TPP - Q Teppco Earnings Conference Call

Transcription

1 TPP - Q Teppco Earnings Conference Call Event Date/Time: Jul / 9:00AM ET streetevents@thomson.com

2 CORPORATE PARTICIPANTS Barry Pearl TEPPCO Partners, L.P. - President and CEO Tracy Ohmart TEPPCO Partners, L.P. - Acting CFO Dan Duncan EPCO, Inc. - Owner CONFERENCE CALL PARTICIPA NTS Yves Siegel Wachovia Securities - Analyst Ron Londe A. G. Edwards - Analyst John Tyssela nd Smith Barney - Analyst PRESENTATION Good day, everyone, and welcome to the TEPPCO Partners 2005 Second Quarter earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to TEPPCO Partners President and Chief Executive Officer, Mr. Barry Pearl. Please go ahead, sir. Thank you, Audra. Good morning everyone and thanks for joining us today for our second quarter earnings conference call. As usual, we will review financial results and address our business environment, as well as the key factors impacting our second quarter results. We'll also talk about some recent growth initiatives and update our outlook for Joining me on the call today are Tracy Ohmart, TEPPCO's acting Chief Financial Officer and several other members of the TEPPCO management team. Also, we're pleased to have Dan Duncan with us today on the call, representing EPCO, Inc., the owner of our general partner. Before we begin, I'd like to remind everyone that the matters discussed on this call will include forward-looking statements that involve certain risks and uncertainties which are described in detail in TEPPCO's filings with the Securities and Exchange Commission. Our discussion will also include certain non-gaap financial measures as defined under SEC rules. To comply with these rules, we have provided a reconciliation of these non-gaap measures on our website, Yesterday, we issued our second quarter earnings release including our financial statements, operating statistics, business segment data, and updated earnings outlook. On July 15, we announced a distribution increase, as we declared a second quarter distribution of $0.675 per unit. This marks the 13th consecutive year of distribution increases for TEPPCO, a track record that we're very proud of. Also on July 15, we announced a proj ect to expand our Gulf Coast refined product supply capabilities, including the acquisition of pipeline and storage assets from Texas Genco, LLC. I will be addressing that project and acquisition in greater detail later in the call. Let's turn now to our financial results. TEPPCO had another quarter of solid earnings, reporting net income of $42.2 million, or $0.45 per unit, compared with an income of $37.8 million, or $0.43 per unit for second quarter Net income for the six months ended June 30, 2005 was $90.8 million, or $0.99 per unit, compared with $78.2 million, or $0.88 per unit for the period year period. Thomson StreetEvents streetevents@thoms on.com om 3

