Spectra Energy Partners, LP (NYSE:SEP)
Barclays CEO Energy/Power Conference Call
September 3, 2014 11:05 AM ET
Gregory L. Ebel – Chairman, President and Chief Executive Officer
Christine Cho – Barclays Capital Inc.
Richard Gross – Barclays Capital Inc.
Christine Cho – Barclays Capital Inc.
Our next company is involved in gas, NGL and crude oil in almost all parts of the value chain, from gathering and processing, transportation with last mile advantage to premium price market, storage and even distribution with its utility in Canada. With all of these natural gas opportunities that are materializing, Spectra is one of the best positioned company to leverage its footprint and has a very low cost MLPs to help fund all of it.
Here to talk about all the growth is Greg Ebel, Chairman, President and CEO of Spectra Energy and Spectra Energy Partners.
Gregory L. Ebel
Thank you. Thank you Christine, good morning everybody, it’s always a pleasure to be here and Barclays always puts on a great gig. So congrats again to you Christine and Rick and everybody that’s involved.
Safe Harbor Statement, you all know what that’s about, although I’ll ask you to read it. It’s important, but let’s just leave it there. So I love this map, I always start with this map; it is the fundamental strategic advantage of Spectra Energy. We have the first mile and last mile advantage assets that are literally irreplaceable and it’s a unique asset footprint that only a couple other folks have that really put us in a position of connecting the major basins with all the key demand areas, and it really I think shows you that not only being connected to the demand areas, but as you can see from these lines and this is basically a satellite picture and where the bright lights are that’s where we go, but importantly we are also connected back to the supply base.
And so it doesn’t matter if it’s the Pacific Northwest or British Columbia, whether it’s the Marcellus and the Utica where we've been there going through those areas for 50 years or whether it’s the more traditional areas in the Permian and the Midcontinent, we are connected there and equally connected right here into Manhattan as recently as November of last year anywhere down in the Southeast along the Gulf Coast and of course around the Great Lakes region as well.
The company continues to have a great setup of assets and this map has really grown a lot over the last few years, we've doubled in size in the last five years or so, but equally we are no longer just a natural gas pipeline company. We were originally a natural gas pipeline company, its still the backbone if you will of the company, but importantly and this is just since the beginning of the 2013, we've now become the third largest transporter of natural gas liquids, those of you who know us, we were already the largest producer of natural gas liquids, but now the third largest transporter in North America.
We are also in the oil business, in crude oil line only one of only three crude oil lines that come out of Canada delivering oil sands gas or oil sands product to here in the United States. So it’s a pretty unique portfolio, we transport still 12% to 15% of the gas that moves around North America in any given day, as we said the largest NGL producer and one of only three oil pipelines.
We also uniquely have an LDC inside the company which I will come back and talk about, it’s a small element, but it’s a very unique LDC relative to what folks would usually see and it’s actually the second largest one of those in Canada. Another way to look at the company is from a structural perspective and after dropping down all of our U.S. pipeline assets into the MLP in 2013, virtually all our assets in the United States now exist in Spectra Energy Partners except for the joint venture at DCP which has its own MLP and approximately half of the entire EBITDA of $3 billion plus is contained that SEP structure.
So that current structure really gives us a competitive cost structure, competitive cost of capital structure and a lot of flexibility and support to move forward with the growth plans or as we like to call it our drive $35 billion by the end of 2020. And in the United States particularly that’s through a early in the splits, pure-play, fee-based MLP which I think is unique also both at its size and the assets that are in it, and that MLP model here in the United States obviously serves Spectra Energy’s shareholders both in Canada and the United States in terms of our efforts to grow SE’s dividends at a very nice healthy rate.
Ironically, I only have about 35 minutes to talk about $35 billion worth of project, so I’ll get right to it. And we are really looking at continued growth and backlog of the projects that really positions a company for a continued long-term growth for our investors, both share appreciation and dividend appreciation. Very dedicated, committed and focused on delivering and securing $35 billion of incremental expansion projects between 2013 and in 2020.
