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SEP > SEC Filings for SEP > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for SPECTRA ENERGY PARTNERS, LP

Form 10-Q for SPECTRA ENERGY PARTNERS, LP


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 September 30, 2012, we reported net income of $46.1 million compared to $43.5 million for the comparable period in 2011. For the nine months ended September 30, 2012 and 2011, we reported net income of $145.4 million and $130.0 million, respectively. Cash available for distribution was $175.6 million for the nine months ended September 30, 2012, an increase of $18.0 million from the prior year. 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.

On October 31, 2012, we acquired a 38.76% ownership interest in Maritimes & Northeast Pipeline, L.L.C (M&N US) from Spectra Energy for approximately $319 million in cash and approximately $56 million in newly issued partnership units. M&N US has debt outstanding of $439 million, 38.76% of which is $170 million. M&N US owns a FERC-regulated, 338-mile mainline interstate natural gas transportation system in the United States which extends from the Canadian border near Baileyville, Maine to northeastern Massachusetts and has market delivery capability of approximately 0.8 Bcf per day of natural gas. M&N US's cash flows are backed by an average contract life of approximately 19 years and over 90% fee-based revenues. M&N US's pipeline location and key interconnects with Spectra Energy's transmission system link regional natural gas supplies to the northeast U.S. and Atlantic Canadian markets.

We estimate 2012 capital and investment expansion expenditures of approximately $30.0 million, of which $21.7 million was spent as of September 30, 2012. 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 $0.49 per limited partner unit was declared on October 24, 2012 and is payable on November 14, 2012, to unitholders of record at the close of business on November 6, 2012. This distribution represents a 1.0% increase over the previous distribution of $0.485 per limited partner unit paid in August 2012. Our 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.


Table of Contents

RESULTS OF OPERATIONS



                                           Three Months Ended                       Nine Months Ended
                                              September 30,                           September 30,
                                                           Increase                                 Increase
                                     2012       2011      (Decrease)        2012        2011       (Decrease)
                                                                  (in millions)
Operating revenues                  $ 57.2     $ 52.9     $       4.3      $ 177.8     $ 147.1     $      30.7
Operating, maintenance and other
expense                               20.2       20.0             0.2         58.0        58.6            (0.6 )
Depreciation and amortization          9.3        9.7            (0.4 )       27.9        24.9             3.0

Operating income                      27.7       23.2             4.5         91.9        63.6            28.3
Equity in earnings of
unconsolidated affiliates             26.4       27.3            (0.9 )       77.6        81.9            (4.3 )
Other income and expenses, net           -        0.9            (0.9 )        0.1         2.2            (2.1 )
Interest income                          -          -               -            -         0.3            (0.3 )
Interest expense                       7.7        7.7               -         23.1        17.2             5.9

Earnings before income taxes          46.4       43.7             2.7        146.5       130.8            15.7
Income tax expense                     0.3        0.2             0.1          1.1         0.8             0.3

Net income                          $ 46.1     $ 43.5     $       2.6      $ 145.4     $ 130.0     $      15.4

Net cash provided by operating
activities                          $ 73.3     $ 51.4     $      21.9      $ 185.1     $ 170.5     $      14.6
Adjusted EBITDA (a)                   37.0       32.9             4.1        119.8        88.5            31.3
Cash Available for Distribution
(a)                                   56.3       53.7             2.6        175.6       157.6            18.0

(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, 2012 compared to same period in 2011

Operating Revenues. Operating revenues increased $3.8 million due to the NET project placed into commercial service in September 2011, and $1.8 million due to a rate increase on existing contracts at Big Sandy. These increases were partially offset by lower revenues at Ozark. Low natural gas prices and the decision by some producers to delay production in the Fayetteville Shale for the near-term have negatively affected Ozark revenues.

Equity in Earnings of Unconsolidated Affiliates. The decrease includes a $1.5 million decrease in earnings from Market Hub, due to expected lower rates on contract renewals, partially offset by a $0.6 million increase in earnings from Gulfstream. Results of operations at the 100% level are shown below.

