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| SEP > SEC Filings for SEP > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements.
Executive Overview
As discussed in Note 2 of Notes to Condensed Consolidated Financial Statements, on April 4, 2008, Spectra Energy Partners completed the acquisition of the equity interests of Saltville and the P-25 pipeline from Spectra Energy for a purchase price of $107 million. The Saltville acquisition represented a transaction among entities under common control. Accordingly, the condensed consolidated financial statements and related information presented herein have been recast to include the historical results of Saltville and the P-25 pipeline for all periods presented.
Effective upon the completion of the Saltville acquisition, Spectra Energy Partners created a new business segment, Gas Transportation and Storage, which includes East Tennessee and Saltville, and aligns the operations of Spectra Energy Partners with the chief operating decision maker's view of the business. All prior period information discussed herein has been recast to reflect the new segment structure.
For the three months ended September 30, 2008, Spectra Energy Partners reported net income of $24.3 million compared to net income of $136.2 million for the three months ended September 30, 2007. For the nine months ended September 30, 2008, Spectra Energy Partners reported net income of $75.9 million compared to net income of $181.2 million for the nine months ended September 30, 2007. The decreases resulted primarily from the recognition of $110.5 million in income tax benefits in the third quarter of 2007 due to the elimination of deferred income tax liabilities in conjunction with the IPO, lower net pipeline fuel recoveries, and general and administration costs associated with managing Spectra Energy Partners post-IPO, partially offset by higher demand for transportation and storage services in the current periods.
The consolidated results of operations, financial position and cash flows for periods prior to Spectra Energy Partner's IPO on July 2, 2007 and for periods prior to the Saltville acquisition may not necessarily be indicative of the actual results of operations, financial position and cash flows had those entities operated separately during those periods.
Spectra Energy Partners continues to deliver on its primary business objective of increasing cash distributions per unit. Per-unit cash distributions of $0.32 in the first quarter of 2008, $0.33 in the second quarter and $0.34 in the third quarter represented increases of 7%, 3% and 3%, respectively, over the previous quarter's distribution. A cash distribution of $0.35 per unit was declared in October 2008, representing a 3% increase over the previous distribution and the fourth consecutive quarterly increase.
During the third quarter of 2008, East Tennessee, Gulfstream and Market Hub Partners placed new expansion projects into service with new firm revenues contributing to the available cash to support Spectra Energy Partners' cash distributions.
RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
2008 2007 (Decrease) 2008 2007 (Decrease)
(in millions)
Operating revenues $ 29.5 $ 28.6 $ 0.9 $ 91.7 $ 90.4 $ 1.3
Operating, maintenance and other
expense 12.7 9.6 3.1 33.1 22.9 10.2
Depreciation and amortization 6.5 8.8 (2.3 ) 19.6 20.0 (0.4 )
Operating income 10.3 10.2 0.1 39.0 47.5 (8.5 )
Equity in earnings of
unconsolidated affiliates 17.6 18.5 (0.9 ) 45.2 41.5 3.7
Other income and expenses, net 0.4 0.1 0.3 0.8 0.5 0.3
Interest income 0.7 2.8 (2.1 ) 3.0 2.8 0.2
Interest expense 4.5 6.5 (2.0 ) 13.3 10.8 2.5
Earnings before income taxes 24.5 25.1 (0.6 ) 74.7 81.5 (6.8 )
Income tax expense (benefit) 0.2 (111.1 ) 111.3 (1.2 ) (99.7 ) 98.5
Net income $ 24.3 $ 136.2 $ (111.9 ) $ 75.9 $ 181.2 $ (105.3 )
Adjusted EBITDA (a) $ 16.8 $ 19.0 $ (2.2 ) $ 58.6 $ 67.5 $ (8.9 )
Cash Available for Distribution
(a) 36.9 38.6 (1.7 ) 95.2 104.7 (9.5 )
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(a) See "Reconciliation of Non-GAAP Measures" for a reconciliation of this measure to its most directly comparable financial measures calculated and presented in accordance with GAAP.
