Greetings and welcome to Energy Transfer's Fourth Quarter Earnings Conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Long, Chief Financial Officer for Energy Transfer. Thank you, sir. You may begin.

Thank you, operator. Good afternoon everyone and welcome to the Energy Transfer fourth 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. Hopefully, you've had a chance to see the press release we issued earlier this afternoon as well as the slides that we posted to our website. As a reminder, we will be making forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934. These are based on our beliefs as well as certain assumptions and information currently available to us. 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 10-K to be filed this Friday the 21st. I'm going to go ahead and start today with a few of our full year and fourth quarter 2019 highlights. For the year, we came in above the top of our guidance range generating record adjusted EBITDA of $11.2 billion, which is an increase of 18% over 2018 and was driven by record financial and operational results across the majority of our segments for the year. We also reported record DCF attributable to the partners of Energy Transfer as adjusted of $6.3 billion and our coverage for the year was 1.96 times, which resulted in excess cash flow after distributions of $3.1 billion. Looking at results for the fourth quarter of 2019. Adjusted EBITDA was $2.8 billion; and DCF attributable to the partners of Energy Transfer as adjusted of $1.55 billion, which resulted in distribution coverage for…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Shneur Gershuni with UBS. Please proceed with your question.

Hi good afternoon everyone. Before I jump into my two questions, Tom, can you just clarify that you said the long-term CapEx run rate is now $2 billion to $2.5 billion down from $3 billion to $4 billion that you'd mentioned previously?

Yes. Shneur I mean, obviously, as you know, there's been a lot of discussion. This is probably one of the main talking points in a lot of the investor conferences, et cetera. But as we just continue to evaluate it -- and Mackie is here also, can chime in. But as we looked out, basically what we're saying is, that $2 billion to $2.5 billion, I think we've been also very, very open about the fact that when we really look out at approved projects starting from 2021 on, that number is at $1.8 billion. So is that what you were looking for, just a clarification on that?

Yes, I was just looking for the clarification.

Okay.

In terms of the two questions that I had, maybe to start off, Kelcy and Mackie, just wondering if you had made any progress on the recontracting of the Texas crude pipeline assets. I noticed there is a modest step down in rates, but higher contracted volume activity. Is that sort of reflective of the ongoing efforts to recontract that system?

Yes. This is Mackie. Yes, that's a high priority right now for our partnership. We've kind of reorganized our crude team, led by Jim Malott and there's a tremendous amount of time spent right now. We are a little bit different than our competitors in that, now we have Houston we have Nederland. As Tom talked about in the opening statements, we have all the refineries. We're developing a VLCC project. So we're not in a panic to fill it, because what we're offering of course is from the wellhead out in West Texas or Cushing or Bakken and delivering it all the way to wherever they want it to a market, or to the export markets or to our VLCC project. So, yes, we are in the process of negotiating. We're optimistic that we'll roll over and extend a substantial amount over the next six to nine months. And then long term, we expect a lot of those volumes to support our VLCC project.

Now, that makes a lot of sense. And maybe as a follow-up question, Tom. With the recent financings that were completed in January, I realize it was a refinancing of the SemGroup-related debt. However, one component that you noted, or two components, I should say, included a pref. Typically you get equity credit for that -- or different levels of equity credit for that from the agencies. Does this now gets you a lot closer to the leverage target that the rating agencies are actually looking for or that they've shared with you? And was the equity credit part of the rationale in terms of using the prefs as well as just the financing?

Yes. The short answer is absolutely. I think when you look at the retained cash flow, meaning the DCF above the distributions for the year, you'll see that that's a little over $3 billion, right at $3.1 billion. When you really add in these perpetual preferreds, obviously, we've been trying to do everything in a very credit-friendly manner in order to be able to achieve those accelerated deleveraging. You can see that nearly $800 million added to that $3.1 billion gets you to the $3.9 billion. So basically we were able to fund the growth. When you look at it, the guidance we've given for this year, you can say that we're funding it with no debt, so no equity and no debt -- no common equity and no debt, so --

All right. Perfect. Thank you very much. Appreciate the color. Thanks.

Our next question comes from the line of Pearce Hammond with Simmons Energy. Please proceed with your question.

Good afternoon and thanks for taking my questions. My first is what are your latest thoughts on C-corp conversion or an UP-C conversion.

This is Tom Long again. We have, I think, continued to talk about this. And once again, I know with a lot of the conferences, et cetera, we say that it's on the radar screen and we continue to evaluate it. As we look at and we look at this market, we are getting a lot of feedback. We're hearing from a lot of our investors to have the option of a 1099 currency. In other words, a C-corp currency is something that we are hearing as appealing. And so, we're going to continue to evaluate that. It is something that we think will be very beneficial.

