Spectra Energy Partners' Management Presents at Credit Suisse MLP and Energy Logistics Conference (Transcript)

| About: Spectra Energy (SEP)

Spectra Energy Partners, LP (NYSE:SEP)

Credit Suisse MLP and Energy Logistics Conference Call

June 11, 2014 8:00 AM ET


J. Patrick Reddy – Vice President and Chief Financial Officer


John D. Edwards – Credit Suisse Securities LLC

John D. Edwards – Credit Suisse Securities LLC

Hi, next up we have Spectra Energy – Spectra Energy Partners. we have Pat Reddy who is the Chief Financial Officer for Spectra Energy and he is going to give us an update. Spectra has an outstanding natural gas pipeline network and I’m going to turn it over to Pat to give the full details on that.

J. Patrick Reddy

Good morning, John. thank you very much and welcome, everyone. I’m Pat Reddy, Spectra Energy’s Chief Financial Officer. We always start with our Safe Harbor statement. as you know, some of the things that we’re going to talk about this morning involves forward-looking statements, so I’ll just refer you to our SEC filings, our Q’s and K’s.

The first slide really gets to what our competitive advantage is in our space, and it really is our backbone of oil and gas transportation system. the gas pipelines that we operate connect the Gulf of Mexico and go through some of the best supply basins in the country, into four of the five fastest growing markets in the Northeast and the Southeast.

We won a project last year that I’ll talk a little bit more about in a minute that we call Sabal Trail, to build the third new pipeline into Florida, primarily for electric generation. we’re also competing or will compete hard for a new RFP that was announced recently. Duke and Piedmont need about 1 Bcf a day of additional gas supply into the Carolina. and so just to illustrate, we’ve got a lot of growth off of our backbone system puts us in a very competitive position to win new business.

today already, we move about 12% of the country’s natural gas. we also have a very large crude pipeline system, one of only three that brings crude oil from Canada into the U.S., and serves refiners in the Rockies, that’s our Express-Platte system.

And then as of last year, we also made a one-third direct investment in two natural gas liquids lines that DCP owns and operates. so, you can see that on a combined basis, over the next couple of years, we’re looking at a growth in EBITDA of about 11%.

The other thing that’s important to note maybe as a differentiator about Spectra Energy Partners is that about 90% of our revenues are fee-based. and so, very little fluctuation from year-to-year, no – really no exposure to commodity prices. and when I say fee-based, really on the pipeline side, the revenues that we recover are generated by capacity reservation demand charges, and those amounts are paid to us in monthly installments really without variability.

On our biggest pipeline, Texas Eastern, the majority of our gas pipeline capacity continues to be held by Northeast local gas distribution companies or utilities that include our pipeline reservation charge on their bill to their retail customers.

The weighted average contract length on Texas Eastern is seven years. That’s maybe deceptive in the sense that part of the reason that it is seven years is that we have 20-year contracts that we signed with the utilities years ago. and rather than take new contracts in for approval, they just exercise their annual evergreen. and so we’ve been in evergreen status with some of our utilities for years and again, have 98% renewal rate.

So very stable market, but also a market with a lot of growth, we’ll talk about that in a minute. On our other pipelines, we have contract lengths on average of 9 years to 18 years. This is a little bit more detailed map on the gas pipeline side of the business. and I wanted to start this part of the discussion talking about projects that we have in execution.

So these are projects where we secured contracts, going through the regulatory process and/or in construction. So we’ve got about $4 billion of projects in execution within service dates starting as early as this fall and extending through the first half of 2017. And on a full year basis, once all of these projects are in service, we expect them to deliver about $515 million of incremental EBITDA.

For those of you that follow the industry, you certainly know that the supply zones for natural gas is both growing and it’s shifting and the demand is growing everywhere that our system reaches and beyond. And the supply and demand growth is what’s boosting the value of our assets and providing continuing opportunities for new projects.

One of the themes that you hear discussed a lot in the gas industry today is the fact that owners of these long-haul Trunkline pipelines are announcing plans to make their systems bidirectional. and I’d just say about that we started down that past three to five years ago. and as of today, with the five projects on here that I’ll talk about our system is fully multidirectional.

