Greetings ladies and gentlemen and welcome to Energy Transfer Third Quarter 2019 Earnings Conference Call. [Operator instructions]. It is now my pleasure to introduce your host Mr. Tom Long. Thank you. You may begin.

Thank you operator, good morning everyone and welcome to the Energy Transfer Third Quarter 2019 Earnings Call and thank you for joining us today. I'm also joined today by Kelcy Warren Mackie McCrea and other members of the senior management team who are here to help answer your questions after our prepared remarks. Just as a reminder, we will be making forward looking statements within the meaning of Section 21 A of the Securities Exchange Act of 1934. These are based on our beliefs as well as certain assumptions and information currently available to us and also referred to it yesterday but doc distributable can flow or DPF and distribution coverage ratio, all of which are non gap financial measures will find the reconciliation of the non GAAP measures on our website. Let's start with a few highlights. As we look at the business, the third quarter was another strong quarter. Our businesses doing very well as we benefit from a franchise that is fully integrated across the midstream value chain from wellhead to market. We are delivering high return projects with strong cash flows. On the financial side adjusted EBITDA for the third quarter of 2019 was $2.8 billion this was up 8% compared to the third quarter of last year. DCF attributable to the partners of ET as adjusted was $1.5 billion which was an increase of approximately 10% over the same period last year. The NGL & Refined Products segment delivered another record quarter as a result of the ramp up of Mariner East II and record frac volumes that were driven by Frac VI coming online and our other major businesses delivered solid performances with increased volumes across the majority of those segments. Distribution coverage for the quarter was 1.9x which resulted in excess cash flow…

[Operator Instructions] Our first question comes from Shneur Gershuni with UBS. Please proceed with your question.

Hi, good morning everyone. Just -- it was good to see the 2019 EBITDA guide moved higher for EBITDA and CapEx lower for '19 and kind of a flat 2020 CapEx as well with that. I was wondering if we can sort of expand on your CapEx program for 2020. I'm just wondering if you can sort of walk through your expected return profiles for the projects? And I was wondering if you can -- if you're able to sort of split the budget the $4 billion into a group of projects? Are any of them smaller in nature and higher-return brownfield projects? Or are all of them mostly on the longer build cycle type projects? Any color on that would be greatly appreciated.

You bet. Shneur this is Tom. I think I'll kind of start with the guidance that we talked about for '20 which is approximately $4 billion. We thought it was important to also put the $1.5 billion which is the backlog of CapEx budgets beyond. So I think you can kind of see the nature of the projects right there meaning that a lot of what we're working on right now with going into next year. So I'd say there's obviously a very high percentage of everything we're working on those that are of that shorter nature we're referring to. In other words I'd say less than 12 months you can see from start to finish and coming online with cash flow would be majority of all of those projects. As far as the -- go ahead I'm sorry.

I was just wondering if can you comment on the return side also.

As far as the returns go well listen these are all -- we consider very good high returning projects we have. Obviously when you look at our footprint and you can see the type of projects we have as far as the size etc. I think you can see these things. Obviously they're going to vary, but when you have the integrated portfolio like ours you get to see returns across pretty much all of your segments as you make each one of these capital investments. So we're being very, very selective and very disciplined in how we're looking at these.

All right. And as a follow-up question. Through the course of late 2018 2019 you've put a lot of projects into service. And I was thinking about a disclosure you'd made I think it was late 2018 that your business was roughly about 10% to 14%. I think you split it up as 5-7 and 5-7 but with respect to exposures to spreads and NGL pricing. I was just wondering given the strength of the results in the third quarter against the backdrop of following NGL prices and spreads compressing has the percentage of non-fee business or red bar earnings fallen relatively because of all fee-based projects you've added? And do you an updated percentage by any chance?

Well they're actually staying fairly consistent. You are right we've always said that we are -- probably that 10% to 15% is what we say is as more variability to it. And we split that. We split that 10% to 15% half has to do with spreads half has to do with commodity exposure. And I guess where I'd leave you with is with these projects coming on etc. they've all been good fee-based projects etc. but I would still say that we're in that same range right now.

Great. And just one final question if I may. As you noted the CapEx is going to be flat year-on-year certainly down from the spending levels that you've been at but leverage has been a focus of investors and largely attributed for the valuation gap that you've seen with peers. Is there a process in place to also look at pruning some assets as well? I realize you have sold assets in the past. You've also acquired some as well too recently. Just wondering if there's a process to actually look at pruning to make sure that you've got the highest returning type assets -- projects or assets in your portfolio.