                                                         Three Months Ended
                                                           September 30,
                                                                         Increase
                                                  2012       2011       (Decrease)
                                                           (in millions)
      Gulfstream
      Operating revenues                         $ 70.1     $ 69.7      $       0.4
      Operating, maintenance and other expense      9.5        9.8             (0.3 )
      Depreciation and amortization                 8.9        8.9                -
      Other income and expenses, net                  -       (0.3 )            0.3
      Interest expense                             17.4       17.7             (0.3 )

      Net income                                 $ 34.3     $ 33.0      $       1.3

      Spectra Energy Partners' share-49%         $ 16.8     $ 16.2      $       0.6


Table of Contents
                                                        Three Months Ended
                                                           September 30,
                                                                        Increase
                                                  2012       2011      (Decrease)
                                                           (in millions)
      Market Hub
      Operating revenues                         $ 27.2     $ 31.0     $      (3.8 )
      Operating, maintenance and other expense      5.1        5.9            (0.8 )
      Depreciation and amortization                 2.8        2.7             0.1
      Income tax expense                            0.2        0.1             0.1

      Net income                                 $ 19.1     $ 22.3     $      (3.2 )

      Spectra Energy Partners' share-50%         $  9.6     $ 11.1     $      (1.5 )

Other Income and Expenses, Net. The decrease is primarily due to a higher equity portion of allowance for funds used during construction (AFUDC) on the NET project in 2011.

Nine Months Ended September 30, 2012 compared to same period in 2011

Operating Revenues. Operating revenues increased $20.3 million due to the acquisition of Big Sandy in July 2011 and $15.3 million due to the NET project placed into commercial service in September 2011. These increases were partially offset by lower revenues at Ozark. Low natural gas prices and the decision by some producers to delay production in the Fayetteville Shale for the near-term, have negatively affected Ozark revenues.

Operating, Maintenance and Other Expense. The increased costs related to the acquisition of Big Sandy, accelerated software amortization and lower net fuel recovery at East Tennessee were more than offset by transaction costs associated with the acquisition of Big Sandy and expenses related to securing an initial credit rating in 2011.

Depreciation and Amortization. The increase was driven mainly by the acquisition of the Big Sandy assets and the NET project.

Equity in Earnings of Unconsolidated Affiliates. The $4.3 million decrease includes a $1.8 million decrease in earnings from Gulfstream and a $2.5 million decrease in earnings 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
                                                 2012        2011       (Decrease)
                                                           (in millions)
     Gulfstream
     Operating revenues                         $ 206.6     $ 205.0     $       1.6
     Operating, maintenance and other expense      32.2        27.3             4.9
     Depreciation and amortization                 26.7        26.5             0.2
     Interest expense                              52.6        52.4             0.2

     Net income                                 $  95.1     $  98.8     $      (3.7 )

     Spectra Energy Partners' share-49%         $  46.6     $  48.4     $      (1.8 )


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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 was partially offset by higher short-term transportation revenues from colder weather in 2011. The increase in operating, maintenance and other expense reflects a favorable ad valorem tax adjustment in 2011 and higher pipeline integrity costs in 2012.

                                                         Nine Months Ended
                                                           September 30,
                                                                         Increase
                                                  2012        2011      (Decrease)
                                                           (in millions)
      Market Hub
      Operating revenues                         $ 86.3      $ 92.1     $      (5.8 )
      Operating, maintenance and other expense     15.8        16.9            (1.1 )
      Depreciation and amortization                 8.5         8.0             0.5
      Interest income                               0.1         0.1               -
      Interest expense                             (0.1 )         -            (0.1 )
      Income tax expense                            0.2         0.2               -

      Net income                                 $ 62.0      $ 67.1     $      (5.1 )

      Spectra Energy Partners' share-50%         $ 31.0      $ 33.5     $      (2.5 )

Market Hub's revenues decreased $5.8 million primarily due to expected lower rates on contract renewals, partially offset by revenues from storage cavern expansion projects placed into commercial service during the second quarter of 2011. Operating, maintenance and other expense reflects $1.9 million of favorable tax adjustments in 2012, partially offset by higher maintenance costs.