Three Months Ended September 30, 2008 Compared to Same Period in 2007
Operating Revenues. The $0.9 million increase was driven primarily from new firm transportation contracts on East Tennessee's Patriot system.
Operating, Maintenance and Other Expense. The $3.1 million increase was driven primarily by:
• a $1.0 million increase from lower net pipeline fuel recoveries recognized by East Tennessee in the 2008 period compared to the 2007 period,
• a $1.6 million increase in general and administrative costs due primarily to increased governance costs, and audit and legal fees associated with the Saltville acquisition in 2008, and
• a $0.5 million project development cost increase associated with the Greenway expansion. In accordance with Spectra Energy Partners' policy, project development costs are initially expensed until it is determined that recovery of such costs through regulated revenues of the completed project is probable, at which time inception-to-date costs of the project are capitalized and operating expenses are reduced.
Depreciation and Amortization. The $2.3 million decrease was driven primarily by a depreciation rate adjustment on the Jewell Ridge expansion project in 2007.
Equity in Earnings of Unconsolidated Affiliates. The $0.9 million decrease consisted of a $1.3 million decrease in equity earnings from Gulfstream and a $0.4 million increase from Market Hub.
The following discussion explains the factors affecting the equity earnings of Gulfstream and Market Hub, each representing 100% of the earnings drivers of those entities.
Three Months Ended
September 30,
Increase
2008 2007 (Decrease)
(in millions)
Gulfstream
Operating revenues $ 60.5 $ 56.9 $ 3.6
Operating, maintenance and other expense 8.0 (2.2 ) 10.2
Depreciation and amortization 7.5 7.5 -
Loss on sale of assets, net (0.6 ) - (0.6 )
Other income and expenses, net 3.2 0.6 2.6
Interest expense 10.8 12.0 (1.2 )
Net income $ 36.8 $ 40.2 $ (3.4 )
Spectra Energy Partners' share $ 8.6 $ 9.9 $ (1.3 )
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Gulfstream-Owned 24.5%
Gulfstream's net income decreased $3.4 million to $36.8 million for the three-month period in 2008 compared to $40.2 million for the same period in 2007. The decrease was driven primarily by:
• a $10.2 million increase in operating, maintenance and other expense due primarily to the capitalization of $7.0 million of previously expensed project development costs in the 2007 period, higher ad valorem expense of $1.0 million due to a favorable valuation adjustment in 2007, a $1.0 million increase in pipeline operating and maintenance expenses associated with incremental facilities added as part of Gulfstream's Phase III and Phase IV expansion projects, and $0.4 million in higher project development expenses compared to the prior-year period, mostly offset by
• a $3.6 million increase in revenues primarily from the Phase III and Phase IV expansion contracts,
• a $2.6 million increase in other income and expenses, net driven primarily by a $2.4 million increase in allowance for funds used during construction (AFUDC) (equity component) as a result of capital expenditures for the Phase III and Phase IV expansion projects, and
• a $1.2 million decrease in interest expense resulting from higher interest costs capitalized as a result of capital expenditures for the Phase III and Phase IV expansion projects.
