise debt and equity to fund our growth CapEx needs, maintain sufficient liquidity and of course manage our credit metrics to maintain our investment grade credit ratings.

That wraps up ETP. Let's move on to Southern Union, where its results for the third quarter was $169 million of adjusted EBITDA. That compares with $247 million in Q3 of 2011. Period-over-period results was lower largely due to the sale of Citrus to ETP in March of 2012, and the impact of lower realized NGL prices impacting the Gathering and Processing segment.

In the Gathering and Processing segments, adjusted EBITDA was $25 million, compared to $34 million in Q3 of last year as lower average NGL prices and lower natural gas prices were offset by increased NGL produced volumes. And, for Q3 of 2012, realized NGL prices averaged $0.292 per gallon. That compares to the $1.38 per gallon in Q3 of 2011 and average NGLs produced about 42,000 barrels per day in Q3 2012. That's almost 11% increase from Q3 of last year.

Within the Transportation and Storage segment, adjusted EBITDA was $122 million for Q3 in 2012. That's down about $77 million from Q3 of 2011, primarily driven by the lower adjusted EBITDA of $79 million due to the sale of Citrus to ETP. And within the Distribution segment, adjusted EBITDA increased to $8 million from Q3 of 2011 to $22 million in Q3 of 2012. That's driven by a decrease in operating, maintenance and general expenses as well as an increase in net operating revenue which resulted from an impact of new customer at the New England Gas Company.

Now for ETE, where distributable cash flow adjusted to exclude certain acquisition related costs incurred by both, Southern Union and ETE, was $189 million for the quarter. That compares to $126 million in Q3 of last year. ETE's cash distribution expected from ETP before the impact of IDR relinquishment were $197 million for Q3 of 2012. That compares to $154 million in Q3 of 2011.

That was a Citrus and Sunoco IDR relinquishment, but ETE agreed to as part of the ETP's acquisitions of a 50% interest in Citrus and the HoldCo transaction, cash distributions from ETP were $166 million for the quarter. For the same period, ETE's cash distribution expected from Regency were $50 million. That's an increase of roughly 4%. As it relates to distributions, distributions to ETP unit holders of [$0.605] per unit on a quarterly basis or $2.50 on an annual basis will be paid on November, 16 to unit holders of record as of November the 6th.

As we stated before, the Energy Transfer Company sense the benefit from not only the ETP Sunoco merger, but also ETP HoldCo transaction as it will create a best-in-class natural gas, crude oil, NGLs and refined products logistics platform, but also further Energy Transfer's long-term initiatives to expand its business mix, diversify and grow its cash flows while providing for numerous commercial opportunities to Sunoco Logistics' complementary asset base and significant inventory of attractive, highly accretive growth projects.

With that, operator, let's go ahead and open the line for the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from the line of Stephen Maresca from Morgan Stanley. Please proceed.

Stephen Maresca - Morgan Stanley

Two quick on housekeeping. I don't know if I heard you. 2013 growth CapEx, did you say a number. I missed it?

Martin Salinas

We did, Stephen, for 2013 growth CapEx, we expect to spend between $750 million and $900 million.

Stephen Maresca - Morgan Stanley

Okay, and that is at the ETP level?

Martin Salinas

That's at the ETP level. Correct. That doesn't reflect the 30% contribution from Regency on Lone Star projects, which that will be about $100 million to $150 million.

Stephen Maresca - Morgan Stanley

Okay. Thank you. Then you also mentioned earlier like $400 million to $500 million of EBITDA contribution. What was that referring to, was that just all CapEx projects or is that something that.

Martin Salinas

No. So, what I commented on is that we are investing about $3 billion primarily in our Midstream and NGL platforms. Once, all these assets come in service, of which about $2 billion come in by the end of this year, we expect the contribution to be about $400 million to $500 million. Once those projects are in service, and the volumes that we anticipate is through the commitments or what we believe will show up will end up being on an annual basis. Now thinking of year or two, but we think that that's what the expected EBITDA contribution from our asset will be for those projects particularly.

Stephen Maresca - Morgan Stanley

Okay. Then with relation to CapEx, you talked about opportunistically raising debt and equity. Can you remind us what, I mean, you still have AmeriGas APU units, is that correct that you can use as a funding source for you?

Martin Salinas

That is correct. We come out of a lock up period on that starting first quarter next year, so that's another arrow in our quiver of liquidity sources for us.

Stephen Maresca - Morgan Stanley

And what's the amount that you have?

Martin Salinas

Roughly $1.3 billion.