We’re able to move about 2 Bcf a day, south on the system from – basically from the Marcellus and 5 Bcf to 7 Bcf to the Northeast on our system, which is like a telescope. the smaller piece of the system is in the Gulf area, and then it grows starting about the middle of the system and on into the northeast.

And so projects that we’ve undertaken to make the system increasingly multidirectional include our TEAM 2014 project, which goes into service later this year. Our OPEN project, which moves gas from the Utica into Texas Eastern, a project we call Uniontown to Gas City that partially debottlenecks capacity on Texas Eastern.

A follow-on project called TEAM South. and then also, a project we call Gulf markets, and that’s a project where we’re going to move about 600 million decatherms of gas daily down to – in a southward direction. And it’s for customers like the Cameron LNG facility and their sponsors who even though, they don’t have all their formal approvals yet to build. they went out and took capacity on our system realizing that there is only a finite amount of capacity currently available to move that gas.

So I guess, I’d say, we were kind of first movers on the efforts to make these systems multidirectional. We have a couple of high profile projects that we’re working on this year that make up the $4 billion in execution. two of those would include, or the first one would be the Sabal Trail Florida project that I talked about, that’s a pipeline that will be serving the Florida market when it’s completed in 2017.

the total cost of it is about $3.2 billion. Our primary customers there are FPL and Duke. We have a co-investor, the parent of FPL, NextEra and the potential to make equity available to a couple of other sponsors. So in the end, we’re out looking that we’ll own about 50% of that project when it’s completed.

We also have a couple of expansions on our Algonquin pipeline system. the first one is our Algonquin Incremental Market, or AIM project. That’s a $1 billion effort to increase the west to east capacity on Algonquin by about 350 million cubic feet a day to serve the local distribution companies in New England.

I’ll talk in a minute about a second expansion of Algonquin with a 2017 in-service date and then some potential expansions beyond that. So just to give you a sense of this $4 billion in execution, it’s primarily expansions of our backbone system with the exception of the big build into Florida.

And we’re targeting a 10%, or better Rockies on investment. So looking at execution projects, I just want to take a quick look at some of the other projects that are advancing. First of all, we have what we call our NEXUS project and NEXUS, as you can see on the map is to move gas across the U.S./Canada border near Detroit and on into our big Dawn storage hub.

We have one of the largest – it is the largest storage field of its kind in North America with a capacity of 150 Bcf of underground storage. Enbridge also has storage at Dawn. Very liquid trading hub, that gas can go to serve the Toronto market, our own Union Gas market, or to come back into the U.S. Northeast and avoid some of the pipeline bottlenecks that currently exist today.

It brings really last mile delivery service in a very competitive environment. Today, we have – as of today, we signed up the three key local distribution companies that in combination are taking about 50% of the capacity on NEXUS and we’re also talking with a number of producers that would top up the project and we’d expect to be able to talk more about that a little bit later in the year – our successful outcome there.

Next, I mentioned the AIM Project on the prior, or just previously. And that’s a project to move 350 million a day of incremental supply on the Algonquin pipeline into the Northeast that’s for the LDC market. We have a second project with a 2017 in-service date on Algonquin that we call Atlantic Bridge. And that’s also to serve not just the LDC’s but to begin to provide gas for the electric generation sector.

We’ve conducted an open season that was very successful. We had 33 parties that expressed interest in a multiple of the service that we’re targeting, which is about 200 million to 300 million cubic feet a day. And the reason that we wouldn’t do more is that we’re trying to sequence projects to have consecutive in-service dates, so AIM would be in-service in 2016, Atlantic Bridge 2017. And you can imagine that we’ll be talking with generators about a third follow-on that would provide additional gas supply for that market in a future timeframe.

So there are some other projects besides the Northeast that we’re pursuing. We’ve got additional opportunities in the Gulf coast. I mentioned the project that’s underway for the Cameron LNG folks, we’ve got other opportunities though in the Gulf to continue to expand our header system to make use of storage like our Bobcat storage field that we acquired a few years ago and are developing.

And we also see the need to serve more infrastructure for electric generators and other customers in the mid-Atlantic and Southeast U.S. I mentioned, for example, the Duke/Piedmont RFP that is underway currently. And so we feel very confident in our ability to secure at least $3 billion of use growth opportunities by year-end. I’d say that the two biggest projects that would fall in that category would be Atlantic Bridge and NEXUS. So watch for more news on those projects in the months ahead.

