Spectra Energy Earnings Call Insights: DPM Unit Sale Issuances and Express-Platte

Spectra Energy Corp (NYSE:SE) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

DPM Unit Sale Issuances

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Craig Shere – Tuohy Brothers: A couple of quick ones here. What were the EPS gains from the DPM unit sale issuances?

Gregory L. Ebel – President and CEO: I think they were about $35 million in the quarter, Craig. So we’ve kind of expected – that’s – we expect, I think, full year number is probably running around $40 million for our accounts, so a little bit earlier in the year than we had expected.

Craig Shere – Tuohy Brothers: Now that you’ve closed on Express-Platte and started dropping it down, can you provide more color on the Canadian tax benefits that are retained as you drop down the assets themselves?

Gregory L. Ebel – President and CEO: Pat, do you – on the Canadian tax benefits with respect to…

John Patrick Reddy – CFO: Yes. Craig, there were tax benefits that we enjoyed that were part of the acquisition that Spectra Energy was able to use for net operating losses, but we’re not breaking that out as something that’s significant for the year. It’s really in the $0.03 to $0.05 that Greg talked about on a full year basis or the EBITDA numbers that we’ve provided.

Gregory L. Ebel – President and CEO: It’s really the bigger – the tax benefits that the previous owners couldn’t realize that prevented them from being able to move it into the MLP. So it’s really not a big uptick for us. It just prevents tax leakage.

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John Patrick Reddy – CFO: Craig, on your prior question, just to clarify, the actual DPM – or the actual gains that we enjoyed related to those units as shown this was $43 million and our outlook for the full year had been about $35 million. So we are ahead of schedule because of it. It was a bigger drop of the – in the first quarter than we had outlooked.

Craig Shere – Tuohy Brothers: So do I understand that avoiding tax leakage, so you mean on the drop-downs that the NOLs there benefit you?

John Patrick Reddy – CFO: No. That was a benefit we got with the acquisition and then on the drop-downs, you probably saw from the release that we’re anticipating that SE would take back units with a value of about $139 million or about 20% of the equity consideration and that relates to the tax leakage to prevent that…

Craig Shere – Tuohy Brothers: Last question, in terms of drop downs, can you kind of speak to the need to fill up Sand Hills and Southern Hills completely before drop downs or – obviously, Express-Platte isn’t fully utilized 100% right now. So, as you think about filling those other NGL pipes up in coming years completely, maybe you can kind of give us some color on the potential timing of where you see drops relative to those assets maturing?

Gregory L. Ebel – President and CEO: Well, I think there’s no doubt that Express is probably, at this point in time, anyways the other half of that would be ahead of the NGL lines, but we’ll see how it fills up. We’d expect it kind of basically it’s through into ’15 before we get the NGL lines more full, but we still may want to mix and match here, if you will. So Craig, not to be too – to dodge the question a little bit, but I think your thinking is right, that you’ve got Express filling up faster and it’s in a better position. I think we have, a great deal of confidence given the cash flow and earnings stream there, where the NGL lines just will take that, call it, 18, 24 months to build up. That being said, I think it’s pretty clear the value of those over time so that’s just going to be a discussion with the independents, if you will, at SEP about where they’ll see that value build over time.

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Craig Shere – Tuohy Brothers: Sure. Could we see the other half of Maritimes & Northeast before the NGL lines are dropped?

Gregory L. Ebel – President and CEO: Well, that’s not the current plan, but yean, that’s something we’d consider wherever we have assets. The fact set has just changed so much in the last, if you will, even six weeks, right, six weeks ago, we didn’t have an oil pipeline and that was earning $145 million or so and we didn’t have the NGL Pipelines in service, now we do. But that doesn’t say that we wouldn’t look at other assets if mixing and matching made sense and helped obviously SEP to continue to see that nicer growth on its distribution, which I’m sure you noticed we announced yesterday.