Stephen Maresca - Morgan Stanley

And you can do, is it $500 million next year or you can do more than that?

Martin Salinas

We can do more than that, so we have two $500 million offerings limitation.

Kelcy Warren

Hey, Stephen this Kelcy, but I want to add to that we have great deal of respect for the AmeriGas people and we consider ourselves to be good partner. So, believe me, anything we do in regards to those units, and we think we do intend to divest of those units, but it will be done with good communication and cooperation with AmeriGas.

Stephen Maresca - Morgan Stanley

Okay. Thanks for that, Kelcy. And then, on the Intrastate business, do you think we are starting to see an inflection a little bit. It looks like on a year-on-year basis, the margin relative to volumes increased a little bit. I mean, are we at a low point with upside or some comment on that, maybe?

Mackie McCrea

Yes. This is Mackie. We do believe we are at a low. The Barnett Shale has continued to drop throughout the year. We said last time it started to level out and from quarter-to-quarter it's pretty level, but from year-to-year third quarter last year to this year it has fallen fairly dramatically, hence it's reflected in our numbers, but we believe it's leveled out and we also would bring it on the Woodford project. We are already adding volumes, we expect those volumes to grow every month throughout 2013, so we are very optimistic that we'll see volumes grow and grow fairly consistently and significantly throughout 2013.

Stephen Maresca - Morgan Stanley

Okay. Final one for me, Martin, you mentioned just sort of simplification of HoldCo and transfer of HoldCo into an MLP structure, which I don't know if that was meant to be generic. I mean, is it fair to say that - the ideal place for that would be to collapse that fully into ETP?

Martin Salinas

Stephen, it was very generic and I think not to steal some thunder for next week's discussions, but we think there's a number of opportunities that have been available to us to stall for moving some of the – stalling moving from C Corp assets that are MLP qualified into MLPs, but also to simplify the structure in appropriate - well as you mentioned, an easy step of that simplification is to have ETP buy out the remaining 50% interest in HoldCo from ETE, and those are one of a number of things that we are exploring to stall or to execute on our planned simplification.

Stephen Maresca - Morgan Stanley

Okay. Well, thanks for all the color and I'll see you guys next week.

Operator

Your next question is coming from the line of Curt Launer from Deutsche Bank.

Curt Launer - Deutsche Bank

A couple of related questions on ETE side. First, I'll admit to finding it confusing to try to figure out what the ETE report was from an EBITDA perspective, and I think part of the differentiation here is trying to run through the APU ownership from the standpoint of the cash received on the units owned as well as the equity value there. Could you walk us through the ETE side, with a little bit more detail than what you provided on the call?

Martin Salinas

Yes. I think it would be helpful, Curt if you go and look at the press release that we issued yesterday, and I think that to simplify ETE's cash flow. I'd say today, as of September 30th, there's really three primary sources of ETE's cash flow, the largest being ETP, and its ownership of the GP, IDRs and roughly 50 million units of ETP. That net number for the quarter came out to about $166 million. It's ownership of Regency resulted in about $15.5 million to ETE, and then distributable cash flow related to its ownership of Southern Union resulted in about $76.5 million.

That obviously will be changing with the HoldCo transaction. Again, our objective going forward is to provide a little bit more color as to how those cash flows will be coming up to both, ETP and ETE as a result of that transaction and you'll see some more from us in the days to come, but for the quarter just simplifying those cash flows, those are the three sources for ETE.

Curt Launer - Deutsche Bank

Okay. Fine. We'll working on that more and I'll probably try to call you later, because it still is confusing, we're getting a lot of questions relative to ETE and where the EBITDA was relative to consensus and things like that, so let's leave it there for now.

Second question, probably an easier one on the Sun side, just want to get an update relative to the issues in the Northeast related to the hurricane and now the snow and are there any issues for the products pipelines and terminals and so forth from the Sun side of the house?

Martin Salinas

Curt, maybe I'll turn it over to Brian, and Brian would you mind addressing that?

Brian MacDonald

Sure. I think, what I would say is as of now, we work through all the supply issues. We had a number of stations over 500 down due to no electricity. Everything is substantially up now. We are incurring some incremental transportation charges kind of getting product to station, but I would say overall no material financial impact and we are really focused on getting product to the stations and making sure we have ample supply.

Curt Launer - Deutsche Bank

Okay. Thank. Terminals are operating normally?

Brian MacDonald

Well, we have some issues that are impacting us in the short-term, and we are working around those, but we expect everything to be back to normal in a matter of weeks.