Another important and growing part of the business in conjunction with our gas transmission is our liquids business. and for those of you that follow us, you’d know that the last year marked our entrance into the petroleum products, or the petroleum transportation segment.

Years ago, we had built a company called TEPPCO that was a petroleum products pipeline. And we wound up selling that while we were part of Duke, and so we were looking for a reentry point. And the fact that Express-Platte came up for sale in the fall of 2012 gave us that opportunity. It’s, as I said, one of only three existing pipelines that brings crude into the U.S. from Canada with about 130 to 140 employees that had very good relationships with refiners in the area along the pipeline.

We also get all the way down to Wood River through the Platte portion of the pipe. And our timing really could not have been better. I know at the time that we announced the transaction the northern piece, the Express pipeline was only 70% committed.

And on just the first few months of our ownership, starting in March of last year, we were able to fully contract that pipeline. we were able to extend terms from two years out to 11 years, and able to switch from the old committed rates to current market rates that escalate with inflation and the FERC adder.

So that’s a big part of the growth that you see in that business, a little over 30% in the next couple of years as that ramps up. Another part of that growth is that last year, we made a direct investment in two big NGL pipelines that our affiliates, DCP Midstream, has constructed and placed into service.

Each one of those pipelines had a construction cost of $1 billion, and the two parent sponsors, ourselves and Phillips 66, decided to help with that investment by taking a direct one-third ownership, and we each have placed our ownerships in our MLP, since we now hold ours at Spectra Energy Partners, a lot of good growth there as those pipelines fill up and ramp up.

Just talking a little bit more about Express-Platte, for those of you that aren’t as familiar with it. The Express pipeline extends from Hardisty, Alberta to Casper, Wyoming. And it feeds refineries in the Rockies along the way that make products like asphalt for Montana and Wyoming. And it then connects to the Platte pipeline and other infrastructure such as rail that can take the supply to downstream markets.

The Platte pipeline, the southern portion is the largest crude oil pipeline from the Rockies to the Midwest today. And it takes some of the Canadian crude that comes down, as well as crude from the Bakken and local Rockies production eastward to Midwestern markets. And the NGL lines that we’ve invested in bring NGLs from the Eagle Ford, the Permian and the Mid-Continent down to the Gulf Coast at Mont Belvieu.

So that’s a kind of a snapshot of that business. And then here is what it translates to with respect to EBITDA. with more throughput and more committed capacity combined with higher tolls we’re experiencing a significant increase in our EBITDA from the Express-Platte system.

You can see that represented in the blue bars of that portion of the chart here growing at about 32% in total for liquids and about 19% for Express-Platte. so a very nice growth in EBITDA with very little incremental capital, again, the Express-Platte piece just reflects the filling up of Express and the conversion to current market rates that escalate. And then the Southern Hills, Sand Hills, the green portion of that bar reflects the fact that we sized those NGL lines for their near-term potential and not for day one capacity. and so those lines will be ramping up in terms of utilization between now and kind of the end of next year.

There are a number of opportunities that we see in the liquids business. and at our February roll out of our guidance for the year, we talked about five potential things that we might do. And so it really, the point is that in getting back into this business and acquiring this platform, it’s something that we’d really like to grow. we think we came in at a very good time. the fact that there are some other pipelines that are underway, or in various stages of approval isn’t a concern, because if the producers are right, there’s going to be 7 million barrels of incremental oil production in North America, between heavy and light by the end of the decade.

And that means that there’s going to be a need not only for Keystone, XL, and TransMountain, Energy East and all the ones that have been talked about. And then some and we like our route. we’ve had a lot of reverse inquiry from the time that we announced our acquisition from refiners and producers asking if we considered things like twinning the line, or investing in rail terminals or additional storage.

And so these are five projects that have been under consideration. the first one is what we call our synergy pipeline and that’s a line that along with our partner, ATCO Energy Solutions, we intend to build back to the oil sands provide another transporter of oil down to the Hardisty hub to compete with those that are already there. And we’re currently in discussions with multiple shippers and we’ll have more to say about that in the months ahead.

