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SEP > SEC Filings for SEP > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for SPECTRA ENERGY PARTNERS, LP

Form 10-Q for SPECTRA ENERGY PARTNERS, LP


7-Nov-2013

Quarterly Report


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

EXECUTIVE OVERVIEW
As discussed in Note 1 of Notes to Condensed Consolidated Financial Statements, our results include the results of Express Canada and Express US since March 14, 2013, the date of Spectra Energy's acquisition of both entities, as the subsequent acquisition by us represented a transfer of entities under common control. As also discussed in Note 1, it was determined that Express US is a VIE, and as such, we present Express US on a 100%-consolidated basis, with the associated 60% interest that we did not own as of September 30, 2013 presented as noncontrolling interests.
For the three months ended September 30, 2013, we reported net income from controlling interests of $59.6 million compared to $46.1 million for the comparable period in 2012. For the three months ended September 30, 2013, cash available for distribution (CAD) was $66.3 million, an increase of $10.0 million from the prior year quarter. The increase in both net income from controlling interests and CAD was primarily the result of the acquisition of the 38.76% interest in the M&N US pipeline in October 2012 and the acquisition of a 40% ownership interest in Express US and a 100% ownership interest in Express Canada from subsidiaries of Spectra Energy (collectively, the Express-Platte acquisition).
On August 2, 2013, we acquired a 40% ownership interest in Express US and a 100% ownership interest in Express Canada from subsidiaries of Spectra Energy for $410.4 million in cash and 7.2 million of newly issued common and general partner units (valued at $318.8 million). See Note 2 of Notes to the Condensed Consolidated Financial Statements for further discussion.
On August 5, 2013, we entered into a definitive agreement with Spectra Energy to acquire ownership interests in the remaining Spectra Energy U.S. transmission, storage and liquids assets, including the remaining 60% interest in Express US (the Dropdown Transactions). On November 1, 2013, we completed the closing of substantially all of the Dropdown Transactions. See Note 2 of Notes to the Condensed Consolidated Financial Statements for further discussion. On September 25, 2013, Spectra Energy Partners, LP issued $1,900.0 million aggregate principal amount of senior unsecured notes, comprised of $500.0 million of 2.95% senior notes due in 2018, $1,000.0 million of 4.75% senior notes due in 2024 and $400.0 million of 5.95% senior notes due in 2043. Net proceeds from the offering were used to pay a portion of the cash consideration for the Dropdown Transactions from Spectra Energy which closed on November 1, 2013.
On November 1, 2013, Spectra Energy Partners, LP entered into and borrowed $400.0 million under a senior unsecured five-year term loan agreement. A portion of the proceeds from the borrowing were used to pay Spectra Energy for the Dropdown Transactions.
A cash distribution of $0.51625 per limited partner unit was declared on October 17, 2013 and is payable on November 14, 2013, representing a 1.5% increase over the previous distribution of $0.50875 per limited partner unit paid in August 2013. With the close of the Dropdown Transactions on November 1, 2013, it is our intention to increase our quarterly distribution paid by three cents per unit in the first quarter 2014, and by one cent per unit each quarter thereafter. Our Board of Directors evaluates each distribution decision within the confines of the Partnership agreement and based on an assessment of growth in CAD.


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RESULTS OF OPERATIONS

                                               Three Months Ended                      Nine Months Ended
                                                 September 30,                           September 30,
                                                               Increase                                 Increase
                                        2013        2012      (Decrease)       2013        2012        (Decrease)
                                                                      (in millions)
Operating revenues                    $ 133.1     $ 57.2     $      75.9     $ 336.8     $ 177.8     $      159.0
Operating expenses                       58.1       20.2            37.9       136.6        58.0             78.6
Depreciation and amortization            15.9        9.3             6.6        42.7        27.9             14.8
Operating income                         59.1       27.7            31.4       157.5        91.9             65.6
Equity in earnings of
unconsolidated affiliates                30.5       26.4             4.1        91.5        77.6             13.9
Other income and expenses, net            1.0          -             1.0         0.4         0.1              0.3
Interest income                           0.1          -             0.1         0.5           -              0.5
Interest expense                         13.4        7.7             5.7        35.2        23.1             12.1
Earnings before income taxes             77.3       46.4            30.9       214.7       146.5             68.2
Income tax expense                        1.7        0.3             1.4         2.7         1.1              1.6
Net income                               75.6       46.1            29.5       212.0       145.4             66.6
Net income-noncontrolling interests      16.0          -            16.0        34.4           -             34.4
Net income-controlling interests      $  59.6     $ 46.1     $      13.5     $ 177.6     $ 145.4     $       32.2
Adjusted EBITDA (a)                      46.1       37.0             9.1       124.3       119.8              4.5
Cash Available for Distribution (a)      66.3       56.3            10.0       194.8       175.6             19.2

(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 generally accepted accounting principles.