Curt Launer - Deutsche Bank

Okay. Thank you and just one last question on this. Sorry to beat it death, but demand impact, any kind of a thought relative to what the fourth quarter might show with all this going on?

Brian MacDonald

It's a little hard on demand. Obviously, there was a few days when things were really shutdown and then a big spike back up as people filled up and got product for generators, the vehicles got moving around again, so it's really hard to say what the overall impact would be on the fourth quarter yet.

Curt Launer - Deutsche Bank

Okay. Thanks. We'll keep up with you on that one too.

Brian MacDonald

Thank you.

Operator

Your next question is coming from the line of Ted Durbin from Goldman Sachs.

Ted Durbin - Goldman Sachs

Hey, thanks. Just a couple of things on the conversion of Trunkline, I am just wondering if you can talk about where you are in the regulatory process with FERC, any kind of feedback you've gotten about changing that into crude? And then, sort of similarly, I think you mentioned one point you think about doing some conversion on Transwestern maybe you are leading a portion of that did to move to liquidity service kind of what your thoughts are in that?

Mackie McCrea

Okay. This is Mackie. Yes. We are very excited about the Trunkline conversion. We have begun back in September, the process that is going very well. There were some concerns that were brought up from some shippers and we have alleviated many of those concerns and we are confident that we'll receive the approval to them at sometime third quarter of 2013. We continue to talk to somewhat large players and have different sources of supply of that pipeline. And, as I mentioned, we are very excited about that project.

In regard to T, there is a 24-inch pipeline that runs through Southeast into New Mexico and into West Texas. It was very underutilized. We did abandon it and we have and are in the process of converting to the NGL service to accommodate the growing demand for NGL output from that area and especially for our Red Bluff facility under SUGS, and other SUGS related assets.

Ted Durbin - Goldman Sachs

Thanks for that Mackie, and can you tell us the timing then if you could the abandoned all be the timing of brining Trunkline into service. What kind of capacity do you think you could move on it?

Mackie McCrea

If everything goes as planned, we expect to bring it on by the second quarter or in the middle of 2014. Depending on the shippers that sign up, it could range anywhere from 400,000 barrels a day to 600,000 barrels a day, whether it's light crude or heavy crude, but we do anticipate that because of early conversations it will probably be more around the 400,000 to 420,000 barrels a day starting mid-2014.

Ted Durbin - Goldman Sachs

And, any sense of the capital that you would need to do the conversion?

Mackie McCrea

Yes. A lot of that will depend on the amount of shippers that signed up ultimately fully loaded, we are estimating about $1.5 billion.

Ted Durbin - Goldman Sachs

Okay. That's very helpful. Thank you. Then, if you can just give us an update on where you are on hedging whether it's on retained fuel, maybe some of the basis differentials any of the NGL length for 2013?

Mackie McCrea

Okay. On retained fuel, we've seen volumes drop on our systems. We are familiar with volumes declining on other systems, and we as a partnership had really become much more bullish, not saying that gas profitable into the roof, but we do think they'll maintain especially any type of a cold winter. We think we can see strengthening, so we don't have a lot of hedges on right now. We are very minimally hedged on our retained fuel on our interstate assets.

However, because of our growth in our NGL recoveries and because of the types of contract, the SUGS assets have, we are contained to evaluate and do intend to put on hedges around our NGL business. We've been hesitant in the past, because of the limited amount of plants, where you could create much of use, but we do plan on hedging some of our NGLs and we also will at the right time hedge our retained fuel.

As far as the basis spread, there is still is no basis. It's pretty much zero. Some days it's higher in the west and some days it's higher in the east. We continue to try to create revenue around that narrow basis, we expect with a lot of the volumes moving out of the Eagle Ford into Southeast Texas that we may see some movement there and we are poised to move quickly on any type of widening of basis and locking in longer term deal.

Ted Durbin - Goldman Sachs

That's very helpful and that's it for me. Thanks.

Operator

Next question is coming from the line of Darren Horowitz from Raymond James.

Darren Horowitz - Raymond James

Thanks. Martin, I appreciate your color around the project timing, but I was just curious as it relates to West Texas and just as in the two fracs has anything changed from a CapEx perspective?

Martin Salinas

No. I think, Darren, those estimates are still expected to be achieved from a cost perspective.

Darren Horowitz - Raymond James

Okay. And, then Mackie, just a final question for me, as it relates to Lone Star, how are you all thinking about downstream opportunities? Whether or not it's additional brand to support what could possibly be like a frac 3 or maybe even more downstream connectivity for LPG export. With Frac I and Frac II seemingly being almost fully committed at this point, how do you start thinking about the backend of that supply chain?

