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Spectra Energy Corp (SE)

November 08, 2011 12:15 pm ET

Executives

John Patrick Reddy - Chief Financial Officer

John R. Arensdorf - Chief Communications Officer

Gregory L. Ebel - Chief Executive Officer, President and Director

Analysts

Paul Bornstein - Black Diamond Advisers

Craig Shere - Tuohy Brothers Investment Research, Inc.

Andrew Gundlach - ASB

Faisel Khan - Citigroup Inc, Research Division

John R. Arensdorf

Okay. I think we're ready to get started. Just so you know, this is being webcast, and I would ask you that when it comes time for the Q&A, if you'd wait for a microphone so that those on the webcast can hear the question, as well as the answer, that would be great. I've gone around the room and introduced myself to a number of you. But for those of you who might not know me, I'm John Arensdorf. I'm the Chief Communications Officer at Spectra Energy.

And as a sort of our tradition at the end of each quarter, today, we have Greg Ebel, our CEO; and Pat Reddy, our CFO, who are here to just to give you a few brief remarks, maybe put a little color on the quarter, what our current plans are. And then we really like to reserve most of the time for these sessions for what's on your mind for the Q&A session.

So before we get started, I will ask you to take a quick look at Page 2 in your book, which is the Safe Harbor statement. I'm not going to read the entire Safe Harbor statement. Suffice it to say that I'll ask you to look at that and to remember that things don't always turn out exactly as you have them planned.

So with that, we're going to go ahead and move forward and Greg will kick it off.

Gregory L. Ebel

All right, great. Thanks, John. And does this one go in here? Thanks, John, and good afternoon, everybody. Glad you guys could be with us. As John said, we'll just run through a few slides, and then I think opening up for questions would be great.

Earnings for the quarter grew by about 23%, which was a nice jump for us and pretty much in line with our expectations for the year. And what we've seen year-to-date were earnings for the first 3 quarters up in the 20% range. All the businesses are really doing well, frankly, driven by a couple of things: one, all the projects that we've been able to bring into service, not just this year, but last year as well. So we start -- they typically come in, in the fourth quarter, so you pick up those earnings in Q1, 2 and 3 of the following quarter; and then, of course, we're doing well in the NGL front as well. NGL price is running around 40% or so, higher than they were in the third quarter last year, and 20%, 25% higher than we expected for the year.

Equally important, volume growth, really starting to see the volumes come in through all the various shale plays. But in particular, in the DJ Basin, where we built a plant at our DCP Midstream business and expect that to take several years to ramp up, but in fact, it is now full. The Eagle Ford volumes are coming in very strong, and even places where, in the Processing business, we had not seen good growth from a volume perspective, like the Midcontinent, now seeing growth for the first time in several years.

So that was extremely positive and, obviously, gave us confidence to move forward on the dividend front in terms of making that move, with good visibility on what's going to happen in the fourth quarter, while not finalizing our 2012 plans, but good visibility in how 2012 goes. We thought it was time to move the dividend up, which you see in this slide, which I think is Page 4 of the deck that you guys have. Not only did we move it up, but we felt that at this point in time, having spent $5 billion or so of capital on your behalf and that monetization of that strategy coming forward, great cash penetration, operating income, very strong EBITDA, low interest rate environment, good gas environment, that in fact, we could see an increase in the dividend at basically twice what the consensus increase was and bring it in a quarter early.

I think that good cash generation and the monetization strategy also underlines a couple of other benefits. One -- a, our ability to execute on the $1 billion plus in expansion capital through the next several years, through 2015. And to do so, without having to tap into equity markets, that the cash generation inside the company not only plays for, obviously, simple things like taxes and interest and the dividend and all the maintenance cap, but fully now pays for half of our expansion capital. So -- and the balance sheet's running 55%, 56% debt-to-cap, and you're generating more than 50% a year expansion capital after paying everything else in internally generated equity. U.S. investors, obviously, don't have to worry about access to capital markets or dilution and all the while, seeing a stronger balance sheet. We've improved the balance sheet by about 600 basis points since '09, running from 62% debt-to-cap down to about 55%, 56%. You see the same type of results from a coverage perspective as well.

