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Spectra Energy Partners, LP (NYSE:SEP)

Q3 2012 Results Earnings Call

November 1, 2012 11:00 AM ET

Executives

Derick Smith - Director, Investor Relations

Julie Dill - Chief Executive Officer

Laura Buss Sayavedra - Chief Financial Officer

Analysts

Paul Jacobs - Raymond James

Elvira Scotto - RBC Capital Markets

Chris Signhinolfi - UBS

Operator

Good morning. My name is Brenda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectra Energy Partners Third Quarter 2012 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 Mr. Derick Smith. Sir, you may begin.

Derick Smith

Thank you, Brenda. 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 third quarter 2012 earnings.

This morning, Julie Dill, our Chief Executive Officer will discuss some highlights of the quarter and recent developments. Then Laura Buss Sayavedra, our Chief Financial Officer will cover the financial results for the quarter 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 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 Julie.

Julie Dill

Thank you, Derick. Good morning, everyone. I know many of you are probably in the New York, New Jersey area or along the East Coast, and just wanted to know that our thoughts and prayers have been and will continue to be with you and your family as a result of the Superstorm. I also know that some of you may actually be on cellphones sitting in your cars. So thank you very much for joining us today.

This morning, I’m pleased to report that we delivered another quarter of solid results. Thanks in large part to the composition of our portfolio, with revenues driven by capacity charges and long-term contract that have an average remaining life of 11 years.

This quarter, our cash available for distribution was about $56 million, up almost 5% over the same period last year. Our strong financial performance allowed us to announce our 20th consecutive quarterly distribution increase, bringing us to a $1.96 per limited partner unit on an annualized basis.

We’re very proud of our track record here as it demonstrates our continued commitment to delivering dependable distributions and value for our investors. And we believe we’re offering more value for our investors with the acquisition we announced last week, an ownership interest of 38.76% in the U.S. portion of the Maritimes & Northeast asset.

The purchase from our general partner Spectra Energy closed yesterday. I’m delighted with this acquisition. If accretive, it expands our reach into the Northeast U.S. and it brings Spectra Energy Partners more long-term cash flows and average contract life of 19 years, and revenues that are over 90% demand charge.

As you can see on the map if you are able to follow it’s on our webcast. The full Maritimes system operated by Spectra Energy originates in Nova Scotia. However, our ownership starts at the border, near Baileyville, Maine.

The pipeline goes through Maine and New Hampshire into Massachusetts just north of Boston, where it connects with Spectra Energy’s Algonquin Gas Transmission system and the rest of the North American pipeline grid. It’s a 338 mile interstate pipeline that brings steady fee-based cash flows to Spectra Energy Partners.

The Maritimes system was placed into service in 1999 and completed an expansion in 2009 that broadest capacity to 800 million cubic feet per day. Maritime is important to the region as it provides transportation for natural gas from LNG and Canadian sources to downstream markets in the Northeast.

With supply evolving throughout North America, Maritimes will continue to evaluate capital investment opportunities for this pipeline. It’s a great addition to our portfolio and its characteristics are consistent with our strategy of how we deliver value to our unitholders.

Our overall strategy is unchanged. We will create value through strategic acquisitions, organic opportunities and when appropriate drop down from our general partner. We continue to be active in the marketplace to find additional opportunities to support further growth of our portfolio and our distributions as well.

We have a high quality portfolio of assets that are positioned to serve growing natural gas market. We do continue to see increasing demand along our footprint for new gas-fired electric generation and existing plans that are converting the natural gas. And we are also ideally located to serve industrial and residential market growth in the Southeast and Northeast regions.

Overall, I am very pleased with the performance of our assets and with the opportunities offered by the latest edition to our portfolio of the Maritimes asset. The third quarter was a good one.

So let me turn the call over to Laura, who will speak more fully about our results for the quarter and the financing of our Maritimes acquisition. Laura?

Laura Buss Sayavedra

Thank you, Julie. Good morning, everyone, and thank you for joining us today. First, I’d like to share the summary of SEP earnings for the third quarter. As you can see the increase in our net income to $46 million for the third quarter 2012 was driven primarily by growth in our Gas Transportation and Storage segment. So let’s take a look at the results at each of our businesses starting with this segment.

As you know, Gas Transportation and Storage includes East Tennessee, Saltville, Ozark and Big Sandy. Revenues were up from the prior year quarter, primarily due to the net project that came online last September and an increase in 2012 rates in existing contracts at Big Sandy.

These increases were partially offset by lower revenues at Ozark Gas Transmission. As you know, Ozark is in the Fayetteville Shale, a dry gas play. Due to low natural gas prices and the decision by some producers to delay production in the Fayetteville for the near-term, Ozark revenues have been affected. The overall segment EBIT for the quarter is up, almost $4 million over the prior year quarter.

