Good day, and welcome to the Energy Transfer Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I now like to turn the conference over to, Tom Long. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to the Energy Transfer’s second quarter 2023 earnings call. I'm also joined today by Mackie McCrea and other members of the senior management team who are here to help answer your questions after our prepared remarks. Hopefully, you saw the 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 Securities 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 Form 10-Q for the quarter ended June 30, 2023, which we expect to file tomorrow August, the 3. I'll also refer to adjusted EBITDA and distributable cash flow or DCF, both of which are non-GAAP financial measures. You'll find a reconciliation of our non-GAAP measures on our website. I'd like to start today by going over our financial results for the second quarter of 2023. We generated adjusted EBITDA of $3.12 billion, compared to $3.23 billion for the second quarter of 2022. In our base business, we had strong performance from our operations, which delivered record volumes across our Intrastate and midstream segments, as well as through our NGL pipelines, and NGL and refined products terminals, including record NGL volumes exported out of our Nederland and Marcus Hook terminals. Our volume growth was more than offset by significantly lower quarterly average natural gas and NGL prices, which declined 70% and 45% respectively over the second quarter of last year. DCF. Approval to the partners of Energy Transfer as adjusted was $1.55 billion, compared to $1.88 billion for the second quarter of 2022. This resulted in excess cash…

[Operator Instructions] Our first question comes from Spiro Dounis from Citi. Please go ahead.

Guys, first question, maybe just go to Lake Charles quickly. Two-part question there. So one, do you have any sense on the DOE timing at this point to approve a new non-FDA authorization? And Tom, I want to make sure I heard you correctly. I believe you mentioned working with equity investors on the project. You actually identified potential equity counterparties yet? Or was that just more of a general statement?

Yes, this is Mackie. Let me start, and Tom may add to it. Yes, for confidentiality reasons, we can't talk about who our equity partners. Maybe we can say that we have two very significant partners at a minimum, one that is one to step up for a large amount of the equity as well as a lot of the offtake. And I'll just make a quick comment. We've worked pretty hard on this project. We slowed down during the pandemic. Mason and his team did a great job picking this back up when Ukraine war started. We had tremendous momentum, signed up a lot, 8 million or 9 million tonnes developed relationships all around the world, really good relationships. A lot of those folks I've met over the last three or four months that really believe in our project, and then lowering the whole DOE cut the legs out from under us kind of by surprise without us even expecting it. So we kind of read gearing. We've spent a great deal of time with the DOE over the last several weeks. We have a real important meeting next week with them. And we're being optimistic that they'll work with us to exponentially go down this new path that we're going down to try to get an export authorization approved by them. But in the meantime, as Tom said, we are continuing to work with not only existing customers, but with new customers. And as I said, we have some equity partners that really believe in this project, and we'll be excited to have them part of the team as we work diligently towards FID.

Great. That's helpful color, Matt. Second one is going to switch gears a bit here, but just in thinking about TTM. I think it was maybe two quarters ago, it sounded like you were hoping to be able to be in a position to announce something later in '23, but it also sounded market dependent, basically, I think, sort of looking for things to get better. And I guess we haven't seen that yet. So just curious, where are you in that process? How much is that delayed and maybe new sort of timing? I'm thinking about an announcement there?

Yes, I'll give a little background first. So we're talking about that earlier today. Nederland is such a gem for any partnership, but especially for ours. If you look at what sits at Nederland, in all of our connectivity to all the refineries, we actually are connected to over 25% of refining capacity from that area in South Texas. We have the ability to move large volumes of feedstocks to that facility. We've got four pipelines from Mont Belvieu with ethane, propane, butane and natural gasoline that can feed the petchem facility. And as I just mentioned, there's a lot of belief over the next 5 or 10 years by some, that there's going to be an issue of getting -- of finding a home for gasoline components, which would also feed -- or could be very good feedstocks for our petchem project. And then you add that to our ability to deliver to ethylene and propylene downstream of this project as well as the export markets, we couldn't be more excited. This is a very unique world-class facility, and we have an extreme amount of interest. We are focused with one equity partner today, who's very interested in a significant portion of ownership and also a significant portion of takeaway capacity. They actually have assembled a very large team working with us. And at the appropriate time, we'll be able to talk more about it. But yes, just like a lot of our projects, it is going to take time. It's a very unique cracker like nothing else in the world, not only because of what it can crack and what it can do, but also logistically with the advantages it has over any other crackers. So we're very excited about it, and we have a great team led by Raj and others working that project. And we do believe at some point in the road, we'll get to FID, but it is going to be down the roadways.

