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| SEP > SEC Filings for SEP > Form 10-Q on 9-May-2012 | All Recent SEC Filings |
9-May-2012
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
For the three months ended March 31, 2012, we reported net income of $52.4 million compared to $48.9 million for the comparable period in 2011. For the three months ended March 31, 2012, cash available for distribution was $66.2 million, an increase of $7.4 million from the prior year quarter. The increase in both net income and cash available for distribution was the result of the addition of Big Sandy pipeline and East Tennessee's Northeastern Tennessee (NET) assets to our portfolio in July and September 2011, respectively.
We estimate 2012 capital and investment expansion expenditures of approximately $30 million, of which $13.1 million was spent in the first quarter. The majority of these expenditures are to complete projects at East Tennessee and Market Hub, both of which went into commercial service in 2011.
A cash distribution of $0.48 per limited partner unit was declared on April 19, 2012 and is payable on May 15, 2012, representing a 1.1% increase over the previous distribution of $0.475 per limited partner unit paid in February 2012. The Spectra Energy Partners board evaluates each individual quarterly distribution decision within the confines of the Partnership agreement and based on an assessment of growth in cash available for distribution.
RESULTS OF OPERATIONS
Three Months Ended
March 31,
Increase
2012 2011 (Decrease)
(in millions)
Operating revenues $ 61.9 $ 51.2 $ 10.7
Operating, maintenance and other expense 19.5 18.3 1.2
Depreciation and amortization 9.3 7.8 1.5
Operating income 33.1 25.1 8.0
Equity in earnings of unconsolidated affiliates 27.4 27.8 (0.4 )
Other income and expenses, net - 0.5 (0.5 )
Interest income - 0.1 (0.1 )
Interest expense 7.7 4.2 3.5
Earnings before income taxes 52.8 49.3 3.5
Income tax expense 0.4 0.4 -
Net income $ 52.4 $ 48.9 $ 3.5
Net cash provided by operating activities $ 57.5 $ 57.6 $ (0.1 )
Adjusted EBITDA (a) 42.4 32.9 9.5
Cash Available for Distribution (a) 66.2 58.8 7.4
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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 March 31, 2012 compared to same period in 2011
Operating Revenues. Operating revenues increased $10.2 million and $5.7 million due to the acquisition of Big Sandy in July 2011 and the NET project being placed into commercial service on September 1, 2011, respectively. The increases were partially offset by decreases in contract revenue of $3.7 million and a reduction in throughput-driven revenues of $0.6 million both at Ozark.
Operating, Maintenance and Other Expense. The increase was driven mainly by the Big Sandy acquisition and planned higher software costs, partially offset by higher fuel recoveries at Ozark.
Depreciation and Amortization. The increase was driven primarily by the acquisition of the Big Sandy assets.
Equity in Earnings of Unconsolidated Affiliates. The following discussion explains the factors affecting the earnings of Gulfstream and Market Hub, each representing 100% of the earnings drivers of those entities.
Three Months Ended
March 31,
Increase
2012 2011 (Decrease)
(in millions)
Gulfstream
Operating revenues $ 67.7 $ 66.9 $ 0.8
Operating, maintenance and other expense 10.1 7.0 3.1
Depreciation and amortization 8.9 8.8 0.1
Other income and expenses, net - 0.4 (0.4 )
Interest expense 17.5 17.2 0.3
Net income $ 31.2 $ 34.3 $ (3.1 )
Spectra Energy Partners' share $ 15.3 $ 16.8 $ (1.5 )
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Gulfstream-Owned 49.0%
Gulfstream's Phase V expansion project went into service on April 1, 2011 and
increased operating revenues by $2.6 million. This increase in revenue from
Phase V was partially offset by higher short-term transportation revenues from
colder weather in 2011. Operating, maintenance and other expenses reflect $2.3
million of favorable tax adjustments in 2011 that did not reoccur in 2012.
Three Months Ended
March 31,
Increase
2012 2011 (Decrease)
(in millions)
Market Hub
Operating revenues $ 31.2 $ 30.1 $ 1.1
Operating, maintenance and other expense 4.2 5.4 (1.2 )
Depreciation and amortization 2.8 2.6 0.2
Interest income - 0.1 (0.1 )
Interest expense (0.1 ) - (0.1 )
Income tax expense 0.1 0.1 -
Net income $ 24.2 $ 22.1 $ 2.1
Spectra Energy Partners' share $ 12.1 $ 11.0 $ 1.1
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Market Hub-Owned 50%
Market Hub's revenues increased as result of the cavern expansion projects placed into commercial service during the second quarter of 2011. Operating, maintenance and other expenses reflect $1.5 million of favorable tax adjustments in 2012.
Other Income and Expenses net. The decrease is primarily due to a higher equity portion of allowance for funds used during construction (AFUDC) in 2011 related to the NET project.
Interest Expense. The increase is due to the issuance of $500.0 million of unsecured senior notes in June 2011.