And do you have like a time line that you're kind of roughly thinking on this evaluation?

No. No, in answer to your question, to give you the short answer of it. But I will tell you that, it is something that we are, once again, evaluating as we look out through 2020 here. So...

Okay. Thank you, Tom. And then the follow-up is, on the $2 billion to $2.5 billion of growth CapEx for 2021 and beyond, how much of that is to do with the higher return thresholds, or does it have a lot to do with just there's less projects to do in the industry as the production growth rate is slowing down for the U.S. E&Ps, more capital discipline, et cetera? Is it a combination of those two or more on just higher return thresholds?

This is Mackie. It's a combination. Tom talked about in the opening statement all the projects that we brought on last year and those projects are going to be ramping up throughout this year. We've got all these NGL projects coming on. And so we're in the kind of the mode of growing as fast as we can but we've kind of set a threshold of – we've said 18% probably even north of that because our focus right now is filling up the assets that we have. And more importantly, as contracts terminate over the next three, four, five years on fracs and on processing plants that were built four or five years ago, we're really focusing on filling up those projects ahead of new projects. But it doesn't mean that if a project jumps out and it's synergistic with our other assets that – and it meets the rate of return threshold that we won't spend more capital but it's certainly not something we're focused on right now.

Thank you, Mackie.

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

Good afternoon. So just to follow up on the commercial announcement from this afternoon. Could you characterize what the current business contribution is from that counterparty whether it be the Permian or the Eagle Ford?

Yes I can. And let me elaborate a little bit because it kind of goes to the same theme we're talking about. We couldn't be more excited about this type of structure that we've negotiated. It is anonymous but it's a large player. And for example, they had contracts that roll off the next three or four years. We now have extended those out 10 to 15 years. And more importantly, what we've done is it increases the volume from around 300,000 a day to – tiering up to up over 800,000 a day. In addition to that, the liquids are around 20,000 or 25,000 barrels a day. They will grow to in excess of 100,000 barrels a day. So it's just a yes, we've taken some short-term pain on some discounts for the next couple of years from the existing deal that we had but we couldn't be more excited how this is going to feel building our assets as contracts roll off. And what it gives us the liberty to do is as contracts roll off, we'll have the ability to renegotiate at rates that work and we will expand if we do or we'll have both contracts roll off and contracts like this will fill in the place and keep those assets full. So we're very excited about that announcement.

And Mackie just on the – up to 100,000 barrels a day of liquids, does that involve incremental processing or is that coming from third-party plants?

It's approximately between 250,000 and 300,000 today. It will grow to approximately – or in excess of 800,000 Mcf a day. And on the liquids side, it's approximately 25,000 barrels a day T&F and it will grow to over 100,000 barrels a day over the next two or three years.

Okay. And to realize that 100,000 barrels a day, is that processing that you guys would be building out kind of full value chain, or is that now mostly just on the P&L side?

Yes. I'm sorry. I didn't answer your question. I didn't understand it. It's built out. We're utilizing existing processing capacity, existing liquid NGL transport capacity and frac capacity. We're not adding any capital. We are adding some capital out in the field to gather this gas to our facilities but we're not – this is a very low capital amendment and extension.

Got it. That's very helpful. And then just to follow up on some of the earlier comments on NGL services, it looks like there was a decent step down quarter-on-quarter in terminal services. Can you all frame what you're seeing from the Mariner system maybe year-to-date and whether the compression in global spreads has had any impact on the marketing business?

Yes. This is Mackie again, yes. If you focus on Marcus Hook, yes the terminal volumes did decline over that quarter and the reason being is that we had kind of almost historical prices for propane and of course butane blending into gasoline. There was a large demand in the Mid-continent. A lot of barrels were leaving Western Pennsylvania and heading west and even in Northern New York in the Northeast, the price just skyrocketed. So a lot of the barrels that typically show up at Marcus Hook didn't show up for that quarter. Those barrels are coming back. And a lot of the barrels that move through our lines, the Mariner system are demand-charged. So even though the volumes are down, we're still receiving revenue. There – one other point is with PES it has impacted our movements out of Marcus Hook into Marcus Hook in other terminal assets we have in Northeast. But our teams are already looking on ways and we're already filling those gaps with new deals and new long-term arrangements.

Got it. That's helpful. Appreciate the time.

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Hey, guys. A couple of questions actually. Can you talk -- in the quarter I think your release referenced that Mariner East II contributed $77 million. How should we think about what kind of a normal quarterly run rate for Mariner East II is? Is that $77 million that normal run rate? Is it something that's a little bit higher that will come in the first quarter of this year? And then how should we think about what the adder for 2x would be something similar to two or slightly different just due to the different size and capacity of the pipe?

