Sanjay Lad - Director, IR
Mark Maki - SVP
Steve Neyland - VP, Finance
Enbridge Energy Partners, L.P. (EEP) Q3 2013 Earnings Conference Call October 30, 2013 5:00 PM ET
Good day, ladies and gentlemen, and welcome to the Q3 2013 Enbridge Energy Partners LP Earnings Conference Call. My name is Kim, and I will be your operator for today. At this time all participants are in a listen only mode. (Operator Instructions). I would now like to turn the conference over to your host for today Mr. Sanjay Lad, Director of Investor Relations. Please proceed.
Thank you, Kim. Good morning, and welcome to the 2013 third quarter earnings conference call for Enbridge Energy Partners. This call is being webcast and a copy of the presentation slides, supplemental slides, condensed unaudited financial statements, and news release associated with it can be downloaded from our website at www.enbridgepartners.com. A replay will be available later today and a transcript will be posted to our website shortly thereafter. As a reminder, the partnership’s results are also relevant to Enbridge Energy Management or EEQ. I will be available after the call for any follow-up questions you may have.
Our speakers today are Mark Maki, President; and Steve Neyland, Vice President, Finance. Available for the Q&A session, we also have Steve Wuori, President, Liquids Pipelines, Enbridge, Inc.; Terry McGill, Senior Vice President, Operations and Engineering; Darren Yaworsky, Treasurer; and Nor Casey, Controller.
Moving onto our legal notice. This presentation will also include forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings release and the partnership's SEC filings and we incorporate those by reference for this call. This presentation also contains certain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found in the Investor section of our website.
Please turn to Slide 3. I will now turn the conference over to Mr. Mark Maki, President.
Thank you, Sanjay. Good afternoon, and welcome to our third quarter 2013 earnings conference call. As relates to our agenda for this afternoon, I will provide an overview of the progress and the partnership’s growth program, in addition to an update in our major construction projects and then pass it along to Steve Neyland to present our financial results.
Before I dive further into the presentation report, as noted in the press release the partnership’s distribution continues to be consistent with prior quarters. A number of headwinds experienced during the first three quarters of the year, have detracted from our financial performance, of note for deliveries in our liquids pipeline systems due to unplanned refinery maintenance and delays and demand growth in Lakehead System through the first half of the year. Weaker than forecast NGL prices and ethane rejections at some of our plants in the gas business also impacted our performance.
As we head into balance of the year and more importantly to 2014, we expect our performance and fundamentals to improve. In addition, the partnership realized distributable cash flow growth from recently completed drilled projects. We expect distribution coverage to improve in 2014. We will update our outlook in our year end call.
Please turn to Slide 4. We have made solid strides in our growth program year-to-date both from a project to execution perspective and through our recent financing actions, which Steve will address in more depth in his section. On the major projects initiatives, we are making tangible progress in executing on the partnership’s multibillion dollar organic growth program. Our major projects team continues to deliver these projects largely on time and on budget.
First, let me turn to project execution and recap developments from the first half of the year. We substantially expanded our infrastructure footprint in the North Dakota, Bakken Region. First our Bakken Pipeline Expansion or BPEP and the Berthold Rail Facility were both placed in service and began delivering earnings and cash flows earlier in the year. These two projects provide incremental takeaway capacity from the North Dakota region of 145,000 and 80,000 barrels per day respectively.
Our Bakken Access Project, which enhanced receipt capabilities of our North Dakota System and our service across the second and third quarters, increasing our gathering capabilities on the North Dakota system by 100,000 barrels per day through the addition of gathering and truck unloading facilities. On our Line 6B 75-mile replacement project, we have placed in service approximately 65 miles of pipeline segments year-to-date and expect to complete the remaining two 5 mile segments by the first quarter of 2014.
Moving onto our Eastern Access program, we completed the expansion of our Line 5 during the second quarter, providing an incremental 50,000 barrels per day of capacity from Superior, Wisconsin into Sarnia, Ontario. During the month of October, we substantially completed our Line 62 Spearhead North Pipeline Expansion, which increases that line’s capacity from Flanagan, Illinois to our terminal in Griffith, Indiana, which is near Chicago by 105,000 barrels per day.