So all of that allows us to be able to grow the dividend, pay for the CapEx. And I think you'll find that where we would expect to see the dividend grow at a rate better than what you typically see in some of the other yield plays, if you will, in the Alerian Index, I think it's 5% or 6%. And you can see that we've got dividend growth in excess of that without having to also worry about going out and raise the equity to get that type of growth.

Just in terms of the next chart, just on some of the things that our unique position, and being able to serve the key supply areas as well as the demand areas, really gives us a huge strategic advantage. And you can see that in the projects that we've been able to put in service even so far this year. The net project, which is about a $150 million project in terms of putting a new power plant deep in the Tennessee Valley, and I think it's a good symbol of what you'll start to see increasingly so as the decade goes on and changes from oil and coal-fired generation to gas-fired generation. TEMAX / TIME III, obviously important for this northeast neck of the woods. And that allowed us to pick up gas from the REX pipeline. It came in a couple of years, take it from Clarington and move it East to market. Obviously, that's -- this come in service.

We did pick up most of the revenue on that front, actually, about a year ago. But the full project is now in service. Announcement was an important one for us to be able to deliver in the, call it, in the $700 million range. And then the Dawson project, which up in Northeast British Columbia, really represents just the ongoing development of the Canadian shale plays, particularly in Northeast British Columbia, that whole Horn River and Montney region, where we will invest about $1.5 billion through early 2013, the bulk of which is already done. The Dawson Plant will come in at the end of this year, start of next year, and then the second phase in early 2013. And then our Fort Nelson Horn River Plant, that will kick in, in May second quarter in that range for next year.

So that's very positive. And then some 4 other projects came in during the year so far as well. So we had indicated to you that of the investment that we're making, that should generate about $0.20 in EPS this year. And in fact, that's what's happened. About $185 million in incremental EBIT from the projects that we put into service, and in fact, that's what you're seeing.

Perhaps equally important and something I thought I'd spent a little bit of time on because I'm not sure it's always easily understood, is just DCP Midstream, just for the type of growth that we're seeing there. Traditionally, that area had been kind of a flat business on a commodity neutral basis. Now we're seeing 2%, 3%, 4% type growth off a pretty big base. And just to put that in context, how big DCP Midstream is from an industry perspective.

So in terms of NGL production, DCP Midstream produces 35% more than the next closest competitor, which would be Enterprise. It produces about 8, 9x the NGL that ONEOK would. So we're talking about a huge player and some really great opportunities to extend upon the value chain here, which you see in these 2 projects. The first one being the Sandhills Pipeline, which will move liquids from the Permian to the higher priced market in Mont Belvieu region. That project will come into service in the first part and the second half of 2012. And then you'll see the remainder coming in, in 2013. About $1 billion project, so a big project for DCP, which as I said traditionally, has spent probably more in the $300 million, $400 million range at most from an expansion perspective on an annual basis.

And then the second project, which closes another pricing gap for our customers, which is moving from basically the Conway location, taking liquids down into, again, Mont Belvieu, to serve that market in the higher priced market. And just by us announcing these projects, you can see we basically have a Y-shaped grid, if you will, that's surrounding the Eagle Ford, Permian, DJ Basin type activities to bring liquids down into the Mont Belvieu region. It's created a lot of interest from producers and so you see a couple of little of spurs there up to the West on the Southern Hills pipeline, which is really just ideas that we have and different ways that we can move that pipe to serve our customers. Because if they see the opportunity, they, in fact, will probably help us determine the final starting point of that Southern Hills pipeline.

And then, of course, obviously, we're bringing on some plants as well. As I mentioned, the plants, newborn plant, which is in the DJ Basin up in the Colorado region, that project, again, we hadn't expected it to fill up until probably 2014. It's already full. So it's just -- that's going to lead to other opportunities. And then the LaSalle and Eagle plants will come in as part of the projects ongoing. So all of that is pretty exciting for us from a DCP Midstream perspective, and obviously, [indiscernible] be a very, we as the GP holder of that entity, along with Conoco, obviously, getting a lot of cash from those entities that comes home and issues by 2 ways at the corporate level at Spectra to pay dividends and obviously, to fund the pipeline projects.

