Sea Limited (SE) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectra Energy and Spectra Energy Partners Second Quarter Earnings Call. [Operator Instructions] Thank you. Mr. John Arensdorf, you may begin your conference.

Thanks, Julie. Good morning, everyone, and welcome to our call. I'm John Arensdorf, Chief Communications Officer for Spectra Energy. We are pleased that you've joined us today. Beginning this quarter, we will address quarterly results for both Spectra Energy and our Master Limited Partnership, Spectra Energy Partners, in 1 combined call. On today's call, in addition to highlighting our earnings for the quarter, we'll provide details on our plans to drop down Spectra Energy's remaining U.S. Transmission, Storage and Liquids assets into Spectra Energy Partners. We'll also update you on the progress we've made in securing and executing an impressive array of growth projects. Leading today's discussion will be Greg Ebel, our President and Chief Executive Officer; and Pat Reddy, our Chief Financial Officer. Julie Dill, President and CEO of Spectra Energy Partners, is here with us as well. Pat will begin by discussing second quarter results for Spectra Energy and Spectra Energy Partners, and then Greg will update you on our capital expansion program and speak to our drop-down plans, which will play a large role in enabling our growth and enhancing value for both SE and SEP investors. And of course, we'll leave plenty of time for your questions. But as always, before we begin, let me take a moment to remind you that some of the things we will discuss today concern future company performance of Spectra Energy and Spectra Energy Partners and include forward-looking statements within the meanings of the federal securities laws. Actual results may materially differ from those discussed in these forward-looking statements. You should refer to the additional information contained in Spectra Energy and Spectra Energy Partners' annual report on Form 10-K and in other SEC filings concerning factors that could cause these results to be different from those contemplated in today's discussion. In addition, today's discussion include certain non-GAAP financial measures as defined by SEC Reg G. A reconciliation of those measures to the most directly comparable GAAP measures for each of the companies is available on the Investor Relations website at spectraenergy.com and spectraenergypartners.com. So with that, I'll turn the call over to Pat.

Well, thank you, John, and good morning, everyone. As you've seen, Spectra Energy delivered second quarter ongoing results of $0.30 per share compared with $0.33 per share in last year's quarter. Results for this quarter are slightly ahead of our plan by about $0.02, and year-to-date results are tracking above the expectations. As you'll hear, our core businesses are performing well. There were a couple of anticipated items in the quarter that show a negative effect when compared to last year, the most significant among those was a major plant turnaround in Western Canada. Overall, however, we're very pleased with our second quarter results and where we stand at midyear. Let's take a closer look at our results by business segment, beginning with U.S. Transmission, which reported EBITDA $248 million compared with $237 million in the second quarter of 2012. Quarterly EBIT results reflect increased earnings from expansions on Texas Eastern, partially offset by expected lower storage revenues. Our Distribution segment reported second quarter EBIT of $65 million compared with $75 million in 2012. This decrease is due to lower storage and transportation revenues, as expected, partially offset by higher customer usage due to colder weather. We're pleased to share with you that Union Gas has successfully reached a settlement agreement on a new 5-year incentive rate mechanism to be effective January 1, 2014, assuming OEB approval. The agreement would provide Union Gas the opportunity to earn above our allowed return on equity of 8.9%. Similar to our previous 5-year incentive rate plan, we have a sharing mechanism in which the company retains the first 100 basis points above the allowed return on equity, shares the next 100 basis points 50-50 with our customers and retains 10% of anything above 200 basis points. This mechanism will significantly reduce regulatory uncertainty over the 5-year period. Moving to Western Canada Transmission & Processing, this segment reported EBIT of $74 million compared with $94 million in 2012. The decrease is due to increased O&M primarily associated with scheduled major plant turnarounds and additional depreciation related to plants placed in service last year. Contracted volumes in the conventional gathering and processing business were also down as expected. These results were partially offset by positive earnings at Empress, attributable primarily to lower extraction premiums and higher sales volumes compared to the second quarter of 2012. Earlier this year, we indicated that we were reviewing our options for the Empress facility and that we expect it to make a decision on future plans by midyear. We completed our review and are adjusting our business model to implement a commercial structure that will provide us with a more stable and modest level of EBIT going forward. We'll accomplish this by hedging extraction contracts as they are executed through a combination of physical forward gas purchases at fixed prices and NGL swaps. We'll use hedge accounting for these transactions. Field Services reported EBIT of $46 million compared with $66 million in 2012. The change in EBIT is attributable primarily to the negative income effects of asset drop-downs to DCP Midstream Partners, inclusive of drop-down hedges and the effects of lower NGL prices, partially offset by lower operating costs and improved natural gas prices. During the second quarters of 2013 and 2012, respectively, NYMEX natural gas prices averaged $4.09 per MMBtu versus $2.22. DCP's realized NGL prices averaged $0.71 per gallon versus $0.77. And crude oil remained relatively flat at $94 per barrel. DCP Midstream continues to pay attractive distributions to its owners, with Spectra Energy receiving $93 million year-to-date. Our Liquids segment consists of the Express-Platte Pipeline System and our equity investments in the Sand Hills and Southern Hills Pipelines. This segment reported second quarter EBIT of $32 million, with most of that attributable to Express-Platte operating results, which continue to exceed our acquisition case. And finally, Other, which is comprised primarily of our corporate governance costs and captive insurance premium, reported net costs of $45 million compared with $25 million in last year's quarter. The increase is due primarily to the accrual of higher employee benefit costs attributable to Spectra Energy's stock-based, long-term incentive plan. Now let's turn to Spectra Energy Partners. Spectra Energy Partners reported second quarter cash available for distribution of $55.6 million and second quarter net income of $49.3 million, up about 5% over the prior-year quarter. The higher CAD and net income for the quarter were primarily driven by the drop-down of the Maritimes & Northeast U.S. assets during the fourth quarter of 2012. The increase from this asset was partially offset by lower revenues at our Market Hub Partners storage assets, as expected, and slightly higher costs. For the second quarter, SEP also delivered its 23rd consecutive quarterly distribution increase to unitholders, an increase of $0.0075 per unit, 20% higher than the prior year's increase. The distribution now equates to slightly more than $2.03 per unit on an annual basis. And last Friday, we closed on the drop-down of the first half of the Express-Platte System. So both Spectra Energy and Spectra Energy Partners recorded solid quarterly results and are moving forward in securing and delivering opportunities that further strengthen our portfolio and value proposition. Now let me turn things over to Greg, who will discuss in greater detail our plans to drop down the remaining assets from our U.S. Transmission and Liquids segments and the significant opportunities we have in various stages of execution and development.