Other Income and Expenses, Net. The decrease is primarily due to a higher equity portion of AFUDC on the NET project in 2011.

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.


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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.


Table of Contents

Spectra Energy Partners

Reconciliation of Net Income to Non-GAAP "Adjusted EBITDA" and "Cash Available
for Distribution"



                                                Three Months  Ended               Nine Months  Ended
                                                   September 30,                    September 30,
                                              2012            2011(a)          2012             2011(a)
                                                                    (in millions)
Net income                                  $    46.1        $     43.5      $   145.4        $     130.0
Add:
Interest expense                                  7.7               7.7           23.1               17.2
Income tax expense                                0.3               0.2            1.1                0.8
Depreciation and amortization                     9.3               9.7           27.9               24.9
Less:
Equity in earnings of Gulfstream                 16.8              16.2           46.6               48.4
Equity in earnings of Market Hub                  9.6              11.1           31.0               33.5
Interest income                                     -                 -              -                0.3
Other income and expenses, net                      -               0.9            0.1                2.2

Adjusted EBITDA                                  37.0              32.9          119.8               88.5
Add:
Cash Available for Distribution from
Gulfstream                                       19.3              20.7           57.8               61.0
Cash Available for Distribution from
Market Hub                                       10.6              11.8           34.6               36.5
Preliminary project costs, net                      -                 -              -                  -
Less:
Interest expense                                  7.7               7.7           23.1               17.2
Cash paid for income tax expense                    -                 -              -                  -
Maintenance capital expenditures                  3.0               4.0           13.9               11.3
Other                                            (0.1 )               -           (0.4 )             (0.1 )

Cash Available for Distribution             $    56.3        $     53.7      $   175.6        $     157.6

(a) Cash Available for Distribution for the three and nine months ended September 30, 2011 has been revised to reflect the refinement to our definition that was effective January 1, 2012.


Table of Contents

Spectra Energy Partners

Reconciliation of Net Cash Provided by Operating Activities to Non-GAAP
"Adjusted EBITDA" and "Cash Available for Distribution"



                                                Three Months  Ended                 Nine Months  Ended
                                                   September 30,                      September 30,
                                              2012             2011(a)           2012             2011(a)
                                                                    (in millions)
Net cash provided by operating
activities                                 $     73.3        $      51.4       $   185.1        $     170.5
Interest income                                     -                  -               -               (0.3 )
Interest expense                                  7.7                7.7            23.1               17.2
Income tax expense-current                          -                  -               -                0.1
Distributions received from Gulfstream          (16.1 )            (12.0 )         (45.9 )            (50.6 )
Distributions received from Market Hub          (11.5 )            (11.5 )         (34.8 )            (39.5 )
Changes in operating working capital
and other                                       (16.4 )             (2.7 )          (7.7 )             (8.9 )

Adjusted EBITDA                                  37.0               32.9           119.8               88.5
Add:
Cash Available for Distribution from
Gulfstream                                       19.3               20.7            57.8               61.0
Cash Available for Distribution from
Market Hub                                       10.6               11.8            34.6               36.5
Preliminary project costs, net                      -                  -               -                  -
Less:
Interest expense                                  7.7                7.7            23.1               17.2
Cash paid for income tax expense                    -                  -               -                  -
Maintenance capital expenditures                  3.0                4.0            13.9               11.3
Other                                            (0.1 )                -            (0.4 )             (0.1 )

Cash Available for Distribution            $     56.3        $      53.7       $   175.6        $     157.6

(a) Cash Available for Distribution for the three and nine months ended September 30, 2011 has been revised to reflect the refinement to our definition that was effective January 1, 2012.


