Spectra Energy Partners' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 5.13 | About: Spectra Energy (SEP)

Spectra Energy Partners, LP (NYSE:SEP)

Q4 2012 Earnings Call

February 05, 2013 11:00 am ET

Executives

Derick SmithDirector of Investor Relations

Julie Dill – President and Chief Executive Officer

Laura Buss Sayavedra – Vice President and Chief Financial Officer

Analysts

Becca Followill – U.S. Capital Advisors

Craig Shere – Tuohy Brothers Investment

John Tysseland – Citigroup

Elvira Scotto – RBC Capital Markets

Chris Signhinolfi – UBS

Rich Cheney – Deutsche Bank

Operator

Good morning. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2012 Spectra Energy Partners Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would like to turn the call over to Mr. Derick Smith. You may begin.

Derick Smith

Thank you, Susan. Good morning. I’m Derick Smith, Spectra Energy Partners’ Director of Investor Relations and I’m pleased that you could join us for review of our fourth quarter and year end 2012 earnings.

This morning, Laura Buss Sayavedra, our Chief Financial Officer will cover the 2012 financial results and follow with our 2013 financial outlook. Following Laura’s presentation, Julie Dill, our Chief Executive Officer conclude with a look ahead at 2013 and beyond before opening the floor to any questions you may have.

Before we begin, let me take a moment to remind you that some of the statements we make today about future company performance will include forward-looking statements within the meanings of securities laws. Actual results may materially differ from those discussed in these forward-looking statements. You should refer to the additional information contained in our Form 10-K and other SEC filings, concerning factors that could cause these results to be different and contemplated in today’s discussion.

In addition, today’s discussion includes certain non-GAAP financial measures as defined by SEC Regulation G. Our reconciliation of those measures to the most directly comparable GAAP measures is available on our Investor Relations website at spectraenergypartners.com.

With that, I’ll turn the call over to Laura.

Laura Buss Sayavedra

Thanks, Derick. Good morning, everyone and thank you for joining us today. This morning, I’m pleased to report that we delivered another solid quarter results. This rounded up a strong year which benefited from our well structured fee-based portfolio. With the addition of an interest in Maritimes & Northeast U.S. late last year, SEP’s weighted average contract life is now 13 years.

For the year, our cash available for distribution was $229 million, up 8% over 2011 and above our 2012 outlook of $222 million. Net income for the year was $194 million, an increase of $22 million over the previous year. These strong financial results in 2012 contributed to the announcement last week of our 21st consecutive quarterly distribution increase bringing us to $1.98 per limited partner unit on an annualized basis.

This next slide lays out the elements of our earnings results for 2012. We are not going to spend additional time here since the drivers for 2012 net income and cash available for distribution are very similar. I know you are most interested in cash available for distribution so that we move ahead to that discussion.

As this slide shows, our total cash available for distribution grew in 2012 to $229 million, an increased of $17 million compared to 2011. This is also $7 million higher than we forecast in our original 2012 outlook. Let me review the primary drivers for our 2012 results. Growth in adjusted EBITDA and cash available for distribution was driven primarily by the benefit of a full year of the Big Sandy acquisition and the start up of the East Tennessee Nat project.

We also have around $8 million of benefits in 2012 primarily as a result of favorable ad valorem tax adjustment across many of our businesses. These adjustments were not included in our outlook for 2012 and are not forecast to recur in 2013.

At the end of October 2012, we acquired half of Spectra Energy’s interest in Maritimes & Northeast U.S. pipeline. At that time, we expected the acquisition to be neutral to cash available for distribution for 2012 but in fact it added around $1 million inclusive of transaction and financing costs. We also benefited from savings on overall O&M expenses that were partially offset by higher maintenance CapEx.

2012 was the final year of the 10 year base line assessment set out in the 2002 Pipeline Safety Reauthorization Act. The work [associated] with this assessment came in around $2 million more than we had originally anticipated for the year. All of this led to $17 million improvement over the previous year in actual cash available for distribution and $7 million of our outlook. So we wrap up the year with great results and we are well positioned to deliver on our 2013 outlook, which I will discuss next.

For 2013, we are estimating cash available for distribution of $239 million. This forecast may be lower than some of you were anticipating, so let me walk through how we arrived at our outlook. First, let me remind you that as has been our practice, our outlook does not include any organic growth not approved by our Board nor does include any acquisitions or anticipated dropdowns from our general partner.