Three Months Ended
September 30,
Increase
2008 2007 (Decrease)
(in millions)
Market Hub
Operating revenues $ 25.7 $ 24.8 $ 0.9
Operating, maintenance and other expense 5.4 5.2 0.2
Depreciation and amortization 2.7 2.4 0.3
Other income and expenses, net 0.2 (0.1 ) 0.3
Interest income 0.7 0.9 (0.2 )
Interest expense 0.2 0.9 (0.7 )
Income tax expense 0.2 - 0.2
Net income $ 18.1 $ 17.1 $ 1.0
Spectra Energy Partners' share $ 9.0 $ 8.6 $ 0.4
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Market Hub-Owned 50%
Market Hub's net income increased $1.0 million to $18.1 million for the three-month period in 2008 compared to $17.1 million for the same period in 2007. The increase was driven primarily by:
• a $0.9 million increase in revenues driven by an increase of $3.5 million in firm storage revenues due to the completion of the Egan Cavern 4 expansion, partially offset by a decrease in interruptible services of $2.6 million driven by market demand, and
• a $0.7 million decrease in interest expense primarily due to lower interest rates associated with collateral held from counterparties and affiliates, partially offset by
• a $0.3 million increase in depreciation expense primarily due to the Egan expansion,
• a $0.2 million decrease in interest income due to lower interest rates on notes receivable with affiliates issued in the third quarter of 2007,
• a $0.2 million increase in operating, maintenance and other expense due primarily to timing of expenses between the quarters and mostly offset by higher fuel recoveries, and
• a $0.2 million increase in Texas income (margin) tax expense.
Interest Income. The $2.1 million decrease was due to the sale of marketable securities held by Spectra Energy Partners that were originally purchased with a portion of the IPO proceeds in July 2007. These securities are pledged as collateral to secure the term loan portion of Spectra Energy Partners' credit facility entered into on July 2, 2007. As the term loan is reduced, securities are sold.
Interest Expense. The $2.0 million decrease was due to lower interest rates on term and revolver borrowings.
Income Tax Expense (Benefit). Spectra Energy Partners' income tax expense for the three months ended September 30, 2008 was $0.2 million compared to an income tax benefit of $111.1 million in the same period in 2007. As previously discussed, Spectra Energy Partners recorded a one-time benefit of $110.5 million in the third quarter of 2007 from the reversal of deferred income tax liabilities. Effective July 2, 2007, as a result of Spectra Energy Partners' MLP structure, Spectra Energy Partners is no longer subject to federal income taxes.
Nine Months Ended September 30, 2008 Compared to Same Period in 2007
Operating Revenues. The $1.3 million increase was driven primarily by a $3.8 million increase from new firm transportation contracts on East Tennessee's Jewell Ridge lateral and Patriot systems, partially offset by the absence of $2.5 million of salt sales during 2008 due to the sale of the salt plant in the second quarter of 2007.
Operating, Maintenance and Other Expense. The $10.2 million increase was driven primarily by:
• a $5.7 million increase from lower net pipeline fuel recoveries recognized by East Tennessee in the 2008 period compared to the 2007 period, and
• a $4.2 million increase in general and administrative public company costs as a result of corporate functions associated with managing Spectra Energy Partners post-IPO.
Equity in Earnings of Unconsolidated Affiliates. The $3.7 million increase consisted of a $2.0 million increase in equity earnings from Gulfstream and a $1.7 million increase from Market Hub.
The following discussion explains the factors affecting the equity earnings of Gulfstream and Market Hub, each representing 100% of the earnings drivers of those entities.
Nine Months Ended
September 30,
Increase
2008 2007 (Decrease)
(in millions)
Gulfstream
Operating revenues $ 152.9 $ 141.1 $ 11.8
Operating, maintenance and other expense 23.0 9.2 13.8
Depreciation and amortization 22.2 22.7 (0.5 )
Loss on sale of assets, net (0.6 ) - (0.6 )
Other income and expenses, net 9.4 1.8 7.6
Interest expense 33.5 36.2 (2.7 )
Net income $ 83.0 $ 74.8 $ 8.2
Spectra Energy Partners' share $ 20.4 $ 18.4 $ 2.0
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Gulfstream-Owned 24.5%
Gulfstream's net income increased $8.2 million to $83.0 million for the nine-month period in 2008 compared to $74.8 million for the same period in 2007. The increase was driven primarily by:
• a $11.8 million increase in revenues driven by higher demand for interruptible and short-term firm transportation from generation customers caused by warmer weather and a favorable gas-to-fuel oil price differential compared to the prior period and the Phase III and Phase IV expansion contracts,
• a $7.6 million increase in other income and expenses, net driven primarily by a $5.5 million increase in AFUDC as a result of capital expenditures for Gulfstream's Phase III and Phase IV expansion projects, and a $1.0 million increase related to the favorable resolution of a sales and use tax matter during the second quarter of 2008, and
• a $2.7 million decrease in interest expense resulting from higher interest costs capitalized as a result of capital expenditures for Gulfstream's Phase III and Phase IV expansion projects, partially offset by
• a $13.8 million increase in operating, maintenance and other expense primarily resulting from a $7.1 million increase in ad valorem tax expense due to the impact of a favorable valuation in 2007, a $2.8 million increase in project development costs due to the capitalization in 2007 of previously expensed costs related to the Phase IV expansion, $2.3 million of higher pipeline operations costs associated with overhauls in 2008, and $0.8 million in higher project development expenses compared to the prior-year period.