2 important things about these 2 pipeline projects. Remember, DCP has commodity exposure, but these projects, actually, are fee-based pipelines. And [indiscernible] get the uplift is, we also helped to underwrite with our own barrels of liquids that help to underwrite this. So you get a multiplier effect here to this type of investment.

Longer-term growth, driven by a variety of additional projects, which I think are important and has given us that comfort to see growth through that 2014 period. We look at kind of 3-year timeframes. Another round coming in the Horn River and the Montney, driven by 2 things. One, just the continued production buildout, particularly in the Montney region, but also the possibility of LNG exports. A big discussion, obviously , in the last 12 months, but really been something we've been discussing for probably 24, 36 months in both the Gulf Coast and here in Northeast British Columbia.

As you can see, that blue line that goes down the slide on the left-hand through British Columbia there, there's no other gas pipeline, interprovincial or interstate pipeline between that blue line and the coast, which is where Kitimat is, which has been the much talked about site for a variety of projects. There's probably 4 to 6 projects being bated about there. I don't know exactly how many will they’ll build, I would hope that at least 1 would get built, maybe 2. And I think that'll depend on the size. And you can imagine, we're spending a fair bit of time with customers from one end of that value chain to the other. It could be a very large investment indeed to move that forward over time. And we'll see how that develops. But obviously, maybe $2 billion to $4 billion in terms of pipeline possibilities there.

Northeast demand here in the Northeast region continued to see opportunities here, whether it's moving Marcellus gas. As you know, we have our New Jersey-New York project, which is in execution, expected to receive the final regulatory approvals early in 2012 that will allow us to start building that to be in service for November 2013. So you see that ongoing.

And then the continued move, again, to power, not only here in the Northeast, but probably even more dramatically in the Southeast and the Florida region. As you know, Florida has moved basically almost entirely to gas, some nuclear opportunities, but even -- but that's a great challenge, as you know. So as we move through the decade, we see more and more opportunities on the power side. And then finally, back to DCP midstream, another $2 billion worth of opportunities that they’re pursuing that will help their growth to continue on an ongoing basis.

So good quarter 3. Good backlog of projects moving forward, all of which we feel very comfortable that, that will support at least an $0.08 growth in our dividend on an annualized basis through 2014.

So with that now, I'll turn to Pat for a little bit more details, then we'll take questions.

John Patrick Reddy

Okay, great. Thanks. Reach across here. Well I know that many, if not all of you, were able to listen in on our earnings call last week. And so I'm not -- I'm going to try not to repeat everything we said in the call or that I've said. And I'll give -- but I'll give you a recap and touch on the highlights of the quarter and our year-to-date.

So in the third quarter, we had ongoing earnings of $247 million, which compared with $201 million last year, very good results and on track with what we expected to see. Our earnings this quarter surpassed our expectations, and our year-to-date performance reflects the solid progress on our capital expansion plans that Greg talked about. We are on track to realize incremental EBIT from expansions of $185 million this year or $0.20 a share. That helps not only with our earnings, but also with our cash flows and our ability to contribute to the internally-generated funds for much of our expansion growth.

As Greg mentioned, our core fee-based businesses performed in line with our expectations, along with the growth projects that we had. Our ongoing net income was up 23% for the quarter, about 22% for the year.

Turning now to our ongoing EBITDA for the quarter. It was $785 million compared with $695 million in the third quarter a year ago. That's a 13% increase year-over-year. We're up about $90 million and 13% for the year-to-date.

Looking at our ongoing segment EBIT and other expenses. In U.S. Transmission, we reported third quarter EBIT of $235 million, up a little bit over last year. As you would have expected, that segment benefited from the Northeast expansions that we placed into service at the end of last year, primarily our TEMAX / TIME III and our Algonquin East to West projects. And these benefits were partly offset by higher expected operating costs. Distribution reported third quarter EBIT at $50 million, down a little bit from last year, reflecting higher employee benefit costs, which were partially offset by a stronger Canadian dollar.