The growth we have included in 2013 comes primarily from a full year’s benefit from the Maritimes & Northeast U.S. pipeline. We also do not assume any upside on Gulfstream from things such as favorable weather and contract optimization. So our outlook for this business is based only on our firm contracts in our 49% ownership.

Maintenance CapEx is expected to be slightly lower compared to last year. Some of you may have expected a bigger decrease year-over-year since we completed our baseline assessment on East Tennessee in 2012. However, due to Department of Transportation requirement in 2013, we will upgrade segment of our East Tennessee system that now runs through a high population area.

As I mentioned earlier in 2012, we had $8 million of benefits related primarily to ad valorem tax adjustments. We don't expect these to recur, so they are not included in our 2013 plan. We also expect Market Hub Partners storage revenues to be lower year-over-year by $7 million in 2013. The forecast for MHP is based on our view of the market and contracts we’ve already secured for this year’s renewals.

As we’ve indicated previously, 40% of MHP’s capacity is up for renewal in the spring 2013 compared to 25% last year. In the near term, storage values continue to be low as a result of the well subscribed market and the lack of price volatility. We also expect higher interest expense in 2013, reflecting long-term financing for our Maritimes acquisition, partially offset by lower interest expense associated with our late 2012 East Tennessee debt refinancing. This all leads to our 2013 outlook of $239 million in cash available for distribution.

So now that we have gone through 2012 results and 2013 outlook, let's take a look at financing activity in 2012 and SEP’s financial position going into the year. First, Spectra Energy Partners investment grade ratings were affirmed in 2012. These include BBB ratings by both S&P and Fitch and Baa3 rating by Moody's. In November, we completed $5.5 million common unit public offering and late in 2012, we successfully refinanced East Tennessee’s $159 million debt with $200 million note with a 3.1% interest rate. So a good year all around, and we start 2013 in a solid position to finance our growth opportunities with more than $0.5 billion of liquidity.

And with that, let me turn the call over to Julie.

Julie Dill

Thank you, Laura, and good morning, everyone. Clearly we had a very good 2012 and we are looking forward to an even better 2013 and beyond. With the ongoing evolution of the energy landscape in the United States, we continue to see great opportunities to grow Spectra Energy Partners by executing on our strategy; growth through third-party acquisitions, organic expansions and dropdowns from our general partner. Demand for natural gas continues to be robust, primarily driven by power generation and increasingly by industrial restarts and expansions.

Let me start with the latter, as we announced our new Kingsport project just a few weeks ago. These projects will provide an additional 86 million cubic feet per day of firm transportation capacity to the Eastman Chemical Company’s Kingsport, Tennessee facility, which represents about $120 million in capital investment. With terms of 25 years, our agreements with Eastman will further enhance our profile of fee-based long-term contracts that provide steady reliable cash flows. While these projects are subject to various approvals, we expect them to be fully in service during the first quarter of 2015, with the majority of the CapEx spend in 2014.

In addition to the Kingsport projects, we also recently executed an agreement with the another industrial demand user, Wacker Chemical, for East Tennessee to provide up to 8 million cubic feet per day of natural gas service to Wacker’s polysilicon plant in Bradley County, Tennessee. This project should require less than $5 million of CapEx in 2013, with the full in-service late this summer. And while it is a relatively small project, it does help to illustrate the growth potential we see in this sector.

On the acquisition front, our general partner recently spoke quite frankly about their backlog of well over $2 billion of dropdowns that will be available over the next couple of years to Spectra Energy Partners. Spectra Energy's addition of attractive assets like the Southern Hills and Sand Hills natural gas liquids pipelines and the expected edition of the Express crude oil pipeline would provide us with assets that have attributes well-suited for our portfolio. Spectra Energy expects to dropdown a large part of these assets into Spectra Energy Partners in the 2013 and 2014 timeframe, with the first dropdown candidate likely being Express-Platte.

While we haven't had conversations with our general partner about the exact timing or other specific details of these dropdowns, we’re confident they will happen. We're very excited about this potential going forward as we are looking forward to delivering even greater value for our unit holders in the future.

Spectra Energy Partners has been a public company now since 2007. When you look at our growth over the last five years, you can see that we’ve consistently created value for our unit holders. We’ve had a compound annual growth rate of about 9% in distributions for our investors and as Laura mentioned, we've had 21 consecutive quarters of distribution increases.