The next question comes from Jeremy Tonet from JPMorgan. Please go ahead.

Hi, good afternoon. Just want to pick up with, I think, some of the comments towards the end there with regards to capital allocation priorities. And now that the leverage has come in a bit, just wondering how you balance, I guess, capital at this point, be it distribution growth seems like it's a focus there, but also kind of tuck-in M&A has been something that ET has done over time. And it seems like there might be larger industry consolidation of foot right now. At the same time, buybacks has been topical in the industry. So just wondering if you could kind of walk us through the latest thoughts on capital allocation?

Yes, Jeremy, this is Tom. Still a very, very good question. So I always appreciate it. As you know, we have focused on the debt. We're very, very obviously pleased to have it down into our 4 -- kind of 4.5 range kind of at the top of it. So we'll continue to look at moving down maybe towards the lower end of that like we mentioned in the prepared remarks. But moving on past the debt side, the balance sheet side of it, we're going to continue to focus on a lot of the projects that we've talked about here. I know we've got a fantastic team that's coming up with a lot of really, really good investment opportunities that continue to expand the great footprint that we've built. And we're just very, very excited about a lot of these and excited about the returns that we're getting on them. So you're going to see us continue to do that. But the distribution growth is the other piece of it. Moving on to that one, where we've put out that guidance of 3% to 5%, and we feel very good each quarter as each quarter goes by is to where we are on that. So we're going to continue to allocate toward that. The unit buybacks still remain on the radar screen. But I will say that right now, we're continuing to focus on investing in the company as well as the balance sheet and of course, the distribution growth to given back to our equities. But I do want to go ahead and expand a little bit on one other item you brought up in there, and that was the M&A side of it. We do still remain very optimistic that you're going to see consolidation in the midstream space, and that's something that we feel like we're very, very good at. You can see from all the acquisitions that we've done, we can always make them very accretive. And they've got us to where we are today as well as within the organic growth projects that come along with each one of these. So we're going to continue to stay very focused on that side of it and allocate a lot of time toward that piece of it, too.

Got it. That's helpful. And maybe picking up with that, some of the recent acquisitions, be it Lotus or even looking back at Enable, if you could kind of walk us through synergy capture, where it stands now versus expectations at that time? Just curious how things have materialized.

Okay. Listen, why don't you let me start with that a little bit, especially on the cost side. And then Mackie will -- he's got a lot of great things to talk about there. So if you look at really both of those, and we'll start with the Enable one. That one just continues to exceed anything that we ever expected on that. So even if you go back to the S4 and you look at what forecast we had in there, we're significantly higher, a good probably 40% or 50% higher than what we were anticipating. And a lot of that was -- some of that was cost synergies, but there was a lot of commercial synergies that are now we're seeing every day as we continue to work through that. And once again, Mackie will expand on that. But I'll comment a little bit on the Lotus. Obviously staying disciplined the same way we did with Enable as to what we're transacting on these acquisitions, at what level we're transacting at. They work for us. They're accretive, and they're deleveraging. And likewise, on that one, we have achieved every bit of the cost savings that we were anticipating on that. But likewise, that one is still new. We just closed in May, but we're still seeing a lot of opportunities on that one also. And Mackie, I'll hand off if you want to add anything more on the commercial side on both of those.

Okay. Yes. Chris Hefty and his team have done an unbelievable job. Those acquisitions that Tom just talked about have been incredible. Tom hit on a little bit, Enable. We keep finding things. We were able to move volumes out of Louisiana to Enable down to some of our East Texas assets and just a lot of things that we're finding that are very beneficial. Our WEX acquisition, it is what it is. We bought it at a great multiple, and it's proven out at that multiple or better. So we're very pleased with that one. And then Lotus, gosh, we've just closed it in our crude team gets excited every week about something new. Some new routes, some new blending opportunities, some new additions that we can add to move more throughput on some areas we didn't think about. So as I just mentioned, what great acquisitions that will end up paying off a lot more than we anticipated when we purchased them.

And Jeremy, I'd like to just add real quick. When you have the very, very strong talent we do internally, the more tools you can provide to them, it is just truly amazing what we find out of each one of these.

Got it, that’s helpful. Thank you.