Well, thanks a lot, Pat, and good morning, everybody. Yesterday, we reached definitive agreement between Spectra Energy and Spectra Energy Partners as to the terms of our drop-down of U.S. assets. You'll recall that, on June 11, we indicated that we would drop the remainder of our U.S. Transmission and Storage assets, and so we're doing that and more, as we are also accelerating the drop-down of the other half of Express-Platte asset, as well as our 1/3 interest in the Sand Hills and Southern Hills NGL pipelines. So that means that virtually all of our U.S. assets, excluding our interest in DCP Midstream, will be dropped into Spectra Energy Partners by the end of this year. I know you're keenly interested in the specific transaction details, so let me dive right in. The EBITDA multiple of this transaction is approximately 9.3x, based on a unit price of $36.12, and this is consistent with the multiple calculation of similar peer transactions, using the volume-weighted average price for the 10-day period ending June 11, which was the day we announced the transaction. In consideration, Spectra Energy will receive 172 million SEP LP units, 3.5 million GP units to retain our 2% interest in the partnership and $2.2 billion in cash, in which Spectra Energy will use to pay down debt. Spectra Energy Partners expects to issue debt to fund the cash going to Spectra Energy. Additionally, SEP will assume approximately $2.5 billion in third-party debt associated with the assets to be dropped. We've included a schedule profiling this debt in the presentation index -- or appendix, which can be found on our website. Unlike a number of other MLP transactions, our SEP drop-down assumes no IDR give-back [ph] by Spectra Energy. So let's turn now to Spectra Energy Partners' pro forma financial profile. On a pro forma basis, for 2014, total EBITDA is estimated to be about $1.48 billion, with cash available for distribution of about $900 million. 2014 maintenance CapEx is estimated to be about $300 million. And we estimate 200 -- 2014 interest expense to be about $250 million. This transaction will allow SEP to increase the quarterly distribution to be paid in the first quarter of 2014 by $0.03 per unit and continue with a $0.01 per unit quarterly increase thereafter, realizing approximately a 9% CAGR on distribution growth over the 2013 to '15 timeframe for investors. Spectra Energy Partners' ongoing distribution coverage is targeted to be between 1.05x and 1.15x, reflecting the very stable cash flows associated with SEP assets. Now turning to the Spectra Energy side of the equation, let's look at its pro forma financial profile. Upon closing, Spectra Energy's total ownership of Spectra Energy Partners is expected to be about 84%, which includes the 2% GP interest, with Spectra Energy holding about 240 million LP units and approximately 6 million GP units. By 2015, we expect total distributions to Spectra Energy of approximately $800 million, comprised of $225 million in GP and $575 million in LP distributions. Our GP distributions are expected to increase fivefold over the 2013 to 2015 timeframe. The cash to Spectra Energy from both its LP and GP holdings, along with cash generated from Canadian operation and DCP Midstream distributions, will support Spectra Energy's stated $0.12 a year dividend growth through 2015, which translates to an approximate 9% CAGR. Going forward, we expect Spectra Energy to pay out 80% to 90% of its cash through dividends, which equates to a coverage ratio of about 1.1x to 1.2x. This level of payout is entirely possible since the significant level of our growth will now be funded by SEP. At both Spectra Energy and Spectra Energy Partners, we expect investment-grade ratings, which we believe are important for the funding of our strategic growth opportunities in the U.S. and Canada. So we're very pleased with the transaction plans and look forward to closing by year-end. Here's what our structure will look like following the close of the drop-down. As you can see, Spectra Energy will maintain significant scale, stability and cash flow diversification. Each of our businesses stand out on their own right. Combined, they create quite a powerhouse. Union Gas is the second-largest gas distributor in Canada, operating under a stable regulatory and rate structure and providing us with important cash generation for our dividend. Our Western Canadian assets are situated in the heart of Canada's most prolific production fields and serve customers through strong, multi-year, fee-based contracts with many large growth opportunities ahead. DCP Midstream is the largest NGL producer in the United States, a premium gas gatherer and is well positioned to benefit in a big way when liquids pricing improves. And of course, our growing MLP Spectra Energy Partners, which has the advantage of great assets and unrivaled U.S. footprint and solid long-term contracts and an abundant group of CapEx projects now contractually secured. As you can see, we've got a great go-forward structure that allows us to maintain the scale, the geographic reach and portfolio diversification that sets us apart. Those are the details you've been waiting for and have been waiting to hear. But now let's take a step back and take a big picture view. Our sector-leading MLP is a big story for investors, but so too are the new growth projects we've secured in recent weeks, which I'll address shortly. Spectra Energy is in the midst of transformational growth to the tune of some $25 billion in expansion by the end of the decade. Beyond what's on the drawing board, we see tremendous opportunities within our sector, opportunities that we're ideally positioned to secure on behalf of investors. That growth outlook is a catalyst to advance our MLP strategy now, strategically employing our MLP to efficiently fund our U.S. growth and enhance Spectra Energy's general partner position. Here's why this is such a win-win for investors, both Spectra Energy and SEP investors. The transaction creates 2 strong entities. Earnings and cash flows at both Spectra Energy and SEP will be underpinned by stable, best-in-class assets. They expand the financial flexibility of both entities. The transaction provides a desirable scale for SEP, creating more robust MLP to access attractive capital markets, allowing us to efficiently fund large U.S. growth projects. Post close, SEP will be one of the largest fee-based MLPs in the country. We see this transaction allowing Spectra Energy to maintain the scale essential to executing on strategic opportunities in both the United States and Canada. And while the drop-down involves U.S. assets, our Canadian businesses benefit from a large, well-capitalized C-Corps that enables them to deliver on their sizable expansion plans and, in turn, contribute to dividend growth. The drop-down enhances Spectra Energy's valuation for providing greater transparency on a general partner's cash flow, which is highly valued by investors. And importantly, the transaction provides great potential to increase value at both Spectra Energy and Spectra Energy Partners. The transaction will also allow Spectra Energy to pay a higher portion of its cash-out in dividend. Spectra Energy becomes far less dependent on external sources to finance growth. Spectra Energy will now realize dividend growth of approximately $0.12 a year versus our previously discussed $0.08 a year. The transaction also provides SEP unitholders with greater visibility for distribution growth via a $0.03 increase to be paid in the first quarter of 2014, followed by an increase in the distribution rate of a $0.01 per quarter thereafter. A key driver behind this transaction is the advancement of our growth projects, which will deliver strong, sustainable returns to both Spectra Energy and SEP. So here's an update on some of those projects. This slide shows the array of projects that we have underway and within our sights. The current market environment is highly favorable to the type of infrastructure growth we're pursuing and winning. Changing supply dynamics are creating interest among end-users and producers to secure transportation services to flow gas, and Spectra Energy is responding with an extraordinary suite of projects. I'll start with those on track to contribute to Spectra Energy Partners' 2014 cash available for distribution. Sand Hills and Southern Hills are now fully in service, coming in on budget and ahead of schedule. These NGL assets are great fee-based pipes that connect the Permian, Eagle Ford, Mid-Continent regions to the premium Mont Belvieu market. Our 1/3 ownership interest in Sand Hills and Southern Hills represents about an $800 million investment. While these pipes won't contribute significantly to 2013 earnings, we anticipate revenues in volumes to continue ramping up over the next few years. We're likewise making great progress on the New Jersey-New York expansion project of our Texas Eastern system. The project is about 90% complete now. We finished all 9 directional drills and are on course to complete the expansion by November 1, as planned, and within the $1.2 billion capital investment we discussed with you. We completed our FERC filing for the TEAM 2014 project in February and anticipate a certificate by year end and an in-service state in the second half of 2014. TEAM is a $500-million expansion of our Texas Eastern mainline that will serve Chevron and EQT, allowing them to flow their production both east and south from the Marcellus. This project is the first of many that will transform Texas Eastern into a true bidirectional facility that will continue to provide our customers with access to multiple supply basins and growing demand markets. And next week, we'll file with the FERC for the $120 million Kingsport project, an expansion of our Texas -- our East Tennessee system for Eastman Chemical. That project is expected to be in full service in early 2014. Now in January, we made you aware of a number of opportunities we're pursuing in the U.S. And as promised, we're pleased to be able to share with you today that we have signed firm contracts underpinning 3 major projects, moving $3 billion in capital investment opportunities for our account into execution. Let's start in Florida. In January, we told you we felt we were well positioned to compete in Florida Power & Lights RFP process. Well, as I hope you now know, FP&L recently announced their selection of Spectra Energy to construct the Sabal Trail Transmission system. We'll partner with NextEra on this $3.2 billion project, which is underpinned by 25-year contract with FP&L. Sabal Trail offers a critically-needed third pipeline into the state. Initially sized for over 1 Bcf per day, this expandable pipeline will fuel Florida's natural gas demand for decades to come. We're already in advanced discussions with other parties interested in contracting Sabal Trail capacity, so we expect volumes and returns in this project to build over time and we anticipate an in-service date in mid-2017. This is a very big win for the Spectra Energy team and for SE and SEP investors. We're also moving forward with our $500 million Ohio pipeline energy network, or the OPEN Project, designed to move gas from the Marcellus and Utica to markets in both the North and the South. We have 2 anchor shippers, including Chesapeake for this 550 million cubic feet per day expansion of Texas Eastern. We expect to file our FERC application in the first quarter of 2014, with a targeted November 1, 2015 in-service date. Also moving to execution is our Algonquin Incremental Market, or AIM project, which will supplement the needs of LDC customers serving New England markets by a 300 million cubic feet per day expansion of our Algonquin system. To date, we've signed agreements with Northeast Utilities, National Grid and UIL Holdings to underpin this $850 million expansion. We'll file with the FERC in the first quarter of 2014 with an expected completion date in the second half of 2016. As you can see, great projects are across our system, which, in aggregate, will achieve returns on capital employed in the 9% to 10% range, well above our cost of capital. And while we're proud of the projects we've secured to date, we continue to make great progress on several growth opportunities that are in various stages of development. We won't win all of this, but our record of success is quite good. So let's take a look at those. Crude oil transportation affords a number of opportunities for us. And while the Express-Platte System has been in-house less than 6 months, closing on March 14, we've seen significantly better results than anticipated in our acquisition case. There's been a sizable volume ramp-up on the Express pipeline, thanks to increasing refinery demand in Rockies and more Canadian crude moving into PADD 2 via the Express and Platte Systems. This volume ramp-up trend is holding steady, with recent Express shipments continuing to average about 220,000 barrels per day or about an 80% utilization of that line. Based on the increased level of demand, we're in the midst of a binding open season for Express, which will conclude on August 9. We're seeing high levels of interest from refiners in the Rockies in need certainly of supply, and from others looking to move Canadian oil out of Wyoming by rail. We believe we'll be able to convert a significant portion of uncommitted volumes on Express to committed contracts at close to full uncommitted rates. That gives us and our investors the best of both worlds, attractive rates and contract certainty. In addition, Express-Platte is pursuing a number of other growth opportunities, some of which could be significant and require the deployment of large amounts of capital dollars, above and beyond the $25 billion we discussed with you in January. We're looking at everything, from expanding the system northward, to connect directly with oil sand supplies, to double the capacity of the total system. We're also exploring crude oil infrastructure opportunities beyond the Express-Platte footprint, including storage on the Gulf Coast and rail terminal and pipeline projects in California. To continue to work -- we continue to work on the Renaissance project, which could move Marcellus gas to the Southeast U.S. We are in advanced discussions with 5 customers interested in securing capacity on this potential $2 billion, 1.3 billion cubic feet per day pipeline from Texas Eastern system in Tennessee to the Atlanta area. Assuming we can reach contract terms that allow us to realize an acceptable return on this new highly competitive market for us, we expect to be able to make a decision on this project in the coming weeks. The next project -- the NEXUS project, our partnership with DTE Energy and Enbridge, will provide a seamless transportation path for Utica and Marcellus gas to move into the upper Midwest and Ontario. This project is progressing well. And based on market demand indicators, we remain optimistic that we'll move NEXUS into execution sometime next year, so stay tuned on that front. We're reviewing a number of potential Gulf Coast projects related to the infrastructure needed to support the industrial resurgence and LNG exports and look forward to updating you on the progress we're making on those projects by year end. Moving north, there's also a number of LNG export projects being considered on the West Coast to British Columbia, including our partnership with the BG Group. Clearly, not all of these projects will move forward, but we believe Spectra Energy is well positioned to support those that do. And we have structured our agreement with the BG Group to ensure our development costs are covered under any outcome. We continue to pursue additional gathering and processing opportunities in Western Canada, predominantly centered now in the Montney region. Spectra Energy occupies premier positions in Western Canada's world-class, natural gas supply plays. So if any of the proposed LNG export projects proceed, we will see an abundance of G&P opportunities in both the Montney and Horn River and even perhaps in the Liard and Cordova regions. The opportunities before us require significant capital investment, and we're dedicated to funding that level of expenditure via the most efficient means possible, whether that's employing our MLP to fund growth in the U.S. or utilizing our large, well-funded C-Corps for Canadian expansion. So withstanding opportunities ahead of us, backed by a full complement of funding options, the win-win I mentioned earlier keeps rewarding our investors. We shared a lot of information with you today, and I hope you've been able to sense our confidence and optimism. This is a great time to be investing in Spectra Energy and Spectra Energy Partners. Since the end of the third quarter of 2012, Spectra Energy and SEP have created $6 billion in share and unit price appreciation for investors. That's an impressive number, enabled by impressive execution on many fronts. We first announced the acquisition of our 1/3 interest in both Sand Hills and Southern Hills Pipelines from DCP and our intent to drop them into SEP. Not only did this provide a catalyst for future drop-down activity for SEP, it also allowed DCP to continue its unprecedented expansion efforts, thanks to strong owner support. We then executed on our plan to expand into the crude oil infrastructure segment. In December 2012, we announced the acquisition of the Express-Platte System. The flexibility of our structure allowed us to efficiently make this acquisition and add a fee-based asset with escalators to our portfolio. This too served as a springboard for further growth at SEP. As we expected, SEP's currency strengthened with the announced drop of 50% of Express-Platte and our indication of dropping the remaining 50%. And then, with the maturation of several large expansion projects that have been on the horizon, Florida, OPEN, AIM, totaling about $3 billion, the time was right to move forward with the drop-down of all of our U.S. Transmission, Storage and Liquid assets into SEP. As you'd expect, we'll continue to evaluate multiple value-enhancing options that build upon the momentum achieved to date. And in evaluating further enhancements, we continually consider the many dynamic factors and scenarios at play. We consider our expansion CapEx requirements and evaluate the most efficient structure to fund growth and other strategic opportunities. As we stated, this was a major consideration that U.S. Transmission and Liquids drop-down transaction that's now underway. We consider tax implications, including those stemming from cross-border transactions, which are especially relevant to Spectra Energy given our extensive portfolio above U.S. and Canadian assets. We consider commodity exposure, particularly at DCP Midstream as the largest NGL producer in the U.S. It's difficult to effectively hedge all DCP's commodity exposure without moving the market. While we think the current structure at DCP makes sense today, we continually look at other options. For example, with growing GP distributions at DPM, there could be an opportunity to more fully realize the value of our interest in DCP. Lastly, and of utmost importance, we consider the needs and interests of all of our many stakeholders, including our joint venture partners and investors, both equity and fixed income, in Spectra Energy and SEP. In summary, we're pleased with the investor value we've been able to delever -- deliver to date and look forward to continuing this trajectory. We've accomplished a lot over the last 6 to 8 months for our investors, a slate of high-performing projects delivered into service, new lines of business in crude oil and natural gas liquids transportation sector, the deployment of a major MLP drop-down to support continued growth of success and the $6 billion in share and unit price appreciation I mentioned. Our primary focus over the next several months will be closing the drop-down transaction, executing on the projects we have and securing additional growth projects for multiple ways to create value through existing lines of business, through the execution of new projects and through opportunities that serve our business and investors' interests. You can be assured that we are constantly looking at all of the options available to us, those within our sight today and those will emerge as market dynamics evolve. With that, let me turn things back over to John, so we can take your questions.

