TMCnet News
EL PASO PIPELINE PARTNERS, L.P. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) General and Basis of Presentation The following information should be read in conjunction with (i) our accompanying interim consolidated financial statements and related notes, (ii) our consolidated financial statements and related notes included in our 2013 Form 10-K and (iii) our management's discussion and analysis of financial condition and results of operations included in our 2013 Form 10-K. Growth Projects Liquefaction Projects Elba Island Liquefaction Project. Under the terms of the LLC agreement between SLC and Shell US Gas & Power LLC (Shell G&P), which was entered into in January 2013, both parties are obligated to make certain capital contributions in proportion to their membership interests in ELC to fund the construction of the liquefaction facilities at SLNG's existing Elba Island LNG terminal. SLNG received DOE authorization to export the produced LNG to FTA countries and has applied for non-FTA approval. In December 2013, Shell G&P gave notice to ELC to move forward on Phase II of the project. Phase II capacity will be either 70 MMcf/d (0.5 million tonnes per year) or 140 MMcf/d (1.0 million tonnes per year), at the election of Shell G&P. At full development, the project is expected to have total capacity of approximately 350 MMcf/d of natural gas (2.5 million tonnes per year of LNG). EPB's investment in the Elba Liquefaction Project (including EPB's portion of capital required under the joint venture as well as capital required on its existing SLNG facilities) is expected to be approximately $1.3 billion. Subject to regulatory approvals, first production from Phase I of the project is anticipated in late 2016 or early 2017, and first production from Phase II is expected in 2017. The project is moving forward under FTA country export authority. DOE has recently proposed new rules for approval authority to export LNG to non-FTA countries. The new rules, if approved, are expected to have minimal effect on our existing non-FTA application. In January 2013, ELC signed a liquefaction services agreement with Shell NA LNG LLC (Shell LNG) to provide liquefaction services. Once the project is finalized, Shell LNG will subscribe to 100% of the liquefaction capacity pertaining to Phases I and II of the aforementioned project. Subject to various regulatory approvals, SLNG will modify its LNG terminal to load the LNG onto ships for export. SLNG entered into a Maintenance and Administrative and Operating Agreement with ELC in which SLNG has agreed to perform operation, maintenance and administrative services associated with the construction and operation of the liquefaction facilities. We filed full project applications with the FERC in March 2014. Gulf LNG Liquefaction Project. In May 2014, the FERC accepted a request by GLLC, a wholly owned subsidiary of Gulf LNG, our equity method investment, to begin the environmental review process for a project to install LNG liquefaction and export facilities at its existing LNG regasification terminal near Pascagoula, Mississippi. GLLC recently entered into a memorandum of understanding with a third party to begin negotiations on a definitive liquefaction agreement. GLLC has also commenced work on a FERC-FEED (Front-End Engineering and Design) study. The proposed project, which already has FTA LNG export authority, would provide up to 10 million tonnes per year of LNG export capacity. An application to export to non-FTA countries is pending. Subject to obtaining sufficient commitments from potential customers and regulatory approval, construction could begin in June 2016, with initial exports of LNG occurring in 2019. Elba Express and SNG Expansions Elba Express and SNG will invest more than $275 million on the following two expansion projects for incremental, long-term natural gas transportation service to support southeastern U.S. infrastructure growth and the needs of customers in Georgia, South Carolina and northern Florida. Elba Express Expansion. The Elba Express expansion will create incremental north-to-south capacity, including interconnects and delivery points with SNG and other pipelines and shippers, designed to serve a new load created by the proposed Elba Liquefaction Project at SLNG's Elba Island Terminal near Savannah, Georgia and other capacity needs along the Elba Express Pipeline. Following successful open seasons in August 2013, binding customer contracts were executed for incremental capacity of approximately 800,000 Dth/d, which includes approximately 240,000 Dth/d contracted to SNG. Elba Express customers have also expressed interest in incremental optional capacity of approximately 300,000 Dth/d, which, if exercised, would bring the total capacity of the expansions to approximately 1.1 Bcf per day. Elba Express expects phasing in service as early as June 2016 pending regulatory approvals. 