Very reachable goal that was a goal that was only $20 billion, $25 billion a year-ago, in January, a little bit more a year ago. In January, 2013 we moved it to $35 billion, just given the projects that we saw and that does not include opportunities on the M&A front that may come along.
So let me leave you three numbers associated with that $35 billion. First of all, $6 billion of the $35 billion is already producing cash in earnings, it is in the ground, it is operating and fully contracted. $7 billion what we started with at the beginning year of projects that we have in execution. So stuff that we had either singed up contracts or have received the Board approvals and in process of regulatory approvals are actually building that $7 billion as of the second quarter became $9 billion. So we got $6 billion in service, $9 billion in execution, so on the first less than two years of that goal, we've secured about $15 billion of $35 billion of projects.
I think over the next 24-month is a really fascinating window, where the bulk of natural gas infrastructure decisions through the end of decade will actually be made that big producers, big customers will sign up and determine who will actually crate that web. There is lots of studies that are out there that talk about $600 billion over the next 20-years needed for midstream infrastructure, but I think a big chunk on the long-haul pipes, gathering and processing or et cetera will be made in about the next 24-months.
On the liquid side, it’s probably out to 36-months. So when you look to the end of the decade, a lot of the decision on what's going to get built, given how long it takes, given the profiles of different supply areas and the demand needs, those decisions are probably going to be made in the next two years.
If I look to the $9 billion of projects and execution, we moved six new projects into execution just in the first half of the year, those projects total about $2 billion worth of additional CapEx, so going from that $7 billion to $9 billion and they are underpinned by customer commitments.
Those projects on the NEXUS project, Atlantic Bridge. The 2016 Dawn to Parkway project and two new expansions along the Sand Hills NGL line, again NGL lines that did not exist a little bit more than a year ago, but we are already seeing some expansions on them or some expansions to the Red Lake and Spraberry expansions, one of our large projects critically important to continue the development there.
And then the partial Ozark conversion working with Magellan going from a gas pipeline to refined products for a segment of that. Given the time, I think I’ll focus on three key projects here in execution and I should also say that we likely will add at least another $1 billion of projects to the execution mode before the end of this year and so stay tuned on that front.
Just turning to NEXUS first, the NEXUS project is really going to bring supply diversity and security in markets in the Midwest, U.S. as well as Eastern Canada by delivering Utica and Marcellus gas supplies by late 2017. NEXUS has signed customer contracts necessary to move forward and we are doing just that on the project which we announced in the start of the third quarter.
Anchored by commitments from Eastern Canadian LDCs, three of which the partnership own which was always helpful, so we have market absolutely as well as Appalachian producers as well underpinning that. I would expect our investment opportunity here is between $700 million and a $1 billion for our proportionate, we are still working at exactly what the final equity positions will be there.
And as I said, we recently completed the open season securing the volumes needed to make this work for Marcellus and Utica producers as well as the LDCs. We are now at the point where we’ve got 80% of the 1.5 Bcf a day designed capacity committed to and the next big milestone here I would expect to see would be the pre-filing which will happen by the end of the year.
Turning to Union Gas I would first in all formally say that I think investors often forget Union Gas it is a LDC that serves about a 1.5 customers, one of those great state here in interstate earns a nice return each year, but more importantly from our perspective is that it’s a 5 Bcf a day major pipeline, running basically from the Detroit to Toronto and that is creating some very healthy growth opportunities that you do see it on [CN] (ph) and LDC and this particularly true between the period of 2015 through 2017, it looks particularly robust
So let me talk about one of those, at least at this point in time tying the other ones. So in 2015, we have a $400 million expansion along this 5 Bcf a day pipeline called the Dawn–Parkway 2015 expansion, fully underpinned, but we are also now executing on the 2016 Dawn–Parkway expansion and it does provide the customers some of which are Union gas, but the other customers in the region and in Eastern Canada with access to new supplies from Marcellus and Utica through NEXUS project.
So in many respects this is a front end to Nexus and again a real strategic benefit when you own one of the assets, it happens to need end solution supply diversity and you can supply that on the other side of the boarder. And as most of you know Western Canadian Gas at least Alberta Gas is declining in [furlough] (ph) futures along the TransCanada pipeline and as such. The LDCs in region that are looking for solutions.
