Energy Transfer LP

Greetings and welcome to the Energy Transfer First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Long, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator, and good afternoon, everyone, and welcome to the Energy Transfer First Quarter 2020 Earnings Call. And we really want to thank all of you for joining us today. I'm also joined today by Kelsey Warren, Mackie McCree, and other members of the senior management team who are here to help answer your questions after our prepared remarks. Hopefully, all of you have seen our press release we issued earlier this afternoon, as well as the slides posted to our website. As a reminder, we will be making forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934. These statements are based upon our current beliefs as well as certain assumptions and information currently available to us and are discussed in more detail in our quarterly report on Form 10Q for the first quarter of 2020. I'll also refer to adjusted EBITDA, distributable cash flow, or DCF, and distribution coverage ratio, all of which are non-GAAP financial measures. You'll find a reconciliation of our non-GAAP measures on our website. And we expect our 10Q to be filed later today. The current COVID-19 pandemic has impacted our nation in more ways than one. As we navigate through this uncertainty, we want to start today by thanking our team of more than 12,000 men and women across the country for their remarkable contributions and incredible commitment during this challenging time. We understand and appreciate the tremendous amount of hard work and coordination it requires to keep our assets running safely and efficiently while keeping energy products moving both for the benefit of our partnership and our country. Now before addressing the current market conditions brought on by COVID-19 and the OPEC oversupply I'm going to start with a few of our first quarter 2020 highlights. For the first quarter, we generated adjusted EBITDA of $2.64 billion and DCF attributable to the partners of ET as adjusted of $1.42 billion. And our coverage ratio for the quarter was 1.72 times, which resulted in excess cash flow after distributions of $594 million. Adjusted EBITDA was adversely affected by inventory valuation adjustments of $213 million in the first quarter of 2020, which I will discuss further in the segment reviews. Without these adjustments, first quarter adjusted EBITDA would have been approximately $2.85 billion, and both adjusted EBITDA and DCF results would have been above our expectations. During the first quarter, we also brought our seventh fractionator at Mont Bellevue online, which brings our total fractionation capacity at Mont Bellevue to over 900,000 barrels per day. Additionally, our 200 million cubic foot per day Panther II processing plant in the Permian Basin was placed into full commercial service in January of 2020. Finally, in January, we completed dual offerings of debt and perpetual preferreds in the aggregate amount of $6.1 billion. A portion of the proceeds from these offerings were used to redeem all of our 2020 maturities with the remainder used to pay down short-term borrowings on our credit facility. We had a strong liquidity position of approximately $4 billion at the end of the first quarter. Additionally, we have a very manageable $1.4 billion of maturities in 2021. Now looking at our 2020 outlook, although the current year has become increasingly challenging in the energy industry and has resulted in lower financial projections across the midstream space, we believe that our fully integrated, diversified asset base offers unique benefits and a foundation that has been built to help mitigate cyclical markets. In light of the significant weakness in crude oil prices due to the COVID-19 demand disruption and additional OPEC supply, we are revising our 2020 adjusted EBITDA guidance range to $10.6 to $10.8 billion. In addition, as producers curtail drilling and in some situations shut in existing wells, we do expect some short-term volume reductions in crude associated with gas and NGLs. Helping to offset the impacts from lower volumes and lower commodity prices, we expect increases related to the addition of the SIM group assets, as well as contributions from the ramp up of Mariner East, Fract 7, new processing in the Permian, as well as full year contributions from projects that went into service in 2019. We are also taking additional steps to keep our assets running efficiently and our cash flows steady as we navigate the tough market conditions and challenges ahead. These include cost reduction measures and reduced 2020 growth capex expenditures. Commercially, our team is focused on locking in existing volumes for longer terms, and this continues to take precedence over development of new assets. Operationally, we are leveraging our extensive infrastructure to help drive operational efficiencies and optimize our assets. As a result, Through the combination of our diverse asset base