In Western Canada Transmission & Processing, we saw improved results in our base gathering and processing business. And that was driven primarily by higher contracted volumes from expansions in the Horn River and the Montney, which more than offset declines in conventional basins.

We also were helped by performance at our Enbridge processing plant, which saw the benefit of higher -- basically higher sales prices, and the segment that was also helped by a stronger Canadian dollar this year.

In Field Services, the story there primarily is higher NGL costs, as well as higher oil prices, which helped our condensate sales. Although it's really the NGLs that drive the performance in that business.

We also mentioned on our call last week that we're experiencing higher-than-expected dividends from our partnership there. We have received $395 million so far this year, and that's well beyond the $350 million that we expected for the year. So, again, ahead of plan there.

So to close our formal remarks, the question really on your mind, I'm sure, is why invest in Spectra Energy? And I'd just say about that, that reflecting Greg's comments in our financial performance, we've made very good progress on our capital expansion plans. Our core businesses are performing just as we expected. And we've captured the upside of higher commodity prices at our Field Services business. We're advancing on the 2 fronts that investors care about. We're growing our earnings in a consistent, reliable, transparent manner. And we're bringing dividend increases along with that. Having announced an $0.08 dividend increase during the quarter, we both upped the pace of dividend increase and accelerated the timing of that increase, which reflects our confidence, not only in the financial results year-to-date, but our outlook for next year, which we'll talk more about in January when we're back.

So with that, I'll just stop. And John, I think we're ready to take questions from the audience.

Question-and-Answer Session

John Patrick Reddy

[Operator Instructions] Who has the first question? [Operator Instructions]

Faisel Khan - Citigroup Inc, Research Division

Faisel Khan with Citigroup. Pat, Greg, on the storage, you mentioned a little bit on the earnings call about your outlook for storage. You thought that you're going to continue to build that process in the storage side, and you see this becoming a more fruitful sort of business in 3 to 5 years. Can you talk about how we get there? What's going to cause the storage environment to get better? Is it just a notional price of gas? Or is it something else that we need to look for on the demand side of the equation?

Gregory L. Ebel

Well, it depends. For our business, I'd say it's largely on the demand side, one, and that demand side driven by the power demands. And we've seen this in Ontario. When we switched out to a much more gas-fired generation market in Ontario, it wasn't just about storage capacity, it was also about deliverability. And we were able to offer some new pricing and new deliverability services for the power producers up there, which augmented our margins. So I think as you see power come in, in the United States, you'll see the same, particularly around the Gulf Coast, where we've got high-deliverability salt dome storage, which is going to be really valued. So that's one. Two, I think the very fact that we've got multiple storage sites really creates opportunity for the power producers there to -- for us, again, to sell a little bit more services of transportation and the storage capacity. Unless you saw that last winter, when you had the power problem, if you will, in Texas, we were able to serve a number of our customers from multiple storage sites when they couldn't them from other locations. So I think that'll come back. Do I think it's coming back to the, call it, the '07, '08 type range for us? I don't think so. I don't -- you need some volatility from a trading prospective. We haven't traditionally traded around those assets. But I think it's the softness that we see, call it, 20% or so now. I think as you get to the mid-decade, you start to get some balancing and where the gas is going to come from, how exactly power plants are coming, and you'll see it come back. So -- but, again, I'm not forecasting it's, call it, 10% of our business. I'm not forecasting it to go back and going to be as robust market in '07. For some of the guys that trade around it, I think they need the volatility to be able to get some of those prices back.

Faisel Khan - Citigroup Inc, Research Division

Yes, a separate follow-up. Given the transactions you've seen where you've seen MLPs basically taking out C corps. Can you give us a little bit of your philosophy on how you think of the MLP as a tool in financing? I mean, what's your opinion on these MLPs basically using that instrument to take out large C corps? Is that kind of the design of the instrument? Or is it -- or do you have a different view of it?