Yes is the short answer. And you're right. We have -- I think we've got a good track record as you've seen with some of the assets that we monetized. And we've also monetized just portions of some of them. So we've been very diligent on that. We continue to look at that. And where it makes sense we will continue to do those. But once again it needs to make sense for us to do it.

All right, perfect. Thank you very much. Appreciate the time today.

Thank you. Our next question comes from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Just wanted to start off with the 2020 CapEx a bit more as well here. I guess at our modeling we're having a tough time building into that $4 billion number. So I was just wondering if you could kind of walk us through some of the larger building blocks there to get that. And is there any part of that that is kind of unidentified projects that may or may not happen? And if these things don't materialize could that capital be used for buybacks? Just trying to figure out what can get the stock going here?

Okay. Let's start with the first part of your question. It still remains the same as far as the allocation of those capital dollars to the NGL & Refined Products segment. And some of those can -- are things like Mariner East. Like I mentioned on the call we actually took 2019 down substantially. But some of that is due to the permitting around Mariner East that we pushed it back to mid-next year. So you have to put that in there as a piece of it. Lone Star Express Pipeline LPG facilities at Nederlands of course you've got Fracs VII and VIII we've talked about still have the Orbit going on. But then you've got probably 25-plus projects that are all less than $50 million. And so when you look at it still makes up the lion share of expenditures. We've always said its 60% to 70% or so for 2019. And really went it carries into 2020 it's broadly 75% 3/4 of the CapEx spend. And then rest of it is going to be kind of split between Midstream Crude Oil. So you've got the gathering projects we've talked about obviously some compression facilities etc. But once again you've approximately 25 projects that are less than $50 million on that front. In the Crude Oil of course the Bakken we talked about and the Ted Collins Pipeline we talked about. So that's the material items that make it up. Like I said it's very consistent between the two. I think the second part of your question we have been very diligent in looking at projects. Any we have seen us bring our down throughout 2019 and then you -- when you really look at 2020 you'll also see that we're staying even with the push some of the dollars from '19 to '20 we are still approximately at $4 billion. So you can see where we would have been had it not been for that and we thought it was important to go ahead and disclose the 2020 and beyond as far as some of the committed projects at the $1.5 billion. So we think we are well positioned. We hear you loud and clear on the last statement that you made on that about the unit buyback. We get it also and I think we are taking all the steps necessary to position ourselves financially to be able to do that.

That's helpful. And then just one more for me if I could. It seems like in the marketplace there has been a bit of discussion on the REIT structure as it implies potentially the midstream and PLR out there regarding that. Just wondering if you guys have analyzed that or explored the potential for any of your pipelines to kind of utilize the REIT structure. Is this something that could be of interest to you guys? Or is this something that doesn't really make sense?

This is Brad Whitehurst. We have we have looked at it. It is technology that's been around. It doesn't always work as well with operators. But we continue to look at it as possibly being a tool in our toolbox.

Got it. That's it for me. Thanks.

Thank you. Our next question comes from the line of Pearce Hammond with Simmons Energy.

Thank you, I appreciate you taking my question. So first question is what's the latest on the permitting on the VLCC? And how is that progressing the VLCC offshore terminal?

Yes. This is Mackie. It's progressing on plan. We are taking the number of steps both from a regulatory and from a permitting process. At the same time we're in negotiations on the commercial side. But right now we're expecting everything to go well and to have it in service sometime kind of late 2022 or early 2023.

Great. And then my follow-up. On the -- if you can provide an update on the Orbit JV with Satellite Petrochemical? And do you see other potential opportunities similar to that that you might be able to sign up here especially if the tariff war with China gets resolved?

Yes. Tom mentioned in his statement it's going extremely well on our side as far as building out our assets. It's going just as well on the Satellite side. There's every expectation that the project on both sides will be complete and ready for delivery of ethane by the fourth quarter of next year. And answer to your question is yes. We are in dialogue with a number of companies and a number of countries. If you focus at the largest market in the world it's China. As we know the tariff issue has kind of put things on hold as far as finalizing deals but it hasn't put on the hold discussions negotiations and ongoing opportunities to expand our ethane export capability and we do expect that to happen. However we also are chasing other ethane opportunities that we expect will provide us the opportunity to expand both at Marcus Hook and at Nederland.

Thank you.

Thank you. Our next question comes from the line of Michael Lapides with Goldman Sachs.

Hey guys, Actually I have a couple of them. First can you talk about especially on the gas and NGL side counterparty exposure and counterparty risk I mean obviously you've got a small customer on Rover who is going through restructuring of some kind. But can you talk about kind of across your bigger customers on some of your bigger either gas pipelines processing even maybe on the NGL side kind of what you're hearing from your counterparties given the low price environment in NGLs? And kind of what that means in terms of kind of risk management and risk exposure for transfer?