Mackie McCrea

We are thinking about it very intensely. The amount of project and plants we are building, we are building, we will need more frac capacity. As you mentioned, we are very close to filling up now the second frac. We do have room at Mont Belvieu on our property to construct another fractionator and we are looking forward to make that decision in very near future and we are also moving forward on other related synergistic-type downstream business related to our Lone Star assets.

Darren Horowitz - Raymond James

And, would that possibly include LPG export?

Mackie McCrea

Absolutely. Any way, we can enhance the value of our significant foothold in Mont Belvieu and our growing presence there. Certainly, that's something that we are looking at closely.

Darren Horowitz - Raymond James

Is it too early to put some details around scale and scope of what you are contemplating?

Mackie McCrea

Yes. It is this time.

Darren Horowitz - Raymond James

Okay. Thanks.

Operator

Your next question is coming from the line of Michael Blum, Wells Fargo.

Michael Blum - Wells Fargo

Two questions for you. One, do you have any timeline in terms of when you think you will realize all the synergies that you laid out as related to the acquisition?

Kelcy Warren

Yes. On Southern Union as I mentioned, we've identified about $80 million. Then I think we'll start seeing the benefit in 2013. I think we'll see some carryover into '14 just from a run rate basis if some of the integration steps will occur probably first half of '13. As it relates to Sunoco, we'll probably start looking at some of those in '13 with some carryover into '14. I think, it's safe to say by '14, which we will have all of our integration in place and synergies locked in.

Michael Blum - Wells Fargo

Great. Then do you have any growth CapEx estimate for 2013 for Southern Union and Sunoco if there is any capital to be spent there?

Kelcy Warren

At this time, I think it's a little too early. We are going through our budgets right now with only as it is. Obviously, we felt comfortable with where we are with ETP and Sunoco Logistics from 2013 CapEx guidance. We are sharpening the pencils on Southern Union and we'd provide that number probably sometime in fourth quarter.

Operator

Your next question is coming from the line of Helen Ryoo from Barclays.

Helen Ryoo - Barclays

A question on your Southern Union maintenance CapEx, it seems like it came down sequentially $42 million versus $48 million last quarter. Is this is a good run rate to use. Is there further room to bring this down?

Kelcy Warren

To answer your second question, I think there is. As I just stated to Michael, we are still sharpening the pencils around Southern Union's CapEx. We think there is some opportunity to bring the number down from what it's been historically. As far as the run rate, I think it's a little too early to answer that question, but certainly before the end of the fourth quarter, we'll provide guidance on where we think Southern Union's CapEx will be both, growth and maintenance.

Helen Ryoo - Barclays

Okay. And, the synergies that you will realize, some of that may show up in the maintenance CapEx and some of that may show up in the segment results. Is that sort of how we should think about it?

Kelcy Warren

That's a fair statement yes.

Helen Ryoo - Barclays

Okay. Great. Then just on Transportation segment, the EBITDA was up about 6% from Q2. Could you maybe talk about what's driving that?

Martin Salinas

The transportation on Southern Union?

Helen Ryoo - Barclays

Yes. Southern Union.

Martin Salinas

A lot of that I think was a result of just increased demand through the system. From a trend perspective, I think we kind of continue to see volumes there kind of holding on their own similar to what we saw in our interstate, so nothing more than I think just a higher demand across the pipeline.

Helen Ryoo - Barclays

So, this quarter's number, is that a sustainable number going forward, or should that see some sort of fluctuation depending on the demand beyond each quarter?

Martin Salinas

Yes. I mean, we typically see a little bit of seasonality on the transportation within Southern Union, again as a result of just the seasons. I think it's probably best to kind of look at it on a trailing 12.

Helen Ryoo - Barclays

Okay. And then, sticking to SUG, on the interest expense, it came down to 35 versus 57. Would you talk about what drives the big reduction in your interest expense there?

Martin Salinas

I'd have to go back and look it down up. Top of my head, Helen, I don't recall. You're looking at I guess last quarter this quarter right?

Helen Ryoo - Barclays

Yes.

Martin Salinas

Yes. Okay. We, if you recall as a result of selling Citrus, we repaid some of the debt at Southern Union, and so debt levels are just coming down as a result of that and so the interest expense is following that, and then we refinanced a term loan at Southern Union, running for reclose and that had a slightly lower interest cost component to it. So, those two make up the delta between interest expense, Q3 of last year to Q3 of this year.