Okay. Julie, we're ready to take questions. If you could give the instructions on how to ask a question once again.

[Operator Instructions] And your first question comes from the line of Christine Cho with Barclays.

I would think that you are taking on all of the future pipeline projects at SEP now that the MLP is much bigger, is that right?

That would be a correct assumption.

Is there any scenario where you would potentially take on something at the parent level? And also, about any potential large-ish acquisitions, would you prefer to do that at SEP or at SE?

Well, I think it totally depends on the situation. I guess, part of it is size. As you know, the MLP market has become quite deep, but very large transactions. So I guess if you view that the transaction is similar to the size of SE, you might want to be able to use the Spectra Energy comment in that type of situation. But -- and a major project that was above what we think SEP could do, that's something we'd consider. But at this point in time, acquisitions are not the primary focus. The primary focus is execution on getting more projects. Obviously, those are cheaper and more efficient for us. So I would keep that assumption, Christine, that anything you see us do in the United States would be done at the SEP level if it's got to do with crude or it's got to do with gas pipelines or even NGL pipelines.

Okay. And then, I know you gave that 80% to 90% of cash payout for the dividend?

Right.

And I'm assuming you're going to pay out 100% of all the cash distributions that you'll receive from the MLPs. But how should we think about payout ratio from the respective -- or from Western Canada, the utility, and your cash flow from DCP, given the maintenance needs add to the segments and the commodity exposure at DCP?

Well, that 80% to 90% looked at everything. So we looked at the cash that we'd get from the Western Canadian businesses as well as the distributions we'd get from DCP. So we look at it from a conglomerated perspective, Christine. So obviously, it's affected, not just -- at Spectra Energy, not just by what we get from SEP.

So I mean, when we look at that calculation, we should just aggregate it and take 80% to 90% of it?

That's correct.

Okay. And then, just the Florida pipeline. I know you guys have a 2/3 interest in that, and I think you're possibly looking on to take on another partner. How should we think about your ultimate stake in the pipeline? And what are your thoughts around looking to sell a portion of your interest, given this is supposed to be such an attractive project?

Yes -- no, we're not looking to sell any of it. Look, this is -- I would suggest, for modeling purpose, maybe think about 50%. I think we could get anywhere from, call it, 40% to 2/3 of the project. We obviously -- it was important for FP&L to be a part of this project, and we're glad that they are and NextEra, however you want to look at it. And as I believe you are aware, Williams has the opportunity to participate in a small way. But I think 50% is probably the way to look at it from a modeling perspective as some of those elements won't be known until we secure other contracts. I don't think securing other contracts from other utilities will take too long. I would expect that to happen in the next 60 to 90 days. So you'll have some more clarity at that time too, Christine.

Okay. And then, last question for me is can you confirm the blended cash tax rate for the utility as well as the LP and GP distributions is about 25%? And then, also, give us a sense for cash taxes at Western Canada and DCP? I would think DCP is 35%, but I wasn't sure about Western Canada given the ongoing CapEx you've had there for the last couple of years.

Yes. I don't know if Pat's got it, but he doesn't have that right here. But you're right on DCP. The Canadian tax rate runs around 25%.

That's right, Greg. It depends on the blend of distributions and earnings between Canada and the U.S. And then, of course, this year, in this quarter, we benefited from a pretty significant benefit due to enacting of some Canadian tax legislation that lowered our tax burden by about $12 million in this quarter. So that gets down to about 26% on the blended rate, and I think that's probably a way to look at it.

Your next question comes from the line of Bradley Olsen with Tudor, Pickering.

And congratulations on reaching terms on the MLP drop-down. I just wanted to drill down a little bit further into, kind of, go-forward strategy. Christine's question hit on the payout ratio. Going forward, given the rapid growth of the GP and LP cash flows from SEP, it appears that Spectra's dividend in 2014 through 2016 will be largely and increasingly funded with after-tax LP and GP cash flows and after-tax DCP dividends, kind of exclusively. How should investors think about a cash return from those Canadian businesses? And I know you mentioned some of the unique tax attributes of those businesses in your prepared remarks, and I was just hoping to get maybe a little bit more color on how those tax attributes might affect the payout from those businesses.

Well, the way to think about Canada is that, obviously, the Western Canadian business is making a lot of investments, as you know, in G&P and, hopefully, in LNG going forward. But the way to think about Union is it provides, call it, $150 million towards our dividend at Spectra Energy. So that's about 20% of that. And obviously, because of -- well, maybe not obviously, but because of the nature of Spectra Energy in multiple businesses, different jurisdictions, we obviously won't be surprised to use a lot of levers to minimize the cost of bringing cash across the border. So that's the -- that's one of the key attributes that, obviously, stand-alone companies may not be able -- or probably wouldn't be able to benefit from that. So think about 20% is probably a number today that -- of the dividend that's provided by the Canadian assets.

Okay. Great. And given the robust CapEx backlog that you've announced that's moving into the execution phase this morning, I know you've talked about 25% cash tax rate. But can we think about those LP and GP cash flow tax rates moving down over the next several years as you invest this kind of large capital base at the SEP level?