You bet. It might be helpful for me to kind of start off with a higher level look but I will say that over 80% of our just normal credit exposure etc. when you look at it is all at large investment-grade companies. And then when you get into the rest of them there's no single one that even rises to a 1% type level. It makes up hundreds of counterparties. So we do a very, very good job here of spreading our risk and managing our risk from a credit standpoint etc. Then on top of that what we'll do is obviously we'll depending on various customers etc. we will always get various security from that standpoint. And we'll also take a lot of other steps that mitigate risk whether it's master netting agreements etcetera. So we feel very comfortable I think from an overall credit exposure out there and the way that we manage that. So none of that I guess I would say is keeping us up at night right now. So...

Got it. Okay. Also what are your producer customers large and small? I mean we've seen some of the Permian producers bring down production or provide production guidance that have disappointed. Obviously it's playing out with a number of the Marcellus guys as well. How are you thinking about the flow through of that on kind of your intrastate midstream businesses for 2020?

This is Mackie again. Whether it's Northeast or down south we do keep hearing that -- and seeing that there are struggles in certain areas but we're just not seeing it in our pipes. Quarter-after-quarter including this quarter we are increasing our volumes on our systems. If you look at the Permian Basin both Midland and Delaware Basins it's such good rock it's some of the best rock with the most prolific formations in the world. As long as oil and gas prices don't just collapse they're going to continue drilling. We are positioned very well to take advantage of picking up production at another area if one producer starts falling off. So we think we've built a company and kind of strategy to kind of mitigate from impacts that we might have from certain producers in certain areas. But we as Tom mentioned we feel really good about the mix that we have of producer customers in our system.

Got it. Much appreciated. One last thing though any update on Lake Charles?

Yes. This is Tom Mason. We're continuing to make good progress on the project. We -- as you know we signed a project framework agreement with Shell in the spring and set a number of milestones for progressing the project and we're on track things are going well. We're in the EPC bidding process right now and we're also actively marketing. And we think our project is highly competitive. So we are pleased with the progress.

Got it. Thanks, guys.

Thank you. Our next question comes from the line of Keith Stanley with Wolfe Research. Please proceed with your question.

Hi, good morning On the ME2X and going to the middle of 2020 in service is it mainly delays in getting permits from the DEP? Or are there any changes in the scope of the project at this point?

Yes. This is Mackie again. Yes that's primarily it. We've got all hands on deck. We're doing everything we can to accommodate what we're being asked to do. But certainly we've got to get to a point where we get the permit limit listed -- I mean lifted. And we're pushing to make that happen but certainly that has made difficult to meet some of our time lines to get through excellent by the end of the year.

Is there anything specific that the DEP is still looking for to start giving permits again?

Yes. We're working on -- a series of documents have been submitted for the Revolution project. In fact have another review of those documents scheduled for next Tuesday in Pennsylvania. It appears that we're getting really close to reaching agreement and hopeful that we'll see a permit bar lifted in the reasonably near future.

Okay great. And then just a clarification on the CapEx discussion. So sounds like most of the reduction in 2019 which is a pretty good sized reduction is Mariner spending getting pushed out. I guess the $4 billion for 2020 the Ted Collins Pipeline is included in that. So that's not included on the SemGroup side that's included on the Energy Transfer side of the CapEx?

That is correct. That is only Energy Transfer side of the CapEx.

Great. Thank you.

Thank you. Our next question comes from the line of Christine Cho with Barclays. please proceed with your question.

So your CapEx is $4 billion next year and 2019 dropped by $700 million at the fair point. Is it fair to say that most of the drop is tied to the ME2X play? And that non-ME2X spending is closer to $3 billion? And is there any possibility that some of that $1.5 billion that you mentioned you're evaluating can creep into 2020 CapEx?

Yes. Let's say it's about half of it of the reduction is associated with the ME2X the first part of your question there Christine. And really the rest of it is everything from some efficiencies to just various projects that once again we continue to evaluate as to what we're doing. Now as far as the second part of your question I guess I would say that is there a way for some of that to creep up? I think that the way we've laid it out is the best estimate we have as we sit here right now. I don't see a high probability of that occurring. So...

Okay. And then just moving over to the acquisition. One of the segments that don't really fit in with your asset footprint from SemGroup is SemCAMS. And I think there is several hundred million of spending that still needs to be done there next year. How do you balance on spending money on an asset that you probably ultimately will sell anyway versus just selling it sooner than -- and having the proceeds to allocate towards your own CapEx and deleveraging process?