So again, we have secured customer commitments here and expect to file that application with the Ontario Energy Board this month, so that CapEx is $400 million so that’s $800 million and I would expect that such opportunities will continue, so you should expect to see an open season for a 2017 expansion that will happen sometime before the end of the year.
Now turning to the Northeast and I guess New England in particular, the third project that I would focus on at this point in time, a step that just moved into execution the Atlantic Bridge project which further expand our Algonquin and Maritimes and Northeast pipeline systems, which is again connecting those supplies abundant supply as we see out of the Marcellus and other places to the New England states and of course the Maritime provinces.
We have committed anchor shippers onboard and the project is slated to go into service in 2017. This is about a $900 million project and the final capacity is in a 175 to 200 a day range, which really tells you the challenges of actually putting infrastructure and how expensive it is, but relative to what people are using whether it for power generation or heating homes called the fuel oil, still very cheap and economic solution for that part of the world. I don’t think it is lost on that part of the world, the real benefit of us having just built for the first time in 30-years a new pipeline into Manhattan that came into service in November and the same type of benefit focus in New England.
Also recall that we are already executing on the AIM project as well here and almost regardless – that’s a $1 billion project and almost regardless of what happens with infrastructure up there, whether it’s us that builds an additional pipeline or somebody else, because of the critical nature of Algonquin and Maritimes and Northeast it is that backbone of natural gas into New England that we would expect another say a $1 billion project on top of the AIM and Atlantic Bridge project in the coming year or so. As I said, it’s just a critical backbone.
Now we are not by any stretch of the imagination done, so if I move from projects that we have on execution, there is also a very robust backlog of projects still in development. And these are just the specific ones, obviously a much bigger list of things that we have going in, but not by a long shot or we done this growth and I think these projects will continue to support the growth of the company and the dividend in 2017 and beyond.
So let’s start with U.S. Transmission projects and this slide course includes projects right across our whole footprint. We have a number of immediate and near-term prospects, in the next 18-months again I think will be or 24-months is going to be critical component for origination.
As I just mentioned, continue to see opportunities in New England and at least another $1 billion dollar project there. We continue to see a variety of projects in the Marcellus and moving Marcellus Gas South, not just to the Northeast, but also South and North and in fact West. We’ve got additional projects on the crude and liquid side Canadian JMP and pipeline opportunities obviously related to LNG exports.
I would also say that Mexico is also on our radar screen, we have traditionally only operated in the United States and Canada, it served us very well, but as you all know there is a variety of changes going on in Mexico, still early day, but given our position as you see on the map, we go right to the Mexican border that we have some assets just over the border that we see opportunities both front-end opportunities on the Northern side of the Mexican U.S. border for us to develop as well as opportunities right in Mexico. So there is $2 billion plus worth of opportunities at least that we see there in the near to mid-term.
A little closer to home, Texas Eastern continues to be the backbone that slugs with the red line you see that going from the Gulf Coast up to the Northeast and continues to generate organic growth opportunities adding to projects that are in execution like TEAM 2014, TEAM South and OPEN, TEAM South and TEAM 2014 all of which will come in to service between now and the end of the year, OPEN next year, but we are further advancing that bidirectional capability, so the ability to actually move gas both ways along our Texas Eastern system.
And in last July, we commenced two new open seasons for the Adair Southwest project you see here in the second one and Access South as well and those two projects combined total about $400 million in CapEx and provide additional incremental firm capacity from Appalachian shale markets to the Southeast in the Southern U.S.
So when those two projects are completed along with TEAM 2014 and OPEN and Uniontown to Gas City. By November 2017, we will actually have the ability to move 2.4 Bcf of gas South on Texas Eastern and then latterly a number that people would think you have lost your mind if you had suggested that just 24-months ago.
So real changes in dynamics and obviously going back to that initial strategic value of Spectra Energy, the assets that can’t replaced right away that can’t be replaced upon Texas Eastern, the ability to reconfigure and restructure to move gas in multiple directions is a real competitive advantage and as you see here leading to opportunities to continue to grow.