Nine Months Ended
September 30,
Increase
2008 2007 (Decrease)
(in millions)
Market Hub
Operating revenues $ 72.8 $ 69.1 $ 3.7
Operating, maintenance and other expense 15.8 14.4 1.4
Depreciation and amortization 7.9 6.6 1.3
Other income and expenses, net 0.2 0.1 0.1
Interest income 2.4 0.9 1.5
Interest expense 0.9 2.9 (2.0 )
Income tax expense 0.2 - 0.2
Net income $ 50.6 $ 46.2 $ 4.4
Spectra Energy Partners' share $ 24.8 $ 23.1 $ 1.7
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Market Hub - Owned 50%
Market Hub's net income increased $4.4 million to $50.6 million for the nine-month period in 2008 compared to $46.2 million for the same period in 2007. The increase was driven primarily by:
• a $3.7 million increase in revenues driven by an increase of $7.7 million in firm storage revenues due to the completion of the Egan Cavern 4 expansion, partially offset by a decrease in interruptible services of $4.1 million driven by market demand,
• a $1.5 million increase in interest income due to notes receivable with affiliates issued in the third quarter of 2007, and
• a $2.0 million decrease in interest expense primarily due to lower interest rates associated with collateral held from counterparties and affiliates, partially offset by
• a $1.4 million increase in operating, maintenance and other expense resulting primarily from a $0.5 million increase in ad valorem tax expense primarily due to a favorable valuation in the first quarter 2007, and a $0.5 million increase in operating expenses due to the Egan expansion in 2007 and lower net fuel recoveries in 2008, and
• a $1.3 million increase in depreciation expense primarily due to the Egan expansion placed in service in July 2007.
Interest Income. The $0.2 million increase was due to interest earned on marketable securities purchased with a portion of the IPO proceeds in July 2007.
Interest Expense. The $2.5 million increase was due to term and revolver borrowings entered into on July 2, 2007.
Income Tax Expense (Benefit). Spectra Energy Partners' income tax benefit for the nine months ended September 30, 2008 was $1.2 million compared to an income tax benefit of $99.7 million in the same period in 2007. As previously discussed, Spectra Energy Partners recorded a one-time benefit of $110.5 million in the third quarter of 2007 from the reversal of deferred income tax liabilities. Effective July 2, 2007, as a result of Spectra Energy Partners' MLP structure, Spectra Energy Partners is no longer subject to federal income taxes. In addition, a tax benefit of $2.5 million was recognized in the second quarter of 2008 due to the elimination of deferred income tax liabilities associated with the Saltville entities' change in tax status as a result of the acquisition by Spectra Energy Partners.