Now, let’s turn to Gulfstream. Gulfstream continued to deliver steady results in the third quarter, reflecting the strengths of its portfolio of fee-based long-term contracts with our base customers serving South and Central Florida, including LDCs and electric utilities. Gulfstream’s equity earnings were about $17 million, up slightly compared to the prior year quarter.

Moving on to Market Hub Partners, as expected Market Hub Partners revenues were lower in the third quarter of this year compared to the prior year, reflecting the effects of the re-contracting that was completed this spring. All together, this resulted in equity earnings of $9.6 million, $1.5 lower than the prior year quarter.

Next, let’s see how all this translates to cash available for distribution for the quarter. The first three lines on this schedule reflect the third quarter performance I’ve just related about each of our businesses. Adjusted EBITDA for the third quarter 2012 was up $4 million compared to the prior year.

In addition, while our net income was up at Gulfstream. Our cash available for distribution at Gulfstream was lower this quarter due to higher maintenance capital expenditures compared to the prior year. Our maintenance CapEx for the Gas Transportation and Storage segment was down slightly quarter-over-quarter.

This was a result of what I mentioned in our last call. Good weather this spring provided an opportunity for us to start our plant work earlier this year. As a result, we incurred a small share cost in this third quarter.

So now that we’ve looked at the results for the quarter, let me spend a little time talking about the financing of the Maritimes & Northeast acquisition. To fund the Maritimes acquisition that closed yesterday, we leveraged our strong financial position under $640 million of liquidity that we had at the end of the third quarter.

We financed the transaction with about $319 million in cash, funded with short-term borrowings and issued around $56 million in partnership units to our general partner Spectra Energy Corp.

As we passed acquisitions, we expect to use a combination of long-term debt and equity overtime to finance the acquisition. Given upfront transaction costs and debt payments due at the end of November, we do not expect a significant contribution from the Maritimes acquisition in 2012. And as a result, we have no change to our base outlook of $222 million of cash available for distribution this year.

For 2013, we expect our interest in the Maritimes U.S. assets to contribute around $30 million in cash available for distribution, excluding SEP financing costs. As Julie said, we’re excited to have this great asset and steady cash flows added to Spectra Energy Partners portfolio.

So to wrap up, Spectra Energy Partners portfolio of quality assets has delivered another quarter of solid results. We continued SEPs record of delivering value to our investors, including our 20th quarterly distribution increase and our financial position remains strong after the acquisition of the Maritimes interest, as we continue to actively target additional growth opportunities.

With that, we’d like to thank you for your interest in Spectra Energy Partners and we look forward to answering any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question from Paul Jacobs with Raymond James.

Julie Dill

Good morning, Paul.

Paul Jacobs - Raymond James

Good morning. So just a couple of quick questions here. The first one as it relates to your long-term financing plans for the Maritimes & Northeast Pipeline. So when you think about that given there is some debt already existing on that asset, when you look to go to the markets, do you think you would do a traditional 50-50 sort of financing or how do you think of that in terms of the existing debt plus even after finance?

Laura Buss Sayavedra

We’ll look at it on just a combination of debt equity. I won’t comment specifically on what we’ll do -- what we’ll do there. But I think we have space if you look at what we -- where we are overall on our debt-to-EBITDA metrics and we would be reasonable on how we look at that.

Paul Jacobs - Raymond James

Okay. And then, is there any opportunity to acquire additional interest in that pipeline?

Julie Dill

I guess the shortest answer would be, yeah. As you know our strategy does continue to be focus more on building the overall portfolio through acquisitions or our organic opportunities.

But certainly our general partner only having drop down half of that assets, does have some capacity to drop the other half down, if we determine that that was the best value for our unitholders.

Paul Jacobs - Raymond James

Okay. And then, looking at the cash billable for distribution, you’re showing here the $30 million, that’s a little, slightly lower than I think what it said in your original release. Is there a reason for that or is that just, if had a little bit more time to go through numbers and solidify that.

Julie Dill

I think, Paul, it was more just for color and how we scripted this. So we said about $30 here in the call, I think the press release said $31. So we were -- it was just a little more prose than anything.

Paul Jacobs - Raymond James

Okay. And then, as it relates to maintenance CapEx Gulfstream that you’ve booked this quarter. In the past it looks like the majority of that maintenance activity is seem to fall in the fourth quarter and certainly, that chart is higher than we’d expected. Is that just a matter of timing, I mean, do you think that, what you would have expected in the fourth quarter historically that just shifted to 3Q or is that going to be higher maintenance CapEx even in the 4Q?

Laura Buss Sayavedra

I think it’s a matter of timing within the year, Paul. We still continue to expect to be in line with our cash available for distribution forecast for Gulfstream which is I think $77 million for the year.

Paul Jacobs - Raymond James

Okay. Great. Thank you.

Julie Dill

Thank you.

Operator

Your next question comes from Elvira Scotto with RBC Capital Markets.

Elvira Scotto - RBC Capital Markets

Good morning.

Julie Dill

Good morning.

Laura Buss Sayavedra

Hi, Elvira.