20-------------------------------------------------------------------------------- Table of Contents SNG Expansion. The SNG expansion will create capacity on its South Main system and also provide subscribing customers firm north-to-south transportation service on the Elba Express Pipeline using firm transportation service being acquired by SNG in the Elba Express expansion. Subject to regulatory approval, SNG anticipates construction to begin in the third quarter of 2015 with an expected in-service date of June 2016. Results of Operations Non-GAAP Measures The non-GAAP financial measures, DCF before certain items and EBDA before certain items, are presented below under Distributable Cash Flow and Earnings Results, respectively. Certain items are items that are required by GAAP to be reflected in net income, but typically either do not have a cash impact, or by their nature are separately identifiable from our normal business operations and in our view are likely to occur only sporadically. Our non-GAAP measures described below should not be considered as alternatives to GAAP net income, operating income or any other GAAP measure. DCF before certain items and EBDA before certain items are not financial measures in accordance with GAAP and have important limitations as analytical tools. You should not consider either of these non-GAAP measures in isolation or as a substitute for an analysis of our results as reported under GAAP. Because DCF before certain items excludes some but not all items that affect net income and because DCF measures are defined differently by different companies in our industry, our DCF before certain items may not be comparable to DCF measures of other companies. EBDA before certain items has similar limitations. Our management compensates for the limitations of these non-GAAP measures by reviewing our comparable GAAP measures, understanding the differences between the measures and taking this information into account in its analysis and its decision making process. Distributable Cash Flow As more fully described in our 2013 Form 10-K, our partnership agreement requires us to distribute 100% of our available cash to our partners on a quarterly basis (available cash as defined in our partnership agreement generally consists of all our cash receipts, less cash disbursements and changes in reserves). DCF is an overall performance metric we use as a measure of available cash. Because we distribute all of our available cash to investors, our primary objective is to grow cash distributions over time. We believe the primary measure of company performance used by us, investors and industry analysts covering MLPs is cash generation performance. Therefore, we believe DCF is an important measure to evaluate the operating and financial performance of the partnership and to compare it with the performance of other publicly traded MLPs within the industry. We define DCF before certain items to be limited partners' income before certain items and DD&A, less sustaining capital expenditures (those capital expenditures which do not increase capacity or throughput), plus our share of DD&A of our equity method investees less our share of sustaining capital expenditures of our equity method investees, plus other income and expenses, net (which primarily includes deferred revenue, non-cash AFUDC equity and other items). Our DCF was $141 million and $129 million for the three months ended June 30, 2014 and 2013, respectively. The increase in DCF of $12 million in 2014 as compared to 2013 was primarily due to contributions from Acquired Investments as discussed in Note 2, "Acquisitions," partially offset by increased general partner's incentive distributions, the settlement of SNG's and WIC's rate cases and lower rates on WIC contract renewals. 21-------------------------------------------------------------------------------- Table of Contents Our DCF was $304 million and $298 million for the six months ended June 30, 2014 and 2013, respectively. The increase in DCF of $6 million in 2014 as compared to 2013 was primarily due to contributions from Acquired Investments as discussed in Note 2, "Acquisitions," along with higher revenues from placement of our Elba Express Phase B Expansion project into service in April 2013, partially offset by increased incentive distribution payments to our general partner, the settlement of SNG's and WIC's rate cases and lower rates on WIC contract renewals. The table below details the reconciliation of Net Income to DCF (in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net income $ 131 $ 136 $ 304 $ 310 Certain items: Non-cash severance costs(a) - 1 - 1 SNG offshore assets hurricane repair - 2 - 2 costs Sales and use tax reserve adjustment - 2 - 2 Net income before certain items 131 141 304 315 Less: General Partner's 2% interest (3 ) (3 ) (6 ) (6 ) allocation Less: General Partner's incentive (55 ) (47 ) (107 ) (92 ) distribution Limited Partners' Net Income before 73 91 191 217 certain items Plus: Depreciation and amortization(b) 81 47 134 95 Less: Sustaining capital expenditures(b) (10 ) (10 ) (16 ) (15 ) Less: Other, net(c) (3 ) 1 (5 ) 1 68 38 113 81Distributable Cash Flow before certain $ 141 $ 129 $ 304 $ 298 items-Limited Partners ---------(a) The amount reflects the non-cash severance costs allocated to us from El Paso as a result of KMI's acquisition of El Paso; however, we do not have any obligation nor did we pay any amounts related to this expense. (b) Includes our share of equity method investees' depreciation and amortization or sustaining capital expenditures. (c) Includes deferred revenue and certain non-cash items such as AFUDC equity and other items. Earnings Results Our management assesses our earnings performance based on EBDA, which excludes DD&A, general and administrative expenses and interest expense, net. General and administrative expenses include items such as employee benefits, legal, information technology and other costs that are not controllable by operating management and thus are not included in the measure of performance for which they are accountable. Our management uses EBDA as a measure to assess the operating results and effectiveness of our assets, which consist of both consolidated operations and earnings from equity method investments. We believe providing EBDA to our investors is useful because it is the same measure used by management to evaluate our performance and allows investors to evaluate our operating results without regard to our financing methods or capital structure. EBDA may not be comparable to measures used by other companies. Additionally, EBDA should be considered in conjunction with net income and other GAAP performance measures such as operating income or operating cash flows. 