The next question comes from Brian Reynolds from UBS. Please go ahead.

Hi, good afternoon everyone. Maybe to start off on the long-term annual capital run rate, growth CapEx run rate of $2 billion to $3 billion. I was curious if you could just touch a little bit more perhaps on what these projects could look like, differentiating between perhaps traditional midstream-based business opportunities versus some of these low carbon opportunities that you discussed, LNG, CCUS transport and ammonia? Thanks.

Okay. It's Mackie again. Yes, we've got a lot of things already in the works that we've already got FID on. We're moving forward on. And then as we've talked about some of these and there's a lot of other opportunities that we're chasing, we certainly are looking at some renewable opportunities. For example, CapturePoint. As we talked about in the opening remarks, it will be a great project for us, not just because it will be transporting, sequestering CO2, but it also helps us with our upstream contracts on treating and transportation. So there's added benefits to that. And then some of the other projects that we're looking at will also be contributors. But from a capital perspective, it will be pretty minimal compared to a lot of these other projects that we're working on that we've already committed to and a lot of the ones that we think will get to FID over the coming six months and 12-month period.

And the only other thing I would add to this, as you know, we do continue to work or look at and spend more time on more of these downstream projects like what Mackie has mentioned. But we are spending some time on the international front likewise in looking at various projects.

Great. Thanks. And maybe to follow up on Lake Charles LNG. A lot of HOAs signed during the quarter were some notable E&P counterparties that have previously voiced interest in equity ownership in an LNG facility. So just given the tight existing time line that you currently have with the DOE, I was just kind of curious if there's any change in tone or capital structure in your view for Lake Charles in terms of appetite for ET to perhaps own incremental equity and ownership perhaps than a few months ago, just given the fast pace of HOAs that have been signed over the past few weeks. Thanks.

Yes, this is Mackie. No, nothing has really changed there. We kind of have a target of around 25% of equity ownership. That hasn't changed. We won't really talk about who the equity partners potentially are. I mentioned a few without naming them, but yes, there's more than that. There are some producers that expressed interest. And so there's a wide range. As we kind of consummate some of the bigger equity commitments, then we'll go to whatever remaining commitments that we need to attain that kind of 75% of partners in the project. So, nothing has changed as far as our strategy around Lake Charles.

The next question comes from Jean Ann Salisbury from Bernstein. Please go ahead.

I think you may have more exposure to lower gas price in your midstream segment than I had realized. Can you give any more color on how that exposure works? If there's floors? If you hedge out gas price? Is it as simple as if gas price goes back up next year, that segment will improve?

Yes. Jean Ann, this is Tom. The natural gas prices, that's correct, the sensitivity is there, especially in the midstream. But we want to make sure we add in there the ethane component that's included in there. So when you start looking at where those prices were, going on the liquid side, that likewise has rolled into that impact. And that's the reason even in our materials that we put out, we put in that kind of 5% to 10% of sensitivities related to commodity prices. We use spreads at 0 to kind of 5%. But you're seeing us really kind of stay in line with that. I do think it's worth noting that when you do get down to a certain level, that you are able to kind of have floors on some of the contracts that provide kind of a downside protection on these things. But once again, when you get with the whole decisions we make on all the processing we do, when to reject as far as ethane rejection goes and when we extract. But it's really based upon not just the natural gas prices, but the ethane prices also, liquids prices.

Got it. Okay. And then just the latest on the up sea [ph] potential. And if you've kind of had any interest from investors that count [ph] on MLPs that they'd be interested in the up sea?

Yes. No, you bet. We do continue to spend time on that and evaluate it. We haven't advanced it to market type studies or anything else. But we do have various discussions with banks, et cetera, on views on the market side of it. Where a lot of the time is really spent on the structuring also. We want to make sure that we get this thing structured in a way that is a win-win for all. So we're continuing to look at that. So it's clearly on the radar screen, something we're going to continue to move forward, move down the field, so to speak, and kind of come out at the right time that makes sense.

The next question comes from Keith Stanley from Wolfe Research. Please go ahead.

Hi, thank you. Maybe starting with Gulf Run and the compression expansion project. Can you talk to what customers are saying on the timing of needing more takeaway? And I guess, could that project move forward as soon as this year? Are the needs there that quickly? Or the Haynesville needs more time to recover?

