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Cold Gave Spectra Hot 1Q; More Expansions Eyed

Brutal cold during the first quarter drove throughput on Spectra Energy Partners pipelines to record levels, and some of that pipe was put in the ground only last year, just in time, Spectra Energy Corp. CEO Greg Ebel said Wednesday.

Like others, Spectra has been expanding capacity out of the Marcellus/Utica region, and the next wave of such expansions is on the horizon, Ebel said.

"While the growing shale supply is a significant driver for the current environment of changing pipeline flows, equally important is the demand growth we're seeing along the Gulf Coast, the Southeast and the Midwest U.S.," Ebel said during a first quarter earnings conference call. "...[B]y 2017, [Spectra Energy Partners'] Texas Eastern [Transmission] will be able to move 2 Bcf of supply per day to the Gulf Coast and Midwest markets via bidirectional flows, and importantly will do that while retaining full capacity to deliver to Northeast markets."

Team 2014 and Team South would be the first Texas Eastern projects with a firm path for Marcellus supply to move south. By 2015, expansion projects such as Open would bring incremental supplies to the south and the Uniontown to Gas City project would bring supplies to the West. The two-phased Gulf Markets expansion is to provide gas to southern markets by mid-2016 and mid-2017.

But that won't be the end of it. During the conference call analysts were curious about future expansion capabilities, for instance, a larger Team South or Uniontown to Gas City project?

Ebel said existing infrastructure is somewhat limiting and a bigger expansion all the way down to the Gulf might be in order. "The challenge with that, of course, is being able to do it on an economic basis..." he said. "Look, we're putting two projects into service this year to move gas south. We're putting two more in next year...I think we're 18 months ahead of others. That really gives us another opportunity to look at even larger expansions. But that's going to be more capital and bigger assets as opposed to just reconfiguring compressor stations and pipe yards, if you will."

Spectra is in the heart of the Marcellus/Utica, Ebel said. "...We can move gas to the Northeast. We're going to move it west; we're already doing that. We're going to move it north, and we're going to move it south."

Ebel said the next big round of capacity expansions would be for projects in 2017-2018. However, he said a need is still to be met in the Mid-Atlantic region. "Obviously, that could be a pretty big opportunity, which we're going to pursue pretty forcefully...The next round of plays are for '17, '18 and '19, and that's what we're focused on.

"I think there's another round of projects that have to occur, at least brownfield type projects probably, but maybe some big greenfield projects into the Northeast...I think to the west it's a little bit tougher, but that's not a big focus for us...I don't see a huge need for a ton of more pipe into Chicago."

Spectra said it is making solid progress on the Sabal Trail pipeline into Florida to serve Florida Power and Light's growing need for access to natural gas to fuel new power-generation facilities. The Algonquin Incremental Market (AIM) project is 100% subscribed by virtually all the major local distribution companies in New England. The company submitted its Federal Energy Regulatory Commission filing for AIM in February and expects to receive its certificate in the first quarter of 2015.

The Nexus project, which would serve Eastern Canada with Utica and Marcellus gas, is advancing and is expected to be anchored by commitments from eastern Canadian and Midwest local distribution companies for about half the capacity, with the remainder to be subscribed by Appalachian producers, the company said.

Spectra recently submitted an environmental assessment certificate application for its Westcoast Connector Gas Transmission Project to the British Columbia Environmental Assessment Office, beginning a 180-day review of the project, including a comment period. The new pipeline would begin in the Cypress area of northeast BC and end at BG Group's proposed Prince Rupert liquefied natural gas (LNG) export facility, on Ridley Island. The project is envisioned as a natural gas transportation corridor that would allow for up to two pipelines with total design capacity of 8.4 Bcf/d in a single right-of-way, creating an opportunity for multiple LNG projects in the Prince Rupert area.

Spectra is also evaluating longer-term opportunities related to LNG in the Gulf Coast and the need for more pipeline infrastructure to serve power generators and industrial demand.

Quarterly results exceeded management expectations, Ebel said. "New assets in our portfolio, increased winter demand on our system and higher commodity prices all helped to deliver an excellent quarter, and importantly, a strong start to the full year."

The U.S. transmission and liquids businesses, which make up the Spectra Energy Partners reporting segment, had a particularly strong quarter. The Algonquin, Texas Eastern Transmission and East Tennessee systems experienced the highest total delivered quantity of natural gas ever during the quarter. On Texas Eastern, 24 new peak days were recorded, due in large part to the pipeline's New Jersey-New York Expansion, which was put into service on Nov. 1.

Spectra Energy Corp. reported net income of $419 million (62 cents/share) compared with $340 million (51 cents) a year ago. Ongoing earnings before interest, taxes, depreciation and amortization (EBITDA) were $1.01 billion, compared with $831 million in the prior-year quarter. Distributable cash flow for first quarter was $631 million versus $503 million. Spectra Energy Partners reported first quarter 2014 EBITDA of $429 million, compared with $347 million in first quarter of 2013.

Analysts at Tudor, Pickering, Holt & Co. were looking for "an all-time high" quarter and wrote Wednesday "that's basically what we got," adding that Spectra Energy Partners "has screamed" and Spectra Energy Corp. "has run hard into" the first quarter. The analysts added that they'd like to see an increase in the partnership distribution and more details on new projects.

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