Three Months Ended September 30, 2013 compared to same period in 2012 Operating Revenues. Operating revenues increased $75.9 million primarily due to the Express-Platte acquisition on August 2, 2013. Express-Platte revenues for the quarter were $76.3 million.
Operating Expenses. The $37.9 million increase was mainly driven by Express-Platte operating expenses of $33.2 million and $5.8 million of transaction costs related to the U.S. assets acquisition from Spectra Energy, which closed on November 1, 2013.
Equity in Earnings of Unconsolidated Affiliates. The $4.1 million increase was driven by the acquisition of a 38.76% interest in M&N US on October 31, 2012 and higher equity earnings at Gulfstream resulting from a favorable ad valorem tax adjustment in the current quarter, partially offset by lower equity earnings from Market Hub due to expected lower rates on contract renewals.


  Table of Contents

                                                                Three Months Ended
                                                                  September 30,
                                                                                Increase
                                                          2013       2012      (Decrease)
                                                                  (in millions)
Gulfstream
Net income                                              $ 35.7     $ 34.3     $      1.4
Ownership interest                                          49 %       49 %            -
Equity in earnings of unconsolidated affiliates         $ 17.5     $ 16.8     $      0.7
Market Hub
Net income                                              $ 13.1     $ 19.1     $     (6.0 )
Ownership interest                                          50 %       50 %            -
Equity in earnings of unconsolidated affiliates         $  6.5     $  9.6     $     (3.1 )
M&N US
Net income                                              $ 16.6     $    -     $     16.6
Ownership interest                                       38.76 %        -          38.76 %
Equity in earnings of unconsolidated affiliates         $  6.5     $    -     $      6.5
Total Equity in Earnings of Unconsolidated Affiliates   $ 30.5     $ 26.4     $      4.1

Other Expenses. The increases in depreciation and amortization expense, interest expense, income tax expense (foreign income tax), and net income-noncontrolling interests were mostly driven by the Express-Platte acquisition. In addition, interest expense also increased due to the issuance of $1,900.0 million senior notes in September 2013.


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Nine Months Ended September 30, 2013 compared to same period in 2012 Operating Revenues. Operating revenues increased $159.0 million primarily due to the Express-Platte acquisition on August 2, 2013. Express-Platte revenues for the nine months ended September 30, 2013 were $162.2 million.The increase was partially offset by lower revenues at Ozark due to low natural gas prices and the decision by some producers to delay production in the Fayetteville Shale for the near-term.
Operating Expenses. The $78.6 million increase was mainly driven by Express-Platte operating expenses of $72.1 million, $5.8 million of transaction costs related to the U.S. assets acquisition from Spectra Energy, which closed on November 1, 2013, higher benefit costs and higher pipeline integrity costs, partially offset by accelerated software amortization costs in 2012. Equity in Earnings of Unconsolidated Affiliates. The $13.9 million increase was mainly driven by the acquisition of a 38.76% interest in M&N US on October 31, 2012 and higher equity earnings at Gulfstream resulting from a reversal of previously expensed project development costs, higher pipeline integrity costs in 2012, and a favorable ad valorem tax adjustment in the current quarter. These increases were partially offset by lower equity earnings from Market Hub due to expected lower rates on contract renewals.

                                                                   Nine Months Ended
                                                                     September 30,
                                                                                    Increase
                                                           2013         2012       (Decrease)
                                                                     (in millions)
Gulfstream
Net income                                              $  101.5     $   95.1     $       6.4
Ownership interest                                            49 %         49 %             -
Equity in earnings of unconsolidated affiliates         $   49.7     $   46.6     $       3.1
Market Hub
Net income                                              $   43.2     $   62.0     $     (18.8 )
Ownership interest                                            50 %         50 %             -
Equity in earnings of unconsolidated affiliates         $   21.6     $   31.0     $      (9.4 )
M&N US
Net income                                              $   52.0     $      -     $      52.0
Ownership interest                                         38.76 %          -           38.76 %
Equity in earnings of unconsolidated affiliates         $   20.2     $      -     $      20.2
Total Equity in Earnings of Unconsolidated Affiliates   $   91.5     $   77.6     $      13.9

Other Expenses. The increases in depreciation and amortization expense, interest expense, income tax expense (foreign income tax), and net income-noncontrolling interests were mostly driven by the Express-Platte acquisition. In addition, interest expense also increased due to the issuance of $1,900.0 million senior notes in September 2013.