Well, remember, we're still -- if I understand your question right, we're still going to have to pay the same tax rate on our LP distributions, right? Those aren't tax exempt. They attract the corporate profile tax rate. So I don't think you would see that element go down, if that's your question, Brad.

I think that's right, Brad. And the other thing I'd just clarify is that that 25% is our GAAP controlling interest tax rate. Our cash tax rate is actually quite a bit less than that, particularly this year with bonus depreciation.

And next year, we expect that number to improve, at least, at the SEP, to be around $200 million of cash.

That's right.

Okay. Great. And, Greg, just a kind of follow-up to your question to me, the -- my understanding would be that some of the depreciation shield that you enjoy as an LP unitholder at the corporate level would allow you to enjoy some of the bonus depreciation as you invest that capital. But I take it from your response that that's not the case.

Yes. Well, it's not significant. You're right, but it's not a significant element.

Okay. Great. And just another question on the terms of the transaction. The $2.2 billion cash return from SEP for a debt pay-down at the SE level, how did you think about the -- how did you think about structuring a transaction, given the fact that you'll probably be slightly over 4x consolidated pro forma for any equity issuance that might need to take place at SEP as far as deciding to take more cash or deciding to take more LP units back and increase your, kind of, go-forward cash distributions from SEP?

Well, it's -- you're right, Brad, it's a balance that we have to strike. And as we've said, for quite some time, because we've been very tax-efficient and because we have low tax basis than the assets that we dropped, we had to take the bulk of the consideration -- or needed to take the bulk in LP and GP units to transfer that low tax basis to those units. And so, it's only in the future, if we were to sell those units, that we'd pay the tax on that differential. But then, we did need a cash piece in order to pay down debt at SE Capital that basically is attributable to the assets that we're dropping down where we did financing at SE Capital in lieu of doing it directly at the entity level, like at the TETCO or Algonquin level. And so, we're going to use that $2.2 billion of cash that we'll get back to reduce our outstanding debt at SE Capital.

Great. And just one more for me. In light of ONEOK's announced spin of their LDC business and the positive reaction we saw from the market to that announcement, how has your thinking around potentially spinning out Union Gas for the larger Canadian business changed, if at all?

Yes, it's -- that's not something we haven't looked at on multiple times in the past. It comes up from time to time. I think the one fundamental difference we see is, as I understand, the ONEOK transaction, Brad, that their utility was a user of capital. As I mentioned earlier, our utility is a provider of capital for dividends. And so being able to have that difference is a big element. And then, of course, we think that some of the very large projects in Western Canada, call it the LNG projects, et cetera, that a small entity in Western Canada probably won't be the winner of a lot of those transactions. And so that's pretty critical element just as it is in the United States. I'm not sure ONEOK would ever have been considered for, say, a Florida project, just given the size differential. So that's the balance we have. That being said, we look at that all the time. And of course, then the big issue from that is tax. I noticed they could do things on a tax-efficient basis. We would not be in that position, again, partially because of the cross-border nature, whether at Spectra Energy or if you went down the route of an IPO, how, say, that piece of paper might be taxed with cross-border cash flows as well. And those are big elements that we've got to consider. But never say never. That's something you look at. But right now, and at the times we've looked at it a multiple times in the past, the tax inefficiency and the size of the project and the fact that we get about 20% of our dividend to SE paid out of our Canadian businesses are important factors for us to keep with the current structure at this point.

Your next question comes from the line of Stephen Maresca with Morgan Stanley.

First thing, on maintenance CapEx for SEP, the $300 million you talked about for 2014, to me, it seemed a bit high relative to what I thought and what your EBITDA is. So I guess, is that -- why is it so high? And is that something that's going to stay at that level going forward, or is this some -- is there some one-time thing going on?

Well, there isn't any real one-time thing. Obviously, we have a combination of brand-new assets and old assets. I think that $300 million rate is probably a pretty fair number to look at going forward. As you know, following the San Bruno events, Macondo, a whole variety, the United States government has actually put more requirements on pipeline. So you have seen maintenance capital move up over the last couple of years, and I think we're in that state. As you know, we run pipelines that have pressures on it that actually no other pipelines in the United States have the ability to do because of the way we looked after those assets. So, yes, I'm not sure what number you had, Brad, but I -- or, Stephen, but I think that the $300 million number is good. We've also taken into account 2 other things that may be unique to us, new air emission requirements that I think will fit -- hit all pipelines, particularly on the compressor front, as well as longwall mining. We have the benefit of going through the Marcellus and other areas. But as you know, that part of the world is also prolific from a coal mining perspective, and there are costs actually that we absorb sometimes or share with the miners on that front, and they're pretty active on mining coal.

And, Stephen, this is Pat. One other nuance on that is that, to the extent that some of these costs are generic and would be imposed on all pipelines, we're looking in from a regulatory perspective to a strategy of being able to accrue these costs and be able to recover them in a future rate case to the extent they benefit general system customers. So it's -- there would be a lag in the time of recovery that perhaps not ultimately -- that we would get them eventually.

Okay. I appreciate that. Secondly, on the EBITDA forecast for 2014. How much of Sand and Southern is included in there? And how should we think about the ramp from '14 to '15 on those pipes in terms of EBITDA generation?

Yes. Give us a minute. I think we can pull that up. It's obviously pretty small in 2013.

Well -- and the 2014 number...

Right, right. And I know the full ramp-up doesn't occur until 2016. So...

Yes.

You're kind of -- but by '14, you're getting to the $60 million range versus in '13, you're more like $20 million range. And then you ramp up fully to about $90 million by the time you get to '16, if that helps you.

That helps greatly. And that is net to you. But that's what your -- or SEP, I should say, right?

Yes, that's RP [ph], sorry...

Okay. And then the final one for me. So another $2.2 billion of cash raised by SEP to go up to SE for this. How should we be thinking about that in terms of the funding at SEP? Is that something where you would look to do a mix of debt and also SEP equity to raise that?

No, the idea would be debt. I won't get into exactly what would be, but debt. But equity on that piece, that would be debt. And I know the treasury guys are working out the best way to be able to do that.

And, Stephen, the only thing I would mention there is that we did -- you may remember we did file for an after-market equity program, which many of our peer MLPs have and a few successfully, and that will allow us to raise equity during the year outside of other issuances.

Your next question comes from the line of Ted Durbin with Goldman Sachs.

I want to come back to the payout ratio, please, at SE. It looks like you're going to target this now to focus on maintenance CapEx. But you do have a lot of large private projects, as you mentioned, in Western Canada. You could -- I think you said $7 billion potentially of LNG. How do you think about funding those if they are all in the go at once? Would you issue equity at the SE level or how do you deal with that?

Well, I think we got a couple of options. We won't -- the biggest chunk of those projects and really, the only one that is the driver here on that, Ted, would be the LNG project, which they -- and remember, $7 billion for that is 100%, which we have the option to get or BG has the option to put to us. But they won't make any FID on that until early '16. So we've got some time to think through that. In the meantime, so call it the next 3 years, that the combination of -- obviously, we have 2 good debt entities there, and they largely raise internally, they produce enough cash generation where they can support the annual investments up there. We don't have -- right now, like we did in the last couple of years, being in a half-dollars project at Fort Nelson, et cetera. If though things really accelerated, obviously, and they're good investments, that's an opportunity that we wouldn't want to miss. We would have the option to use SE equity. But we -- I don't foresee that right now. I think the big driver of that and opportunity for us to chat again about that would be when the LNG project kicks in.

Great. Okay. And then, just going back to Sabal, I guess. Can you talk about the returns on capital you're expecting on that project in particular? You talked about you've got existing commitments. Kind of, how do those returns ramp over time? Or is it more of a levelized return? Just kind of what you've got on the base commitments than what you'd see from -- in terms of upside if you decided to sign up additional customers?

Yes. I think the way to think about it is 9% to 10% return on capital employed initially, and it goes to mid-teens after the second tranche kicks in, which I think is 19%, 20% range. So -- but I fully expect the pipe to be completely utilized as we hook up those other customers. And you've seen some other utilities beyond FPL and NextEra in recent days talk about their need for additional gas-fired generation there. And if you do that calculation, I think you'll see several thousand new megawatts of gas-fired generation of which this pipeline is uniquely positioned to be able to serve.

Your next question comes from the line of Gabe Moreen with Bank of America Merrill Lynch.

Congrats on the transaction. I'm just wondering, I guess, especially on the balance sheet, sort of what metrics you're going to be targeting in terms of debt-to-EBITDA on things like that, both at SE and SEP? I know in the past you've got a sort of debt to cap at the SE levels. I'm just wondering, kind of, what range is there?

Gabe, our ranges really aren't going to change because our objective is to maintain our investment-grade ratings at both SE Capital and at SEP. And as you can imagine, the drop of these assets to SEP is actually very credit enhancing. So we'd be looking for solid BBB/BAA2 status at SEP and to hold our BBB rating at SE Capital for the reasons Greg mentioned to be able to raise debt and equity at the SE Capital level to support both growth in Canada and potential acquisitions. So we're really not going to change our debt-to-EBITDA metrics from where they were.