Yes, this is Mackie. No, we don't expect to get the FID on expansion on Gulf Run. As Tom said in the opening remarks, our team has done a great job of selling out the capacity by January of '25. As he mentioned, we're sold out on 1.65 Bcf on the Zone 2 portion of Gulf Run. But no, we'll remain in negotiations. A lot of that depends on some of the LNG facilities to get to FID. A lot of it will depend on some commitments that we're looking at further downstream on markets along the Gulf Coast, even as far away as Florida. And then also, there's some producer push on a lot of that to get down to markets either off Trunkline or potentially even off FGT. So we're still a way away from that, but we'll remain discussions. And there's a great deal of interest to move more volume, of course, from the growing Haynesville and other areas down to the Gulf Coast.

Okay. Great. And second question, I just wanted to follow up on the $2 billion to $3 billion long-term CapEx run rate. And it's obviously very manageable within cash flows for the company, but it's a little higher than what you've spent. You did $2 billion last year and targeting $2 billion for this year. So can you just give some big picture comments on why you'd expect CapEx to potentially go a little higher in the future? And does that reflect bigger projects? Does that reflect -- I think, Tom, you mentioned looking a little more at international, just how you're thinking about that and spending potentially going up a little?

You bet. And like I say, a very good question here on this. When you really look at the scale of Energy Transfer now, the size and then you start looking at all the projects that Mackie previously mentioned, with the existing footprint we have, but also continuing to move downstream with some of the other petchem international, so when you really start looking at all that, we do not have projects that are specifically identified within that. This is a number that we're just using based upon the sheer size that we've become, start running over $13 billion a year. So don't have really a whole lot more description at this point, other than just kind of guiding you toward all the various projects that we have on the drawing board, so to speak.

Let me add, if I could, one thing is that we are going to be pretty disappointed if we're not pushing against that $3 billion, because the projects that we're chasing are really good rates of return. And everything that we're chasing has synergistic revenues, not part of the IRRs, both upstream and downstream, in many cases. So from the standpoint, from a commercial perspective, I'm going to be disappointed if we -- if our team DOEsn't push closer to $3 billion or even more at the greatest return that we're targeting.

The next question comes from Michael Blum from Wells Fargo. Please go ahead.

Thanks, good afternoon everyone. Yes, I wanted to ask about the recent really spike in ethane prices. There's definitely been some issues with processing efficiencies and fractionation facilities being impacted. So just wonder if you can just, a, were any of your facilities impacted by the extreme heat we've seen in the South? And then, b, should we think of this as an event that you probably benefited from? Or could this be a drag on Q3?

Mike, this is Mackie. Yes, there's a lot of noise made around this that we're a little taking aback by because it really had zero impact on us. We're one of the only -- probably the only company in the U.S. that controls the vast majority of our frac products. So we remain long with everything. That's, of course, why we're expanding our export capabilities, et cetera. But we kind of dug into it. Actually, RVM had a pretty good article. You may be alluding to some of that. We believe it's a combination of a lot of things. What RVM mentioned was a little bit what you said. You have cryos that struggling with heat, production struggles in heat. We've seen pretty excessive heats -- I mean, temperatures. That's been 2% to 3% impact. Frac struggle a little bit more, 5% to 7% of what we've kind of seen on matter or others have seen. There's also kind of a shortage of inventory since that's not really tracked. And some rumors got out that the inventories were really short. And so it's kind of a lot of those factors, but a number of companies, unlike us, that were rejecting. It takes some time to start recovering and figuring out a way to get that to Mont Belvieu. So that took a few days. We also heard there were some crackers out there that were actually selling their ethane because prices have gotten so bad. So it was a pretty short-lived run-up in ethane prices. No impact on us whatsoever or our customers. And so it was just a kind of a conglomeration of a lot of different things that happened over a short period of time.

Okay. Good. No, that's helpful. And then I wanted to ask about LPG and ethane exports. It seems like your volumes are still very strong through the first half of the year. What are you expecting for the balance of the year on both LPG and ethane volumes? If you could just speak generally to what you're seeing in those end markets right now.