Express-Platte

Stephen Maresca – Morgan Stanley: Just on Express-Platte, interesting that you’re seeing increases already. Do the numbers that you put in the press release for the acquisition, do they reflect – what do they reflect, I guess, it’s, what, 70% or 80% utilization?

Gregory L. Ebel – President and CEO: Well, they would reflect the $145 million. So that’s closer to the 80% utilization.

Stephen Maresca – Morgan Stanley: As you look forward on this, what do you see the opportunity here? Is there an opportunity to term out some of this increase in utilization? Is there an opportunity to see for, I don’t know, possible expansion?

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Gregory L. Ebel – President and CEO: Well, I think there’s couple of things. There’s several. So first, yes, term out, and that’s obviously, a balance of rate and demand. There’s a fuller utilization of the pipeline, at least on the Express side, up to 100%. Then, just even some of the things that we’ve seen and that I have mentioned that as Bakken – some of the Bakken crude moves in a different manner that opens up space on Express-Platte – on Platte end of things and as such, we can move more heavies from Canada, which obviously attracts a higher tariff and you’re moving that farther along the line. So that’s some of the benefit as well. Now, with respect to expansions and stuff, definitely something we’re out there looking at and we’ll keep you informed on that. Again, still early days, but I think both upstream and downstream and participation in terminals as well, very interesting there.

Stephen Maresca – Morgan Stanley: One final on Express-Platte. What would you say has been the biggest surprise, thus far? I know it’s early. Is it just the increase in refinery demand?

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Gregory L. Ebel – President and CEO: Well, to be quite honest, I don’t think we are surprised. I mean, we see the value of steel in the ground. I don’t need to go through the list of projects that get pushed out 2.5 years from now and things that people thought would be in service a year ago. So that was the whole rationale for us to get into the business with an asset that’s operating, avoid some of the frustrations that others may be seeing. So I don’t think it’s a big surprise for us. I think it verifies the investment thesis…

Stephen Maresca – Morgan Stanley: One final one. Going forward as we think about Sand and Southern Hills coming in, as those are build lines and you’ve built them, should we be thinking about – how should we be thinking about kind of multiple of a drop into SEP, understanding that for Express-Platte you bought it and you had to kind of sell it at a price. Is it possible that we could be thinking about a better multiple at SEP for some of the future drops for Sand and Southern?

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John Patrick Reddy – CFO: Stephen, this is Pat. I think the way we look at it is, it’s a balancing act so that it provides attractive financing for us by dropping to SEP, letting them issue equity. The quid pro quo is that it’s got to be at a fair multiple that supports their unit price. So I think if you look at the drop multiple, it’s the same as our acquisition multiple. It’s just top of – a little higher EBITDA. So while the acquisition price for SEP is higher than one-half of our purchase price, it’s not a higher multiple because of the things that Greg described and that have been driving higher EBITDA. So, on the NGL pipes, you guys have put your finger on it that the thing that’ll be interesting in the next two years will be to think about that sequencing of our drops and what is it that gives rise in terms of getting full value in a drop and what best supports SEP’s ability to grow its cash available for distribution and meet their targets and objectives to support their unit price. So that’s why it’s kind of dynamic, and at this point, we’re very much on track for the NGL lines to be completed by midyear, but as you know there is, as Greg said, a ramp-up to that. So those are all things that we’ll be looking at in refining and fine-tuning the sequencing of the drops as well as the multiples.

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Gregory L. Ebel – President and CEO: I think the other thing, Stephen, I think if you think of it just, again, with kind of call it $2 billion-plus and growing of opportunities to drop, we can easily manage the interest of both SE and SEP investors, and again, as you’ve seen, just with the value that SE gets from bringing on Express-Platte, but also moving up the distribution growth from $0.005 to $0.075 a unit for SEP once the drop is done, I think you can see us do that balance. So in the past if you only had one asset or a very small, far less flexibility and now that flexibility, I think, is a real advantage from all sides.

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