Okay. Got it. And then maybe if I can follow up with a question on Empress and sort of what you talked about, Pat, in your opening remarks. I think China hedged more in terms of the inputs and outputs there. Could you talk about, kind of, how you came to that conclusion versus looking at some other different potential solutions? Has that solution came up with something you're doing with your partners at Empress? Are you going on a stand-alone basis? And then, finally, since it sounds like you'll be hedging NGLs on a physical basis, how far out do you think you're going to go in terms of that hedging?

Okay. Gabe, well, thank you. Well, the -- in terms of the process, as we've said earlier in the year, there were really 3 potential options that we evaluated. One was stay the course with hedging. The second would have been to sell the plant to a third-party. And the third option would have been to engage in some kind of joint venture with another operator in the area to address the issue of overcapacity for processing. And as we look at those 3 options and given where commodities are at a fairly low point in the cycle, we determined that the main thing we need to do is reduce volatility and ensure that we don't have another year like last year where we operated at a loss at Empress, given that's a relatively small part of our operation going forward. So that's how we arrived at the stay the course with hedging. And we're not doing that with others. We're doing it on our own. We would probably be entering into forward sales -- forward purchases of natural gas and hedges, really, for this season that we -- where we're entering into the extraction contacts. So it would tend to be mostly 12 months ahead or perhaps 18 months.

Yes. And, Gabe, the only reason we can do this, obviously, is since it's a pretty small operation in terms -- and as Pat said, largely forward sales, if you will. There's no proprietary trading or anything like that, just to be clear.

We wouldn't expect to have a lot of mark-to-market. We're not going to be hedging 100% of the output, maybe 75% or 80%. So there will be some GAAP -- a little bit of GAAP volatility. But from an economic margin standpoint, we'll be basically locking in a positive margin for the term of the contracts.

Your next question comes from the line of Josh Golden with JPMorgan.

Just following back up on the debt situation, credit metrics ratings. I've got a couple of questions. The potential hedging, will that help over at the C-Corps to maintain ratings since more of the fee-based assets at this point are going to be dropped down to the MLP? Then as a follow-up, sort of to that question, when you're looking at the cash that's coming back over to the C-Corps, how much of that cash do you think will be deployed to reduce the debt to firm up the capital structure, as you said, to keep it, sort of, constant, roughly 100%? And do you envision trying to look at doing tender offers for existing SE debt?

Okay. Josh, well, on your 2 questions, with respect to hedging, as we mentioned, the Empress operation on a go-forward basis, the EBITDA would be, call it, $30 million for -- and Enterprise was about $3 billion plus of overall EBITDA. So it's relatively small. It's really more. So we don't have to talk about Empress on our earnings call, quite frankly. It's just not big enough to -- it's more of a distraction, if you will, in that sense. And then, with respect to the cash back to Spectra Energy, the $2.2 billion, we're going to use that entirely to pay down debt. So you probably know that, in connection with the Express-Platte acquisition, we took out a bank term loan in the amount of about $1.2 billion, and then we have commercial paper debt that we're going to pay down in addition to that $1.2 billion. And that will leave some small amount leftover that we could use to tender for some SE Capital issuances. But that's something that we'll decide as we go along. The bulk of that $2.2 billion will be used to retire our term loan and to pay down commercial paper.

And just one follow-up. At the SE Corp. level, in your discussions with the rating agencies, now that you've provided a bit more clarity, I mean, are you anticipating the downgrade by either one of the agencies at the C-Corps level?

We made a strong case, I think, that when you think about it -- this is a financial restructuring, the assets and the cash flows are the same. You may have seen that yesterday Fitch has indicated that they're looking positively at what we've done. And so, we still have to hear from Moody's and S&P. But our view is that we should remain, at SE Capital, investment-grade and that we're deserving of a BBB/BAA2 rating. But that's obviously something that the agencies will have to assess on their own, looking at our cash flows.

Yes, I think the agencies look really closely at, obviously, the assets that we have as well as the Canadian assets. I think, one thing, assets like Union Gas provide a lot of comfort to rating agencies. And we think, with all the capital projects going forward, that's going to be a positive element for us as well.

And even in Western Canada, as you know, the -- our G&P business there is fee-based, unlike in the U.S. And so, really, the only volatility we had was at Empress. And as I mentioned, that's a very small piece of the overall picture now.

Yes. And I -- just as a follow-up. I know there's been a good deal of concern in the fixed income bond markets about Spectra potentially engaging in a transaction similar to ONEOK. But if I go back to your comments earlier in the conference call, it basically does not sound as though Union Gas is something that you would be looking to give up, given that it's sort of a provider of cash.

Yes. It's 2 elements: a, it's a provider of cash, and I think it's quite different from the ONEOK situation; and, two, the tax -- the cross-border nature of either the transaction or any piece of paper. So at this point in time, we think we've got the right structure with Union Gas. I can never say never, Josh. But again, this isn't a new idea. It's something we've looked at and the inefficiencies from a tax perspective and the strong benefits from a cash benefit to our dividend suggest this is the right structure. And that's very different from ONEOK, I think.

Can I -- and then, just my last question. If I sort of think about going forward, is it sort of fair to say that the more fee-based stable assets will be moved and, over time, transitioned to the MLP -- or developed in MLP and more of the processing, gathering type of assets still being assets will be held more at the C-Corps level?

No, I wouldn't look at it like that. I would say the fee-based assets in the United States are in the MLP. The fee-based assets in Canada are largely in our C-Corps structure. And the only really volatility -- assets with any type of volatility would be the gathering and processing in the United States, which, as you know, is in DCP, which has its separate entity and financing node with its own ratings. So that's not part of SE, if you will, other than as an equity investment.

Your next question comes from the line of Faisel Khan with Citigroup.

Faisel with Citi. On the stated return on capital employed numbers you were giving for the Florida pipeline, the 9% to 10%, just to go back to that. Is that an after-tax number, the 9% to 10%?

No, that's a return on capital employed. So EBIT over capital.

Okay. It's pretax. And then...

Correct.

And then -- assuming with the contracts that you guys are -- binding contracts you have, is there any sort of stipulation if the pipeline was to go -- to run over budget? Like, how you would cover the excess cost if the pipe goes over budget?

Well, we always build in contingency. And I think with the project we've done, we've got a nice contingency in there, but the equity holders, so NextEra and ourselves would be at risk for any overruns on the project. But I think we'd probably say, "Well, I also think that's one of the benefits of having a partner like NextEra involved and potentially others that will help to ensure against that."

Okay. Understood. And then, just on the guidance for EBITDA for 2014 at the SEP $1.48 billion, and then looking at the 2013 EBITDA numbers for UST of $1.35 billion. I guess if I extract out the equity earnings for Sand Hills and Southern Hills and the EBITDA for the Liquids pipelines, it looks like the gas -- the U.S. Transmission assets aren't really growing all that much from '13 to '14. Is that the right way to look at it, or am I missing something in those numbers?

One thing that -- when you look at EBIT or EBITDA for U.S. Transmission in '13, we have a fairly significant amount of AFUDC in there, about 80 -- call it, $80 million, $85 million. And so, even as new assets go into service like New Jersey and New York, we debt-flipped to cash, but it doesn't dramatically drive up the EBIT or EBITDA. The good thing about it going into service is it's now cash available for distribution.

Right. Okay. That makes sense. And then, just on the binding open season for the Express-Platte expansions, can you go into a little bit more details of what -- this is a binding open season for a mainline expansion of the entire system?

No, the open season right now is just -- remember, when we bought the asset, we assumed a 70% utilization. It's turned out to be more like 80% utilization. And obviously, as you know, no pipes have been approved of significance since then. So there's a lot of interest in the existing capacity on Express-Platte. So this is just to contract up...

30%.

The existing capacity, right? What I was talking about, otherwise, is given -- going through this process, we've had a lot of well in excess of 20 interested parties signing confidentiality agreements, looking into this discussion about could you further expand Express-Platte down the road? And that's something separate from the open season that, obviously, we're looking at, which would be a multi, multi-billion dollar transaction if we were able to structure that, Faisel.

Your next question comes from the line of Carl Kirst with BMO Capital.

Just 3 questions, if I could. One, maybe keying off of Faisel's with Express-Platte. As we look at the EBITDA target for next year and that Express-Platte is doing better-than-expected performance, should we still be thinking of that as $145 million EBITDA asset, even prior to the outcome of this open season? Or does that -- do you think it would have some uplift as we look at it today?

Well, Carl, we're just in the process of finalizing all of our budgets for next year. So I don't want to put it out piecemeal. But I guess I would say this, I'd be very disappointed if next year was $145 million. I think, to date, we've -- our assumptions were more like 70% full at committed and uncommitted rates. And so, I expect we'll do better. But as we come out with a fully detailed plan in January, if you'd give us that time, I'll lay it all out as opposed to just one business unit at a time. But you're thinking in the right direction.

Fair, fair enough. Second question. Just back to Florida -- and I apologize here. I think you may have said this, but I just want to confirm. To the return on capital employed on Florida, are you -- when the project starts up, you're looking at a 9% to 10% ROCE and then expanding that over the time, or the 9% to 10% is the life of the asset?

No, no, no. That's the start-up. So it goes into the mid-teens after Phase 2, which the year of Phase 2 is -- escapes me right now. But I think -- I want to say 20%. But if I'm wrong, the guys will give you a show [ph] and correct it.

