Spectra Energy Earnings Call Nuggets: Western Canada and the Storage Decline
Spectra Energy Corp (NYSE:SE) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Ted Durbin – Goldman Sachs: I just want to start here with Western Canada. Volumes were down pretty significantly on the pipelines on the processing. I’m wondering if you can just give us some more detail on what you are seeing on the conventional declines. I mean, obviously you’ve put some capital in there but still seeing volumes down. How are you seeing that shape up for 2013 and then as well there you’ve talked in the past about maybe getting some solutions for Empress, maybe you can talk about what solutions that might be, maybe that’s capacity rationalization amongst the industry, any progress there?
Gregory L. Ebel – President and CEO: So, I think as Pat mentioned we see really the impact from the conventional side of things in Western Canada for 2013 about $50 million to $55 million. Now you obviously got growth in the unconventional side which is helping to offset some of that. But you know we’ll have to see how things develop in ’14. You know there is always some risk that you could continue to see some of that but, different than on the U.S. side where often we see G&P natural declines, that’s not what’s happening in Western Canada. That’s pure commodity response, so with gas now I think AECO is running around $3, maybe $3.10 and much close to what you’d see on NYMEX running $3.35, a more traditional kind of 10% spread. You should see some of that drilling come back and in fact a lot of that might be on the interruptible side. On the pipeline side, I wouldn’t – that’s not terribly concerning to me. As you know same is on the U.S. side that you know that’s a fee based business and contracted up, so less concerned. With respect to Empress, couple of things, where everything is on the table, Ted. In terms of looking at Empress, you are right, there is too much capacity up there, so is there a way to appropriately rationalize the overall asset base up there amongst all the various players, that’s something we’re looking at. As we’ve said before, Empress is not a particularly strategic item for Spectra Energy. Then lastly, obviously a different contract make-up this year, I think as we shared with you last year. we had a pretty large build-up of contracts that end up being out of the money if you will last year and those have run off substantially and we don’t see the same type of impact things like right downs which I think ran around $15 million last year, we don’t have that so. Feel pretty good about our ability to claw our way back on Empress this year. But everything is on the table from a rationalization perspective.
Ted Durbin – Goldman Sachs: If I could just on the extraction premium what actually is based into the budget there, as well as what propane prices do you have in there to get you back to breakeven?
Gregory L. Ebel – President and CEO: Propane prices are much different from what we see in the rest of the Company. So think about that $0.80 type range. Extraction premiums don’t budget on that basis because the extraction premium is only one element of this and it moves up and down. But you’ve really got the impact of what’s the price of the gas and the output on that front. It’s a little different than what you might see elsewhere that’s why we didn’t give an extraction piece in the last, what I will say though is the extraction premiums have come down substantially from what we saw in 2012, Ted, so you are seeing a fair bit more rationalization in itself if you will but what deals make sense for people as the people are expecting that, opposed to people expecting that NGL prices just go up forever.
Ted Durbin – Goldman Sachs: Than last one for me is on field services we also saw some declines in the gathering and processing volumes sequentially year-over-year. You’ve been bringing on some new process what are you seeing there is it just decline on the conventional production is it ethane rejection may be a little bit more color there?
Gregory L. Ebel – President and CEO: Pretty flat ethane rejection are in around 15,000 barrels day last year, we are actually seeing if you look on volumes will be up this year and NGL volumes will be up 10% or so, is what we are seeing you are right driven by both some new facilities coming on service, but also just the growth in the sector. I think we are pretty flat on throughput last year. I think maybe you were right 2% or 3% that was down, but the NGL production in 2012 was up 5%. As I said, we are probably going to see double that in 2013.
The Storage Decline
Faisel Khan – Citigroup: I just appreciate the details on Slide 7. I’m just wondering if you could help explain a couple of things. The storage decline from ’07 to ’13, the $100 million roughly, that’s not all (bobcat), is it? What are their parts of the portfolios are coming from?
John Patrick Reddy – CFO: Well, let me be clear. That’s not really a decline. All we’re saying is that relative to the capital that put to work you might have expected – so I would say that’s a loss in opportunity cost really Faisel, so I wouldn’t look at it from a decline. As you know, the overall EBIT for the business, storage represents 5% or 6% of our overall EBIT, so that’s not a decline from where we were. So, yes, that’s a good point.
Faisel Khan – Citigroup: Then the dropdowns of SEP, the $70 million, what exactly is that, is that just related to the delusion effect of dropping the asset in and I assume it will be offset once you drop an asset into SEP there will be benefits reinvesting that cash flow either within the CCORP or expanding SEP, so if you could elaborate little bit on that that’d be great?
John Patrick Reddy – CFO: So when you dropdown, so we own call it 65% of SEP. So if we dropdown an asset we’re only going to retain 65% of the earnings associated with that at the EBIT line. So that’s what you are seeing there. So as we drop it down, assuming we own 70% of SEP, if it was $100 million assuming they owned, we owned around $30 million, we would have given up $70 million buck. So, that all that is, but you are right. Below the EBIT line there, you get cash, so obviously reducing your interest expense. It’s mildly accretive or flat to an EPS perspective on a cash basis, but then you go and reinvest that business. So, as long as you keep dropping down businesses into the MLP, the entity above is actually going to lose earnings at the EBIT line but pick-up cash and potential EPS below the EBIT line.
Faisel Khan – Citigroup: But net-net over time as you do these dropdowns in SEP, it’s not dilutive to earnings over the long run?
John Patrick Reddy – CFO: Absolutely not. This is just comparing EBIT, so we’ve basically created and apples-to-apples comparison.
Faisel Khan – Citigroup: Then just on the previous slide, the G&P declines, I think Pat you were talking about the $55 million in sort of declines year-over-year. Did you say that that was related to contract renewal of was that related to just volume decline from the legacy assets that are life of lease?
John Patrick Reddy – CFO: It’s really contract renewals. You see some declines, but it’s really the contract renewals where you’ve got, obviously guys don’t get a drill-up $2 dollar gas versus what they might be able to get in the U.S. or the other piece is, you got remember some of that gas up in that neck of the woods is a lot drier. So, as you know, everybody is going after liquids rich gas. So, as we move down into places like the Montney and place like that with more liquids rich gas, those areas end up coming back, but in the northern areas closer up near the Horn River where it’s drier, you’ve seen people decide not to renew contracts.
Faisel Khan – Citigroup: Well these contracts that are one-year, two year, three, like what kind of tenure are these contracts?
John Patrick Reddy – CFO: they can be all different. We’ve got – you’ve got everything from and just like on pipelines you’ve got annual contracts that come up for renewals. So they could be anywhere from one year contracts to five or 10 year type contracts that came up for renewal. Well we did see a pickup in last year to help and again this year I would expect we’ll see that. It is people, as gas prices come back take up more interruptible. Obviously interruptible at a higher rate but it’s just a little bit more uncertain as you start to fill-up your plants and people want to signup long term contracts. This is pretty typical for Western Canada over a five or six year period. You see the build-up you see the commodity. You see the build-up and it’s got nothing to do with the gas not being there which as I mentioned to Ted’s question is a little bit different than what we see in the U.S. where you may see complete declines in field.