The Deal: Spectra Energy Sells $12.3B in Pipeline Assets to LP

NEW YORK ( The Deal) -- Spectra Energy Partners LP ( SEP) of Houston said Tuesday, Aug. 6, it agreed to buy U.S. natural gas transmission, storage and liquids assets from affiliate Spectra Energy Corp. ( SE), also of Houston, for $12.3 billion, making Spectra Energy Partners one of the country's top pipeline and storage master limited partnerships.

The price includes $2.2 billion in cash and 172 million in newly issued limited partner units and 3.5 million in newly issued general partner units worth $7.6 billion based on Spectra Energy Partners' unit price yesterday. Spectra Energy Partners also will assume about $2.5 billion of acquired asset debt.

Spectra Energy Partners said the transaction's 2014 Ebitda multiple is 9.3 times based on the volume weighted average unit price of $36.12 for the 10 days ending June 11, when Spectra Energy announced its plans for the drop-down. The entities expect to close the deal by year's end.

Analysts at Tudor Pickering Holt & Co. Securities Inc. said the deal is at a higher multiple than Spectra Energy first indicated and based on Spectra's current stock price, it works out to 10.4 times. "Robust U.S. transmission growth backlog provides growth visibility for SEP Spectra Energy Partners , but we think SEP likely expected more up-front accretion from today's announcement," they said.

TPH added that despite the bigger up-front price, less accretion at Spectra Energy Partners cuts the value of Spectra Energy's general partner interest, which is Spectra Energy's highest-value asset.

The move is similar to Williams Cos.' ( WMB) sale of $9.75 billion in assets to pipeline master limited partnership Williams Partners LP ( WPZ) in 2010.

On a conference call with analysts and investors, management wouldn't specify how Spectra Energy Partners will fund the deal, although they said it would be with debt and not equity. Spectra Energy plans to use the proceeds to pay down debt.

Spectra Energy CEO and president Greg Ebel said on the call the company wasn't considering selling or spinning off its natural gas storage, transmission and distribution business Union Gas in Ontario, like Oneok announced it would do with its natural distribution unit ONE Gas on July 25.

"We've looked at it, but their utility is a user of capital and our utility is a provider of capital for dividends. That's a big difference," he said. "Never say never, but right now, the tax inefficiency, the size of the project and the size of the dividend paid out of Canadian assets are important to consider at this point."

Ebel also said the company wasn't considering acquisitions. "The primary focus is execution and getting projects. They're cheaper and more efficient for us," he said. "Anything we do will be at the SEP level involving crude and NGL natural gas liquids and NGL pipelines."

When asked how a Spectra Energy bondholder is expected to "feel good" about the transaction because of the movement of stable, cash-generating assets to the master limited partnership, Ebel said Spectra Energy will still have a big stake in the assets being dropped down plus it has a lot of projects, which are cheaper than going out to buy assets.

"As a bondholder, you have to look at the entire pie: Strong operators, strong control, entities of a very strong nature that outside the U.S. would have a higher rating like Enbridge and TransCanada, which have very similar assets but seem to get stronger ratings," he said.

Large shareholder Sandell Asset Management criticized Spectra Energy in June for not going far enough with the drop-down and threatened to seek seats on its board. It called for the company to review strategic alternatives for its Canadian operations, including a possible initial public offering, and its stake in DCP Midstream Partners LP, including a potential drop-down or sale, so it would more resemble peers Williams, Oneok and Kinder Morgan Inc.

The assets to be dropped down provide transportation and storage of natural gas, crude oil and natural gas liquids for customers in various regions of the U.S. and in Alberta, Canada.

The pipeline systems include Texas Eastern Transmission LP, Algonquin Gas Transmission LLC, the remaining 50% of Express-Platte Pipeline System, an additional 38.77% of Maritimes & Northeast Pipeline LLC, Spectra Energy's 33.3% interest in Sand Hills Pipeline and the Southern Hills Pipeline, an additional 1% of Gulfstream Natural Gas System LLC and 50% of Southeast Supply Header LLC (25% by year's end and 25% one year later). The natural gas and crude oil storage businesses included in the drop-down include Bobcat Gas Storage, the remaining 50% of Market Hub Partners, 50% of Steckman Ridge LP, Texas Eastern's storage facilities and Express-Platte's storage facilities.

"This transaction expands Spectra Energy Partners' reach across the U.S. to substantially all major supply basins and connections to key growth markets," Spectra Energy Partners CEO Julie Dill said in a statement. "These assets will be highly attractive additions to our portfolio with their steady cash flows, market position and expansion opportunities."

Dill said the partnership aims to increase its distribution in the first quarter of 2014 by three cents per unit and one cent per unit quarterly after that.

Spectra said the transmission, storage and liquid assets provide steady, fee-based cash flows with most of the contracted natural gas transportation volumes under long-term firm service agreements. The crude oil and NGL pipelines have annual rate escalators that boost their cash generation and provide Spectra Energy Partners with an opportunity to participate in the expanding North American natural gas, crude oil and NGL markets, which it estimates will have $8 billion in organic growth opportunities by the end of the decade.

Most of the assets to be dropped down are regulated by the Federal Energy Regulatory Commission and are subject to the jurisdiction of various federal, state and local environmental agencies.

Ebel will become chairman, president and CEO of Spectra Energy Partners. Pat Reddy will continue as CFO of both entities.

After the drop-down, Spectra Energy Partners' estimated 2014 Ebitda is projected to be $1.48 billion and cash available for distribution is expected to be $900 million.

There have been drop-downs between the two entities before. In October Spectra Energy Partners bought 38.76% of Maritimes & Northeast Pipeline LLC from Spectra Energy for $319 million in cash and $56 million in newly issued partnership units.

The board of Spectra Energy Partners' general partner approved the deal based on the recommendation of the conflicts committee, which is made up of independent directors.

Evercore Partners advised the committee, including Ray Strong, Eric Bauer, John McGraw, Chris Partridge, Taylor Moffatt, Hunter Hibler and Spencer Macquarie. Baker Botts LLP's Hillary Holmes and Monica White counseled Evercore.

Andrews Kurth LLP and Richards, Layton & Finger PA provided legal advice to the committee. The Andrews Kurth team included Bill Cooper, Mark Young, Jordan Hirsch, Jerry Chandapillai, Brooks Antweil, Tamara Wall, Andrew Bethune, Robert McNamara, Alison Chen, Chris Fenelon, Matt Grunert, Matt Hoeg, Lisa Shelton, O'Banion Williams, Tim McConn and Shemin Proctor. Richards Layton's team included Srinivas Raju and Mark Purpura.

Morgan Stanley's Brian McCabe, Steve Munger, Jonathan Cox and Jeff Hibbard assisted Spectra Energy Corp.

Legal counsel to Spectra Energy Corp. was provided by Bracewell & Giuliani LLP and Vinson & Elkins LLP. The Bracewell team included Mike Telle, Robin Miles and Jon Wry. The V&E team included Doug Bland, Sarah Hurt, Mike Rosenwasser, Gillian Hobson, Matt Pacey, John Lynch, Tom Wilson, Larry Nettles, Brian Bloom, Jay Seegers, Anita Wilson, Albert Osueke, Nate Thomas, Brandon Tuck, Jared Whalen, Ryan Carney, Elizabeth Kade, David Snyder, Andy Beach and Chris Terhune.

-- Written by Claire Poole in Houston

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