Adjusted EBITDA and Cash Available for Distribution
Adjusted EBITDA
We define our Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as Net Income plus Interest Expense, Income Taxes and Depreciation and Amortization less our Equity in Earnings of Gulfstream and Market Hub, Interest Income, and Other Income and Expenses, Net, which primarily consists of non-cash AFUDC. Since Adjusted EBITDA excludes some, but not all, items that affect net income and is defined differently by companies in our industry, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is a non-GAAP measure and should not be considered an alternative to Net Income, Operating Income, cash from operations or any other measure of financial performance or liquidity in accordance with GAAP.
Adjusted EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements to assess:
• the financial performance of assets without regard to financing methods, capital structure or historical cost basis;
• the ability to generate cash sufficient to pay interest on indebtedness and to make distributions to partners; and
• 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.
Cash Available for Distribution
We define Cash Available for Distribution (CAD) as our Adjusted EBITDA plus Cash Available for Distribution from Gulfstream and Market Hub and net preliminary project costs, less interest expense, cash paid for income tax expense, maintenance capital expenditures, excluding the impact of reimbursable projects, and other non-cash items affecting net income. Cash Available for Distribution does not reflect changes in working capital balances. Cash Available for Distribution for Gulfstream and Market Hub is defined on a basis consistent with us. Cash Available for Distribution should not be viewed as indicative of the actual amount of cash we plan to distribute for a given period.
Cash Available for Distribution is a non-GAAP measure and 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.
Spectra Energy Partners
Reconciliation of Net Income to Non-GAAP "Adjusted EBITDA" and "Cash Available
for Distribution"
Three Months Ended
March 31,
2012 2011(a)
(in millions)
Net income $ 52.4 $ 48.9
Add:
Interest expense 7.7 4.2
Income tax expense 0.4 0.4
Depreciation and amortization 9.3 7.8
Less:
Equity in earnings of Gulfstream 15.3 16.8
Equity in earnings of Market Hub 12.1 11.0
Interest income - 0.1
Other income and expenses, net - 0.5
Adjusted EBITDA 42.4 32.9
Add:
Cash Available for Distribution from Gulfstream 19.6 20.5
Cash Available for Distribution from Market Hub 13.5 12.2
Preliminary project costs, net - -
Less:
Interest expense 7.7 4.2
Cash paid for income tax expense - -
Maintenance capital expenditures 1.7 2.6
Other (0.1 ) -
Cash Available for Distribution $ 66.2 $ 58.8
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(a) Cash Available for Distribution for the three months ended March 31, 2011 has been revised to reflect the refinement to our definition that was effective January 1, 2012.
Spectra Energy Partners
Reconciliation of Net Cash Provided by Operating Activities to Non-GAAP
"Adjusted EBITDA" and "Cash Available for Distribution"
Three Months Ended
March 31,
2012 2011(a)
(in millions)
Net cash provided by operating activities $ 57.5 $ 57.6
Interest income - (0.1 )
Interest expense 7.7 4.2
Income tax expense-current - 0.1
Distributions received from Gulfstream (15.3 ) (13.2 )
Distributions received from Market Hub (9.0 ) (11.5 )
Changes in operating working capital and other 1.5 (4.2 )
Adjusted EBITDA 42.4 32.9
Add:
Cash Available for Distribution from Gulfstream 19.6 20.5
Cash Available for Distribution from Market Hub 13.5 12.2
Preliminary project costs, net - -
Less:
Interest expense 7.7 4.2
Cash paid for income tax expense - -
Maintenance capital expenditures 1.7 2.6
Other (0.1 ) -
Cash Available for Distribution $ 66.2 $ 58.8
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(a) Cash Available for Distribution for the three months ended March 31, 2011 has been revised to reflect the refinement to our definition that was effective January 1, 2012.
Gulfstream
Reconciliation of Non-GAAP "Adjusted EBITDA" and "Cash Available for
Distribution"
Three Months Ended
March 31,
2012 2011(a)
(in millions)
Net income $ 31.2 $ 34.3
Add:
Interest expense 17.5 17.2
Depreciation and amortization 8.9 8.8
Less:
Other income and expenses, net - 0.4
Adjusted EBITDA-100% 57.6 59.9
Add:
Preliminary project costs, net 0.3 0.2
Less:
Interest expense 17.5 17.2
Maintenance capital expenditures 0.3 0.7
Other - 0.3
Cash Available for Distribution-100% $ 40.1 $ 41.9
Adjusted EBITDA-49% $ 28.2 $ 29.3
Cash Available for Distribution-49% 19.6 20.5
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(a) Cash Available for Distribution for the three months ended March 31, 2011 has been revised to reflect the refinement to our definition that was effective January 1, 2012.