22-------------------------------------------------------------------------------- Table of Contents Below are the components of EBDA for the periods presented (in millions): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenues $ 353 $ 359 $ 735 $ 745 Operating Expenses Operations and maintenance (60 ) (58 ) (105 ) (109 ) Taxes, other than income taxes (22 ) (23 ) (44 ) (44 ) Subtotal (82 ) (81 ) (149 ) (153 ) Earnings from equity investments 14 3 17 6 Other, net 1 - 2 - EBDA $ 286 $ 281 $ 605 $ 598 Below is a reconciliation of our EBDA to net income, our throughput volumes and an analysis and discussion of our operating results for the periods presented (in millions, except operating statistics): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 EBDA(a) $ 286 $ 281 $ 605 $ 598 Depreciation and amortization (54 ) (47 ) (107 ) (95 ) Amortization of excess cost of equity investments (6 ) - (6 ) - General and administrative(b) (19 ) (22 ) (39 ) (42 ) Interest expense, net (76 ) (76 ) (149 ) (151 ) Net income $ 131 $ 136 $ 304 $ 310 Throughput volumes (BBtu/d)(c) 8,316 7,969 8,481 8,470 ---------Certain items footnotes (a) 2013 amounts include a $4 million decrease in EBDA related to the following certain items: • a $2 million decrease in EBDA, included in operating expenses, related to SNG's sales and use tax audit interest and penalties; and • a $2 million decrease in EBDA, included in operating expenses, related to hurricane repair costs for the SNG offshore assets. (b) 2013 amounts include non-cash severance costs of $1 million allocated to us from El Paso as a result of KMI's acquisition of El Paso; however, we do not have any obligation nor did we pay any amounts related to this expense. Other footnotes (c) Throughput volumes presented are 100% of the volumes transported for WIC, CIG, SNG, CPG, Elba Express and Ruby for all periods. Intercompany volumes are excluded. EBDA The items described in footnotes (a) above increased our EBDA by $4 million for the three and six months ended June 30, 2014 as compared to the same periods in 2013. Following is information related to the remaining changes in EBDA and revenues for the three and six months ended June 30, 2014 compared to the corresponding periods in 2013 (in millions): Three Months Ended Six Months Ended June 30, June 30, EBDA Revenues EBDA Revenues increase/(decrease) SNG $ (5 ) $ (2 ) $ (11 ) $ (5 ) Elba Express - - 7 7 WIC (8 ) (7 ) (14 ) (14 ) CIG 1 3 6 2 Acquired Investments 10 - 10 - Other 3 - 5 - Total EPB $ 1 $ (6 ) $ 3 $ (10 ) 23-------------------------------------------------------------------------------- Table of Contents • SNG's EBDA decreased by $5 million and $11 million for the three and six month periods in 2014 as compared to the same periods in 2013. These decreases were driven by lower reservation and usage revenues of $7 million and $15 million for the three and six month periods due to rate reductions pursuant to its rate case settlement effective September 1, 2013, as discussed in Note 9, "Accounting for Regulatory Activities." Partially offsetting these unfavorable impacts were incremental revenues of $4 million and $10 million for the three and six month periods primarily due to increased park and loan services, additional firm transportation services and revenue related to an expansion project that was placed in service in late 2013. In addition, SNG experienced $2 million and $6 million of higher operating expenses for the three and six month periods in 2014 as compared to the same periods in 2013 primarily due to the aforementioned rate case settlement's impact on our electricity cost recovery and higher property taxes and field operation and maintenance expenses; • Elba Express contributed higher EBDA of $7 million for the six month period in 2014 as compared to the same period in 2013 primarily due to higher revenues resulting from the placement of the Elba Express Phase B Expansion project in service in April 2013; • WIC's EBDA decreased by $8 million and $14 million for the three and six month periods in 2014 as compared to the same periods in 2013 primarily due to lower reservation revenue of $8 million and $14 million as a result of rate reductions pursuant to its Section 5 rate settlement as further discussed in Note 9, "Accounting for Regulatory Activities" and lower rates on contract renewals; • CIG's EBDA increased by $1 million and $6 million for the three and six month periods in 2014 as compared to the same periods in 2013. The increases were driven by higher revenues of $4 million and $6 million for the three and six month periods attributable to the revenue surcharge mechanism (which enables us to make estimated customer billing surcharge accruals with certain customers when realized revenue is less than the annual threshold amounts as included in CIG's August 2011 rate case settlement) and increased revenue from the High Plains expansion project which was placed in service in March 2014. In addition, CIG experienced lower operating expenses of $4 million for the six month period due to favorable rates on gas used for system balancing which is generally expected to reverse for the full year. Partially offsetting these favorable impacts were lower transportation revenues of $1 million and $4 million for each respective period due to the nonrenewal of expiring contracts and restructuring of certain contracts at lower volumes or discounted rates; and • The Acquired Investments contributed an additional $10 