Also further out in time, we’ve talked about the twining of our entire system that would be a very big undertaking up to 750,000 barrels a day. that would bring oil from Canada, as well as some from the Bakken down to the Midwest and beyond.

We’ve completed our preliminary engineering, which gives us an idea of what the cost per barrel would be and it looks to us to be very competitive. So we are currently in discussions with several large refiners, targeting a formal open season around the end of the year or early next year, as we continue to work on market feedback.

So sort of wrapping up and encapsulating all that, we’ve gotten off to a very strong start in the year. For those of you that listened to our first quarter call, our coverages are very good, our EBITDA was a little higher than we’d anticipated. We’re continuing to execute well on a growth strategy.

We have strong fee-based cash flows that continue to underpin our growth. We’re targeting 8% to 9% distribution growth at Spectra Energy Partners with the distribution coverage of about 1.1. And as we’ve said before, as we do better from an EBITDA and DCF standpoint, we intend to share that with our investors in the form of higher distributions, something that we’ll consider later in the year, as we take our budget for next year to our Board for approval.

Underpinning, this is an impressive list of fee-based growth opportunities at attractive returns, significantly above our cost of capital, and we’re executing on those projects and working to complete them between now and the end of the decade.

We have lots of opportunity to fund that growth, a strong balance sheet, the ability to issue equity at Spectra Energy Partners. You may know we have an aftermarket equity program that we put in place last November. and since then, we’ve raised about $150 million to date, so off to a good start there. So I think everything in balance, good returns, solid growth underpinned by long-term contracts, very little variability in our EBITDA plus the growth. So I think a very compelling story in our space.

So with that, let me just pause and take any questions that you may have.

Question-and-Answer Session

J. Patrick Reddy

Anything from you, John that you would like to know more? Yes.

John D. Edwards – Credit Suisse Securities LLC

Just a quick one, as you kind of look across the space, who do you think of as sort of the most relevant competitors or peers?

J. Patrick Reddy

Well, we have a group that we look at four comp purposes and that’s really in terms of who do we compete with for capital, and who do we compete with for talent. But I’d just say that as we think of ourselves, we tend to think of ourselves as more like an enterprise or an Enbridge in the sense that we’re striving for a consistent, sustainable level of growth in that 9% to 10% range in our cash flows, and our EBITDA and our distributions.

This is basically a 10% business when you think about Rockies and IRRs, for the kind of infrastructure that we’re investing in. We have at the parent level, areas or pockets of higher growth like in field services, but more volatility. And where you’ve got exposure to commodity prices, we don’t have any of that in our MLP. And so we would like to set this up to be a company that year-in and year-out can meet investor expectations at a very nice rate of growth with relatively little risk. So I think those would be two comparators. Yes, those would be the two primary ones.

John D. Edwards – Credit Suisse Securities

Anybody else have questions? I have a couple that.

J. Patrick Reddy

Fire away.

John D. Edwards – Credit Suisse Securities

Yes. So one question I have is I’ve asked this to somebody else, I just wanted your view. So Inga updated their study with regard to the total amount of infrastructure, they went from 300-some-odd to something like $640 billion over 20 years. And then API came out with one, they said over 10 years. It’s going to be more like 800 – or 11 years, $890 billion. So a pretty dramatic range there. I’m just curious in your all’s view and what you’re seeing coming down? What do you think is right, who do you think is closer to being right?

J. Patrick Reddy

Well, I’m not exactly sure of that handicap, but I think the good news is whoever is right, or if it’s somewhere in between that’s a staggering amount of additional infrastructure that’s going to be needed. And our strategy is just to make sure that we’re right in the middle of it. And that, as I mentioned at the outset, our competitive advantage is our footprint, because I would say three-fourths of the projects, whether it’s gas or oil, that we’re undertaking involve incremental build outs off our footprint.

And the advantage is that you’re already there. The attractiveness to a customer is that you can often get a project done quicker when you’re building off your system. You can typically do it cheaper, because you are blending the incremental cost of new build with the old historically depreciated cost of your backbone oil or gas system. so you can offer better rates, you can get it done quicker.

And typically you can have better profitability than a Greenfield build with less risk. So, that’s I think the challenge for investors is to kind of separate the wheat from the chaff. Everybody is talking about billions of dollars of backlog. And I think one of the things we’ve done is we’ve actually put names of projects and dates against the business that we’re going after. And when you come through it, you see that most of it really is incrementally built off our system.