Yes. It's Mackie here. As we look at the future and we look at the negotiations we have going on, we talked about this earlier today. We're in discussions with over 500,000 barrels of ethane demand potentially coming online in the next three or four years. Of that, there's probably 150 to 180 that's highly likely we will contract. So there's a huge demand for ethane. On the propane front, as everybody probably knows, there's a lot of PDHs being built. There's five or six already completed in China, and there's another -- a total of another about 12 more. So there's a lot of propane demand out there and a lot of propane being built. So we are very bullish, of course, that's why we're expanding as quickly as we can, very bullish on volumes increasing, especially at Nederland. We'll always have a little pullback at the Marcus Hook. Because of location up there, a lot of those barrels stay locally, how we are able to take a lot of what flows and take it to much higher-priced market from a margin standpoint. But certainly in the South, we remain very optimistic. We're already seeing volumes stronger next month than we saw here in July. So we remain very bullish not only the next quarter or 2, but bullish long term. There is a significant growth on really everything we do for natural gas liquids. And even gosh, we were talking about oil today. There was more oil consumed in the world last quarter than there've ever been. So the run away from oil and the slowdown oils happening. If anything, it's increasing. So that was a long-winded answer to we remain very bullish.

Great. Thank you.

The next question comes from Neel Mitra from Bank of America.

First question, you obviously have some very capable upstream assets that can be expanded with Gulf Run and Trunkline. Are you looking at expanding those separately from the Lake Charles decision? In other words, if you were to twin those pipelines for other facilities, would you still be able to manage to get the gaps down to Lake Charles in an efficient way so that both sets of projects can work?

Yes, this is Mackie again. Our team is looking to move as much gas through our pipeline network and expand our network to whatever markets there are. So yes, simultaneously with making sure that we will have the pipeline and volume support for LNG once it gets to FID. We also have teams working daily on delivering to other LNG facilities and to other markets everywhere, not only in the Gulf Coast, but where anybody is looking for gas. So yes, we'll continue to chase markets and look to expand the Gulf Run, Truckline, other assets to meet any demands that are out there that we end up contracting.

Great. And then for the follow-up, just on your commentary around M&A, can you be a little bit more specific? Do you have a preference for asset packages versus corporate M&A? Any specific commodities? And then how would you look at your leverage profile? Would you look to go above 4.5 times temporarily if there was something that was attractive? Or would that be kind of the governor that you wouldn't want to exceed that from the very beginning?

Yes. Listen, when we look at these various transactions, whether it be on the company side or whether it be on an asset acquisition, either one of them, we always evaluate how the connectivity is to our current assets. And some of it could be moving maybe a little bit further downstream with value add. But a lot of it, we always evaluate as to the connectivity so that we can get more commercial synergies with the footprint we have. And when you start looking at this across all the commodities, natural gas, natural gas liquids and the crude oil, you can see how we've built the franchise here that we have and being able to take product from wellhead all the way through export facilities. So we're going to continue to look at them on that basis as to where the value comes in. So let's go to the metrics, which is the second part, which really relates to the first part of my question, too, on the answer that I just gave you on that piece of it. And that is the accretion piece of it. And that's how we're able to be able to go in with a lot of these and get the accretion is because of the connectivity and what we're able to do with the product all the way downstream. And so when we will kind of walk through these and evaluate them, we're careful. We're disciplined in how we look at these various commercial synergies, but we have a great team that is able to extract a lot at. But the other component, besides just accretion to a DCF per unit basis, is the leverage. That's the other piece of it. And you'll see, with the transactions we're doing, we will always evaluate these things as to what is the combination of equity and cash that we use. So we don't have intention of going back above from a leverage standpoint. And we think we've got a great currency to be able to work with here. But most importantly, we've got a great team that's able to go in and extract the value as we walk through the integration of our acquisitions.

Okay, great. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Long for any closing remarks.

This is Mackie real quick before Tom closes out. I was thinking about, we're meeting with Bill Berg and our team kind of preparation for this. And they made some great points is that -- and everybody knows this, I believe. But Tom mentioned this earlier. We believe we have the best team running any midstream in the United States by far, and a lot of them are sitting in this room. We think we have the best base of business, a very strong base with record volumes in several segments every quarter. We're delivering on the projects that we're building with Gulf Run and Gray Wolf at the end of last year. And then, of course, we just brought on Bear. We're having, once again with Chris Hefty's great efforts around M&A. We've got Lotus really kind of kicking in, and then we've got the frac going on. That, combined with strong cash flow stability, our disciplined M&A strategy, we are incredibly well positioned for growth. So if you can't tell it in our voices, we are very excited about where we sit, the assets that we have throughout the country and what the future holds for our partnership and really for our industry. So we're pretty excited, if you can't tell in our voices.

No, I think that's a wrap, Mackie. Thank you. Appreciate it.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.