Spectra Energy Partners' Adjusted EBITDA and Cash Available for Distribution
Adjusted EBITDA
Spectra Energy Partners defines its Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as Net Income plus Interest Expense, Income Taxes and Depreciation and Amortization less Equity in Earnings of Gulfstream and Market Hub, Interest Income, and Other Income and Expenses, Net, which primarily consists of non-cash AFUDC. Spectra Energy Partners' Adjusted EBITDA is not a presentation made in accordance with GAAP. Because Adjusted EBITDA excludes some, but not all, items that affect net income and is defined differently by companies in Spectra Energy Partners' industry, Spectra Energy Partners' definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Adjusted EBITDA is used as a supplemental financial measure by Spectra Energy Partners' management and by external users of Spectra Energy Partners' financial statements to assess:
• the financial performance of assets without regard to financing methods, capital structure or historical cost basis;
• operating performance and return on invested capital as compared to those of other publicly traded limited partnerships that own energy infrastructure assets, without regard to financing methods and capital structure.
Significant drivers of variances in Adjusted EBITDA between the periods presented are substantially the same as those previously discussed under Results of Operations. Other drivers include the timing of certain cash outflows, such as capital expenditures for maintenance and scheduled payments of interest.
Cash Available for Distribution
Spectra Energy Partners defines its Cash Available for Distribution as Spectra Energy Partners' Adjusted EBITDA plus Cash Available for Distribution from Gulfstream and Market Hub, less cash paid for interest expense, net, and maintenance capital expenditures. Cash Available for Distribution does not reflect changes in working capital balances. Cash Available for Distribution for 2008 reflects the incremental general and administrative expenses associated with being a publicly-traded partnership.
For Gulfstream and Market Hub, Spectra Energy Partners defines their Cash Available for Distribution as their Adjusted EBITDA less cash paid for interest expense, net, and maintenance capital expenditures. Cash Available for Distribution does not reflect changes in their working capital balances.
Cash Available for Distribution should not be viewed as indicative of the actual amount of cash available for distribution or that Spectra Energy Partners plans to distribute for a given period.
Cash Available for Distribution should not be considered an alternative to Net Income, Operating Income, cash from operations or any other measure of financial performance or liquidity presented in accordance with GAAP. Cash Available for Distribution excludes some, but not all, items that affect Net Income and Operating Income and these measures may vary among other companies. Therefore, Cash Available for Distribution as presented may not be comparable to similarly titled measures of other companies.
Significant drivers of variances in Cash Available for Distribution between the periods presented are substantially the same as those previously discussed under Results of Operations. Other drivers include the timing of certain cash outflows, such as capital expenditures for maintenance and the scheduled payments of interest.
Spectra Energy Partners
Reconciliation of Non-GAAP "Adjusted EBITDA" and "Cash Available for
Distribution"
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(in millions)
Net income $ 24.3 $ 136.2 $ 75.9 $ 181.2
Add:
Interest expense 4.5 6.5 13.3 10.8
Income tax expense (benefit) 0.2 (111.1 ) (1.2 ) (99.7 )
Depreciation and amortization 6.5 8.8 19.6 20.0
Less:
Interest income 0.7 2.8 3.0 2.8
Equity in earnings of Gulfstream 8.6 9.9 20.4 18.4
Equity in earnings of Market Hub 9.0 8.6 24.8 23.1
Other income, net 0.4 0.1 0.8 0.5
Adjusted EBITDA 16.8 19.0 58.6 67.5
Add:
Cash Available for Distribution from Gulfstream 12.7 14.0 25.4 25.9
Cash Available for Distribution from Market Hub 9.9 9.7 28.0 25.9
Less:
Cash paid for interest expense, net 1.3 1.0 8.5 5.2
Maintenance capital expenditures 1.2 3.1 8.3 9.4
Cash Available for Distribution $ 36.9 $ 38.6 $ 95.2 $ 104.7
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Spectra Energy Partners
Reconciliation of Non-GAAP "Adjusted EBITDA" and "Cash Available for
Distribution"
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(in millions)
Net cash provided by operating activities $ 30.1 $ 24.1 $ 104.1 $ 62.0
Interest income (0.7 ) (2.8 ) (3.0 ) (2.8 )
Interest expense 4.5 6.5 13.3 10.8
. . .
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