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Segment Results
Management evaluates segment performance based on EBIT, which represents earnings from continuing operations (both operating and non-operating) before interest and taxes, net of noncontrolling interests related to those earnings. Cash, cash equivalents and investments are managed centrally, so the gains and losses on foreign currency remeasurement, and interest and dividend income on those balances, are excluded from the segments' EBIT. We consider segment EBIT to be a good indicator of each segment's operating performance from its continuing operations, as it represents the results of our ownership interest in operations without regard to financing methods or capital structures. Our segment EBIT may not be comparable to similarly titled measures of other companies because other companies may not calculate EBIT in the same manner. Gas Transportation and Storage

                                            Three Months Ended                          Nine Months Ended
                                               September 30,                              September 30,
                                                            Increase                                    Increase
                                    2013       2012        (Decrease)         2013        2012         (Decrease)
                                                                     (in millions)
Operating revenues                $ 56.8     $ 57.2     $       (0.4 )      $ 174.6     $ 177.8     $       (3.2 )
Operating expenses                    18.0       18.3           (0.3 )         52.6        52.1              0.5
Depreciation and amortization        9.3        9.3                -           28.2        27.9              0.3
Operating income                      29.5       29.6           (0.1 )         93.8        97.8             (4.0 )
Other income and expenses            0.3          -              0.3            0.6         0.1              0.5
EBIT                              $ 29.8     $ 29.6     $        0.2        $  94.4     $  97.9     $       (3.5 )

Three Months Ended September 30, 2013 Compared to Same Period in 2012 Results for the Gas Transportation and Storage segment for the 2013 quarter were relatively flat compared to the 2012 quarter.
Nine Months Ended September 30, 2013 Compared to Same Period in 2012 Operating Revenues. Operating revenues decreased $3.2 million primarily due to lower revenues at Ozark due to low natural gas prices and the decision by some producers to delay production in the Fayetteville Shale for the near-term. The decrease was partially offset by higher revenues at East Tennessee and Saltville primarily due to changes in rates.
Operating Expenses. The $0.5 million increase was mainly driven by higher benefit costs and higher pipeline integrity costs, partially offset by accelerated software amortization costs in 2012.


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Liquids

                                              Three Months Ended                            Nine Months Ended
                                                September 30,                                 September 30,
                                                                 Increase                                    Increase
                                      2013          2012        (Decrease)         2013        2013         (Decrease)
                                                                     (in millions)
Operating revenues               $    76.3        $     -     $        76.3     $  162.2     $     -     $        162.2
Operating expenses                    33.2              -              33.2         72.1           -               72.1
Depreciation and amortization          6.6              -               6.6         14.5           -               14.5
Operating income                      36.5              -              36.5         75.6           -               75.6
Other income and expenses              0.2              -               0.2          0.5           -                0.5
Noncontrolling interests              17.6              -              17.6         38.2           -               38.2
EBIT                             $    19.1        $     -     $        19.1     $   37.9     $     -     $         37.9

Express pipeline receipts,
MBbl/d (a)                             205              -               205          204           -                204
Platte PADD II deliveries,
MBbl/d                                 173              -               173          169           -                169
Canadian dollar exchange rate,
average                               1.04              -               n/a         1.02           -                n/a

(a) Thousand barrels per day.

Our Liquids segment is comprised of Express US and Express Canada. As previously discussed, Liquids results include the results of Express US and Express Canada since March 14, 2013, the date of Spectra Energy's acquisition of both entities.


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Adjusted EBITDA and Cash Available for Distribution Adjusted EBITDA
We define our Adjusted EBITDA as Net Income plus Interest Expense, Income Taxes and Depreciation and Amortization less our Equity in Earnings of Gulfstream, Market Hub and M&N US, Interest Income, and Other Income and Expenses, net, which primarily consists of non-cash Allowance for Funds Used During Construction (AFUDC). Adjusted EBITDA is also less the effects of noncontrolling interests. 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 as our Adjusted EBITDA plus Cash Available for Distribution from Gulfstream, Market Hub, and M&N US 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 is also less the effects of noncontrolling interests. 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 for M&N US includes an adjustment for amortizing bond payments. These bond payments are paid out in the second and fourth quarters of each year using operating cash flows. Spectra Energy Partners, Gulfstream and Market Hub do not make similar bond payments. 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.