Yes. I think we may elaborate a little bit, but I think right now we won't get into those details to that degree. As we spoke earlier, we are very optimistic that by the end of the year if not earlier, the next significant phase of Mariner will be completed. Once that is completed then we will have -- already have committed volumes to step in with demand charges both through our pipe and through Marcus Hook. So the -- once we complete Mariner, we will -- and add additional volumes, we'll see a substantial increase in revenue.

Got it. And then just a question on Satellite. Your counterparty in China has made extremely good progress in the construction effort there may even be on time if not a tad bit early. Where are you all in the process of having conversations with them about incremental potential export capacity and whether or not they need and if so when?

Well, we said every time we couldn't be more excited about that project. It's a great partner with Satellite just an outstanding Chinese company. They do what they say, they're going to do. They're moving forward as we are. We're on track to be complete and loading ships by the fourth quarter. We haven't really had in my knowledge a lot of dialogue about expanding with them out of Nederland. Of course, we're in many conversations with expanding our ethane export avenue with other customers, but we certainly would accommodate very quickly any excess or any additional volumes that they would be interested in signing up for. But right now I think they're focused on getting our crackers built and loading ships hopefully by the end of the year and we're really excited about that project coming to completion.

Got it. Thanks guys much appreciated.

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

Thanks everybody. First question is just on the Bakken pipeline capacity expansion. You said the initial phase will be on in early 2021. Do you have a sense of how much capacity you'll have at that point?

Michael as you imagine, we don't know yet. We are still in the middle of an open season. Things are moving along very well. We've secured all the midpoint pump station sites. We've met with all the state and county agencies and we filed all the required filings with them. We're working with several states to finalize the approvals that we need and also other interested third parties. In fact we received today approval from the North Dakota for -- to amend the certificate to go to the 1.1 million barrels. So we are designing and seeking approval and we'll obtain approval for up to 1.1 million barrels a day. We don't know, if we're going to reach that in this open season, but what we do know is there's a tremendous amount of interest. We're by far the best option with the most optionality going to -- the Midcontinent oil coming all the way down to Gulf Coast hit the St. James etcetera, etcetera so nothing compares to what we can do. We're confident that through time, we'll get to 1.1 million barrels over the next four or five years. It remains to be seen where we kind of level out here at the end of this open season.

Okay. Great. And then I just wanted to ask on Rover and I guess in general the Northeast. Are you having any of your shipper customers approach you for short-term relief from those comments you made earlier about short-term relief in exchange for long-term contracts? Is anything happening up in the Northeast on that front?

Yes we have -- we do have some of those inquiries and some -- an extension similar to what I described on our -- in the Permian Basin. We also executed an extension and a better NPV project -- I mean returns for us with the customer. And so, that's part of this impact we have over the next few years. It's embedded in our numbers.

Great. Thank you.

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

Good afternoon. And maybe part of the answer for my first question picks up on that last point there. But I'm just looking at 4Q, 2019 EBITDA of $2.8 billion and if I annualize that it seems like it puts you right in the middle of the guide next year. And arguably I think in 4Q, 2019 some of the spreads had already kind of tightened. So there wasn't necessarily as much of a benefit there. And so I was just wondering what other I guess headwinds or elements of conservatism built into the guide next year because with new projects coming online and the full year benefit of some of the things from this year including SemGroup acquisition, it seems like you have some nice tailwinds built in there.

Yes. And listen this is Tom Long, Jeremy. As we look out at 2020 and like I've said in my prepared remarks it was really two components. So it's the contract – kind of the contract renewal rates that we're looking at in addition to the spreads. We're happy to maybe talk to you in further detail, if you'd like to kind of drill down further. But I would say, those are the two headwinds and they're probably about equal in amount or so. So that – those are – that's in addition to those spreads. I'm not trying to say that, we don't still look at 2020 and see – and still see spreads, but at the same time, they're not going to be at the level that we did get to enjoy through 2019. Now, the other thing I think that is worth noting is that you did see some of the hedge benefit in the fourth quarter. And we did break that out even in the press release a little bit that we had – where spreads were net of the hedges. So keep that in mind too that, we did see some benefit in the fourth quarter of 2019 for that that as we look out at 2020 you don't necessarily get to enjoy as much of that either. So.

Got it. And I just wanted to direct one question towards Kelcy if I could. And it seems like the market kind of wants to pull ET in a lot of different directions be it looking for growth looking for improving competitive positioning looking for stock appreciation. I guess, I was just wondering if you could provide some comments as far as how you think what are the top priorities or top focus when you're thinking about how to run ET best?