3 Please note that the income per unit amounts for the 2005 periods reflect 7 million units issued during second quarter The weightedaverage number of units outstanding for the second quarter and six months ended June 30, 2005 was 66.6 million and 64.8 million, respectively, compared with 63 million for the corresponding 2004 periods. The impact of the additional units and distribution increase amounts to 3 cents per unit for the quarter. EBITDA for the second quarter totaled $96.1 million, a 12% increase over second quarter 2004 EBITDA of $86.1 million. For the first six months of 2005, EBITDA was $195.5 million, a 9% increase over the period year period EBITDA of $179 million. We continue to be pleased with our 2005 results, as we set a record for second quarter EBITDA, as well as for the first half of the year. Once again, we enjoyed good performance across each of our business segments. More importantly, we are developing and pursuing a number of growth opportunities in each of our business segments, which should enhance our platform for continued growth in the years ahead. Moving to our segment results, let's begin with our Upstream business. Upstream segment earnings for the quarter were on par with a very strong prior year period and actually exceeded our expectations. The key drivers in our quarterly performance were increased transportation revenues on our South Texas system and on Basin Pipeline, as well as revenues from storage contracts utilizing our newly -acquired tankage at Cushing, OK. This is quite pleasing to us, as we have recently invested growth capital in each of these areas. We also benefited from gains related to mark-to-market treatment on some contracts entered into in late- 2004, which offset mark-to-market losses recorded in the first quarter related to those contracts. Seaway Pipeline had a challenging quarter, with long-haul volumes of 214,000 barrels per day, compared with 275,000 barrels per day in the second quarter of Seaway s volumes were impacted by a pipeline failure and release which occurred in May. The downtime associated with the release impacted TEPPCO's share of Seaway's earnings by approximately $1.5 million. When we returned the line to service, we reduced maximum operating pressure by 20%, which is standard procedure until we can determine the cause of the pipe failure and implement the required corrective measures. A study of the failed pipe was recently completed by independent, metallurgical experts who determined that the pipe failed due to damage that occurred during rail shipment associated with its installation some 30 years ago. The study also concluded that the initial damage was insufficient for the pipe to fail when hy drostatically tested prior to its initial operation. In fact, it took 30 years of operations for the original small crack in the seam to expand and ultimately fail. Our corrective action includes running a very sophisticated, high definition inspection tool to determine if there are any other sections of pipe that have similar damage. This approach is consistent with directives from the DOT's Office of Pipeline Safety in past failures of this type. We're in the initial stages of evaluating 300 miles of pipeline that have similar vintage pipe. Because of the complexity of the inspection tools we will be utilizing, we expect that it will take several months to analy ze the data, as well as complete any additional repairs that are identified from the analysis. Hence, we expect to be operating at reduced pressure through the first quarter of Looking forward, we believe that with the selected use of drag reducing agent, we will be able to serve our customers and meet our business plan for the remainder of 2005, even while operating under the reduced maximum operating pressure. For example, we expect July business to be in the range of 275, ,000 barrels per day, which is comparable to last July's very strong performance. All in all, I'm proud of the quick response and hard work of the TEPPCO team, including our field personnel, commercial and support groups, to minimize the impact of this incident on all of our stakeholders. Turning to our Midstream segment, we continue to benefit from volume growth along the Jonah Gas Gathering System, with second quarter 2005 average throughput of nearly 1.1 Bcf/day, 19% above the prior year quarter s throughput level of 918 MMcfd. Volumes on the Jonah system continue to increase, as we have set several daily records in July at the 1.2 Bcf/day level. Drilling activity at both Jonah and Pinedale continues at high levels, with 30 rigs currently active on acreage dedicated to our system. Work on the Phase IV expansion of the Jonah system is progressing well, with completion scheduled for the fourth quarter. This expansion will bring our system capacity up to 1.5 Bcf/day. We are currently in negotiations with producers on a broad range of investment opportunities at both Jonah and Pinedale, which could result in a substantial level of organic growth investment during the next few years. We hope to have our negotiations completed on a good portion of these opportunities during the third quarter. Moving on to our Val Verde System, second quarter 2005 volumes averaged 490 MMcfd, a 24% increase over the 396 MMcfd level in the prior year quarter. This increase is largely attributable to the full operation of our Red Cedar gathering system, which connects the Val Verde sy stem to Thomson StreetEvents streetevents@thoms on.com om 4