Gregory L. Ebel

Well, I think the challenge, we've -- as you know, we've been in the MLP market for a very long time. We were one of the first parties to put out an MLP. And I think we look at it much more as an acquisition and financing vehicle. So from that perspective, if you think they've got a long-term cost of capital advantage, then I think there's some real value in that. It does pay out 100%. MLPs pay out 100% of their earnings and cash flow. And in volatile markets, I think that creates some challenges. As you know, investors are getting a return on and of capital. So it is a sinking fund. I think it's a great financing vehicle. I don't think it's a be-all and end-all. And I think you see -- we talk about MLP takeouts, but you don't remember you do have KMIs [ph] of C corp, actually, that's holding MLPs. And that's very much how we look at DCP Midstream. There's a C corp holding a general partner, basically, and we take all the cash out of that. So I think it's definitely something to look at, something we'll continue to use. But I don't see Spectra changing its overall structure. A little bit unique element of Spectra. First of all, if you recall, half the assets are in Canada. So you get a challenge on that front. And 20% of the business has good commodity exposure in DCP Midstream. So I think if, largely, what we've put in to the MLP has been most of the pipeline assets or which are all the pipeline assets, ex Texas Eastern, which obviously has a low basis, which would have a fair bit of large tax leakage that couldn't be protected. Like some of the other MLPs have looked at or some of the C corps have looked at spinning out their business, which is what we did in 2007, and may have tax shelters from the E&P side that can able to prevent that tax leakage. That's not something that Spectra has. So our view has been, let's find a way to grow the distributions as fast as what you're looking at average in the Alerian Index. And let's do that by paying 35% to 40% lower payout, which also gives us an opportunity, and not having to rely on capital markets to only feed your growth. At the same time, use the MLPs we have to go out and buy assets. And we've done that with respect to Ozark, with respect to the pipeline that we bought in Kentucky. And obviously, DPM has done the same thing on the DCP side of things. I think both can work.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Craig Shere, Tuohy Brothers. So, Greg, if I can dovetail on Faisel's last question a little bit. You commented about the low basis of some of your assets and just not economic to drop down and, say, pursue, we'll call it, the El Paso strategy. But you have some tremendous organic growth at DPM. And I guess I wonder if in a couple of years, with the opportunities there, if it doesn't make sense at some point or if you think it might make sense at some point to get greater color on the some of the parts by doing a GP MLP IPO?

Gregory L. Ebel

Yes, I mean, first of all, we’re changing some partnerships up at Conoco. So we've got a new downstream business. So I think we’re going to let those guys get in the business, understand the GP that we do have, which is a privately-held GP, of which we take out all the cash without having to deal with the public nature of that. I think more likely, Craig, as you see some of these projects come on, Sandhills and the Southern Hills projects, you've got the benefit of the parent, basically, helping to fund that on the debt side. So that's DCP. The equity side, if we drop some assets into DCP -- into DPM, we can raise some equity. Fund those projects. Once those projects are up and running as fee-based pipelines, I think they're excellent candidates, then drop into DPN. Not saying that's exactly -- that's what we'll do, but I think you're talking about a couple of billion dollars’ worth of investment there that you're right, you could easily see move into the MLP, which I think would give better visibility on some of that DCP growth by dropping some of that stuff in DPM. But right now, you get the cheapest cost of debt, which is at the C corp, and you're getting the cheapest cost of equity, which is at the MLP DPM.

Paul Bornstein - Black Diamond Advisers

Paul Bornstein, Black Diamond. You have a lot of projects in the portfolio, and it seems like the industry is in a sweet spot. I'm just curious. Are you -- as you look at further projects to expand on, are you starting to hit the -- a ceiling on returns? Or you still think we have a long way to go?

