Derick Smith – Director, IR
Laura Buss Sayavedra – VP and CFO
Julie Dill – President and CEO
Spectra Energy Corporation (SEP) Q2 2012 Earnings Call August 2, 2012 11:00 AM ET
Good morning. My name is Matthew and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Spectra Energy Corp Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)
I would now like to turn the call over to your host, Mr. Derick Smith. Mr. Smith, you may begin.
Thank you, Matthew. Good morning. I’m Derick Smith, Spectra Energy Partners’ Director of Investor Relations and I’m pleased that you could join us for a review of our second quarter 2012 earnings.
This morning, Laura Buss Sayavedra, our Chief Financial Officer will cover the financial results for the quarter. Following Laura’s presentation, our Chief Executive Officer, Julie Dill will provide some remarks on the business looking ahead, 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 meaning of Securities Laws. Actual results may materially differ from those discussed in the 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 include 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 will turn the call over to Laura.
Laura Buss Sayavedra
Thanks, Derick. Good morning, everyone and thank you for joining us today. I’m pleased to report that Spectra Energy Partners had a solid second quarter, thanks to the benefits of our portfolio, with revenues driven by capacity charges and an average contract life of 11 years.
Net income increased from around $38 million in the prior year quarter to $47 million in the second quarter 2012. And cash available for distribution was $53 million, up $8 million over the second quarter of 2011.
Now, let me walk through the performance at each of our individual businesses. Let’s start with Gas Transportation and Storage, which includes East Tennessee, (inaudible), Ozark and Big Sandy. Revenues were up from the prior year quarter, reflecting the Big Sandy acquisition that’s closed at the beginning of the third quarter 2011 and East Tennessee’s net project that went into service last fall. This was partially offset by lower revenues at Ozark Gas Transmission.
Expenses in the second quarter 2012 increased from the prior year quarter, reflecting O&M and depreciation for the Big Sandy and net assets that were brought on line last year. Also keep in mind that our operating expenses for the segment are typically a bit higher in the second half of the year and we would expect this to be the case again in 2012. Overall, this brings EBIT up to $33 million for the second quarter, around $14 million over the prior year quarter.
Next, let’s turn to Gulfstream, Gulfstream’s revenues were in line with the second quarter of last year. Operating expenses were higher compared to the prior year quarter, mainly reflecting pipeline integrity work completed within the second quarter of 2012. As a result, equity earnings of $14.5 million dollars were down slightly compared to the prior year quarter. We continue to expect Call Streets four year results to be consistent with our outlook. As expected at MHP, turning to the next slide. MHP revenues were lower in the second quarter compared to the prior year quarter, reflecting and re-contracting that was completed this spring. Expenses were higher in this year’s second quarter compared to last year, due mainly to higher maintenance costs. Altogether, this resulted in equity earnings of $9 million in line with our expectations.
Next, let’s take a look at the SEP Earnings summary. With the primary drivers have just review any additional information on this slide, you can see how you arrived at around $47 million of net income, driven by growth in our gas transportation and storage segment. Now let’s see how this translates to cash available for distribution for the quarter.
Adjusted EBITDA of more than $40 million for the second quarter 2012 was up around $18 million from the prior year quarter. This reflected the benefit to the Big Sandy acquisition and East Tennessee’s net project. Cash available for distribution for caution in MHP, decrease from the prior year quarter, but still in line with our expectations.
In addition, you’ll see that interest expense increased $2 million of the prior year quarter, reflecting the net impact of the debt that SEP issued in mid-June of 2011. Maintenance CapEx for the second quarter 2012 was just over $9 million compared to about $4.5 million in the prior year quarter. Good weather this spring provided an opportunity for us to start our planned work earlier this year, which resulted in the larger share costs in the first half of 2012.
That being said, we continue to expect around $19 million in maintenance CapEx for the full year, in line with our outlook. We continue to track toward the annual target to each of our business areas that we share with the early on year and toward our full year outlook of $222 million for cash available for distribution. Let me close by saying that our financial position remains strong with solid credit metrics and liquidity of about $630 million at the end of the second quarter, positioning us well to move quickly on any new investment opportunities. Reflecting that strength SEPs investment grade ratings were also recently affirmed by all three major rating agencies.
And with that update, let me now turn the call over to Julie.