million of equity earnings for each of the three and six month periods in 2014 due to the May 2014 Drop-Down Transaction. Depreciation and Amortization Our depreciation and amortization expense was $7 million and $12 million higher for the three and six month periods in 2014 as compared to the same periods in 2013 primarily due to the higher depreciation rates as a result of SNG's rate case settlement. General and Administrative After adjusting for the item described in footnote (b) above, our general administrative expense was $2 million lower for the three and six month periods in 2014 as compared to the same periods in 2013 primarily due to legal fee reimbursements and lower rent expenses partially offset by higher benefit costs. Interest Expense, net Our interest expense, net decreased by $2 million during the six months ended June 30, 2014 as compared to the same period in 2013 primarily due to a lower average interest rate on debt outstanding driven by the repayment of $88 million of EPPOC senior notes in September 2013 and $71 million of SLNG senior notes in February 2014, partially offset by the issuance of $600 million of EPPOC senior notes in May 2014. For a further discussion of these debt obligations, see Note 3, "Debt," and our 2013 Form 10-K. 24-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources General As of June 30, 2014, we had approximately $1.1 billion of liquidity, consisting of $1.0 billion of availability under our revolving credit facility and $50 million of cash on hand. We expect our current liquidity sources and operating cash flow to be sufficient to fund our estimated 2014 capital program and to allow us to manage our day-to-day cash requirements and any anticipated obligations, and currently, we believe our liquidity to be adequate. We will continue to assess and take further actions where prudent to meet our long-term objectives and capital requirements. Our primary sources of cash include cash flow from operations and funds obtained through long term financing activities and bank credit facilities. Our primary uses of cash are funding capital expenditure programs, meeting our debt service obligations, meeting operating needs and paying distributions. Our outstanding short-term debt as of June 30, 2014 was $41 million which consisted of $35 million of CIG's 5.95% senior notes and our subsidiaries' other financing obligations of $6 million. We intend to refinance our current maturities through issuance of a combination of long-term debt and equity and/or borrowings under our revolving credit agreement. We may generate additional sources of cash through future issuances of additional partnership units, including issuances under the equity distribution agreement. To date, our debt balances have not adversely affected our operations, our ability to grow or our ability to repay or refinance our indebtedness. For additional information about our debt obligations and our debt-related transactions, see Note 3, "Debt," to our consolidated financial statements and our 2013 Form 10-K. Based on our historical record, we believe that our capital structure will continue to allow us to achieve our business objectives. We are subject, however, to conditions in the equity and debt markets for our limited partner units and long-term senior notes, and there can be no assurance we will be able or willing to access the public or private markets for our limited partner units and/or longer-term senior notes in the future. If we were unable or unwilling to issue additional limited partner units, we would be required to either restrict expansion capital expenditures and/or potential future acquisitions or pursue debt financing alternatives, some of which could involve higher costs or negatively affect our credit ratings. Furthermore, our ability to access the public and private debt market is affected by our credit ratings. In March 2014, Standard & Poor's Rating Services upgraded EPB's corporate credit rating to BBB from BBB- and revised its outlook to stable from positive. Also in March 2014, Moody's Investor Services affirmed EPB's corporate credit rating of Ba1 and revised its outlook from positive to stable. Partnership Distributions Our partnership agreement requires that we distribute 100% of available cash, as defined in our partnership agreement, to our partners within 45 days following the end of each calendar quarter. Our 2013 Form 10-K contains additional information concerning our partnership distributions. On July 16, 2014, we declared a cash distribution of $0.65 per unit for the three months ended June 30, 2014 compared to the $0.63 per unit distribution we declared for the three months ended June 30, 2013. Our declared distribution for the three months ended June 30, 2014 will result in an IDR to our general partner of $55 million. Capital Expenditures We account for our capital expenditures in accordance with GAAP. Capital expenditures under our partnership agreement include those that are maintenance/sustaining capital expenditures and those that are capital additions and improvements (which we refer to as expansion or discretionary capital expenditures). The distinctions are used when determining cash from operations pursuant to the partnership agreement (which is distinct from GAAP cash flows from operating activities). Capital additions and improvements are those expenditures which increase throughput or capacity from that which existed immediately prior to the addition or improvement, and are not deducted in calculating cash from operations. Maintenance capital expenditures are those which maintain throughput or capacity. Thus, under our partnership agreement, the distinction between maintenance capital expenditures