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Energy Transfer Partners, L.P. Message Board

  • factoids2002 factoids2002 Sep 18, 2006 7:54 PM Flag

    Conference Call of 9-18 pt One

    ETP's intro comments were very short and contained no new news. The QnA:

    Ross Payne of Wachovia - Tell us about the fundamentals - supply and demand - and more on the possible Phoenix expansion of the TransWestern line.
    ETP: TransWestern starts at Waha [in west Texas] and goes to the border of California - it was built to gather and transport gas to California. TransWestern has a large presence in the San Juan Basin. We have not had access to the San Juan. The Phoenix expansion of that line is something we like it - intend to pursue this and to complete it as fast as possible.

    What is the cost of the Phoenix expansion and what kind of multiple should ETP get on the project.
    ETP: The costs are more involved than just a line - but an upgrade to existing lines - We expect to invest $700 million - and the initial rates of return will be modest - but build over time.

    Does new pipe [the TransWestern purchase] give you more options - due to basis differentials?
    ETP: Excellent question. One thing we do - we are a supply driven company. We want pipes in areas of exploration - of growing supply. In past - we have been limited to Texas in doing shipments that would maximize our margins. By accessing other areas - coupled with ETP intrastate system - we can add upside that previously TransWestern alone [or ETP alone] could not have done.

    Give us an update on tariffs - and the discounting of recent contract - it appears there is falling demand from California [which is lowering tarrifs].
    ETP: The California market is extremely competitive - and we expect it will remain that way. One example is an LNG plant locating in Mexico that will supply California. But - Gas can also move east out of California on the TransWestern pipes. We will study this.

    Because it is reversible - you can reverse TW?
    ETP: Yes
    That would take supply away from California?
    ETP: No. That is not our intent going in. We try to maximize the volumes in our pipes. We listen to out customers and supply the service. [Did ETP contradict itself here?]

    This diversifies ETP with FERC assets. The ratings agencies should like it. Will you talk with S&P?
    ETP: We are in talks with S&P all the time.

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    • Scott Glover of USAA
      You mentioned that there will be $350 million of private placements?
      ETP: The figure is more than $350 million. [And I missed any mention of private placements.]

      Steven Roundhouse of Tung[?] Capital noted that TransWestern planned to file a rate case - is it still on the board?
      ETP: Yes. We have gotten to know TW employees. They will help us a lot with FERC matters.

      What do you expect from the rate case?
      ETP: That we will now have scrutiny from FERC. We are optimistic about the rate case.

      How much headroom currently exists between allowed rates and charged rates?
      ETP: We expect that the charged rates will stay flat. [So they want FERC to allow higher rates, but the market is too competitve to allow those rates to go into effect?]

      From Eves Segal with Wachovia - how were the TransWestern pipes maintained - what is a good run rate on maintenance cap ex? Have you talked with the TransWestern customers already? What is the contract roll-over on the Transwestern contracts?
      ETP: We do not have a firm number on the maintenance cap ex [10-15% EBITDA]. The maintenance on the TransWestern pipeline is superb - there are no anomalies expected. Contract roll-overs start in 2009. Existing contracts should be renewed. The TransWestern people invited us to their last customer meeting. Customers are pleased with service in past and we assured them that this level of service will be maintained or improved.

      Ted Gardner of Raymond James - You stated that there would be $1 billion equity [the cash payment to GE] - is the rest in debt assumption? Yes
      On the subject of equity issuance - will there be any to the seller [GE]?
      ETP: No. We are looking at where we want to place the equity.

      Hugh McCafferty with AAM - had soon will the deal close?
      ETP Not before Nov 1st. The speed of closure depends on regulatory approval. It will close at the first of the month AFTER there is regulatory approval.

      Devin Gaen of Zimmer Lucas - does this purchase allow you to expand in Texas?
      ETP: We have openly stated that we want to move gas from Waha east. TransWestern had limited ability to move the gas east from San Juan.
      The Transwestern pipes are bi-directional from San Juan? Right?
      ETP: Yes. [The San Juan to California pipe is currently uni-directional.] We now have San Juan as a supply base - and the southern part of the Rockies. So the gas from San Juan could go to California, or Phoenix [which is a growing market] or Texas.