In Western Canada, we remain on track to receive the environmental certificate for our West Coast connector pipeline which will deliver natural gas to BG Group’s proposed LNG export facility in Prince Rupert, British Columbia; of course there are many projects on the LNG front in Western Canada being developed in BC. So not only are we interested in that particular project, but also the other infrastructure in BC that will be necessary to have such a build out.
As you would recall for some of you that we currently process about 60% of the gas in British Columbia on a pure fee-base, no commodity exposure there as you would see in the United States in many cases on a fee-based. So we would expect to get a considerable portion of the JMP activity in British Columbia regardless whether it’s a BG project or any of the other projects.
I think there is a lot of water to go under the bridge on these projects [SID] (ph) is still in that 2016 range, but the source is there, many of the players there are not as free to invest in the United States as they are in Canada, you know particularly companies that maybe state entities back from Muslim countries or the Chinese have difficulty investing directly in resource. In United States they see those opportunities in Canada and that’s a very different dynamic.
So I think we've continued to see Gulf Coast projects, Canadian projects, East Coast move around and who is ahead on the race, I think there is a good opportunity for many of these to move forward, but there is still a lot of water to go under the bridge, but huge opportunities to build both Greenfield and Brownfield gathering and processing facilities as well as expand our existing pipeline that are already up there.
Not to be forgotten of course on the liquid side of things, as I mentioned this is a relatively new business for us that we basically got in from a transportation perspective beginning of 2013 and I think its fair to say its been highly successful both at the acquisition of the express pipeline and the build out that with DCP and Phillips 66 of the Sand Hills and the Southern Hills NGL lines, in combined those two businesses we see the EBITDA growing by 100% plus between 2013 and 2016 going from call it a $130 million to well in excess of $300 million by 2016.
In addition to that we are continuing to see a lot of organic growth projects on the Express-Platte system probably dealing with directly there, just projects to debottleneck the system, and utilize the assets to attach new load and supply. This is probably anywhere from $100 million to $150 million perhaps $200 million of easy organic projects along Express-Platte, which we really haven’t talked about to-date, projects that could be in service and will be in service in the 2016 range and obviously it will deliver attractive returns for us.
We see similar projects and I noted earlier that the Spraberry and Red Lake expansions along the Sand Hills project, those are project that we didn’t assume a year-ago and again what they do is help to fill up Sand Hills quickly than we originally expected, which obviously leased to the opportunity for further expansions along Sand Hills. And then of course we got a number of longer term step up projects on the liquids front, so a doubling or twining if you will of the Express-Platte pipeline.
The ICE project in California which I could speak to and the Synergy project which is a project to move not more well out of the oil sands area to the Edmonton-Hardisty hub in Canada working with a joint venture in there. So bearing a large project on those fronts, largely backend of the decade in Express-Platte pipeline and a 100% is multiple billions couple of billion on the Synergy project much smaller project for the ICE project.
But we have done enough work there, had enough expressions of interest that we are completing the preliminary environmental and engineering work for both the Synergy project and the Express-Platte project, the ICE project into California. We would expect to file a regulatory application very surely here and if all proceeds as planned that project could be in service in 2017.
So that’s going on and a lots of good results and so we are pretty excited on the projects, not only that were executing on and I think if you look back over the projects that we've put in service over the last half a dozen years on time, on budget, very commendable portfolio, not only economic project that once that actually get done and that’s increasingly become a real competitive advantage for us to the amount of time spent upfront on projects to see that they get in time not only for customers, but also for our investors obviously the longer it takes for projects to get into service the lower it is for the cash to come through.
Yet the bottom line of all this is, first half of the years has been pretty good, we delivered strong financial performance exceeding our expectations in the first part of the year and we would expect to continue with our plans this year, we said at a target of $1.40 on the EPS side and distributable cash flow and I would expect we would at least exceed those numbers.
So we are please with those results to-date, we are pleased to be ahead of the mid-year benchmarks that we said, we are executing on the infrastructure projects that are really critical needed in all the areas that we are and we are moving projects from development into execution, as I said, $2 billion alone just in the first half o the year and at least $1 billion more when moving to last half of the year.