Helen Ryoo - Barclays

Okay. Great. And, just lastly on your growth CapEx, $750 million to $900 million, so net to yours after receiving contribution from Regency is that $650 million to $750 million?

Martin Salinas

That is correct.

Helen Ryoo - Barclays

Okay. And, is it based on projects that have already been announced, so if you were to add any more projects would this number go up or does it include some projects that are not yet announced, but being developed?

Martin Salinas

No. As we have typically done, we'll put our guidance on what we've announced. Those are all the projects that are currently under construction today. As an example, Mackie talked about the Trunkline conversion, we are not quite there yet in terms of commercial signs relative to FERC. Once we do get there though, we'll provide those numbers and those numbers will obviously will be reflected upwards or adjusted upwards. So, that number is based on what we've announced or committed to today.

Operator

Your next question is coming from the line of (Inaudible).

Unidentified Analyst

Just curious about your plan on this LDC and retail assets, and then can you guys provide any color in terms of what we want to do with them?

Kelcy Warren

Yes. This is Kelcy. The retail sales of natural gas through Missouri utility and the Massachusetts utilities are businesses we are considering exiting those businesses, and I do believe that we will exit those businesses. So, that's the first answer, and then on retail sales of gasoline. That's a business that we stated that we think it makes more sense for our unit holders that we are a long-term holder of those businesses and we think they are extremely well run and we are very confident that the cash flow generated from those businesses is predictable. Somewhat absent of seasonality and so we are okay with that business and probably we'll be a long-term holder of that business.

Unidentified Analyst

Interesting. Then in terms of timing for any potentially divestiture, how should we think about it?

Kelcy Warren

Actually you get state commissions, public utility commissions are involved in those processes. So, those do not move as quickly as other divestitures might move. However, saying that, we are down the road and are thinking of divestiture of those businesses and I think it's reasonable to see something and if we do something in no later than mid-'13.

Operator

Your next question is coming from the line of Ethan Bellamy from Robert W. Baird.

Ethan Bellamy - Robert W. Baird

Hey, guys. Good morning. Two big picture questions, just to follow-up on (Inaudible) question about the retail gas station. Does the sort of model hold any appeal to you as another potential capital channel? And then maybe going the other way, what potential synergies could you realize emerging Regency with either ETP or SXL. What are your current thoughts there?

Kelcy Warren

To go back to retail, I think everyone on this call understands one of the key things we acquired with Sunoco was expertise. As I think most people on this call know, the majority of us are blue collar pipeline people, natural gas people, the natural gas sector is very different than the crude sector and we do not compare us to the knowledgeable people in the retail sales gasoline. However, we acquired that and we are very pleased with that, and so we were very confident in the peoples' abilities to run the business from where they have got in the past.

We would be open minded to strategic growth in the retail sector, and in fact the gentlemen that runs that. Bob always is in fact probably thinking that way for us now and it would be wrong for me to comment on such a thing. I will need to talk to Bob about that.

Then your other question was what?

Ethan Bellamy - Robert W. Baird

Potentially merging Regency and the ETP or SXL, and I know you don't want to comment too much about that, but I was just curious about what type of synergies might be realized if you were to put say Regency with Energy Transfer.

Kelcy Warren

Well, we have shared services with Regency in Energy Transfer today, so a lot of the synergies have been extracted from the partnerships. However, I believe at some point it does mathematical sense to consider the merger of Regency into Energy Transfer Partners. Obviously, they are publicly traded as is ETP and it would be complex committee's fairness opinions that would be that the process we take very, very seriously, but I think at some point. I think that is something that I believe to be inevitable.

Ethan Bellamy - Robert W. Baird

Okay. Thanks, Kelcy. One more question. With respect to the Williams PLR and chemicals, how does that change the game at all for you? Has it opened up new ideas for potentially moving downstream?

Martin Salinas

I think the private letter ruling, I am not sure which.

Kelcy Warren

Could you tell us which way you are talking about?

Ethan Bellamy - Robert W. Baird

Just the [business] and Geismar?

Martin Salinas

I don't know if we studied that one.

Kelcy Warren

Yes. We don't have our Lone Star folks on the line. I am not familiar with that.

Ethan Bellamy - Robert W. Baird

Okay. Thank you.

Operator

At this time, I am showing no further questions in queue. I would like to turn the call back over to Mr. Martin Salinas for any closing remark.

Martin Salinas

Thanks, Derek, and thanks everybody for joining us today. I look forward to future for Energy Transfer everyone today. Thank you.

Operator

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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