      Stephanie Fielding of Delaware Investing asked about the regulatory issues with MLP owning an inter-state pipe?
      ETP: Attorney Bill Hederman with Morgan Lewis will monitor ETP to see we are in compliance with FERC. Bill was on FERC staff. Secondly - MLPs were hesitant in the past to bring in FERC assets into a MLP - because in past the non-taxable nature of MLPs could be damaging to rate design. That was due to part of rate design being the taxes paid on those assets were allowed to be past along in rates. It was thought that since MLPs did not directly pay taxes, those taxes paid by the units holders would not be a factor in rate calculation. That has now changed. MLPs have successfully argued that the taxes are being paid by SOMEBODY. BWP was a test case. We studied what BWP did. ETP noted one other distinction - that TransWestern is not a c-corp. but an LLC.

      Eves Segal with Wachovia wanted ETP to reiterate the stats on maintenance cap-ex - asking it it was 10-15% of EBITDA and does that mean $10-$15 million for cap-ex?
      ETP: Yes. [I am not sure of this number - so add some salt to it. Does a $1.4 billion investment generate only $150 thousand in EBITDA/annum? Then ETP paid roughly ten times EBITDA for TransWestern? That sounds high to me - and could be why ETP fell a bit today.]

      • 3 Replies to factoids2002
      • Reflecting on the various brokerage reports and discussion with ETP hasa brought me to two conclusions.

        The pipeline acquisition will not initially be as accretive as many would have hoped. It will take not only the initial purchase, but the build out as well to derive much benefit to the unitholders.

        Second and more production is that a FERC regulated pipeline will provide stability in earnings going forward. There is considerable benefit here it that it will guarantee a smoother EBITDA and DCF going forward. This should allow the distribution rate over the next couple of years to grow faster than the DCF because of the predictability and stability of earnings. In possibly simplier terms, ETP will no longer need a 1.3X coverage ration and can cut the coverage to 1.1X. This should allow a distribution increase to over $3.00 within a few quarters and a huge CAGR over the next 2 years.


      • RBC in a verbal comment said ETP paid 9X for the system. Lehman came up with idential numbers. THe Phoenix project where they can build at 6X is where the $$ really begin falling to the bottom line.

        I see a couple areas of concern in the deal. First it is a FERC regulated pipeline and there are alternative choices. Being held in an MLP is no longer a problem, but competition is. The 5% reduction taken by NBPL is a case in point. While the LNG depot in Mexico will provide cheap NG for California and possibly create the need to reverse the flow, it will also create a situation where other pipes can also carry the flow. Increasing revenues over time are not guaranteed. The organic projects are where the real profit potential come in.

        Second, you have an approximate $1.5B deal that will only put .09 or .10 addition to DCF for the limited partners. The 50/50 split on the incentive makes it evident that a high CAGR going forward is going to be very difficult for ETP. It also leads one to wonder about other MLPs that while into the 50/50 split are less well managed. MLPs in general will need to have organic projects to put much to the bottom line in a 50/50 split mix arena. It also bodes well for EPD with the GP incentive capped at 25%.

        I'm not intending to put forth doom and gloom, only attempting to communicate the the days of buying a $1B asset and increasing the distribuion by 5-8% appear to be over.


      • Thanks for your excellent summary, as usual, Factoids. For sake of provoking some discussion, here's my uneducated take on ETP's new pipe:

        ETP makes a lot of money by taking advantage of price arbitrage between hubs because they have the unique ability to transport it to different markets at cost (not to mention their ability to store gas and extend this play beyond the spot market). If they own the pipe, they can can capture the transportation profit built in to FERC rates. This allows them an advantage over producers because it costs them less to move it.

        Even if the price they paid for the pipe was the max value that could have been supported by the transportation revenue stream, its still a discount to ETP becuase it greatly expands their ability to exploit arbitrage. As long as the pipe stays full (as in reversing it if the Mexico LNG drives Cali prices below Pheonix), the arbitrage profits are gravy. I think for this reason, the pipes value to ETP is higher than it would have been to just about anyone else.

        This is merely an outsider's uneducated guess, and I would love to hear why its right or wrong from you folks who understand the gas market.

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