Very focused on this drive to $35 billion, it’s a very reachable target. It’s a target that we strongly believe we will be of the place and be able to achieve if not exceed, largely driven by the fact that we’ve got that enviable expensive and literally irreplaceable North American asset footprint, we've got the diverse business lines to go through different cycles, the proven ability to deliver on projects and serve the customers.
We’ve got that low cost of capital which has been a challenge for some folks, given our MLP structure both that DCP, but of course most importantly at Spectra Energy partners at this time, which not only allows us to compete, but obviously see superior returns and then of course we all know what this is all about, at the end of the day we are [tested] (ph) with delivering shareholder return and for a big expand that’s driven by dividend and distribution growth and investors can count on.
We laid out a good three plan at the start of this year, which saw kind of 9% growth or so on the distribution with some I think pretty modest assumptions. As we set our plans now through the fall and finalize those in December, we will be back to investors and tell you what we are going to do between 2015 and 2017 which I think will be equally positive and some good upside opportunity for that.
So I will close and be happy to take your questions. Thanks very much.
Christine Cho – Barclays Capital Inc.
I guess I’ll kick it off. You talk about one – before year end you think you will move another $1 billion into execution. Can you talk about what kind of projects those are, are they gas, crude a little more details.
Gregory L. Ebel
I think it would be a bit of combination. Yes, I think at least $1 billion dollars, I think it would largely be U.S. projects largely on the gas side, but some of those expenses I talked along Express-Platte, I think we will feel very comfortable saying those are now in execution that $100 to $200 million type expansions. Northeast obviously is a big area for us, but also the Gulf Coast and as the LNG projects on the Gulf Coast gain a little bit more momentum then they had say 18-months ago, I think the opportunity for customers there to firm up their pipeline needs could lead this some opportunities for us too.
Christine Cho – Barclays Capital Inc.
Can you also provide an update on Sabal Trail given just all of the headlines around Southeast demands?
Gregory L. Ebel
Yes, so for those of you who might not recall Sabal Trail is a third pipeline into Florida, which we won last year and we will build in a joint venture with NextEra to serve the very rapidly growing gas demand needs in Florida. That project we will move forward with getting our [fourth filing] (ph) to at the end of the year, I believe it is on target, on budget, continue to be very pleased with the partnership with NextEra. I think it’s a good precursor of what you are going to see across the United States.
So largely LDCs gas and electric participating with midstream companies, obviously the growth on the midstream side it’s for higher than you see on the electric side. And so they are looking for those opportunities, so that’s worked out well with us with NextEra, we don’t see any major regulatory hurdles and that’s an area where we spend a lot of time on the ground making sure that right away et cetera or well thought out that if we need to make changes, we make them in advance. And so I think we've created lot of lead time, good flexibility to be able to bring the projects on time and on budget. Rick.
Richard Gross – Barclays Capital Inc.
The oil projects, is the synergy pipeline in anyway related to and the successor anyway related to the twinning of the [batch] (ph). So you don’t have an anchored shipper that would continue on and become the anchored shipper and twin?
Gregory L. Ebel
Correct. So the synergy pipeline again would go from the oil sand to that Edmonton-Hardisty hub, there is probably two players up there that dominate now, customers are looking for other alternatives. From that hub you can go East or you may be able to go East, if that projects get built that’s not ours, you may be able to go West that’s not ours, but assuming one of those projects get built or you can continue on the existing Express-Platte line or an expansion.
So I think there is almost no lose scenario, you know if projects in Western Canada and go to the Coast I think that bodes very well for producers wanting to move gas into the United States. If the projects go to the West Coast and the East and obviously users in the United States, particularly in that region and you have seen us being able to firm up our contractors from one year contracts to 14-year contracts since we bought that I think that bodes well too.
So I think just given that hub, given the need for growth it’s not relying on anyone of the other projects going forward. That projects probably runs in that $1 billion to $2 billion range, probably close to the high-end.
Christine Cho – Barclays Capital Inc.
I think we’ll go to breakout, which in Liberty 5.
Gregory L. Ebel
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