Gregory L. Ebel

Well, I think there's a limit to how low the returns can go. I don't know that you'll see us see 14.5% returns like we've seen in the last 3 years, and we didn't actually go out there and promised that to investors. We said 10% to 12% type returns. And we were just able to -- it's a combination of things, less capital, higher revenue than we expected to get better returns. But I still think you can get returns in that 10% to 12%. You'll do lower return projects, too. Look, I mean, our New Jersey-New York project is -- kind of call that 8% to 10% type return as supposed of 10%, 12% type return. But it's getting us into a market that in fact is -- they haven't built a pipeline in here in years in terms of major pipeline. There’re lot of things you can predict, but one's almost for sure, that you're going to have a very large energy consuming market here in New Jersey and New York. And so you'll do some projects to make sure that you get into an area that's still beating your cost of capital, but lower returns. I think it depends on what happens on the LNG front. On the LNG front, in Canada, that would probably be a regulated rate of return project, which pipes in Canada a 9.75% return on a 40% equity base, which is -- that's different than what you see in the United States. But we're talking about a very large amount of capital put to work, $2 billion to $4 billion. And then, for us, the way we've always looked at this, okay, what's the incremental add? Forget the pipeline. That's great. Like a good, steady earnings and does wonders for dividends and cash flow and coverages. But what's the incremental on top? The incremental on top of that for us is projects like in the Horn River. So fee-based processing in Canada, which is a higher returning business than the pipeline business. So you put the 2 together and you're able to get still, I think, in that 10% to 12% type return. So at least through, call it, 2014, as far as our plan goes out 2015, I still see us being able to do that. And, again, when you're building that 5 or 6x and sometimes 7x EBITDA, it’s obviously a lot cheaper than going out and buying a 10, 12, 14x EBITDA. So I think we can still get those types of returns. I guess the other benefit of the MLP is, well, you might do lower return projects at the MLP, given that the equity component for at least the short-term is -- could be cheaper equity.

Andrew Gundlach - ASB

My name is Andrew Gundlach, Arnhold & S. Bleichroeder. Talking about the Horn River for a second, which is, as you point out, unique opportunity. How do you see yourselves financing $2 billion to $4 billion? If I remember correctly, you don't cross borders a lot with your cash, if ever. Is that right?

Gregory L. Ebel

Yes, right. The bulk of the way in which we'd finance it is through debt in Canada. So you've got 2 public companies out there from a debt perspective. They generate a lot of cash themselves. I'd expect they'd be able to generate most of the internally generated cash. If we had to cross border or loan some money to them for equity, I guess we could do that as well. But both Union and Westcoast Energy, which is the public company who built the pipe, just issued 30-year debt at the lowest price in their history. So the market up there for yield and infrastructure product is superb, which is why I think you see companies like Enbridge and TransCanada trading at some good multiples. So not worried about financing up there.

Andrew Gundlach - ASB

I was actually more thinking about the equity component, and if I could be more specific, Union Gas, which is not a growth asset. Why can't you recycle that cash into a really interesting project in the Horn River?

Gregory L. Ebel

Yes, absolutely, we do. And you saw that, that money out of Canada gets dividended up or we keep it there to reinvest. So as I said, a huge chunk of what you're talking about in terms of internally generated cash flow, will flow up into Westcoast. In fact, the holding is actually that Westcoast holds Union, so you see dollars flow out all the time.

Andrew Gundlach - ASB

Right. And if someone would give you your asking price for Union, is that a core asset? That's really what I'm asking.

Gregory L. Ebel

Is Union a core asset for us? Well, I think there's -- Union you have to look at it as 3 businesses. You've got the Retail business, Marquee spend, Con Ed, et cetera, which is a very stable as you say, you're adding 1% or 2% in terms of growth. The real benefit of Union, and it's why we hold it, is the size. It's 1.3 million customers. So it's a very large LDC, excellent from a credit support prospective. But the 2 key pieces are the large 5 Bcf a day pipeline that runs down the middle of Ontario, and most of the gas that has to leave either is going out Dawn, so Detroit, or it's going out through Niagara Falls. So they got to come through our system. And then the 165, 170 Bcf of storage that's held there at Dawn, those are the real strategic pieces to that. And breaking those apart would not be possible. But -- and like all our assets, if somebody paid us some amount that we didn't think could keep us holding it, that's something we'd be open to. But I don't -- I'm not a huge fan of selling assets, particularly assets that make steady, solid returns.