4 a system originating in Colorado. We are very pleased with the performance of the Red Cedar connection, as it has exceeded expectations and we're currently evaluating the feasibility of an expansion of this sy stem. Our natural gas liquid systems also performed well during the quarter, with earnings up due to increased volumes on the Panola system and lower operating expenses on the Chaparral System. Now let's turn to our Downstream segment, which had another solid quarter after a very strong first quarter. Downstream EBITDA was 9% above the prior year quarter, primarily due to a 6% increase in long-haul propane deliveries and higher terminal services revenues, partially offset by lower distillate transportation revenues. As expected, we are seeing lower costs due to a reduction in the pipeline integrity expenses. During the quarter, we commenced operations of a new refined products terminal near Shreveport, Louisiana. Throughput has been surprisingly strong, averaging approximately 13,000 barrels per day in June, and 15,000 barrels per day in July, which has exceeded our expectations. We have indications from customers that volumes will continue to grow so much so that we are already evaluating an expansion of our truck loading capacity. We also recently completed the acquisition of ExxonMobil's refined products terminal in Little Rock, Arkansas. With respect to earnings from our Downstream joint ventures, we reached an important milestone during the quarter, as Centennial Pipeline, on the stand-alone basis, recorded its first quarterly profit since it began operations in April 2002, with TEPPCO's share of net income, before intercompany eliminations of $0.7 million, compared to a loss of $0.8 million last y ear. The improved results were driven by volumes of 143,000 barrels per day, a 10% increase over 2004, as well as lower operating expenses. All in all, we were pleased with our Downstream results for the quarter and believe that we are well positioned for a strong second half in this important segment of our business. As I mentioned earlier, on July 15, we announced the commencement of an expansion of our refined products origin capabilities in the Houston and Texas City areas. We also announced the acquisition of 90 miles of pipeline and nearly 6 million barrels of storage capacity from Texas Genco, LLC. Our expansion plans call for TEPPCO's existing Texas City origin facility and a 10-inch diameter, 70,000 barrel per day pipeline system from Texas City to Baytown to be replaced by an 18-inch diameter, 180,000 barrel per day pipeline, which will provide additional receipt and delivery capabilities through the TEPPCO system at major exchange terminals in the Houston area. We are excited about both the expansion project and acquisition for a number of reasons: Texas City is a key source point for product supply to the TEPPCO system, and we believe that expansion of this system is critical to support the Downstream volume growth that we anticipate in future years Besides improving the supply capability for the TEPPCO sy stem, we believe that these assets will provide improved access for customers through the Colonial and Explorer pipeline systems, as well as access to large refined product terminals along the Gulf Coast Some of the acquired pipeline assets can be utilized to increase our capacity to North Houston, which we expect to continue to be a growing market for TEPPCO The new 18-inch pipeline will make available two pipelines for alternative use, and we already have competition within TEPPCO for the potential use of these lines Finally, we've been pleasantly surprised by the apparent demand for use of the tankage that we have acquired This wraps up our review of our operations and earnings highlights. Now let's take a look at TEPPCO's capital expenditures, cash flow, and financial position. During the first half of 2005, TEPPCO generated approximately $25 million in cash from operating activities. This amount represents a decrease from historical cash flow levels due largely cash used to purchase crude oil for storage during the second quarter. We have entered into offsetting sales contracts that will settle during the remainder of the year, returning the cash used, plus an additional margin. Net cash used for investing activities of $126 million for the period consisted primarily of $83 million for capital expenditures and $43 million for acquisitions. Maintenance capital totaled $20 million. Our forecast for 2005 capital expenditures, excluding acquisitions has been increased to approximately $280 million, including $41 million for maintenance capital to reflect recent activity. We are also on track with our original pipeline integrity cost projection of $39 million. Thomson StreetEvents streetevents@thoms on.com om 5

5 At June 30, 2005, TEPPCO had total debt of $1.4 billion, net of $42 million related to fair value hedges. Our debt-to-capital ratio at quarter end was 52% and our debt-to-ebitda ratio was 3.7. Sixty-four percent of TEPPCO's debt was fixed rate at the end of the second quarter, with an average interest rate of 5.6% on all debt. Now, let's turn to our earnings outlook for We remain confident in achieving results within our previously stated EBITDA range for 2005 of $375 million to $395 million. This is based on our solid performance for the first six months of the year and our expectations for similar performance during the third and fourth quarters. As noted in our press release, we have revised our earnings per unit range to $1.75 to $1.95 per unit, to reflect the additional units issued during the second quarter and our cash distribution increase. In closing, I believe that with a solid six months of performance behind us, that we are well-positioned to meet, and hopefully, exceed our original expectations for Looking further ahead, I believe that the combination of the strength of our ongoing business and attractive growth prospects should allow TEPPCO to continue providing solid growth and attractive returns to our investors. With that, we are ready to address your questions. QUESTION AND ANSWER Thank you. (OPERATOR INSTRUCTIONS) For a replay of today's conference, you can dial , and enter a pass code of The replay will begin at 11:00 Central time today and will end on August 2, 2005 at midnight. We'll go first to Yves Siegel at Wachovia. Good morning, Barry. Barry, could you elaborate on the Gulf Coast acquisition and expansion as it relates to, number one, just the timing of the cash outlays and the timing of when you'll start receiving cash inflows? And what kind of returns should we be thinking of if you're spending -- I think the math is roughly $107 million. What kind of EBITDA do you expect that you could generate from that? Well, I'll answer your last question first. I would assume our base case would be a typical organic growth range of returns. I'm not going to give you a specific EBITDA. Given the nature of these assets, there are a variety of uses of these assets and we have -- when we evaluated the acquisition of these assets, which I believe in the past, TEPPCO had been interested in, but they really weren't for sale, we've got various uses. As I outlined in my opening remarks, the primary initial use would be to expand this gathering capability, and I would say probably 12 to 18 months is our expectation. We hope to beat that. It will depend on permitting and things like that. And we are going to get some initial revenue from storage, but I really can't quantify that at the time. As I mentioned, another key focus of these assets will be the Northeastern area, where we already have operations and certainly those that know the demographics of Houston, know that that's certainly a growing area from a supply standpoint. So we are very comfortable that in the mid-range of our forecast, we'll have a fairly attractive organic growth return, and if we hit all of our potential projects would leave a very nice return, but that will take a couple of years to develop. Is there any way to quantify how much storage would be of the cash flow? Right now, no, but as we further develop it in subsequent quarters, I'll certainly be able to give these an update. Thomson StreetEvents streetevents@thoms on.com om 6