and a lot of hard work from our talented employees, we have found some new opportunities during this disruption. The wide and profitable contango spreads on virtually all of our hydrocarbon products is allowing us to capture significant margins utilizing our extensive network of storage assets. Through the end of 2020, we have contracted 6.2 million barrels of crude oil storage capacity in the Department of Energy's Strategic Petroleum Reserve. We have a connection to the reserve through our needle and terminal, so this is an efficient extension for our franchise. In addition, due to this pressure on our business, we have identified and are executing on significant cost-cutting initiatives, both in our corporate offices as well as our field operations. As a result, we expect to save $200 to $250 million relative to our 2020 budget. We have also further reviewed our growth capital expenditures for 2020, including project spend today, completion dates, economic impact on delaying particular projects, and near-term cash flows. Approximately 70% of the growth capital spent in 2020 will be spent on projects that are 60% or more complete and are expected to be in service in 2020 or early 2021. This includes Mariner East, the Lone Star Express expansion, and the Orbit and other LPG export projects at Nederland. However, we have decided to delay some projects, including FRAC-A and select Canadian projects, as well as change the scope of the Ted Collins pipeline. Based on our outlook for the current market, we are reducing our 2020 growth capital expenditures by at least $400 million to $3.6 billion and we are evaluating another $300 to $400 million for potential reduction this year. Although we anticipate growing the business over the next several years, and we are continually evaluating new opportunities given our asset footprint, we view it as unlikely we will add any major organic growth projects to our backlog for 2021. As we think about future capital spend over the next three to four years, we anticipate an annual run rate of less than $2 billion. We remain committed to generating free cash flow and still expect to be free cash flow positive in 2021 after growth capital and equity distributions. Looking more closely at our growth projects, I'll now walk through our recent developments. We are transitioning the Ted Collins crude oil pipeline into the Ted Collins link. which will reduce capital spend and increase the utilization of existing assets while providing the same market connectivity between our Nederland and Houston terminals. The Ted Collins link will be a much less expensive and quicker alternative that will allow us to transport up to 275,000 barrels per day from West Texas and Nederland to our Houston terminal and is expected to be in service in the fourth quarter of 2021. The Moore Road pipeline is now in service. This pipeline expands and improves our existing access to and from our Houston terminal and export facilities, as well as access to Houston Ship Channel refineries. Regarding the Bakken pipeline capacity optimization, as we have previously mentioned, the Bakken pipeline received sufficient market interest to move forward with plans to further optimize system capacity. The initial phase of the optimization above the pipes current capacity of 570,000 barrels per day, will accommodate the volume commitments made by shippers during the recent open season. Subject to completion of the permitting process, we now expect this additional capacity to be in service in the second quarter of 2021. Now moving on to Mariner East system, total NGL volumes through the Marcus Hook Industrial Complex averaged 226,000 barrels per day during the first quarter. with 17,000 barrels per day coming in by other modes, including rail and third-party pipelines. At the beginning of this year, we reached an agreement with the Pennsylvania Department of Environmental Protection that will allow us to complete the construction of projects we have underway in Pennsylvania. And in April, we started to ramp up some additional volumes on the Mariner East system. Customers at our Marcus Hook complex are taking advantage of the flexibility that our Mariner East system has to offer by placing barrels for the upcoming winter season into local markets. We are pleased to be connected to the new CPV Fairview Power Plant in Cambria County for the local ethane supply from Mariner East for Pennsylvania power generation. This connection enables further market flexibility for shippers on the Mariner East system while advancing local energy initiatives with efficient transportation options. At the same time, International demands for propane and butane has remained strong, even while motor fuel demand has waned because of COVID-19. This is helping our Appalachian producers find a market for their products. Looking ahead, we are anxiously awaiting the next phase of the project, which we now expect to be in service in the first quarter of 2021, while the final phase completed