Elvira Scotto - RBC Capital Markets

Just a couple of follow-up questions on Maritimes & Northeast first. Can you remind us what the customer mix is on that pipeline/

Julie Dill

Yeah. The main shipper on the Maritimes U.S. is Repsol and they’ve got about 88% of the available capacity subscribed and that subscribes through February of 2034. And then the remaining 12% of the capacity includes customers like Shell Energy North America, Penngrove, U.S. Corp., Mosbacher and Emera.

Elvira Scotto - RBC Capital Markets

Okay. Great. And I think you had mentioned that you will evaluate growth opportunities. How do you think that growth opportunities on this pipeline as Marcellus production increases?

Laura Buss Sayavedra

Yeah. Elvira, this is one, we are just going to have see how these flows continue to move and Marcellus clearly is that game changer as we’ve referred to it. We’ve had a number of inquires from different parties to kind of evaluate different scenarios in regard to the possibility of reversing flows on that pipeline or potential for some additional LDC expansion.

So we are going to continue to work closely with our various customers on that and see what value there might be. But at present time there are no specific growth opportunities, just in scenarios that we are working with our customers on.

Elvira Scotto - RBC Capital Markets

Okay. Great. Switching over to Ozark, what percent of contracts come up for renewal over the next, for 2013?

Laura Buss Sayavedra

Yeah. Elvira, this is Laura. It’s about, about half, the -- there are some anchor contracts in there that are with the regional like local distribution companies and like Arkansas Western. But the remainder of the producer contracts like Southwestern have really moved for the time being to the year-to-year type model, so that percentage will likely stay in that range as we go forward until we move into a different gas price environment.

Elvira Scotto - RBC Capital Markets

Okay. And then on storage contract renewals, understanding that rates maybe soft. How are you -- how do you think about contracting on storage? Are you, in terms of tenure of contracts, so those moving more to year-to-year or are those kind of in line with historic type of contracts?

Laura Buss Sayavedra

Yeah. You are exactly right, Elvira. The term of the contract has shifted to be shorter in nature simply because of the softness that we are seeing in the storage markets. We do have about 40% of our contracts that are coming up for renewal next year. We are going to continue to work with our customers to see how we can layer those in and try to take advantage of swings that we see in the marketplace.

But I think the overall view not only for the MHP assets but storage just in general. The likelihood is that storage prices will continue to be soft probably through the middle of the decade until we start seeing this additional power generation coming on and then maybe even some additional means based on some LNG faculties that might get cited in and permitted in the Gulf Coast.

So, yeah, shorter terms, just that we don’t lock ourselves in at these low rates. We are trying to take advantage of some market opportunities as they become available which has been our tradition over long period of time.

Elvira Scotto - RBC Capital Markets

But do you leave some capacity open to take advantage?

Julie Dill

Yeah. It’s not a lot, but we do leave some open, so we just want to make sure that we’ve got the flexibility that we think that we need to try to optimize the asset as best we can.

Elvira Scotto - RBC Capital Markets

Great. Thanks. That’s all I had.

Julie Dill

Great. Thanks, Elvira.

Operator

(Operator Instructions) And we have a question from Chris Signhinolfi from UBS.

Julie Dill

Good morning Chris.

Chris Signhinolfi - UBS

Hey, Julie. How are you?

Julie Dill

Great. Thanks. How are you?

Chris Signhinolfi - UBS

I’m good. I’m good. Just a quick question, yesterday the parent company Spectra had announced that it will be purchasing some interest from DCP in some liquids lines, and I was just curious, in the past you’ve talked about potentially expanding the footprint at SEP away from just true natural gas storage and transportation? And I’m wondering about the appetite to maybe move into some of these liquid pipes that Spectra is involving itself with if that opportunity became available?

Julie Dill

Yeah. Chris, one of the things that we’ve tried to articulate is that, we are interested in any kind of a related business that is associated with our pipeline and storage business, whether that be oil, oil terminals from a storage perspective or certainly natural gas liquids. Not to be in competition with DCP at all, but maybe as a complement too.

So we were very excited to see our general partner make that announcement yesterday. Certainly, that has a number of the characteristic that we would be looking for in an asset that we would like in our portfolio. But we’ve not talked about that at all and the pipelines are not completed to just yet. So it might take awhile but certainly it was an intriguing acquisition that Spectra made and we’ll continue to see how that plays out.

Chris Signhinolfi - UBS

Okay. That’s it. That’s it from me. Thanks again.

Julie Dill

Sure. Thanks.

Operator

(Operator Instructions) And you have no questions or comments.

Julie Dill

Okay. Thank you, Brenda. Well, listen, if there are no more questions, I just want to thank you again for taking the time out. We’d ask you to please stay safe no matter where you are and again, if we can answer anything please don’t hesitate to call Derick. He is -- he remains available 24x7 to answer your questions. So don’t hesitate to give us a ring. Have a great day.

Operator

And ladies and gentlemen, that does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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