Since our inception, Spectra Energy Partners has deployed almost $2 billion in growth capital through a combination of third-party acquisitions, dropdowns and organic growth projects. We have a solid foundation we’re building on, and we have a strong supportive general partner that will be continuing to provide important growth opportunities for the partnership. We are on a great path with clear visibility to our growth. I'm very optimistic for the future of Spectra Energy Partners and I look forward to another great year.

So with that, we'd like to thank you for your interest in Spectra Energy Partners and we look forward to answering any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Becca Followill.

Julie Dill

Hi. Good morning, Becca.

Operator

From U.S. Capital.

Julie Dill

Good morning, Becca.

Becca Followill – U.S. Capital Advisors

Morning. With minimal distributable cash flow growth expected for 2013, a higher share count and a fairly tight coverage ratio 2012, can you talk about what this means for distribution growth in 2013? And are you willing to drop below one time for a period of time in expectation of getting some of these dropdowns later in the year.

Julie Dill

Yeah. Thanks, Becca. No, we do expect that we’re going to be having conversations with our Board of Directors. We visit with them every quarter to talk about what our distribution plans should be. We’ve been very consistent with our distribution increases and we are not looking forward to making many changes with that, with the possibility of increasing distributions as we grow our portfolio. It is possible that we may dropdown slightly below one in anticipation of the drop-downs that we foresee coming, but again we are going to do that in coordination with our Board of Directors to ensure that they are comfortable with our cash position.

Becca Followill – U.S. Capital Advisors

That’s great. Thank you.

Julie Dill

You’re welcome.

Operator

The next question comes from the line of Craig Shere from Tuohy Brothers.

Julie Dill

Hi, Craig.

Craig Shere – Tuohy Brothers Investment

Hi. Let me take you back a little on Becca’s question, because a couple of the assets to be dropped down including Express-Platte and the DC Pipe and Trust probably have a couple of years plus of organic just uplift from the time that you might get them. So as I think about a very tight coverage ratio that you might already have and pricing given obvious accretion over a couple of year period, where do you stand in terms of the need to price these things immediately accretive?

Julie Dill

We are always looking to do accretive transactions Craig, and one of the things that we’ll have to look at is, what is the size of the drop that we would be looking at? When you look back at our history, we’ve kind of done that $0.5 billion kind of on average, kind of a drop, so an asset like an Express-Platte that Spectra is purchasing for just a little below $1.5 billion, not all of that would come all at the same time. So we’d have to be looking to see what the right amount was for the drop again to make sure that we have the ability to properly finance it through additional units as well as some debt financing, and spread that out over the period of time that it doesn't extend for our unit holders and that it is accretive transaction for us as well.

Craig Shere – Tuohy Brothers Investment

And do you have any specific targets in mind on the debt and equity mix for funding dropdowns?

Julie Dill

No, we really don't do that Craig. When we look at any transaction, we've got some modeling that we do, but we haven’t gone to that point yet of knowing what that debt-to-equity would look like.

Craig Shere – Tuohy Brothers Investment

Understood. If I'm not mistaken Maritimes & Northeast that kind of half interest at the SC level was dropped about 10.5 times EBITDA. And am I saying that about right?

Julie Dill

That's right, Craig.

Craig Shere – Tuohy Brothers Investment

Okay. So for a mature asset that is not – is that a sustainable multiple or do you think with more dropdowns as you get deeper into the 50% split that multiple would have to come in a little bit?

Julie Dill

Yeah, Craig, we're not going to comment right now on what those multiples look like. As I mentioned, we did not have conversations at all with our general partner and we want to make sure that anything that we’re doing certainly makes sense for the Spectra Energy shareholders as well as the Spectra Energy Partner unit holders. So we’ll make sure that we are doing the right thing all around. And the multiple that we’ll be using will be reflective of that.

Craig Shere – Tuohy Brothers Investment

Understood. You obviously have your play a little forward likely dropdowns from your [Seacor] to the next couple of years, but do you see any opportunities for third-party acquisitions?