So that’s why I like our odds in terms of getting the business that we’ve talked about. And in terms of how big the pie is, it just continues to expand across the four business areas that we’re in.

John D. Edwards – Credit Suisse Securities LLC

So on your system, we noticed that there’s a lot of projects taking gas up into new England, you’ve got things, mid-Atlantic. Obviously, how much more in terms of contract gas pipeline project, gas flow reversals, if you will, north to south, how much more of that are you seeing coming down?

J. Patrick Reddy

Well, I think several of our peers in this space are now talking about reversals to move gas down to the Gulf and two thoughts about that. One is that we were sort of an early mover there and I think cream skimmed a bit in terms of contracting with very high quality customers for the capacity that we had readily available. And then our focus, our continued focus on the northeast and into Eastern Canada, that’s where there’s the fastest demand growth, there’s the supply push and also the demand pull, and so in the northeast and the southeast Florida market, the Carolinas, the Boston, New York and beyond.

And now increasingly, for electric generation, because the six New England governors and their associations have started an RFP for a proposal to allow the merchant generators to be able to recover the cost of paying us to stand by to deliver gas to them, the challenge there has always been that our model is you want firm service you have got to pay for firm incremental service. And their model has been well, we’ll pay you, if we get sequence and that has always been a disconnect, and there appears to be a potential breakthrough there.

So just apart from all the dramatic build to help gas get out of the Marcellus, the growth across our system has been averaging 4% per year, just because gas continues to elbow out coal and fuel oil for home heating, for electric generation. And with the EPA continuing to tighten regulations I don’t see that letting up. So I think there is that, and then the whole industrial and petchem demand that’s continuing.

John D. Edwards – Credit Suisse Securities LLC

Okay. And then with the very cold winter, I mean what did that do to, I guess stimulate more opportunities coming your way?

J. Patrick Reddy

Well, the good thing about that is if you have a good cold kind of long winter every once in a while it reminds particularly, our gas utility customers that, oops, we’ve had growth in our market, we probably need a little bit more capacity. We set 25 or at least record days in a 30-day period in the winter for throughput on Texas Eastern and on Algonquin.

And so I think to that point it just reminds folks that, and it’s not just a thing, I really like about our business is even in an economy when you look back over the last several years, it has been kind of lackluster in terms of growth, but our growth has continued again, just because gases taking a larger share of the energy pie.

John D. Edwards – Credit Suisse Securities LLC

Anybody else? All right, another one. Just I was curious on the California Inland Express Pipeline. I mean, whereabouts in the state is that, and that is an oil pipeline, correct?

J. Patrick Reddy

It would be...

John D. Edwards – Credit Suisse Securities LLC

Where else in the state would that be and where would it, will that be a conversion?

J. Patrick Reddy

It’s a conversion of an existing line. It’s roughly Joshua Tree to Long Beach in terms of where it goes. And this is another example of our approach, which is to go to the marketplace and say, at this price on this route, would you have an interest. And the early response has been, yes, we have an interest, challenge of course, would be to get the necessary permitting in California to convert to a crude line and have the crude go in it. It makes eminent sense from where it’s located and where the refiners are. So that’s really the question. And so we’ve got five or six things we’re looking at. We’ve got some other things on the drawing board on the crude side that we’re looking at. And so just stay tuned, lots of good opportunity.

John D. Edwards – Credit Suisse Securities LLC

So the crude oil for that that would come from the proved production in the San Joaquin Valley is that right or…

J. Patrick Reddy

No. Actually…

John D. Edwards – Credit Suisse Securities LLC

Or where would it, because the Joshua Tree is not really there.

J. Patrick Reddy

The inlet would be fed rail. And so, it could be gas, or excuse me oil from the Bakken or other regions.

John D. Edwards – Credit Suisse Securities LLC

So you pick it up at Mohave I guess, somewhere in there?

J. Patrick Reddy

Around there.

John D. Edwards – Credit Suisse Securities LLC

Yes, because there is a big rail head there.

J. Patrick Reddy

That’s exactly right.

John D. Edwards – Credit Suisse Securities LLC

Okay. All right, anybody else?

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