These expansions are essential to the bottlenecking of North American markets and additional phases of expansion we have entering service over the period 2014 to 2016 will provide even more capacity where it is needed.
Switching to the growth projects in international gas business, our 150 million cubic foot a day Ajax natural gas processing plant situated in the liquids-rich Granite Wash region contributed approximately or commenced service during the third quarter and will ramp up once the associated NGL takeaway infrastructure is up and running. The Texas Express NGL pipeline and gathering project is due to begin service very soon and will facilitate the ramp up of our Ajax plant. Texas Express will provide 280,000 barrels per day of NGL takeaway from the liquid rich basins in the midcontinent, Texas and the Rockies through interconnected pipelines to the premier NGL market at Mont Belvieu, Texas.
Collectively in 2013 the partnership has placed in service over 1.8 billion of organic growth capital. These projects will provide a meaningful contribution to enhance cash flows for EEP in 2014 and beyond. We are also diligently progressing efforts to bring the remaining components over Eastern Access Phase 1 and U.S. Mainline Expansion Phase 1 into service throughout 2014.
As you're all aware, during the second quarter we filed a registration statement relating to the proposed initial public offering of our Midcoast Energy Partners LP. Midcoast is in registration and in a quiet period for disclosure purposes and as a result we'll not be answering any questions regarding the IPO in the Q&A period. Reference should be made to the registration statement on file with the SEC; the rationale for this move from EEP's perspective is very well spelled out in the registration statement.
Please now move ahead to slide 5. Over the last couple of year’s crude oil supply growth has outpaced the development of pipeline infrastructure. These constraints in transportation infrastructure, coupled with continued supply growth has resulted in lower netbacks for producers. The market access programs collectively underway by Enbridge and the partnership are part of the strategic initiative to match growing North American crude oil supply to the respective domestic demand centers.
This slide summarizes all those projects and illustrates on a year by year build up the expanded market access that our systems will provide to help alleviate the current market environment from price dislocations between crude oil in the inland locations and the water borne equivalent.
As you can see from the map the partnership's Lakehead system is ideally positioned to facilitate Enbridge's market access program to increase lake crude oil capacity to the east, increase heavy capacity to the Midwest and serve markets as far south as the U.S Gulf coast.
It is this diversity of premium markets, in other words market optionality offered by the partnership's Lakehead system that differentiates our pipelines from other companies. The line 6B 220 mile replacement project will begin phasing into service in early 2014, expanding the line's capacity from 240,000 barrels a day to 500,000 barrels a between Griffith, Indiana and Sarnia, Ontario. Once complete, this pipeline will have been completely replaced, more than doubling the line's capacity. The expanded capacity will enhance U.S. energy security by supplying U.S. refineries with both U.S. and Canadian source crude oil in addition to enhancing Canadian refinery access to Bakken and light crude oil barrels from Western Canada instead of foreign sourced imported crude oil.
The first phase of our Mainline Expansions increases the capacity of both line 67 and line 61 by adding pump stations to existing facilities. Both expansions are progressing on schedule and will enter service in conjunction with Enbridge's expanded corridor to the U.S. western Gulf Coast, via the Flanagan South and Seaway twin expansions in 2014.
Moving on to our next phase of expansion efforts in the North Dakota Bakken region, we have modified the commercial construct for Project Sandpiper to include shipper pay arrangements to underpin the pipeline. We will also have a small amount available spot capacity as part of the commercial construct. We are in advanced stages of negotiations with Anchor Shippers, which will provide us with enough long term capacity commitments to ensure a successful project. We expect to launch an open season in the very near term for the open capacity that remains on contract.
The pipeline is expected to begin service in early 2016, subject to obtaining regulatory approvals. As you can see, by early 2016 Enbridge and the partnership's crude oil market access initiatives will provide a safe, reliable and efficient pipeline corridor, opening new markets for up to 1.7 million barrels per day of crude oil.