in the second quarter of 2021. In addition, We continue our expansion at the Marcus Hook Terminal as it provides customers with the most efficient way to reach the best markets for their product. This expansion will provide approximately 50,000 barrels per day of incremental NGL throughput capacity at the terminal in the first quarter of 2021, accommodating volume growth from Mariner East. Moving on to our Lone Star assets, Frac 7 is now in service and has ramped up as expected. As mentioned, we are delaying the construction of Frac 8 based on our current supply and volume expectations, along with our customers' volume expectations. We now expect to be in service in the first quarter of 2022, and we are in the final stages of construction on our 24-inch, 352-mile Lone Star Express expansion which will add over 400,000 barrels per day of NGL pipeline capacity from the Permian Basin to the Lone Star Express 30-inch pipeline south of Fort Worth, Texas. We continue to expect the expansion to be in service in the fourth quarter of 2020. In light of the current conditions, we have converted some of our storage facilities at Mont Bellevue to allow us to store a significant amount of natural gasoline and diesel barrels into 2021. which provides us with significant contango revenue. This demonstrates another valuable benefit of our dynamic franchise. Looking at our LPG expansion project at Nederland, we have recently found a very cost-effective way to modify this expansion, which will increase the capacity from 235,000 barrels per day to 300,000 barrels per day. LPG demand has remained strong, as has demand for this project, which will further integrate our Montbellevue assets with our Nederland assets to expand our LPG export capabilities. Construction is progressing well, and it remains on schedule to be in service in the fourth quarter of 2020. The conversion of the White Cliffs pipeline from crude oil to NGL service is complete, and volumes on this pipe, which runs from Platteville, Colorado to Cushing, Oklahoma, began flowing in December of 2019. Construction on our orbit ethane export joint venture with satellite petrochemical is nearing completion, and we expect the project to be ready for commercial service in the fourth quarter of this year. Turning to gas processing in West Texas, our 200 million cubic foot per day Panther II processing plant in the Permian Basin was placed into full commercial service in January of 2020. With the completion of this plant, which is fully subscribed We are now capable of processing more than 2.7 BCF per day in the Permian Basin. Let's take a little closer look at the first quarter results. Consolidated adjusted EBITDA was $2.64 billion compared to $2.74 billion for the first quarter of 2019. The change from the prior period was primarily due to crude oil and NGL and refined products inventory valuation adjustments of $213 million that adversely affected adjusted EBITDA in the first quarter of 2020. Crude oil and NGL refined products had a positive impact of $27 million in the first quarter of 2019 for a total impact of $240 million from the first quarter of 2019 to the first quarter of 2020. DCF attributable to the partners as adjusted was $1.42 billion for the first quarter down $177 million compared to the same period last year. This is primarily due to the decrease in adjusted EBITDA. Distribution coverage ratio for the first quarter was 1.72 times. In March, Energy Transfer announced a distribution of 30.5 cents per common unit for the first quarter, or $1.22 per common unit on an annualized basis. This distribution is consistent with the fourth quarter of 2019 and will be paid to unit holders of record as of the close of business on May the 7th. Let's look at results by segment. Starting with NGL and refined products, adjusted EBITDA was $663 million compared to $612 million for the same period last year. This increase was due to record frac and NGL transportation volumes which were partially offset by a $59 million impact from changes in inventory valuation adjustments in the first quarter of 2020 versus a $9 million valuation adjustment in the first quarter of 2019. NGL transportation volumes on our wholly owned and joint venture pipelines increased to 1.4 million barrels per day compared to 1.2 million barrels per day for the same period last year. The majority of the increase in volumes was on our pipelines out of the Permian Basin and North Texas regions, as well as on our Mariner East pipeline system. First quarter average fractionated volumes increased to 804,000 barrels per day compared to 678,000 barrels per day for the first quarter of 2019. For the crude oil segment, adjusted EBITDA was $591 million compared to $744 million for the same period last year. This was primarily driven by a change in inventory valuation adjustments of $190 million. In the first quarter of 2019, we had a positive $36 million adjustment, and in the first quarter of 2020, we had a negative $154 million adjustment. In