Yes. This is Mackie again. One thing we're extremely excited about SemGroup and very anxious to close and get that started. We're not looking at Sem Canada or anywhere else to sell. Where we're looking at is how do we best deploy our capital and get the best rate of return for our unitholders. And those assets are just tremendous assets up there in regards to the foothold they have the competitive advantage they have. And we're very anxious and excited to work with Mr. Gosse on growing those assets out. So at this point in time we're not looking at selling those assets. We're looking at buying those assets and build them up. It'll be a great growth -- revenue growth vehicle for our partnership.

Okay. And then one more if I could. The MEP that came through and was repaid. And I'm just curious do you guys include that paydown for any of these your pipeline as growth CapEx? And do you have any debt coming due in 2020 on such assets that you would expect us to make contribution?

No. First off we don't include it in the CapEx for sure. That's all part of the liability management if you will piece of it. Gosh as far as any others I mean I know we've got -- there's really none in 2020.

Thank you.

Thank you. Your next question comes from the line of Danilo Juvane with BMO Capital Markets. Please proceed with your question.

Morning, On DAPL I believe that you have an expansion hearing next week on the 13th. Does the timing now change given the modified open seasons to include HFOTCO?

This is Mackie. No nothing changes. We are taking all the necessary steps from a regulatory and right away standpoint to get everything in line to have the permits to build it. From an open season standpoint we have extended the open season on DAPL really to accommodate the opportunity to offer HFOTCO and the Houston Ship Channel market to our customers. And once again we're extremely pleased with how this open season has gone and look forward to our expansion in 2021.

My next question is for Tom. The Crude Oil segment had lower OpEx. And I think you cited some sort of an inter-segment transaction as a driver for that. Firstly is the lower CapEx now the good run rate to use forward? And can you expound on what that inter-segment transaction was?

Yes. Well let me make sure I understand your question completely. But I'll -- let's start with kind of the first part. So for the Crude Oil segment this quarter I want to first say that we did have some of the operational inventory that was approximately $30 million $35 million. But it really was about I think you're saying something only OpEx I think OpEx was really, really wasn't relevant there. Majority of the swing -- let's just say the swing from quarter-over-quarter was you had $14 million positive last year compared to like I said about $34 million negative this year. So I'd say it's a little less than $50 million swing quarter-over-quarter. But very good run rate is what I would tell you on that. Nothing unusual in those numbers.

Those are my questions. Thank you.

Thank you. Our next question comes from the line of Coltan Bean with Tudor Pickering Holt. Please proceed with your question.

So just to follow up on the discussion around intrastate credit risk if you were to see some capacity turn back on pipelines like Tiger or Rover how do you see the current market there in terms of you letting that capacity?

This is Mackie again. What we're seeing in North Louisiana on our Tiger system is significant volume growth. Several years ago it fell below 1 Bcf we're now flowing over 2 Bcf. Because of the size of those wells we do see those volumes increasing. We also see the Tiger can offer the opportunity to both forward haul and also backhaul into our intrastate network getting in some of the premium markets in the Houston Ship Channel and the Gulf Coast. So we feel like Tiger is well positioned to compete at fairly decent rates as contracts roll off in the coming next couple two or three years.

Got it. And just on Rover if you were to see some of that capacity return to you?

Well on Rover 3.1 Bcf is sold term. If some of that comes back to us there is a -- let me restate. That system was built to flow about 3.25 Bcf a day. We now have the ability through experience of moving about 3.5 Bcf a day through it. We are on any given day flowing 3.2 to 3.3. Certainly everything above the 3.1 of demand charges is lower but there's a tremendous amount of volume growing in the Northeast. Our ORS system is at record levels. So there will continue to be a need to get gas out of those areas. Where exactly rates will fall in the event some of the capacity came back to us? We don't know but we do know that -- we do believe the volumes will continue to grow. And they're one of the most valuable and best assets to get gas out of there as far as netback to producers will be Rover -- or is Rover.

Got it. Appreciate that. And then just on Dakota Access. So one of the key Cushing to Gulf Coast Pipeline just announced an open season for additional light capacity at $1.25 a barrel. Does that change the competitive dynamic at all for DAPL versus other Bakken takeaway options that route through Cushing?

No. This is Mackie again. DAPL if we could snap our fingers and have 400000 500000 barrels a day today available we think people will step up forward immediately. Nothing really competes with DAPL. All these new projects when you look at the stacking of fees and where those markets are and the timing to get there nothing really compares to a project that can deliver to the vast majority of the Mid-Continent refineries and then bring it down to the Gulf Coast getting to oil refineries in Texas and then through Bayou Bridge getting through the St. James market. And so we're pretty pleased with our competitive advantage with DAPL.