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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,
                                                       2013          2012         2013         2012
                                                                      (in millions)
Net income                                         $    75.6       $  46.1     $   212.0     $ 145.4
Add:
Interest expense                                        13.4           7.7          35.2        23.1
Income tax expense                                       1.7           0.3           2.7         1.1
Depreciation and amortization                           15.9           9.3          42.7        27.9
Less:
Equity in earnings of unconsolidated affiliates         30.5          26.4          91.5        77.6
Interest income                                          0.1             -           0.5           -
Other income and expenses, net                           1.0             -           0.4         0.1
Noncontrolling interests (a)                            13.2             -          13.2           -
Adjusted EBITDA related to Express-Platte prior
to August 2, 2013 (b)                                   15.7             -          62.7           -
Adjusted EBITDA                                         46.1          37.0         124.3       119.8
Add:
Cash Available for Distribution from Gulfstream         19.5          19.3          58.8        57.8
Cash Available for Distribution from Market Hub          7.7          10.6          24.9        34.6
Cash Available for Distribution from M&N US              9.1             -          25.2           -
Less:
Interest expense                                        13.4           7.7          35.2        23.1
Maintenance capital expenditures                         7.2           3.0          16.2        13.9
Other                                                   (0.1 )        (0.1 )        (0.3 )      (0.4 )
Noncontrolling interests (a)                            (2.3 )           -          (2.3 )         -
CAD related to Express-Platte prior to August 2,
2013 (b)                                                (2.1 )           -         (10.4 )         -
Cash Available for Distribution                    $    66.3       $  56.3     $   194.8     $ 175.6

(a) Represents noncontrolling interests of Express US for the period subsequent to acquisition from Spectra Energy Corp (August 2, 2013 through September 30, 2013).

(b) See Adjustments to Cash Available for Distribution Related to Express-Platte schedule below for further detail.


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Express-Platte
The following reconciliation is provided to provide details of the adjustments
to the Reconciliation of Net Income to Cash Available for Distribution presented
earlier. Net Income as shown on the above reconciliation includes the results of
Express-Platte since March 14, 2013, the date of Spectra Energy's acquisition
from third parties. The adjustments represent the exclusion of Cash Available
for Distribution of Express-Platte prior to our acquisition on August 2, 2013.

Adjustments to Cash Available for Distribution Related to Express-Platte
                                                              July 1, 2013 to        March 14, 2013 to
                                                               August 1, 2013          August 1, 2013
                                                                            (in millions)
Net income                                                  $         12.9         $          44.2
Add:
Interest expense                                                       1.7                     8.5
Income tax expense                                                       -                     0.2
Depreciation and amortization                                          2.2                    10.1
Less:
Other income and expenses, net                                         1.1                     0.3
Adjusted EBITDA-100%                                                  15.7                    62.7
Interest expense                                                      (1.7 )                  (8.5 )
Maintenance capital expenditures                                      (0.4 )                  (1.9 )
    Other                                                                -                       -
Total adjustments below EBITDA                                        (2.1 )                 (10.4 )
Total Adjustments to Cash Available for Distribution        $         13.6         $          52.3

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,
                                             2013           2012        2013         2012
                                                           (in millions)
Net income                             $    35.7          $ 34.3     $   101.5     $  95.1
Add:
Interest expense                            17.5            17.4          52.6        52.6
Depreciation and amortization                8.8             8.9          26.7        26.7
Adjusted EBITDA-100%                        62.0            60.6         180.8       174.4
Add:
Preliminary project costs, net                 -             0.1          (2.5 )       0.5
Less:
Interest expense                            17.5            17.4          52.6        52.6
Maintenance capital expenditures             4.8             4.0           5.7         4.5
    Other                                                   (0.1 )                    (0.1 )
Cash Available for Distribution-100%   $    39.7          $ 39.4     $   120.0     $ 117.9
Adjusted EBITDA-49%                    $    30.4          $ 29.7     $    88.6     $  85.5
Cash Available for Distribution-49%         19.5            19.3          58.8        57.8


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