Please turn to Slide 6. The chart presented on this slide provides an overview of the partnership's organic growth program and the respective project and service dates. Our growth projects will enable the partnership with visible long life stable cash flows, predominantly secured by commercial structure such as cost to service and take or pay structures that control key risk elements of volume and commodity price variability. As these low risk projects are placed into service throughout early 2016, the partnership's distributable cash flow will grow.
The key point to emphasize here is that this visible distributable cash flow growth provides us with a high degree of confidence in improving distribution coverage, strengthening credit metrics, and the ability to overcome bumps along the road over the next couple of years and grow our distribution.
I'll now turn the call over to Steve to present our financial highlights.
Thank you, Mark. Third quarter adjusted net income of $61 million was $56 million lower than the same period of 2012, primarily due to a few factors that impacted our results. First we were negatively impacted in our results by a timing difference between the integrity cost incurred during the third quarter related to the scheduled hydrostatic test on our line 14 in our liquid segment and the related recovery of these costs in our tariff revenues. I will touch more on this item in a few minutes.
Next our results were also impacted by lower NGL prices in our natural gas business. lastly the inclusion of a full quarter of the differed distribution from the 1.2 billion of preferred unit issued in the second quarter this year decreases net income available to the general and limited partners. The accrued deferred distribution attributable to the preferred unit holders for the quarter was $22.7 million. The main items eliminated from these adjusted results include unrealized, non-cash mark-to-market net gains and losses and other items noted in our supplemental slides.
Adjusted earnings per unit for the third quarter was $0.09, compared to $0.29 for the same period of 2012. Lower adjusted earnings attributable to limited partner interest, coupled with the increased weighted average number of units outstanding in 2013, compared to the third quarter in 2012 resulted in lower earnings per unit when compared to the prior year.
We have presented our as-declared coverage ratio both on a cash basis and assuming inclusion of the paid-in-kind distribution, which were 0.83 and 0.75 times respectively, on a year-to-date basis. With the headwinds experienced by our business so far this year, we expect full year adjusted EBITDA to be between $1.18 billion and $1.2 billion. We expect improved fourth quarter earnings to be more representative of future periods, but it will not enough to achieve the bottom end of our EBITDA guidance we communicated earlier this year.
Please turn to Slide 8. Our third quarter Liquids segment results were impacted by a timing difference between integrity cost incurred from the scheduled hydrostatic test on our Line 14 and the related recovery of these costs in our tariff revenues.
During the third quarter we incurred approximately $46 million of cost associated with a scheduled hydro test on our Line 14 and recovered approximately $12 million of these cost through our tariffs, resulting in approximate $34 million unfavorable impact to operating income in the third quarter. Similar to in line inspection cost Enbridge expenses are the cost of hydrostatic testing, unless it is in connection with the initial commissioning of a pipeline or to raise capacity on the system. The Line 14 hydrostatic testing cost will be recovered in our tariffs during the first quarter of 2014.
Please turn to Slide 9. For our Liquids segment, adjusted operating income of $150.2 million for the third quarter was $3.3 million lower than the same period for 2012, and $17.7 million lower than the second quarter of 2013. Over the prior year, third quarter operating revenues increased due to an increase in transportation rates on our Lakehead system, contributions from growth projects entering service earlier in the year, specifically the Bakken - Berthold rail and Bakken Pipeline expansion projects.
Higher revenues during the quarter were more than offset by higher operating expenses, predominantly due to the cost incurred related to scheduled Line 14 hydro test and the respective $34 million of Line 14 timing difference just discussed.
Now turning your attention to the chart on the right, we are pleased with the improved deliveries on all our liquids pipeline systems during the quarter. Deliveries on our Lakehead system improved to 1.83 million barrels per day during the third quarter, which was approximately 8.5% higher than the second quarter of 2013 due to supply growth out of Western Canada and refineries emerging from scheduled and unscheduled maintenance.