Julie Dill

It is an interesting question. We continue to have our M&A group looking at other opportunities. But with the backlog that Spectra now has of these MLP-able assets that we have, that’s really going to be our primary focus here in the near term. However, if something comes up, it’s really opportunistic. We certainly wouldn’t say no to that, but again we’re really excited that we have this backlog that Spectra Energy has got in house now and feel very confident about our growth potential going forward.

Craig Shere – Tuohy Brothers Investment

Great. Thanks a lot.

Julie Dill

Sure. Thanks.

Operator

The next question comes from the line of John Tysseland from Citigroup.

John Tysseland – Citigroup

Good morning. Just to purchase from a little bit different way, I know you have been the focus last questions. But you obviously have increased visibility on your investment opportunities in dropdowns that will acquire, I guess little bit more financing needs in the future versus what you probably seen in the recent past? Do you envision with that need for increased financing that you might provide a little bit more visibility in the future about your distribution growth goals, because obviously with the dropdown strategy you have the ability or the general partner has the ability to kind of manage that process. I think a little bit more from a valuation of the dropdowns and the accretion to the MLP, is that something that is in discussions that we might be able to look forward to gaining more information on over the next couple of quarters.

Julie Dill

Yeah. John, our practice has been that we don’t forecast what our distribution growth is going to be. That could change as we go forward and we have this greater visibility to our growth as we work with our general partner on that. But at this moment right now, we are not prepared to put any forecast about distribution growth out there, and we’re just going to say with our practice of going on a quarter-by-quarter basis at this time.

John Tysseland – Citigroup

Okay, that’s fair. But it’s possible that given the kind of new outlook that it might be something that you could provide in the future potentially, is that fair?

Julie Dill

Yeah. I think that that is a possibility John. Absolutely I wouldn’t rule anything out in that respect.

John Tysseland – Citigroup

Okay. And then also when you look at dropdowns that might come down into the partnership, how do you think about potential expansion opportunities off of those dropdowns. Is that something that the partnership would be able to or be capable of financing and executing, or do you think that most of the organic growth opportunities on dropdowns would remain at the parent in dropdown in a future day.

Julie Dill

I don’t have an answer for that John. I don’t want to get too far ahead of our skis here. Gosh, it sounds almost Canadian again. Don’t want to get too far ahead because we haven’t actually got the assets in. So we need to get them in our portfolio first and then see what the opportunities might eventuate off of that.

Laura Buss Sayavedra

And this is Laura, John. If you look at what we’ve done overtime from the IPO and further drops, we’ve done organic growth off of the assets that we have overtime so you need, [each of them] what we’ve done historically.

John Tysseland – Citigroup

Yeah. Great. Thank you.

Operator

Your next question comes from the line of Elvira Scotto for RBC Capital Markets.

Julie Dill

Hi, Elvira.

Elvira Scotto – RBC Capital Markets

Hi. Good morning. I’m going to switch gears a little bit, on the growth projects that you’ve announced, can you talk a little bit, may be about to what types of returns you’d expect of these projects?

Julie Dill

Elvira, we don't talk specifically about returns, but you could expect that that will be in the range of what we typically would do here through Spectra Energy. So well we’re not going to give a specific return, you can kind of take a look at the range of what we've historically done.

Elvira Scotto – RBC Capital Markets

Okay, that's helpful. And then, can you talk a little bit about re-contracting, I guess that Market Hub Partners, but also at Ozark, I see you’ve brought down the outlook for Market Hub Partners. Can you talk a little bit about sort of as you’ve – what sort of rates you’re looking at, not necessarily the rates, but maybe the year-over-year changes that you’re seeing on both, the storage re-contracting and what you are baking in for Ozark as well?

Julie Dill

Yeah so, let me start with Market Hub right now, we do have 40% of the contracts coming duo here in the spring. We’ve started to go in and re-contract some of them, what we've done in the past, is that we kind of layering contracts over the course of the time when they are coming due. We don't talk specifically about rates, but we know that the pricing has come down substantially. Last year, we re-contracted for prices much less than what the original contracts were for, that’s kind of where we are in now as well. And this is – I don't want to say we’re at the bottom, necessarily, but this is by the last big tranche of contracts that need to be re-contacted over a period of time. So as we move forward, we’re going to see less and less volatility in that.