Market Hub
Reconciliation of Non-GAAP "Adjusted EBITDA" and "Cash Available for
Distribution"
Three Months Ended
March 31,
2012 2011
(in millions)
Net income $ 24.2 $ 22.1
Add:
Interest expense (0.1 ) -
Income tax expense 0.1 0.1
Depreciation and amortization 2.8 2.6
Less:
Interest income - 0.1
Other income and expenses, net - -
Adjusted EBITDA-100% 27.0 24.7
Less:
Interest expense (0.1 ) -
Cash paid for income tax expense - -
Maintenance capital expenditures 0.1 0.4
Cash Available for Distribution-100% $ 27.0 $ 24.3
Adjusted EBITDA-50% $ 13.5 $ 12.4
Cash Available for Distribution-50% 13.5 12.2
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LIQUIDITY AND CAPITAL RESOURCES
We will rely upon cash flows from operations, including cash distributions received from Gulfstream and Market Hub, and various financing transactions, which may include issuances of short-term and long-term debt, to fund our liquidity and capital requirements for the next 12 months. As of March 31, 2012, we had negative net working capital of $205.4 million compared to a negative $204.3 million of working capital as of December 31, 2011, both of which included the East Tennessee notes payable of $150.0 million.
We have access to a credit facility, with available capacity of $660.0 million at March 31, 2012, which is used to manage working capital requirements. Given that we expect to continue to pursue expansion opportunities over the next several years, capital resources may continue to include commercial paper, short-term borrowings under our current credit facility and possibly securing additional sources of capital including debt and/or equity.
Operating Cash Flows
Net cash provided by operating activities totaled $57.5 million and was relatively consistent with the same period in 2011. An increase in payments for normal operating expenses was offset by accrued interest on the $500 million unsecured senior notes and higher earnings due to the Big Sandy acquisition.
Investing Cash Flows
Net cash flows used in investing activities was $9.4 million in the first three months of 2012 compared to $14.9 million of cash provided by in the same period in 2011. The change was driven mainly by:
• $28.1 million of net proceeds in 2011 from the liquidation of available-for-sale securities, and
• $9.5 million due to release of collateral investments in 2011, partially offset by
• $11.5 million decrease in capital expenditures due to the NET project at East Tennessee going into commercial service in September 2011, and
• $5.0 million of return of capital distributions received from Gulfstream in 2012.
Capital and Investment Expenditures
Three Months Ended
March 31,
2012 2011
(in millions)
Capital Expenditures
Gas Transportation and Storage $ 5.3 $ 16.8
Investment Expenditures
Gulfstream - 3.8
Market Hub 9.1 2.1
Total capital and investment expenditures $ 14.4 $ 22.7
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Capital and investment expenditures for the three months ended March 31, 2012 totaled $14.4 million and included $13.1 million for expansion projects and $1.3 million for maintenance and other projects. We estimate 2012 capital and investment expenditures of approximately $49 million, $30 million is expected to be used to complete expansion projects placed into service during 2011 and $19 million is to be used for maintenance and other projects.
We continue to evaluate customers' needs for incremental expansion opportunities at East Tennessee, Big Sandy, Gulfstream and Market Hub. In addition, we are assessing the needs of our Ozark customers for additional transportation services. We expect that significant natural gas infrastructure, including both natural gas transportation and storage with links to growing gas supplies and markets, will be needed over time to serve growth in gas-fired power generation, oil-to-gas conversions, industrial development and attachments to new gas supply.
Financing Cash Flows and Liquidity
Net cash used in financing activities was $45.8 million in the first three months of 2012 compared to $70.5 million during the same period in 2011. This change was driven mainly by:
• $13.0 million of net commercial paper issuances in 2012 compared to $23.6 million of net debt payment in 2011, including net revolver borrowings, partially offset by
• an $8.4 million increase in distributions to partners in 2012 compared to the same period in 2011, as a result of increased distribution rates, limited partner units outstanding and higher incentive distribution rights, and
• $7.0 million of payments on note payable to affiliates in 2012, compared to $3.5 million of net payments in the same period in 2011.
Available Credit Facility and Restrictive Debt Covenants. See Note 7 of Notes to Condensed Consolidated Financial Statements for a discussion of the available credit facility and related financial and other covenants.
Credit Ratings. As of March 31, 2012 our credit ratings are BBB/Stable from Standard & Poor's and Fitch Ratings and Baa3/Stable from Moody's Investors Service. Our credit ratings are dependent upon, among other factors, our ability to generate sufficient cash to fund capital and investment expenditures, our results of operations, market conditions, the leverage of Spectra Energy Corp (Spectra Energy) and other factors. Our credit ratings could impact our ability to raise capital in the future, impact the cost of capital and, as a result, have an impact on our liquidity.
Cash Distributions. As previously discussed, a cash distribution of $0.48 per limited partner unit was declared in April 2012, payable on May 15, 2012, representing a 1.1% increase over the previous distribution of $0.475 per limited partner unit and the eighteenth consecutive quarterly increase.
Other Financing Matters. We have an effective shelf registration statement on file with the Securities and Exchange Commission (SEC) to register the issuance of unspecified amounts of limited partner common units and various debt securities.
OTHER ISSUES
New Accounting Pronouncement. See Note 11 of Notes to Condensed Consolidated Financial Statements for discussion.
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