Absolutely. And then, last question and at risk goes sort of trying to read tea leaves and trying to become a premonologist [ph], one of your statements in your prepared commentary was obviously you all -- you guys always reassess the structure, value-enhancing moves, et cetera. And one thing I wasn't sure if we were seeing a veiled reference to the potential IPO-ing of DPM's GP. And perhaps, maybe whether it was meant to be or was not meant to be -- maybe I could ask the question this way. To the extent that SEP, as it sort of accreted in unit price and you, all of a sudden, won all of these projects and it became -- conditions changed to make that a worthwhile pursuit, if you will, doing this big drop, is there any similar conditions we should think about from the IPO-ing of a GP, for instance, considering it's not really a use of cash or immediate evaluation kind of screen. And I didn't know if you could help me with your thinking as you assess whether to do or not do something like that.

Well, I think, it's a couplefold [ph]. If I go use the DCP piece as an example, as you know, with the MLP was relatively small, we're going to see the GP distributions that DCP [indiscernible] at 100% level going from, call it, $50 million -- or, what am I talking about talking about, $25 million to more like $120 million by 2015. And I think we laid that out for you all last September, October during our Investor Day just on DCP with $66 million. And at that point in time, we said, "Look, if investors aren't going to recognize the value of that, you've got to look at other ways to realize that value. And you've expressed some of the ways to potentially do that." So the same could be said for SEP. Now I would fully expect that investors will recognize the value they're getting from the GP and the LP distributions via our growth in dividends to them. But obviously, we're not stuck on any one structure, which everyone is going to create the most amount of value, Carl. But that is still going to maintain the benefits to the bondholders, the equity holders, et cetera. It's a balance, as you know, of all these pieces so that you can be well positioned to fund growth in the future, while providing investors with the best possible opportunities today.

Your next question comes from the line of Ross Payne with Wells Fargo.

On Express, would it be possible to extend that to Texas Eastern and potentially repurpose some of that to get crude south into the Gulf? And -- well, that's just my first question.

Okay. I think there's a couple of different ways to get to the Gulf. But, yes, that's something we're very interested in and we've also looked at, and this is definitely a tough spot. But obviously, as you know, the price of crude on the East Coast is very valuable. So if there's an opportunity to extend towards Texas Eastern and find a way to use rights of way, et cetera, to get further east with crude, that would be valuable too. So all of those are on the opportunity list, if you will. I would just say that, first and foremost, our most directly in our line of sight right now is the open season contracting up. And then the opportunities on the existing system, if you will, as supposed to further extension all the way down to the Gulf. But as you know, there are players that might find that very interesting, of which we would work with. And those are calls that we didn't have before December 2012 because we weren't in the business. But now, there's a good path to our door and vice versa to the other parties. So, yes, the opportunities are out there, Ross.

Okay. And then, the last question is on the rating agencies. Do you know when we might be hearing on what they conclude in terms of the SE rating?

Ross, I think we could hear as early as later this week from some of them. Others may take a little bit longer until the transaction actually closes. So -- but it could be as early as later this week.

Your next question comes from the line of Matthew Akman with Scotiabank.

Could you comment on the status of the NEXUS project? I'm just wondering if there has been any delay there or whether it's moving forward.

Well, I think we'll have a good feel for you. Early next year, obviously, there's a lot of moving pieces, as you well know, in the Canadian gas transportation business. What is definitely clear is that the amount of gas moving from West to East in Canada is declining pretty rapidly. And yet, the need for natural gas in Ontario and Québec continues to increase. And so, I think you've got the parties continue to be committed and in terms of DTE, Enbridge and Spectra to be able to build that pipeline. And -- but I think it will be early next year before we can say that one is moving into execution. But any delays would be temporal, I think, as opposed to a stop in the project.

Next couple of questions are just on the MLP drop-down and also, conversations, I guess, that have been happening in the marketplace about monetizing your IPO in Canada. So I guess, first question, probably for Pat. Pat, I mean, is there any income tax benefit in the MLP drop-down structure? I mean, I know you're doing -- you've got the bonus depreciation, that's going on now. But relative to a status quo, does the MLP drop-down reduce, in any significant way, income taxes paid by the overall entity or their assets?

It doesn't for the C Corp, Matthew, for SE so that our -- because our PP [ph] and LP distributions are taxed, like any other income for the corporation. We didn't -- we don't -- we, in a drop-down, you don't get a step up in basis for those assets, like you would when you go out and buy assets and get to step them up to the purchase price in a drop-down. You don't do that. And so we basically transfer the low basis in the assets we've dropped to the shares that we take back. And as long as we hold those LP and GP shares, we don't pay tax on that difference. But on an ongoing basis, the distributions that come back to us are not -- don't get a tax shield like they do for the retail investors.

Do you guys have any plans, or is it possible in the future to drop any of the Canadian assets into SEP? I just asked the question because other MLPs have gone up to Canada and acquired assets. So it wouldn't be the first time. And I know there's conversation out there about doing things with the Canadian assets.

Just with respect to the MLP, we did -- we are dropping the Canadian portion of Express-Platte. We were able to do some tax structuring to make that tax efficient. As you know, Union Gas is a distribution company. It's not a qualifying asset to go into an MLP. And then what that leaves out west is our Western Canadian gathering and processing business. So -- and with really no plans to do a cross-border drop of those assets or the pipeline down to the U.S. Canada border.

And my last question is on the rating agencies as it relates to possible spin-off of Canada. I mean, my feeling, and Greg, you touched on this, is the rating agencies are very high on gas distribution, especially in Canada, it's so reliable in its cash flow. Have you had any specific conversations with them about how they would react to a spin of Union, and how that would affect your chances of staying at BBB, which obviously, you guys seem really dedicated to an investment-grade credit rating at SE?

Well, this actually goes back to even 2002, when the assets were bought by Duke Energy at the time, or DETT, if you remember those names. And an important element of that transaction was the maintenance of, to keep Duke's ratings, was the maintenance of Union Gas, which was obviously, a much smaller entity in the big Duke program then it is in West Coast -- than it is in Spectra Energy. And our discussions with the rating agencies, they would not, in fact, they asked us, it's not our intentions to go down that route at this point in time, but they asked us and they would see that as very negative. And I think you might get some indication of that, even on the ONEOK transaction, where you're losing an entity that provides cash and stability in great years, only 10% better and in really bad years, 10% less. So it would no doubt be credit negative and with $25 billion worth of projects, that's something you'd have to consider really hard as to what the value of that is, going forward.

Your next question comes from the line of Becca Followill with U.S. Capital Advisors.

Several questions for you guys in trying to run through the numbers on what this means to SE and SEP. Can you talk to what the GP maintenance CapEx is going to be? You talked about $300 million, roughly $280 million at SEP. What is it at SE? And then while you're linking that up, roughly on -- go ahead, I'm sorry.

Becca, the total is about $700 million for the corporation. So if you take out the $300 million dollars for what we're dropping, I think -- let me just double check that.

I think that number's got the Canadian piece. Are you, Becca, asking for in the U.S.?

Just total maintenance CapEx, so that we can look and calculate what the GP -- what with the remaining cash flow is going to be at SE, and how much you can pay out?

Yes. Well, think about $800 million for the total corporation.

Okay. So the remainder goes to SE?

That's correct.

And then on SEP, rough idea of CapEx for '14 and '15?

Yes, we can give you those numbers.

Certainly. So '14 and '15, we've got about the -- it's about, call it, let's say between -- right around $930 million for CapEx, growth CapEx in '14, and about $1 billion to $1.1 billion in '15.

I'd use $1 billion for right now. But again, as we complete these -- the 2014 plans, we'll give you even a more detailed number as we get to the end of the year. But really, it's the number to use right now.

Ballpark, that's great.

Yes.

And then, at SE, the cash tax rate, there's been several questions. But just, if we could see what the cash tax rate is for the remaining assets that are not the LP and the GP distributions, but the cash tax rate for '14 and '15 for SE?

We haven't projected that, but that -- how it will change with the drop. But we can do that, Becca. Obviously, this year, we're not paying cash taxes because of bonus depreciation.

And then, the EBITDA from the remaining assets that you have at SE that are not Canada, or not the DCP Midstream that you've got half of such that's still left, Maritimes in Northeast Canada. Is there -- what's the EBITDA of those remaining assets? And why drop down session 2 parts?

Well, let me take that one first. The reason is that when you have a joint venture that holds an asset, you could have constructive termination of the joint venture if you drop more than half of your interest in any 12-month period. And the consequence of that is it restarts your tax depreciation and you have to stretch it out over a greater period of years. So you have a, just a net present value detriment to the cash benefit of depreciation in taxes. So that's the reason that agreement -- partnership agreements restrict the amount you can drop down in a given year.

Yes, Becca, we'll follow up with you with some of those numbers we haven't got here. We'll see what we can get you.

Okay, then the last question is, help me understand, just on structure on Canada, the difference between dividending $150 million of cash from Union Gas back to SE each year to pay your dividend, versus having a separate corporate structure in Canada and it paying a dividend back to you. What is the difference in that?

