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Spectra Looks to Mexico; Access Northeast Gathers Pace

The natural gas supply story (too much, too cheap) is all too familiar. Trending, though, is the demand story of gas-fired power generation and exports to Mexico. Spectra Energy Corp./Partners LP executives were enthusiastic about both during a second quarter earnings conference call on Wednesday.

Spectra's proposed Access Northeast project, which would serve supply-short New England power generators, could get a go-ahead by the end of this year. And the recently won contract for Texas intrastate project Valley Crossing to facilitate transport of U.S. gas to Mexico (see Daily GPIJune 14) is only a harbinger of future Mexico demand-driven opportunities, many along Spectra's Texas Eastern Transmission, executives said.

"...[O]ver the weekend we cleared another [Access Northeast] hurdle when the Massachusetts legislature passed an energy bill that does not prohibit electric distribution companies from holding gas, pipeline capacity contracts," Spectra CEO Greg Ebel told analysts. "Connecticut's Department of Energy and Environmental Protection issued an RFP [request for proposals] for natural gas capacity in the early summer. The department received multiple bids in late June, including a bid from Access Northeast, and is now evaluating the submissions with the decision expected in late August.

"In Rhode Island, a long-term pipeline capacity contract with Access Northeast was submitted to the PUC [Public Utility Commission] in June, and a decision is expected by the end of October. So with continued progress on the state regulatory front, we anticipate moving the project into execution later this year." Regulators in Maine also are leaning toward allowing capacity contracts to support pipeline development (see Daily GPIJuly 21).

During the conference call, a number of analysts were particularly curious about Valley Crossing -- a Texas header system that would connect with another pipeline at the Texas-Mexico border -- and what other opportunities Spectra might see in the developing Mexico natural gas market.

Valley Crossing "...positions us well to pursue other incremental upstream regional business," Ebel said. "As Mexico's energy reforms progress, we expect the market will evolve and lead to further opportunities for pipeline expansions as commercial, industrial and power generation loads mature. CFE [Comision Federal de Electricidad] is the customer for both the Valley Crossing and the [Texas Eastern] South Texas expansion project [see Daily GPIJune 2, 2015]..."

Ebel was asked whether Spectra would consider any in-country Mexico investments. Some other U.S. companies, particularly Sempra Energy, have been active infrastructure players in Mexico. Ebel said the returns available today are still too low and the risks still too high.

"What we have seen today is other investors or other pipeline companies willing to take much higher risks for much lower returns [in Mexico] and with $10 billion in backlog here, that didn't seem to be a great idea at this point in time for us," he said. "So we'll continue to look at that, but obviously we want to balance the risk profile with the returns and typically higher risks do get you higher returns, not the other way around."

However, more Mexico-related returns are available to Spectra in the United States, thanks to its connectivity with multiple supply basins via Texas Eastern.

"I think, quite clearly, we're tapping into an enormous market with the Valley Crossing project, getting to the border of Mexico, and if you follow that back and you get to the Texas Eastern system and our vast infrastructure across the Gulf, we hit most, if not all, of the major supply areas,” Bill Yardley, president of the U.S. transmission business, said in response to a question.
“And eventually Mexico will probably be looking to get back to those, and I think that puts us in a good position.”

Ebel said "there is no doubt" that Mexico will be looking for more natural gas supply opportunities north of the border, for power generation but also for commercial, industrial and consumer end use. Supply from the Permian Basin, Eagle Ford Shale, Midcontinent basins, as well as the Haynesville Shale could be tapped for Mexico, Ebel said, noting that there is less pull on these supplies from the Northeast thanks to the Marcellus Shale. "They'll be looking for additional growth opportunities, and we think our pathway is going to be extremely competitive."

Indeed, last May pipeline exports of U.S. gas to Mexico set a record, according to the Energy Information Administration (see Daily GPIAug. 2). For an update on Mexico's rapidly evolving natural gas market, check out NGI's new Special Report titled Mexico: A Whole New Natural Gas Market Opening Close to Home.

Spectra Energy Partners second quarter ongoing net income from controlling interests was $293 million (73 cents/unit) for the quarter compared with $307 million (83 cents) in the prior-year quarter. Net income from controlling interests was $287 million (71 cents/unit) compared with $307 million (83 cents) in the prior-year quarter. Ongoing distributable cash flow (DCF) was $281 million compared with $321 million. Ongoing earnings before interest, taxes, depreciation and amortization (EBITDA) were $448 million versus $456 million a year ago.

Spectra Energy Corp. ongoing DCF was $271 million from $285 million in the same quarter last year. Ongoing net income from controlling interests was $169 million (24 cents/share) compared with $156 million (23 cents) in second quarter 2015. Net income from controlling interests year/year was $149 million (21 cents/share) compared with $18 million (3 cents). Ongoing EBITDA was $655 million compared with $652 million in the prior-year quarter.

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