Yeah. Well, the pipelines are really interesting. If you're not spending money on those assets then you're deteriorating you're eroding. And so you can't just stop. And so Energy Transfer will always pursue as Mackie just said high rate of return projects. We – and we're blessed right now to have more of those than we really want to take on. So we're going to continue to do that. We will continue to – and I know the market doesn't like this but it's just reality. We'll continue to look at M&A. We always look at M&A. Unfortunately the math doesn't work on virtually anything right now. SemGroup was an unusual circumstance. We'll continue to do that. We're going to – we're very committed to the rating agencies to get our credit metrics very comfortably in a spot that we've been guided to, and we will get that done. We're well on our way. Tom Long and the team are doing a fantastic job. And then finally, I will tell you, we'll be very defensive. This is a market where right now we don't have to be very defensive because nobody's doing anything, but we will continue to focus on that and protect our assets not allow competition to encroach on our trenches and therefore erode our margins. So we're going to keep doing what we do. We're going to probably as Tom -- I'll be a little bit more definitive than Tom was. We're probably going to offer a C-corp alternative to our unitholders and I think that if we do that it will happen this year. So I think that's part of the plan also.

That’s helpful. Thank you for taking my question.

Thank you.

Our next question comes from the line of Jean Ann Salisbury with AllianceBernstein. Proceed with your question.

Hi. You have mentioned before that in 2020 fixed fee contracts on Oasis start, which would materially reduce your exposure to Waha Oasis. Can you give any updated information around your remaining exposure going forward?

Sure. This is Mackie again. It's exposure, but golly it's a fantastic exposure. We probably had 0.5 Bcf today that exposed at markets that -- at spreads that are kind of above 50. And I think prop month is even maybe close to $2. However, we also stuck to our strategy and we do have some large contracts 10-year contracts that are coming on later this year. October, November is one of them and the other one is the first part of 2021. The spreads are still probably wide, but it's the right thing to do to hedge those out and get a good healthy rate long-term and not take the risk of the collapse. But we -- the team has done very well I believe on how we've kind of strategized and how we sell that space. We're going to benefit to a large degree on those spreads this year. And then as time goes on and more capacity is built with more risk of the spreads coming in, we will have more of that settlement or long-term agreements.

That's really helpful. Thank you. And then thank you for the commentary around the focus on contract extensions. One of your peers recently disclosed a range of crude contract rates that they got for a 10-year extension. Would you be willing to give a range of what you see as the long-term going rate for crude pipeline capacity? I think it would give investors some confidence that it's not going to cash cost.

The most we can possibly get and I really mean that sincerely. There's customers that will pay a certain rate to go from -- for example from Midland to Houston. And then there's customers that say, we want the option to go to Houston Nederland into St. James to Mariner [ph] and we also want a bunch of storage and export rights. So it'd be probably wouldn't be wise of us to kind of give a range on a call like this where it's so public and many of our competitors but we -- it's a pretty wide range and we will -- we'll continue to pursue those and achieve the highest price we can for our service.

Fair enough. Thank you.

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

Hi thanks. Tom what was leverage at year-end the way you or I guess the way the rating agencies would see it versus the four to four and a half times target?

Well, listen that varies so much between those -- between the agencies. We're still staying in that probably slightly above that 4.5% to 5% or so. But once again, when you've got -- with the joint ventures with -- then the consolidated with both SUN and USAC, et cetera, as you can see that varies a bit. So, the best I can do is kind of give you that range of where we are. So…

Okay. And then when you're looking at 2020, so if EBITDA is flat this year, obviously, debt is not increasing because you have it funded now. But it just feels like asset sales are the best way to delever kind of especially on a more near-term timeframe and get to your target. So, how do you think about asset sales right now given the outlook for 2020 and desire for more financial flexibility? And then I guess also taking into account that the asset sale market has probably softened a bit here, just how are you weighing that overall?

Yes. Listen we think we've done a very good job of the asset sales that we've done. I think we got way out ahead of it. If you look at it currently, I ran your questions here right now, I think we've been pretty open in what we talked about as far as the compression from that standpoint. I can't really take you any further than that. As far as anything goes on that front, clearly, that's not anything you would talk about ahead of time. But at the same time we very much like our assets with where we currently stand. And like I said, we'll just continue to -- as we go through the year, to be diligent on that front, but to be very, very smart. So--

Okay. Thank you.

Ladies and gentlemen, this does conclude today's question-and-answer session. And I would like to turn the call back over to Mr. Tom Long for any closing remarks.

All right. Once again thank all of you for joining today. We really do appreciate your time today and your interest and we look forward to the follow-up calls that any of you may have. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.