6 Is $60 million out the door already, though? Yes, the purchase was completed a few weeks ago, and we expect to spend the other $45 million over the next 12 to 18 months. And if I could, the last question as it relates to Seaway, is there any incremental cost involved in terms of the inspection, and if you have to replace pipe, do you have any sort of expectations on how much that may cost you? On the replacement -- on the repairs, as y ou know, it's very hard to quantify until y ou have the pig data. I believe we're going to spend an extra $1 to $2 million on the inspection phase, that's gross. And, of course, we're 60% of that. And once we have the repairs analyzed, I will update you. I will say that, as I said in my comments, we're stay ing with our initial pipeline integrity forecast for the year, which actually includes some guesstimate of what Seaway could cost, which leads you to the conclusion that in other areas of our original forecast, we're actually a little bit below budget. So we think all in all for this year, we're going to be where we were originally even with the incremental costs on the Seaway line. So we feel good about that development. Thanks, Barry. You're welcome, Yves. We'll go next to Ron Londe at A. G. Edwards. Ron Londe - A. G. Edwa rds - Analyst Yes, thanks. Barry, looking at the segment data -- pardon me -- in total EBITDA, it looks like you have some pretty nice gains in Downstream and Midstream. Performance was kind of flat in the Upstream area. Was that mainly a function of Seaway, or was there something else in play there? From a year-to-year standpoint, we were off a little bit on Seaway, and if y ou recall from our initial guidance in the beginning of the y ear, we expected our Downstream segment data to be approximately $10 million below last y ear. Some of that was because we had a blowout year last year, some of it was because we had some nonrecurring positives last y ear. Right now, with six months behind us, I believe that we will exceed that. In other words, the year-to-y ear delta will not be as great as originally expected. Actually, Seaway even with the incident, the leak, exceeded our internal forecast for the quarter. So we're in the process of having a bang-up quarter and the fact that the 275, ,000 barrels a day for July, and I've been given indication that could continue into August, is very, very strong performance. Obviously, if we have to deal with the pipe, we will. We have a good plan and we have laid that out. But from a business standpoint, our flexibility to wor k the sy stem and really not lose anything in throughput -- you know, we will have a little in some incremental cost in incremental barrels when we use DRA. That's about 20 cents per barrel, incremental barrels, but that's not going to have a big impact if the business remains as strong as we're seeing right now. Thomson StreetEvents streetevents@thoms on.com om 7

7 Ron Londe - A. G. Edwa rds - Analyst Now that you've turned the corner at the Centennial Pipeline, what do you think the incremental growth could be there for, I guess for the six months second half and into next year? Well, really, it's going to be a function of how we can grow our system in terms of the volume growth on TEPPCO, and what we're seeing there - - I can't speak for our partner. Obviously, Marathon has different factors influencing their volumes in terms of supplying their markets, but the rest of the market, the overall market, we're seeing really nice developments in what we call our mid-market, say, from Shreveport up to Cape Girardeau. So that's one element -- one aspect where the incremental barrel into TEPPCO will ultimately become an incremental barrel in Centennial. Secondly, as you know, we spent a lot of money and had a fair amount of downtime the last couple of years on our propane system in the Midwest and Northeast, and what we're seeing this summer is what we hope to believe is a return to some incremental barrels to our system for the winter. And the reason we have some optimism there is that, as you know, when we have to allocate propane in the winter, the allocation is a function of what customers move in the summer. And the fact that we're seeing fairly strong movements right now, we believe is a good indication for us to hopefully grow our market share in the propane business. And that's largely due to the fact that we have our repairs behind us and we really had very good performance last winter, and we're generally in most cases the most economic source of transportation in the Northeast. So those would be two drivers, as well as the overall growth and demand in the Midwest. Ron Londe - A. G. Edwa rds - Analyst I didn't catch the quarter that you expected that Phase IV expansion to kic k in? During the fourth quarter it will come in stages, and we expect it to have it totally completed by the end of the year. And, frankly, given the way production is, we're looking right now at any means we can to accelerate -- you know, pic k up a week here, a week there. It will help us as well help our producers. But we're pretty much on schedule. Ron Londe - A. G. Edwa rds - Analyst And what's the capacity going to be in Phase IV? It will be 1.5 Bcf/day. Ron Londe - A. G. Edwa rds - Analyst Very good. Okay, thanks. You're welcome. Thomson StreetEvents streetevents@thoms on.com om 8