and capital additions and improvements is a physical determination rather than an economic one, irrespective of the amount by which the throughput or capacity is increased. Budgeting of maintenance capital expenditures is done annually on a bottom up basis. For each of our assets, we budget for and make those maintenance capital expenditures that are necessary to maintain safe and efficient operations, meet customer needs and comply with our operating policies and applicable law. We may budget for and make additional maintenance capital expenditures that we expect to produce economic benefits such as increasing efficiency and/or lowering future expenses. Budgeting and approval of capital additions and improvements are generally made periodically throughout 25-------------------------------------------------------------------------------- Table of Contents the year on a project by project basis in response to specific investment opportunities identified by our business segments from which we generally expect to receive sufficient returns to justify the expenditures. Generally, the determination of whether a capital expenditure is classified as maintenance or as capital additions and improvements are made on a project level. The classification of capital expenditures as capital additions and improvements or as maintenance capital expenditures under our partnership agreement is left to the good faith determination of the general partner, which is deemed conclusive. Our capital expenditures for the six months ended June 30, 2014, and the amount we expect to spend for the remainder of 2014 to sustain and grow our businesses are as follows (in millions): Six Months Ended 2014 June 30, 2014(a) Remaining(b) Total Sustaining $ 16 $ 31 $ 47 Discretionary 29 97 126 Total $ 45 $ 128 $ 173 ---------(a) Includes a net decrease in capital accruals and retainage of $6 million, our share of equity method investees' sustaining capital expenditures of $5 million and contributions for discretionary capital to our equity investments of $13 million. (b) Includes our share of equity method investees' sustaining capital expenditures and contributions to our equity method investments for discretionary capital expenditures. We generally fund our sustaining capital expenditures with existing cash or from cash flows from operations. Generally, we initially fund our discretionary capital expenditures through borrowings under our credit agreement until the amount borrowed is of a sufficient size to cost effectively replace the initial funding with long-term debt, equity or both. As an MLP, we distribute all of our available cash and we access capital markets to fund acquisitions and asset expansions. Historically, we have succeeded in raising necessary capital in order to fund our acquisitions and expansions, and although we cannot predict future changes in the overall equity and debt capital markets (in terms of tightening or loosening of credit), we believe that our stable cash flows, our credit rating and our historical record of successfully accessing both equity and debt funding sources should allow us to continue to execute our current investment, distribution and acquisition strategies, as well as refinance maturing debt when required. Cash Flows Operating Activities Net cash provided by operating activities was $428 million for the six months ended June 30, 2014, versus $440 million in the same period in 2013. The period-to-period decrease of $12 million in cash flow from operations was attributable to (i) an $8 million increase in cash from higher partnership income, including increased cash distributions from equity investments, after adjusting for the period-to-period non-cash items offset by (ii) a net cash decrease of $20 million from operating net assets in the first half of 2014 versus the first half of 2013 primarily attributable to timing of payments to vendors and suppliers and recognition of previously deferred revenues. Investing Activities Net cash used in investing activities was $909 million for the six months ended June 30, 2014, compared to $57 million in the same period in 2013. The $852 million increase in cash used in investing activities was primarily attributable to the cash outlay of $875 million made during May 2014 to fund the Drop-Down Transaction partially offset by lower capital expenditures of $24 million in the first half of 2014. Financing Activities Net cash provided by financing activities amounted to $453 million for the six months ended June 30, 2014, compared to $277 million of net cash used in financing activities in the same period in 2013. The $730 million overall increase in cash from our financing activities in the first half of 2014 versus the first half of 2013 was primarily attributable to (i) a $600 million increase in cash due to EPPOC's issuance of $600 million senior notes in May 2014 to partially fund the Drop-Down Transaction, (ii) a $238 million increase in cash due to higher common and general partner unit issuances to partially fund the Drop-Down Transaction in May 2014, (iii) a $71 million decrease in cash due to repayment of SLNG's senior notes in February 2014 and (iv) a $34 million decrease in cash due to higher cash distributions to our partners in 2014. 26-------------------------------------------------------------------------------- Table of Contents Rate Case Settlements See Item 1. Financial Statements, Note 9 "Accounting for Regulatory Activities" for information related to rate case settlements for WIC, SNG and CIG. These settlements are consistent with management's expectations and are not expected to materially impact our future cash flow projections, including our expected 2014 distributions. |