Table of Contents

Gulfstream

Reconciliation of Net Income to Non-GAAP "Adjusted EBITDA" and "Cash Available
for Distribution"



                                                Three Months  Ended                Nine Months  Ended
                                                   September 30,                     September 30,
                                              2012            2011(a)           2012             2011(a)
                                                                    (in millions)
Net income                                  $    34.3        $     33.0       $    95.1        $      98.8
Add:
Interest expense                                 17.4              17.7            52.6               52.4
Depreciation and amortization                     8.9               8.9            26.7               26.5
Less:
Other income and expenses, net                      -              (0.3 )             -                  -

Adjusted EBITDA-100%                             60.6              59.9           174.4              177.7
Add:
Preliminary project costs, net                    0.1               0.3             0.5                0.7
Less:
Interest expense                                 17.4              17.7            52.6               52.4
Maintenance capital expenditures                  4.0               0.2             4.5                1.1
Other                                            (0.1 )               -            (0.1 )              0.3

Cash Available for Distribution-100%        $    39.4        $     42.3       $   117.9        $     124.6

Adjusted EBITDA-49%                         $    29.7        $     29.3       $    85.5        $      87.0
Cash Available for Distribution-49%              19.3              20.7            57.8               61.0

(a) Cash Available for Distribution for the three and nine months ended September 30, 2011 has been revised to reflect the refinement to our definition that was effective January 1, 2012.

Market Hub

Reconciliation of Net Income to Non-GAAP "Adjusted EBITDA" and "Cash Available
for Distribution"



                                         Three Months  Ended           Nine Months  Ended
                                            September 30,                September 30,
                                          2012           2011         2012            2011
                                                           (in millions)
Net income                             $     19.1       $  22.3     $    62.0        $  67.1
Add:
Interest expense                                -             -          (0.1 )            -
Income tax expense                            0.2           0.1           0.2            0.2
Depreciation and amortization                 2.8           2.7           8.5            8.0
Less:
Interest income                                 -             -           0.1            0.1
Other income and expenses, net                  -             -             -              -

Adjusted EBITDA-100%                         22.1          25.1          70.5           75.2
Less:
Interest expense                                -             -          (0.1 )         (0.1 )
Cash paid for income tax expense                -             -             -              -
Maintenance capital expenditures              0.9           1.6           1.4            2.4

Cash Available for Distribution-100%   $     21.2       $  23.5     $    69.2        $  72.9

Adjusted EBITDA-50%                    $     11.1       $  12.5     $    35.3        $  37.6
Cash Available for Distribution-50%          10.6          11.8          34.6           36.5


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Goodwill Impairment Test

We perform the annual review for goodwill impairment at the reporting unit level, which we have determined to be our one reportable operating segment, Gas Transportation and Storage.

We primarily used a discounted cash flow analysis to determine fair value of our reporting unit. The long-term growth rate used for our reporting unit that we quantitatively assessed reflects continued expansion of our assets, driven by new natural gas supplies such as shale gas in North America and increasing demand for natural gas transportation capacity on our pipeline systems primarily as a result of forecasted growth in natural gas-fired power plants. We assumed a long-term growth rate of 3.0% for our 2012 quantitative goodwill impairment analysis. Had we assumed a 100 basis point lower growth rate for our reporting unit, there would have been no impairment of goodwill. We continue to monitor the effects of the global economic downturn with respect to the long-term cost of capital utilized to calculate our reporting unit fair value. In evaluating our reporting unit for our 2012 quantitative goodwill impairment analysis, we assumed a weighted-average cost of capital that market participants would use in evaluating our business of 6.7%. Had we assumed a 100 basis point increase in the weighted-average cost of capital for our reporting unit, there would have been no impairment of goodwill.

Based on the results of our annual goodwill impairment testing, the fair value of our reporting unit at April 1, 2012 (our testing date) was substantially in excess of its carrying value. No triggering events or changes in circumstances occurred during the period April 1, 2012 through September 30, 2012 that would warrant re-testing for goodwill impairment.

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 September 30, 2012, we had negative net working capital of $214.4 million compared to a . . .

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