8 We'll take our next question from John Tysseland at Smith Barney. Barry, are you there? Yes. Sorry about that. I have a few questions. A few things have changed in your guidance from the first quarter, one being, I guess, interest expense and depreciation is a little bit higher. I assume that's due to the acquisition activity that y ou had, or y our -- the Gulf Coast refined products system, expansion project. That would be some of it. Also, the crude oil storage contract. You know, we're in a Contango market and so it's taking out some working capital to fund the purchases. Of course, we're making a nice margin on those barrels, so -- Okay. Is there -- due to that, I mean, the EBITDA number really didn't change. Is that just being conservative at this point, or are the cash flows expected from some of that just going to be delay ed until like -- well, for instance, some of it in '06? Well, our -- the midpoint of our guidance is $5 million above the original guidance since February. We didn't change it quarter-to-quarter, and, as y ou know, we tend to be on the margin a little bit conservative, but I feel real good about the midpoint, and, as I said in my remarks, we're working hard to exceed that. If you look at expansion capital that you -- with the assets that you have today, what do you think for the rest of the year, or I guess for the next couple of years, do you think you have visibility on what -- on projects that y ou could deploy capital internally on y our current street assets? How much, I guess. Well, excluding acquisitions, we look at -- again, I'll have a lot better feel and be able to talk in more detail after we get some of our work done in the Jonah and Pinedale area. But even with a midpoint estimate there, I would hope that we can develop a couple hundred million dollars a year. Frankly, I hope that's low. We are sort of in the early stages of our development, working within the EPCO framework, and I would think that we're going to be more driven and have more ability to expand going forward than perhaps we had in the last couple of years. But we're busy on projects across all of our segments, and I think the growth in our capex this year is a good indication of that. And most of that was already in development in our past life. Thomson StreetEvents streetevents@thoms on.com om 9

9 One last question on your Val Verde System this year, it's finally turned the corner and shown some pretty good sequential gains. Do you expect that to continue, and what do y ou see on the drilling side of the equation in that area? Well, as I mentioned, we are pleased with Red Cedar and I would be surprised if we don't expand that in the next year or so. We still would like the coal bed to be developing at a faster rate than it's developed, but all in all, I think we've had a nice increase this year and we hope to continue that trend. Certainly, it's obviously a different profile than we have at Jonah, but we feel we're in a fairly solid level of earnings there, and hopefully with a little better development of the coal bed, we can keep that trend. I think the progress we've made year-to-year, we're certainly pleased with. Great. Thanks, Barry. You're welcome. (OPERATOR INSTRUCTIONS) We'll take a follow up from Yves Siegel. Hey, Barry, just to elaborate on an answer to one of those last questions, which is, specifically, what are you doing now that may be different than what you did before the change in GP ownership, i.e., in terms of the expansion capital that you're looking at, are you being a little bit more aggressive on taking on some additional risk that maybe you would not take before, or is there something else that is leading to greater opportunity for y ou? Well, I, really, from an organic standpoint, I think we were very focused before, and so I don't think we're really changing our risk profile. I think going forward, I would expect that perhaps we get more opportunities in various areas. But in terms of development of Jonah, development of our Product system, development of our Crude system, I think it's just a continuation, but certainly I would think on the margin we'll have -- we hope to have perhaps access to some deals that perhaps we wouldn't have access to before. Okay. Thank you. (OPERATOR INSTRUCTIONS) Mr. Pearl, it appears there are no further questions at this time. I'll turn the conference back over to you. Great. Well, we certainly appreciate everyone being on the call, and look forward to talking to you at the end of the third quarter. Thanks. Thomson StreetEvents streetevents@thoms on.com om 10

10 And that does conclude today's conference. Again, thank you for your participation. DISCLAIMER Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies mayindicate and believe that the assumptions underlying the forwardlooking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. 2005, Thomson StreetEvents All Rights Reserved. Thomson StreetEvents streetevents@thoms on.com om 11