Unfortunately, we just haven't seen the change in the weather and the spreads that we would typically see in those summer winter spread to give us some additional uplift in those storage values. But again longer-term, we do have a lot of space and these assets will recover in terms of storage values. Again you start looking at the growth in power generation, the growth in industrial demand, announcements like the gas liquids plants, LNG terminals, all of those are going to have need for storage services and our MHP assets are really well suited for that. So we are in the process of re-contracting those storage contracts now, but again our anticipation is that on a year-over-year basis it will be $7 million less for us.

At Ozark, we are continuing to have re-contracting so about half of the capacity that we have is up for re-contracting this year, and about half of that is with southwestern, they are our biggest customer on there. Again, those are coming up due at the end of the first quarter at least the southwestern one is. We are having conversations with them, can’t say specifically exactly where we’ll end up, but southwestern is recommitted to the Fayetteville when they made their announcements last year in their outlook for 2013 in terms of the CapEx that they were going to be spending in the Fayetteville and the number of wells they are producing, they are still committed there. So we feel good about our position with them and again we are not seeing a lot of change year-to-year on Ozark from a revenue perspective. So we are feeling pretty good where we are right now even though it is less active in that area then we had hoped based on the low natural gas prices.

Elvira Scotto – RBC Capital Markets

Gotcha. Okay. And just to go back to Market Hub, so 40% of the contracts are for renewal this year. But you said that’s the last big tranche of renewals from next year, we should see smaller number of contracts up for renewal?

Laura Buss Sayavedra

Elvira, this is Laura. We always have our portion renewing each year, I think Julie's larger point was, we've done renewals at the sort of current market rate that persisted over the last few years of credit market environment and that those have a sense, I think she wish to say more as we move into 2014 we will start contracts that renew, but we’ve kind of rolled through most of the capacity in our portfolio over the last few years.

Julie Dill

Yeah, so we are really – our average contract life at Market Hub right now is down to two years, because we are taking shorter term contract, because of the low price environment we are in. So Laura interpreted my comments for you exactly right, that we will continue to have renewals on contract, but the pricing environment should be less volatile than we’ve seen in the last couple of years.

Elvira Scotto – RBC Capital Markets

Gotcha. Okay, great. That helps.

Julie Dill

Okay, thank you.

Operator

(Operator Instructions) The next question comes from the line of Chris Signhinolfi from UBS.

Chris Signhinolfi – UBS

Hi, Julie.

Julie Dill

Hi, Chris.

Chris Signhinolfi – UBS

How are you?

Julie Dill

Good. You?

Chris Signhinolfi – UBS

I'm great. Most of my questions have been happened, I wanted to quickly follow-up on the earlier coverage questions more from a maintenance CapEx thing, I appreciate the color on the required East Tennessee upgrades. Just curious if you have a rough estimate for what maintenance CapEx would be absent one-time issues assuming ecstatic portfolio. So we are trying to figure out what the annual needs of the business are under normalized conditions?

Julie Dill

Yeah, so this year – last year we ended up with about $21 million of maintenance capital, this year we will have about $19 million roughly and this additional requirement that we have this year equates to about $5 million. The one thing that I don’t know that we can speak to specifically is that with the new Pipeline Reauthorization Act that put into place last year and new FEMSA requirements might there be something else that comes out legislatively in the 2014, 2015 or forward period that will have to contemplate. So we’ll have to watch to see what that looks like. But again for this year, we are kind of, we are down just a little bit year-on-year and this one time item for this year and that relocation of the re-class is about $5 million.

Chris Signhinolfi – UBS

Okay great. That’s all I had. Thanks for the time.

Julie Dill

Okay. Sure, thanks.

Operator

The next question comes from the line of Rich Cheney from Deutsche Bank.

Rich Cheney – Deutsche Bank

Hi guys. My question has already been answered.

Derick Smith

Good morning Rich.

Julie Dill

Okay.

Rich Cheney – Deutsche Bank

Thank you.

Julie Dill

You are welcome.

Operator

There are no further questions at this time.

Julie Dill

Okay. Well thank you all very much for taking the time to join us this morning and as always we thank you for your interest in Spectra Energy Partners, if you got any follow-up questions Derick Smith is again available 24/7 to help you. So don’t hesitate to reach out and have a great day. Thanks a lot.

Operator

Thank you for your participation in today’s call. You may now disconnect. Have a great day.

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Spectra Energy Partners (SEP): Q4 EPS of $0.40 beats by $0.03. Revenue of $59M misses by $1.62M. (PR)