Thank you Laura. And good morning everyone. As Laura explained, this was another good quarter for Spectra Energy Partners and it demonstrates that our portfolio of assets continues to deliver consistent, reliable results through various market cycles. This performance that let us to announce our 19th consecutive quarterly distribution increase, bringing us to 1.94 per limited partnering unit on an annualized basis. And it demonstrates that we continue to be committed to delivering dependable distributions and value for our investors. So how do we sustain as high performance.
First, we will remain focused on operating our assets safely and reliably to ensure, we continue to meet our customers’ needs. Next, we will continue to be active in the marketplace to find the right strategic opportunities that will allow us to grow our portfolio and our distributions. Our disciplined evaluation process and focused on acquiring assets that set our profile, can sometimes result in lumpy growth. However, investors continue to be rewarded through these times with a very attractive yield, as we’re currently trading at about 6%. And our portfolio of quality assets is ideally located in growing natural gas demand markets.
In the southeastern U.S., we believe we are very well positioned to supply new gas fuelled electric generating facilities, as well as existing power plants that are converting to natural gas. We also believe that Spectra Energy Partners, will benefit from increasing demand growth from a variety of industries, takes in large part to relative low gas prices. We continue to see announcements from businesses that are planning to ramp up production, bring existing capacity back on line or build new facilities.
And lastly, the whole market for investment profile, dependable cash flows, which has served their investors well over the market cycles. Our strong fee-based business has no direct commodity price exposure and is supported by our long-term contracts. And that I believe has been very attractive in the current commodity environment.
So to wrap up, we continue to be committed to delivering value for our investors, as we pursue our growth strategy for Spectra Energy Partners. With our strong balance sheet and the strength of our corporate sponsor, we are confident that when the right strategic opportunity for growth comes, we will move quickly and decisively. I’m confident in our business and our business model and I look forward to continuing our record for delivering value for our investors.
So with that well and I want to thank you for your interest in Spectra Energy Partners and we look forward to answering any questions you may have.
Matthew, we’re ready for the question-and-answer session.
Absolutely. (Operator Instructions) And your first question comes from the line of Paul Jacob.
Good morning, guys.
Laura Buss Sayavedra
Good morning, Paul.
Recognizing the fact that there is a lot of gas-fired power plants within your footprint on Gulfstream in the East Tennessee Natural Gas. Could you just give us some color surrounding the opportunity there and how that might play out over the next 12 to 24 months?
Yeah, thanks for that, Paul. On East Tennessee, we probably have a dozen or so power generation facilities within about 30 miles of that pipeline, and those range from very small plants to larger plants as well. So we don’t necessarily think that we’ll have the opportunity to change all of those, but we do think that there is a good opportunity as those companies to look at what their EPA requirements might be, what the environmental requirements might be, and then of course, the economics of converting the natural gas. So we think that overtime we will have a good opportunity off of the East Tennessee system.
Off of Gulfstream of course, Florida is a great market. The Southeast is really the highest demand growth market that we have in the U.S. and there is lots of plants that are being made to convert power plants and build fire power plants there in the Florida market. And our Gulfstream asset is ideally suited to help provide capacity for that. Although we do think by the time we see what might be required, an additional pipeline might be needed into that area.
So with the relationships we have, being able to build up the existing footprint that we have, we think that we have a very high competitive advantage in regard to being able to bring gas to those gas-fired generation facilities there as well. But again, these are going to be longer term, it’s by 2014, ‘15, ‘16 kind of timeframe before some of that would eventuate.
Okay. That’s very helpful. And then relating to your gas storage at Mass Plus and Egan, could you give us a sense for what the rate renewals might look like there and what customer retention looks like?
Yeah. One of the things that we like to talk about with both of the Mass Plus and the Egan facilities is that those are premier storage facilities here in the U.S., primarily because they are high deliverability storage, so lots of flexibility there and really connected well into the system. We don’t talk about specific rates that we have for storage, but as we all know, storage pricing is a bit pressured right now because of the amount of gas that we have. But we’ve got about – probably we’re done with our contracting for this year. So as we start moving into the latter part of this year and into the first quarter of next year, we’ll be looking to re-contract roughly a third of the capacity contracts that we have on the book. So we’ll be looking at how the market is evolving over that period of time. Whether clearly is that a big consideration for us and we’ll see if this overly a warm weather continues due to balance of the year, if we come back to more normal rates. But it’s their great assets for us and we’ll just continue to watch the market closely to make sure that we’re taking the best advantage that we can and get into best value that we can for those high value storage assets.