Well, again, if you had a separate entity, you actually -- we, the money is fungible, given the large size of the organization. But we get a -- you may not have to move cash into Canada, or out of Canada, with the overall conglomerate. The biggest challenge is, is if you did a separate, call it, an IPO or a spin out, Spectra Energy would have to pay cash taxes on that. And if you spun it out into a U.S. piece of paper, let's say, then you would have to bring cash across the border into a single entity to pay out the dividend, and that would attract much higher taxes, call it 50% in terms of taxes, because you've got to pay to get the cash across the border. We can, by moving cash around overall organization, avoid or most efficiently move the dollars inside Spectra Energy that avoids that, what is basically a 50% plus tax rate. That's the challenge. So somebody's going to -- would have to pay, either the investors that get the units for Spectra Energy on the absolute transaction. There's no free lunch on that. Unlike the ONEOK deal where it was indicated that there was absolutely no taxes paid by the corporation. And that's just the cross-border nature of it. With both West Coast and Union Gas and Spectra Energy, we're able to move cash from one puck to another without attracting some of that cross-border tax leakage.

As Greg said, Becca, there's really to no way to spin out a Canadian company from underneath a U.S. company without paying a U.S. tax on that transaction, whether it's by Spectra Energy Corp or by our shareholders.

Your next question comes from the line of John Edwards with Crédit Suisse.

Just -- if I could follow up on Becca's question. Just the growth CapEx, that 9 30 and $1 billion, is that for all of SE, or is that SEP?

That's SEP.

SEP.

That's SEP, okay, all right. Fair enough. And then, I was wondering what the total amount of CapEx opportunity here. Could you carve out the SEP's -- SEP piece of the $25 billion for us?

Yes, that's running in the $9 billion to $10 billion range.

Okay, all right. So that's -- okay, good. Confirming that. And then, as far as the maintenance CapEx, kind of following up Steve's question, should we be thinking about maintenance CapEx going forward as roughly 20% of EBITDA? Because I mean, it happens to work out about that right now. Is that a pretty good rule of thumb to use going forward?

I wouldn't look at it that way. I think, you use $300 million, EBITDA will grow. So hopefully, maintenance capital won't [ph]. We've had some ramp-up for some of reasons that I talked about. I don't think there's a rule of thumb related to EBITDA. That's not the way I'd look at it, John.

Okay, so pretty flat, about $300 million.

Yes, that's -- that would be our target.

Okay, great. And then just -- could you give us your preliminary thoughts on your BC LNG projects, the impact of the announcement by the Energy East project?

Well, I don't see a big impact as a result of Energy East project. I mean, the fact of the matter is that that's displacing if that goes forward on the oil side, largely Alberta Gas. The project -- the BC LNG projects are a largely British Colombia gas. And as you've seen, several prolific developments there, you're talking about a multiple expansion of gas production in British Colombia. That gas has got to get out. And it's either coming -- come down to the United States, and we know the challenges of that. So it comes down the I-5 corridor, for lack of a better word, but there's no lack of gas down here, or, it's got to go to other markets, largely Asia. And so, that's the big driver there. And we have 2 opportunities to play, of which the smaller one is actually a better returning project, but the larger one is a bit of a driver. And the large one, obviously, being the pipelines. I don't expect all of these proposals to go forward. But any of them that go forward are going to require more gathering and processing, fee-based gathering and processing. And we currently process more than 50% of the gas in British Colombia. So that's our -- that's returning opportunity. So if these -- if the LNG projects go forward, I would expect, kind of every 18 months, we'll have to put in $1 billion plus of new gathering and processing opportunities. Forget the pipeline. The pipeline in itself could be anywhere from $6 billion to $8 billion worth of opportunity, just one of them. I would fully expect, as you've seen in the United States, you'll see some consolidation of these projects and that multiple players get multiple pieces. Rarely in these projects are they done by a single entity. So there's lots of things to still play out here in the '14 through '16 time period. But I will say what we're most excited about is that something will happen, and that that will lead to G&P opportunity, which are our best returning businesses up there.

Your next question comes from the line of Chris Sighinolfi up with Jefferies.

Just a couple of cleanup questions for me. Lots of commentary and questions on the Sabal project and returns there. I'm curious, now that OPEN and AIM have been formally moved into the execution bucket, or tranche, of your makeup, how do we think about returns on those projects? I know negotiations were ongoing over the course of the spring? Is sort of the same range of outcomes, in terms of a return on invested capital, expected for each? Are there nuances with each? Can you just talk about that for a moment?

Yes, well, obviously, the capital associated with AIM, when you're thinking you're moving 300 a day, and it's an $850 million project, obviously, that's a much tougher area to operate in. We have, I won't get into the details, but since it's a much tougher area and since it's a really required pipe, we do have some capital cost sharing in that entity and in that project. And I'd expect that project to be right in that same 9% to 10% return area, probably more of the like as opposed to moving up to the teens. And the same with OPEN. Both well above our cost of capital on those projects. The one thing I'd say about AIM, which I didn't in mention my comments is that there is a possibility that project could grow in size. And we're still in discussions with several players on that front. So stay tuned on that. But right now, were calling it an $850 million project. But there may be opportunity to add more volumes there, because that's a very congested area. OPEN is just the start of really continual development of the Utica and Marcellus areas. You move gas north and south and through Texas Eastern. So that one's a -- that was less likely to grow at this point in time.

Okay, great. And for AIM, drive the expansion, potential expansion you talked about. That's party to this same phase, it wouldn't be a later phase?

Correct. No, that'd be part of their -- there's still some ongoing discussions, so we have enough now contracted that this project is a go. It just -- it's only going to improve from there, from a capital investment opportunity size.

Okay, great. And then one more cleanup for me. A lot of questions about capital structure and the credit ratings, mainly centered at the parent company. I'm curious on the MLP, sort of following on from Brad's earlier question. Looking at this sort of back-of-the-envelope, getting somewhere around, call it 4.25x net debt to EBITDA number. Is that, Pat, as you think about wanting to maintain investment-grade at the SEP level as well, you mentioned the ATM [ph] facility. Obviously, you mentioned debt being placed to pay back the parent company. But as we think about it going forward, what sort of level do you think is appropriate or comfortable on the SEP front? And then, as we think about the very, very sizable CapEx spend that you may have here coming the next couple of years, can you just look at maybe funding more of that than historically we would think about with equity, to sort of balance it back out?

Yes, Chris, I mean, with respect to the coverage ratio, we're kind of looking at mid-4s and holding at that level, call it, 4.2 to 4.4, something like that. And then financing our growth for modeling purposes at about 50-50, with debt and equity at the SEP level through the aftermarket program, as well as through individual issuances as we go forward.

Your next question comes from the line of Curt Launer with Deutsche Bank.

Just wanted to follow up on some of the additional questions on the Canadian assets. The CapEx has been coming down the last couple of years, $750 million plus the $520 million this year. What would be the outlook for that for 2014? Follow up relative to the plan of doing additional hedging and the achievement you have this year of Empress being breakeven, will that generate mark-to-market accounting issues that we're going to have to watch on a quarterly basis in the future? And then I've got a couple of others.

Let me start with the last one, Curt, on the mark-to-market. We're going to use hedge accounting, so for the portion that we hedged, there will always be some ineffectiveness, I suppose. So there could be a small mark on that. And then to the extent we're hedging, call it, 75% or 80%, there'll be 20% to 25% that's not hedged, that we won't have a mark on, but that could generate a book gain or loss. But with respect to the hedges, well, they'll be cash flow hedges. We don't anticipate, at least to start, significant ineffectiveness, because we've got a good reference point for the gas price. So we're not looking to generate significant mark-to-market swings that we'll have to talk about. But there will be modest swing.

Okay. And as...

For the CapEx for '14. You know what, Curt, let us pull to -- put the full plan together for '14. I don't expect dramatic changes in Canada next year. As I said, the really, next round of projects kick in as the LNG, both ours and others, go in. So I wouldn't expect big differences. But we will roll out the full plan for the entities beyond SEP, if you will, in -- at the end of the year and start of next year.

Okay. One more on Western Canada, and then over -- I'll go over to Union Gas. But through the second quarter, you seem to be ahead of the guidance in terms of the Canadian numbers that you provided at the January Analyst Day of $615 million. If I take away the O&M and the turnarounds, is that mostly an Empress breaking even situation, or are there other factors that are causing that business to outperform the original expectations from the year?

I think that -- the big issue is that, the highest -- higher Empress earnings. I mean, that's a $20 million turnaround just in the quarter from where we were a year ago. Remember we had that big propane drop off last year. So that's really the big element. And we said we'd breakeven this year. So we're -- that $20 million is obviously the delta from last year. But I think we're around $7 million to $8 million positive, year-to-date. So yes, that's the big element that's happening there. And that -- that was an important -- it was an important action for us this year.

And over to Union. Quick question there. Admittedly longer-term, lots of things that happen in and around that market. TransCanada, with the Energy East conversion, that is one thing that's bound to be a factor for you to consider a longer-term access to gas from the Marcellus. The future of Union Gas looks very good from the perspective of Dawn storage getting higher value over time. Can you talk about that a little bit?