the first quarter, a portion of the barrels previously recognized as operational inventory have been reclassified as a long-term asset, which is expected to help reduce the volatility of earnings in the crude segment. Going forward, based on our current business operations, we expect our inventory that is subject to these adjustments to be between 3 to 4 million barrels. Crew transportation volumes increased to 4.5 million barrels per day compared to approximately 4 million barrels per day for the same period last year, primarily due to increased barrels out of our existing Texas pipelines, volume growth in the Bakken, and the initiation of service of phase two of the Bayou Bridge pipeline in the second quarter of 2019, as well as the acquisition of Sim Group assets in the fourth quarter of 2019. For midstream, adjusted EBITDA was $383 million compared to $382 million for the first quarter of 2019. Higher midstream throughput volumes were partially offset by lower NGL and gas prices, which impacted results by $22 million. Gathered gas volumes were 13.3 million MMBTUs per day compared to 12.7 million MMBTUs per day for the same period last year. This increase was due to volume growth across the majority of our operating regions and demonstrates the strength of both our customer base and our asset footprint. In our interstate segment, adjusted EBITDA was $404 million compared to $456 million for the first quarter of 2019. This was primarily a result of a contractual rate change at the Lake Charles facility. as well as lower demand for services on several of our pipes. And in our intrastate segment, adjusted EBITDA was $240 million compared to $252 million in the first quarter of last year. This was primarily due to higher transport fees from the ramp up of the Red Bluff Express, increased storage margin from a higher storage optimization, and new contracts. These were offset by lower revenues from pipeline optimization. activities. Let's now look at the CapEx. For the quarter ended March 31st, 2020, energy transfer spent approximately $1 billion on organic growth projects, primarily in the NGL and refined products and midstream segment, excluding sun and USAC CapEx. And as a reminder, near as 70% of the capital spent in 2020 is on projects which are more than 60% complete and are expected to be in service in 2020 and early 2021. And as I mentioned earlier, for the full year 2020, we now expect to spend approximately $3.6 billion, primarily in our NGL and refined products and midstream segments. And we are evaluating another three to $400 million for potential reduction this year. Looking briefly at our liquidity position, late in 2019 and early this year, we successfully completed financing transactions which provided an efficient funding source and bolstered our liquidity position. This included debt and perpetual preferred dual offerings completed in January 2020 in the aggregate amount of $6.1 billion for which we used a portion of the proceeds to redeem all of our 2020 maturities. The remainder of the proceeds were used to pay down short-term borrowings under our credit facility. As of March 31, 2020, total available liquidity under our revolving credit facility was approximately $4 billion, and our leverage ratio was 4.12 per the credit facility. And as a reminder, looking forward, we have a very manageable $1.4 billion of maturities in 2021. We continue to target a rating agency leverage ratio of four to four and a half times. In conclusion, I just want to reiterate that we are very pleased to have delivered another solid quarter. Throughout the remainder of 2020, we continue to expect our fully integrated, multi-product assets, as well as our predominantly fee-based cash flows to offset headwinds this year. and the ramp up of growth projects which are expected to drive near and long-term value will continue to generate excess cashflow and fund our growth projects. In addition, our extensive storage capabilities combined with our recently leased space at the SPR are providing valuable opportunities to capture upside related to the contango spreads. We remain committed to our investment grade rating and our strong liquidity position provides us with the financial flexibility as we navigate through this uncertain time. However, we know that it is imperative to remain mindful of our spending and we'll continue our disciplined approach to capital expenditures while also pursuing additional cost savings. Safety and project execution remain among our top priorities and we want to once again thank our employees for their hard work and continued support during this challenging time. Operator, let's open the call up to Q&A.

Thank you. At this time, we'll be conducting a question and answer session. In the interest of time, please limit to one question and one follow-up question, then rejoin the queue for any additional questions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question comes from the line of Jeremy Tonnet with JP Morgan.