Okay. Thank you. That’s very helpful. And then last question for me is more about housekeeping item. When we’re modeling out maintenance CapEx, recognizing that you had substantially more maintenance CapEx in this quarter than last quarter in that $19 million or eventually you pointed to again. Should I be looking at that just being evenly split over 3Q and 4Q or is there some sort of way towards the back end of the year?
Laura Buss Sayavedra
Yeah, I think it’s a little bit different every year depending on the program, but I think, if you would get the debt at about half-and-half, I think that’s a fair way to do it. Within the year quarter-to-quarter predictions are always a little bit of a challenge, but we feel really good about where we are for annual number. So I think that’s a fair way to look at it.
Yeah. And some of it is just taking advantage of what the opportunities are, what the cruise are and now the weather is playing out. And that’s actually why we as Laura mentioned in her remarks we were more heavily skewed in the first half because with the warmer weather we could get started sooner and make sure that we got everything done this year that we were required to do.
Okay. Great. Thank you so much.
Laura Buss Sayavedra
Pleasure. Thank you.
(Operator Instructions) And your next question comes from the line of Chris Asimakis.
Hey, Julie. How are you?
Good, Chris. How are you?
I’m well. I’m well. I just want to follow on quickly some of those questions. With regard to Florida, which talked about new pipe opportunities, obviously with the economic situation things like that, that maybe has been pushed off a little bit. Lot of people, I think have focused on what FPL (inaudible) I do after, I guess some of the rate case decisions in the back half. What’s your expectation in terms of timing for any sort of project, new project to Florida?
Well, we’ve got there is a number of different generating facilities that are being looked at. So if you just look at FPLs modernization project they brought their third unit of the West County Energy Center on line in June and there on schedule they have Cape Canaveral in service by 2013. Their conversion at Riviera Beach is underway and that should be in service in 2014 and then of course they’ve just receive their regulatory approval for a third modernization investment at Port Everglades and that’s an expected in service in 2016.
So, there is kind of a different facilities that are out there from an FPL perspective. I think you’re exactly right, they’re getting through all of their regulatory rate hearings right now, we’ve said before that we expect that we should see an RFP from them by year-end that’s been pushed out from years before and it’s continuing to push out, I don’t have any information that it would be pushed out any further it could be, but again some of it is demand related, economy is a big driver on this as well.
So we’re just going to continue to see how all this evolve, we talked as well earlier in the year about kind of what the number is overall for Florida, we’re going to be in July the count that puts numbers out for gas power generation updated some numbers. And, so over the next 10 years they believe that the power demand is going to go up by about 9,000 megawatts in expected about 8,000 of that’s going to be gas-fired additions. So there is going to be a need for additional capacity, it’s just a matter of timing on that.
Okay. Great. Thanks for that color. I’m just switching gears a little bit now and I’m sure that this is well an encounter, a limitation of what you might say, but Laura talked about borrowing capacity, talked about affirmation as the credit ratings. Julie, when you were talking about growth opportunities it’s quickly and decisively, just thinking we talked about this the path we’re just thinking about this weight of the Rockies base assets that are out there on the block out of Kinder Morgan. Have you guys – can you say if you – I think kind of back to you guys in order that you may have taken initial look at that. Is that something that you’ve looked at in closer detail. Is there any color you can give on sort of some of the known opportunities that are out there right now and what your appetite might be as it pertains to those?
Yeah. I feel like being a little cheeky, and say you’re right. I can’t say a lot, so a bit to know truthfully either really it’s very little to add color that I can and can give at this time. We do look at all the assets that come out and it’s actually quite surprising to see how many assets are out and what people kind of taking a look at what opportunities might be out there and we again want to make sure that we’re looking at those assets that fits the profile that we have established, because again it’s very important first to have those reliable cash flows. So I guess it’s a bit of a trust to me that we are aggressively taking a look at all of those opportunities better rise. And I just to this point haven’t had an opportunity to announce anything.
Okay, perfect. Thanks, guys. I appreciate it.
You’re welcome. Thank you, Chris.
(Operator Instructions) And there are no further audio questions at this time.
Okay. Well, Matthew, thank you for that. And thank you all very much for joining us this morning. If you have any follow-up questions, Derick, as always, is available 24x7 to answer your questions. And I really appreciate your interest in Spectra Energy Partners. And have a great day. Thanks so much.
This concludes today’s teleconference. You may now disconnect.
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