Yes, I think that's right. I mean, look at -- you've got the, what they call the eastern triangle there. So you've got to be able, obviously, the heartland of Canada, both from a people perspective and, historically, at least industrial perspective, is Ontario. You've got to get gas into Ontario and Québec. A, for industry purposes and, obviously, for power generation purposes. Union serves about 90% of the gas-fired generation in Ontario going forward. So if you're not going to get it on the mainline, or the mainline rates are so exorbitant that your Ontario regulators wouldn't approve such a price, then you've got to find another alternative. That's where the synergies of the project like NEXUS with DTE and Enbridge kick in. And obviously, it's got to be prudent, but you would think it would be wise that the utilities in Ontario look for diversity of supplies, the same way they do here in the United States. And so, with Enbridge, Union and DTE utilities as potential underwriters of that pipeline, that bodes very well for Enbridge, Spectra and DTE parents to be able to develop that project, which obviously serves our interest in the United States, serves the interest of all 3 parties on storage in that region and obviously, the local issue. So you're right, there's a lot going on there. Our fundamental issue in Ontario and Eastern Canada is to make sure that our customers have access to reasonable rates and supplies of natural gas. It's all great to change the mainline out to oil, and we have no problem with that, as long as we -- our customers get fair value for that, and we can ensure security of supply. So I think there's a lot of water to go under the bridge on that project still, too. And obviously, we want to be supportive of TransCanada, but also very supportive of customers as well.

Your next question comes from the line of Jeff Healy with AIG.

Having a question on a, trying to get a sense for a, sort of SE Holdco after all the transaction that go on. And, I guess looking for Union Gas and Western Canada, you give guidance on EBIT. I was wondering kind of what that would work out to if we were looking at, like, a distribution or a net income, kind of what I'm backing into is, can I see how much debt we can support at the SE Holdco, given the distributions?

Well, I don't have those numbers right here. But both SE and West Coast are public companies, obviously, and file the same as Qs and Ks. And I don't have them right here. But you can get those, A, as well as they have their own public ratings. Or if you give us a shout after the call, we'd get those for you, too.

Sure, not a problem, just trying to connect some dots there. And I guess, sort of bigger picture, guys, just from a debt hole [ph] point of view, it's not a great day for us. And I guess I'm a little surprised that in the past, we've sort of repeatedly heard from you guys that you're against the financial engineering you saw from some of the other, kind of, peers out there, their growth. When SEP came out of, well, the focus was on growing the pie, and it really kind of feels like a real change in strategy here. And I guess, I don't know, maybe, can you talk me through on what, maybe what am I missing, or how am I supposed to feel good as the SE debt holder at this point, particularly up at the Holdco?

Well, look, I mean, the SE is going to continue to be an 84%, 80% holder of these assets, and strong cash flows from those assets are going to continue to flow up to Spectra Energy, A. B, we have a large suite of Spectra Energy projects that maybe financed at the SEP level. But again, far cheaper than going out there and buying assets. That's going to continue to give very strong cash flows to the SE shareholder. Third, the Canadian assets remain an important element of the fold, an important element of the credit metrics. Those very stable regulatory regimes, very stable cash flows that are there, and a growing opportunity as well there that should give Spectra Energy bondholders benefits as well. So, look, the -- we have used the MLP for years. But until we got the NGL lines, and until we got the crude oil lines, we didn't see the opportunity to restructure such that it would be beneficial for SE and SEP. As the unit prices moved up, that gave us the opportunity to be able to take back paper, which we had to. You couldn't take back all cash, because that would be tax inefficient, and that provide a debt opportunity. So as a bondholder, I think you have to look at the entire pie and realize strong operator, strong control, continued cash flow up to the parent, and entities of a very strong nature outside of the U.S. that, frankly, should have a higher rating. If you looked at the -- if you look at Enbridge and TransCanada, I think the Canadian elements of Moody's and S&P, very similar assets seem to give them a stronger rating. So I would argue the underlying assets are very strong as supporters of SE bondholders.

Got you. And maybe ask you to kind of put a tie in it here. You mentioned that investment-grade ratings are important to you. And I guess I'm trying to make sure, such as why is the investment-grade rating important to you, up at the SE Holdco level?

Well, I think, the key is, we do have $25 billion of projects, of which, as we pointed out, call it $8 billion to $10 billion worth of those projects are at SEP. But that leaves $10 billion plus of projects at the other entities. So you know how the notching effect works, et cetera. So we see being able to go out there and execute on LNG projects, on any opportunities that might show up on Ontario, as very important. At the same time, we also think that there may be other opportunities on the acquisition front, or outside of an SEP structure. You want to maintain your flexibility to be able to use SE as well. So those 2 combined, I think, make it very important. As you know, if you had very little in the way of capital growth opportunities, and you weren't having to use a combination of debt and equity, maybe you wouldn't worry about that as much. But I think from a long run perspective, investment-grade ratings for highly capital-intensive businesses that are growing at a very good rate in a sizable proportion actually serves both the equity and bondholders very well.

Your next question comes from the line of Elvira Scotto with RBC Capital Markets.

Just a couple of really quick follow-up questions for me. To follow up on Sabal Trail, can you just talk a little bit about the timing of the CapEx spend, and is some of that included in the '14 or '15 SEP growth CapEx?

Yes, it's actually more of '15 and '16. There's a small element in '14, but we actually don't actually file for basically 2 years. You're actually -- the big filing for -- obviously, you'll spend capital at hand, sorry, not file. We wouldn't have our full regulatory approvals for a couple of years. So that's when the dollars really get going, Elvira, so we'll give you the '14 number when we come out in January. But it's a pretty small number in the early -- in early years.

Okay, great. And then, for SEP, what's embedded in your distribution growth outlook, with respect to the base business, specifically around -- are you expecting any improvement in gas storage fundamentals?

No, but our standard, in terms of how we're looking at this and how we've modeled things going forward is, basically, status quo on storage right now, status quo on the NGL market. So there's no upside, if you will, baked into that. I do think, as you get more power, you see projects like FPL, you see LNG projects along the coast, the value of storage will improve. But I don't see that until the middle of the decade. So call it that '15, '16 timeframe, the same with NGLs. So that's not a big driver in our numbers at this point in time. It's simply incremental projects and projects that come into service.

Okay, great. And then the last one for me. I just wanted to follow up on the question on dropping the Western Canadian assets into SEP, understanding that you have no plans to do so. But is there something -- is there a big tax hit involved if you were to do so? Is that why you -- it's something that's -- that you're not considering, or is there something that precludes you from doing so?

Well, it's back to -- a large portion of our Canadian assets are in our Union Gas distribution subsidiary, and distribution companies don't need the qualifying asset test for inclusion in an MLP. So it really leaves Western Canada. And when you think about what we have there, today, we've got 17 processing plants, process about 60% of the gas in BC. We're growing those. We've got the takeaway pipeline, which is regulated in Canada. And there are some -- it's not -- there's no prohibition in dropping those into the U.S. MLP. You could do -- you'd have to look at tax structuring to see if that could be done tax efficiently. But we don't have any immediate plans. It's really to grow the distributions at SEP. It's primarily to the growth projects that we've outlined, where we're building at about 6x to 8x EBITDA. The growth that that provides and the GP take is much better even than drops at 9x, let's say, it's more attractive for SEP's distribution growth.

Yes, you've got some withholding tax issues, obviously, as you move cash across the border from Canadian assets into a U.S. MLP. It's not that we'd say never; it's something we've looked at multiple times as well. If there is something that we can achieve greater value, we would. I think the other element is, obviously, you have a pure-play U.S., MLP, fee-based assets, which is highly attractive. One thing that you have to consider, how would that play then, to put Canadian assets into that pure-play U.S. business?

Your final question comes from the line of Darren Horowitz with Raymond James.

Pat, I just have one question on cost of capital. Recognizing where SEP is in the IDR splits and considering that 9% distribution growth rate of SEP over the next couple of years, and then kind of running the model beyond that through the end of the decade, the rise in SEP equity cost of capital should be fairly linear. But when you start thinking about the associated increase in that GP take, raising the cost of that currency and in the out years, how lumpy the CapEx commitments are going to be that you've outlined, how do you think about the return above SEP's cost of capital? Is it basically a possible 200 or 300 basis point return that you're targeting before you step back in, and you start using SE as currency? Or does it come down to more of a debt-to-EBITDA/coverage ratio count? Just a little bit of color there, I appreciate it.

Sure. Well Darren, we're really going to look at both. So today, if you peg SEP's cost of capital at around 7%, we are looking at, say, 200 to 300 basis points above that, or 9% to 10%, like Greg talked about, for our returns. And we are in the 50% splits, but we're not that deeply into them. We just got to that threshold last year. And so I think we've got at least a multiyear runway here before we have to be considered about -- you have -- before we have to be concerned about a higher cost of capital in terms of competing for projects or considering IDR waivers or givebacks. I think we're in the fortunate position of being fairly early in the process, with a few good years ahead of us before that even becomes an issue. But we'll look at it both ways as you described. And it's really back to our ability to compete for projects, which we've shown recently with Sabal Trail, being very competitive from a rate perspective.

Okay. Operator, is that the last of our questions?

That was the final question, correct.

Okay. Well, I'd like to thank everyone for joining us today. We appreciate your time and your interest. And as always, if you have additional questions, you can feel free to call Roni Cappadonna, Derick Smith or me. So with that, thanks for joining us.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.