Deliveries on our Mid-Continent system were 216,000 barrels per day for the third quarter 2013, an increase slightly when compared to the same period in 2012, and were 27% higher than the second quarter of 2013 which was impacted by 13 days of scheduled maintenance in the month of June. Deliveries on our North Dakota system were 36% higher than the second quarter of 2013, as volumes returned to our system due to tightening of crude oil differentials between waterborne and inland prices.
Please turn to Slide 10. Adjusted operating income of $17.3 million for the third quarter was $42.9 million lower than the same period for 2012. The decrease in our third quarter Natural Gas adjusted operating income over the prior year was predominantly due to lower NGL prices, in addition to lower natural gas and NGL volumes on our systems. Lower NGLs are the result of ethane rejection experienced at some of our plants situated in the Mid-Continent.
Our Anadarko system results were negatively impacted by the tightening of the spread between Mont Belvieu and Conway priced NGLs. These trends are consistent with what we observed last quarter. One other element of note relates to true-ups associated with the estimation process inherent in the natural gas business. The third quarter was impacted by unfavorable true-ups to gross margin of $5 million related to our gross margin estimate process.
Lower volumes on our systems was a result of declines in our dry gas focused areas predominantly within our East Texas system. Based on our understanding of producer drilling plants and activity, we are able to run the system. We expect volumes to increase on our systems.
Please turn to Slide 11. We made significant progress on our financing initiatives during 2013, collectively to preferred unit placement and the exercise of doing funding options significantly reduced the amount of third party funding required by the partnership. These actions provide us with additional flexibility around our funding activities, while preserving the upside from the full 40% participation in the Lakehead expansion projects, once they are generating cash flow.
In September we closed on an underwritten public offering and a sale of $8.4 million of listed shares of Enbridge Energy Management or EEQ, including over allotment option yielding net proceeds of approximately $235 million. In September we amended the accounts receivable sale agreement we entered into in late June, whereby Enbridge will purchase the Partnership’s accounts receivable on a monthly basis through 2016 and increase the monthly maximum of outstanding receivables purchased by Enbridge to $450 million.
Lastly we recently extended maturity and modestly reduced the amount of the EEP five year credit facility. The new maturity date is 2018 for the amount of $1.975 billion related to the facility. We target a capital funding approach of 50% equity and 50% debt. Thus as shown on the slide, the financing initiatives we have undertaken year-to-date have satisfied approximately $1.4 billion in equity funding requirements.
Please turn to Slide 12. We continue to make progress on organic growth capital as noted by Mark earlier. Our updated 2013 capital expenditures forecast was approximately $1.92 billion, which is about $100 million lower than the updated the end of the second quarter. Timing on our project and service dates remain consistent with those reported in the second quarter.
The partnership maintains a solid liquidity position as we had approximately $2.7 billion of available liquidity at the end of the third quarter. Continued financial execution while maintaining our strong investment grade credit rating, our key priorities. For further details on our financial results for the quarter, I encourage you to review our supplemental slides that are posted on our website.
Please turn to Slide 13 and I’ll now turn it back over to Mark to address the key takeaways.
Thank you, Steve. Just a few points of emphasis in closing before the Q&A period. We are working through an important transitional period for the Partnership and we are focused on delivering sustainable, long term returns for our unit holders. We expect the Partnership’s performance to strengthen as we begin to realize the benefits for our liquids and natural gas gross projects entering service and as the backdrop of natural gas and NGL prices improve.
Project construction is proceeding on schedule and collective funding actions we have taken year-to-date significantly enhance our financing flexibility over a longer period of time. We expect our distribution coverage to improve as our growth projects ramp up, driving distributable cash flow growth.
I’ll now turn the call over to Kim for Q&A.
Okay. Kim, it looks like we’ve got probably a shy group today. So maybe what we can do is Sanjay, if you want to close the call and of course we’re always available for Q&A at a later point.
Well, thank you, Kim and thank you for the folks on the line. We have nothing further to add at this time but however I’d like to remind you that I will be available for any follow-up questions you may have after the call. Thank you and have a great evening.
This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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