Thank you.

Thank you. Our next question comes from the line of Michael Blum with Wells Fargo Securities. Please proceed with your question.

Thank you. I think in your prepared remarks Tom you talked about raising the bar as when evaluating new CapEx projects. I wonder if you can maybe quantify that in anyway. Kind of type of returns you've historically been targeting versus how that might be changing going forward?

You bet. This is Mackie again. You go back a number of years and you look at some of our processing plants and we were targeting 12% to 13% just to be competitive. We have now looked at a deal that we can't -- in the last 12 to 18 months we haven't looked at for example a processing opportunity at less than 18% rate of return. And remember I know you know this Michael but when we do that on our processing plants which we build 1 about every six months out in West Texas we don't put any of the synergistic revenues none of the liquid revenues downstream none of the residue downstream. So it's stand-alone. So that's our bottom threshold. There are some areas where maybe we don't see as many synergies and the threshold is as high as 20%. So we are being extremely selective on where we put our capital. And we are targeting high rate of return projects with synergistic benefits added to them.

Great. That makes sense. And then I guess my second question and Mackie you talked earlier about you're not -- in spite of some weakness and slowdown in drilling that we're hearing from the E&P community you're not really seeing it on your pipes. Have any shippers on your pipelines or producers in your G&P segment approached you for rate relief? And is that anything that you'd be open to?

Yes. It's kind of a broad question and kind of specific. But it's fair to say that in any given year whatever is happening in the industry we may have people approach and say hey can you work with those own rates here if we can work on some other areas. So certainly we have conversations from time to time and where it is necessary to accommodate it and makes good business sense for our partnership we're certainly looking at helping them where we can when it makes sense.

Great, thank you.

Thank you. Our final question comes from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question.

Hey, good morning, everyone. A couple of quick follow-ups. On ME2X so what's your confidence level now in hitting that mid-2020 in-service state meaning when do you need to get the permit by to hit that date? And then in terms of meeting your volume commitments can you just provide a little more detail as to how you're able to do that?

Yes. This is Mackie again. We're highly very confident that we'll have it in by the middle -- latest at the middle of next year. As part of our contract mix we -- for example Marcus Hook we're filling up a lot of our capacity at Marcus Hook just through the other pipelines truck and rail. So we're making a portion of our revenue today and we'll keep that pretty full as we complete 2X. But we've had no issues whatsoever of living up to the obligations we have under all of our contracts to transport barrels that are committed to us on the Mariner complex. Once we complete some expansions at our chilling and tank for propane and butane by the middle of next year it will be perfect timing as we bring on more capacity on 2X which we will be a huge shot in the arm for us from a revenue standpoint.

Okay great. And then going back to the CapEx question. So for 2019 is part of the reduction in the growth CapEx decision to not move forward with certain projects because they don't meet your return threshold?

No this is Mackie again. No what we did was we've -- on post-2020 we explained what we've already committed to and these are projects that Tom mentioned a while ago are fairly quickly built compared to some other projects we've been working on and there are much higher rates of return. So anything about those projects it needs to meet the threshold. It need to be the 18% to 20%. And it need to have synergistic benefits or at this point in time it just doesn't make sense for us to deploy capital. Our focus right now is that we've built a lot of pipe where we feel extremely good on where we sit in the United States to be able to move different products to different areas gas oil and refined products and we're focusing on completing out the projects that we're building but also maximizing the capacity to our facilities and to our pipeline to the biggest extent that we can. So yes we'll continue to look at new projects very accretive projects at the same time we're maximizing the value of we've already built.

Got it. And just the last one for me just a follow-up on the SemCAMS question. So understanding that you see Canada or those assets as a growth opportunity but in terms of just how they fit in with the overall Energy Transfer portfolio I mean do you see synergistic opportunities there as well longer term?

There's nothing that just jumps out from the synergistic standpoint. But as you know in a transfer we're certainly looking at everything. How the liquid is getting out there? What other opportunities there are? But it's a pretty solid asset and project just stand-alone on -- as I mentioned earlier its competitive advantage in the area the contracts that they already have and we're pretty excited about kind of the built-in growth revenue growth that's already there.

Ladies and gentlemen I'd now like to turn the floor back to Tom Long for closing comments.

All right. Once again thank all of you for joining today. We really appreciate it. And as you've all seen we're obviously very, very excited about the performance of our existing asset base as well as all the projects that we've talked about today that are coming online. I thank all of you for your support and we look forward to talking to you in the near future.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.