Andrew Gundlach - ASB

That makes sense. Another question is Texas Eastern. I think your contracts are like 4, 5 years. One of the reasons El Paso sold, I know they don't really say it, is that they were kind of scared about the Marcellus, and they don't have a lot of growth on those key lines. How do you see your strategic positioning on Texas Eastern?

Gregory L. Ebel

Yes. Well, I love Texas Eastern. A, when the bottom end is attached to the Eagle Ford, which is a huge growth area, and the top end is attached to Manhattan and New Jersey, and the middle is attached to places like the Utica and the Marcellus, that's a pretty good spot to be. So -- and I think you see that through some of our team projects. I think you see that through the TEMAX project. And obviously, the New Jersey-New York project, I think underlines the strategic benefit of it. The only market that really Texas Eastern today isn't attached to is bad Mid-Atlantic market, which is where Transco goes. So I like the strategic position that we have. We see lots of growth opportunities continuing to come along. And we can grow it incrementally. I think what we've been able to prove is, and I think the market has proved, just not so much as, that building bullet lines from, say, the Rockies to New York or New Jersey or building bullet lines even from Ohio is probably not the way people want to go. There seems to be an incremental build. They want multiple receipt points, multiple delivery points, some storage in between, like Steckman Ridge, which we have. So I think there's the opportunity to have receipt points dropoff points storage, and I like it. If you look at renewals, people were concerned about long haul pipes a few years ago, which those of you who have been around know that we didn't have any concern about that at all for a couple of reasons. One, the best place to find natural gas is in existing gas field, Eagle Ford, I think, proves that. And you could argue over 50 years, Pennsylvania proves that as well, And so you see a 96% renewal rate on the contracts that were up this quarter for the year on Algonquin and Texas Eastern, which is -- last year was 93%, so this year, even less turnover. The bulk of those are evergreen contracts that'll come up. Some of the more than -- actually, on the call, I think it said they were all 1-year contracts that come up. But in fact, there's a number that there are 2- to 3-, 4-year type contracts even a couple that are 5. So I think as you see the renewal, Andrew, going on there, I think it speaks to: a, how hard it is to place assets once they're already in service; and b, just the benefit of Texas Eastern being able to attract so many nice markets and being attached to so many producing areas.

Andrew Gundlach - ASB

[indiscernible].

Gregory L. Ebel

Well, it's actually -- it determines -- the reason why you see that depends on the nature of the original contracts. So when a contract was originally written, if it's written for 20 years and at the end of that, it says, "This will then -- you've got the right to turn it over on an annual basis," that's what you get the right to -- if it's right to turn it over for 4-year terms, you will. So most of the turnovers will be in that 1- to 5-year range, hence, you get with an older pipe, you're going to end up having a 4.5-year average over time. We'd be quite happy to renew it 20 years. Any customers that want to do that, go [ph] to.

I think Craig's got another question, John.

Craig Shere - Tuohy Brothers Investment Research, Inc.

If we could just return to storage for a minute. As you measure these things in terms of the decline in the market, it all depends on what's you're looking at as the base. When you're starting out with several years of hedging from a while ago, maybe we're only down $0.20, $0.30. But at the peak, you were talking about -- you were probably looking at maybe $0.22 upwards of $0.25 per Mcf a month, and now we might be $0.10 to $0.12 per high return salt dome storage. So it's fallen in half. Can you comment about -- I mean, so when you say 20%, 30%, is that relative to your...

Gregory L. Ebel

That's our portfolio. So I think, Craig, you have to think about -- some folks sold 100% short-term, right? And that's getting you your prices. We do a mix of portfolio. So you can have 1-, 3-, 5- and even 10-year type contracts. And so, obviously, nobody's going to sign up at those $0.20 a month type rates for 5 years. That's not what we were getting. So you'll see some folks in the market out there, if they went 100%, they would actually have got much better storage returns that we did in '07 and '08. But now that comes home to roost when you got to turn those over every year. So it's, from our portfolio, the kind of decline that we've seen, not the overall market.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Understood. And for further developments, say, on Bobcat, what kind of price points per Mcf month are kind of needed as a hurdle rate to make that economic?

Gregory L. Ebel

Well, you're probably -- you'd like to see stuff on, call it, at least kind of $0.90 on the seasonal basis. So you're talking about -- what's your rate there, $0.12, something like that on a monthly rate? No, maybe $0.10 kind of thing. Can't do my math here on my head. So -- but we took into account that we'd take a 20% or 30% hit when we bought back, right? And remember, we aren't building that out, such little come in, in that '14 and '15 timeframe, Craig. So we have another $350 million path to go in terms of $350 million to go on that, which we would put in, in that '14, '15 timeframe.

John R. Arensdorf

And maybe just for those that may not be familiar with it, we're a company that has invested and developed in storage for decades, and it's an important part of our business. But in terms of the proportion of EBIT that it represents this year, it's about 10%. So it's significant, but it's not as meaningful as it may be for some other companies out there, whose business model is predicated primarily on storage.

Faisel Khan - Citigroup Inc, Research Division

Greg, I wonder if you can talk a little bit about some of the issues that one of your peers has been having with this issue in Keystone. You guys have assets both in Canada and the U.S. [indiscernible] I mean, is this an outcome you think that we'll see by the end of the year? Or do you think that there's other political issues that continue to hold back infrastructure development across the border?

Gregory L. Ebel

So on the -- so it's an oil project, which as you know, we don't have any oil pipelines. Just for clarity, I think it's a good business, mind you. Boy, I hope it gets solved by the end of the year. I think you hit it on the head files, although it's a political issue, right? It's no longer an economic issue or energy security issue. I don't think anybody can come up with a comment that it doesn't help United States' energy security. And it does underline, though, the challenges with getting assets placed. That's for sure. I don't think there's any doubt that it ultimately gets approved, Faisel. But whether it's the end of the year or whether it's some time in 2012, I'm not close enough to kind of give you that type of betting. But when you think about the kind of jobs that are being produced, you think about the kind of lives being lost in the Middle East for energy security. I think some American government is going to look at this and say this is probably a better play. But when that actually happens, I don't know, and then if it's between now and the end of the year, 12 months from now.

Faisel Khan - Citigroup Inc, Research Division

If you also comment a little bit about -- you obviously guys generated a fair amount of cash flow up in Canada. How do you guys think about cash being stuck up there? And obviously, you have a lot to reinvest in right now. But in the future, how do you guys work through that in the...

Gregory L. Ebel

Yes, we've done it through loans back and forth across the border. You can do it. You get some leakage along the way, Faisel. It’d be great if the income tax rate in both countries was the same. And frankly, right now, we're quite happy to invest all we can in Canada. You have a corporate tax rate up there 16%, 18% versus 35%, 37% here. That's why you kind of see, when you see our earnings on a pretax basis, they're pretty well 50-50. And that drops pretty substantially in the U.S. side, given the higher tax rate. But so far, that hasn't been an issue. I guess that'll be a nice problem when we have a bunch of cash up there, and we'll just have to loan it back and forth. This said, you might get a couple of percentage leakage points, but I don't think it's -- that's something I'm concerned about for the next couple of years, anyways. I'm more focused on getting the tax legislation rights so that we can move money around easily. That's something we do spend a fair bit of time in Washington. And I think upped in its recent committee, actually, Chairman upped in ways and means, let me get that right. But I think it's ways and means, actually put forward some legislation that would help companies move dollars around. And that would obviously be beneficial for Spectra as well.

John R. Arensdorf

Anyone else? Going once. All right, well, if you don't have any other questions, I would like to thank you very much for joining us. And I ask you to do something, if you don't mind, so that we know who all was here today. And since we got here late and didn't have the chance to pass out the name tags and what have you, would you mind putting a business card on the table outside on your way out, so that we can have a record of who actually came to the luncheon today. We'd appreciate it very much. And with that, I thank you for joining us. As always, you can call me or Roni Cappadonna with any follow-up questions. Thanks.

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Source: Spectra Energy Corp. - Shareholder/Analyst Call
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