Good morning. My name is Luke, and I'll 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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Julie Dill, Chief Communications Officer, you may begin your conference.

Thank you, Luke, and good morning, everyone. Appreciate you joining us today for our review of Spectra Energy's and Spectra Energy Partners' 2016 second quarter results. With me today are Greg Ebel, President CEO of both Spectra Energy and Spectra Energy Partners, and Pat Reddy, Chief Financial Officer of both companies; as well as Bill Yardley, President of our U.S. Transmission Business. You'll hear from both Greg and Pat this morning as they go through our results for the quarter and provide an update on our growth projects, and Bill is available to answer any questions you may have on our projects and our U.S. Transmission Business segment. And as always, we'll leave plenty of time for your questions. Our Safe Harbor statement is contained within our presentation materials and available on our website. This disclaimer is important and integral to all of our remarks, so I would ask that you refer to it as you review our materials. Also contained in our presentation materials are non-GAAP measures that we reconcile to the most directly comparable GAAP measures, and those reconciliations are also available on our websites. With that, let me turn things over to Pat.

Okay. Good morning, everyone and thanks for joining us today. As you've seen in our news releases, Spectra Energy and Spectra Energy Partners delivered solid ongoing earnings and cash for the quarter. These results reflect the strength of our diverse portfolio and are in line with our expectations. Before I get into the details of the quarterly results, I want to discuss some special items we recorded in the quarter that lowered reported EBITDA by $33 million. The first two items related to the Texas Eastern pipeline incident that occurred in April in Pennsylvania. We're working closely with PHMSA as we conduct a thorough assessment of the incident, consistent with the amended corrective action order we received on July 19. Spectra Energy's Other segment included a special item of $10 million for our self-insured portion of cost associated with this event. U.S. Transmission also recorded a special item of $6 million for inspection and repair cost of our pipeline system in Pennsylvania. In total, we expect to incur special item cost in the range of $75 million to $100 million related to these activities. Importantly, we expect that by November 1, we'll be in a position to fully meet our customer obligations for the winter season. The next item is a $3 million charge attributable to the effects of recent flooding in British Columbia, which affected our Grizzly Valley operations in Western Canada. The full impact of the floods is still being assessed, so we'll update you when we have a clear estimate. We expect insurance recovery for the majority of costs associated with this event. Next is part of the ongoing cost management efforts in our Western Canadian business segment and the DCP, we took charges of $6 million and $5 million, respectively, related to employee and overhead reductions.…

Well, thanks very much, Pat, and good morning, everybody. You've heard me say that fundamentals matter, and Spectra Energy and SEP's fundamentals continue to be extremely strong. Both companies are an investment for all cycles. We've got an outstanding natural gas focus footprint that goes where the lights are to high-demand, high-growth markets. Our pipelines and projects are fee-based, with minimal volume risk. We serve strong creditworthy customers, and as you've just heard, we have the investment grade balance sheets and liquidity to support our growth. Because those fundamentals are working, today, we are in an even stronger position than we were last quarter or at the beginning of the year. Let me walk through a few of the actions that have made us stronger and position us well going forward. Pat has spoken to some of these, but I think they're worth repeating. We are one of the few companies that continue to meaningfully add to an already strong project backlog, while delivering projects into services plant. During the quarter, we added $1.8 billion in new demand pull projects, bringing our total backlog to $10 billion, extending our growth backlog and horizon. This impressive track record is possible thanks to a robust project execution model that allows us to hit the mark and meet investor and customer expectations. We achieved another solid quarter of strong earnings and cash generation. Our performance year-to-date is in line with the expectations we had at the beginning of the year. Underscoring the strength of our portfolio in our market conditions. And as Pat just mentioned, we have further enhanced our competitive position as a result of the successful capital markets activities we've executed so far this year. Next, we reduced our commodity exposure with the sale of the Empress NGL business to Plains…

Thanks, Greg. So, Luke, if you would give some instructions in terms of how to queue up for their questions, I'd appreciate it.

Your first question comes from the line of Darren Horowitz from Raymond James. Your line is open.

Good morning, guys. Greg, I know this is a tricky one, on Access Northeast and certainly very tough to handicap. But when you think about the four states PUC approvals that were required to proceed, which state hurdle do you think is going to be the most challenging to clear? And if the timeframe does end up getting pushback for situations outside of your control, do you have an idea as to how long that process might take to be remedied, and what do you think it might mean in terms of deploying capital and actually starting construction?

Well, I think clearly, given the progress on some of the other states, but then just where it's located, the Mass approval – the Massachusetts approval are probably the most critical ones. That being said, it's also where I think our partners probably have the best ground game. They're good in the entire region, but I feel pretty confident in their ability to achieve that. As you know, we have not put this project in execution yet. But that being said, I think at this point in time, we still feel confident that we'll be able to deliver the service as expected. The other thing I'd say Darren, it's really not a financing issue, because most of our capital work is done in the last, call it, seven months to 12 months of any project cycle. So there is no near-term financing issues related to it. It's really much more of a get the ground game done, and then go out and execute. So, I guess if you thought there was going to be a delay, I couldn't handicap what that is. But I can remember a year or two years ago, there were multiple projects, and now there's just one. I don't think there's any doubt that, without natural gas infrastructure, they're going to have a hard time keeping light to New England, and if you have continued cold weather. And I remember, two years ago, I mentioned $1 billion in savings. But two years ago, it was more like $2 billion in customer savings. So, I think logic will prevail, and as usual, the consumer should be the benefactor here and nothing like the consumer actually has power with politicians and regulators.

How big of a challenge, Greg, do you think it's going to be to get the FERC EIS? I mean, you guys filed for it in April, but just from a process perspective, is there anything that you guys can do in order to expedite the process? When do you expect to receive that?

No. I mean like, I don't know if we actually have a date on EIS at this point in time. But I would say, I don't see FERC as the big challenge here, Darren. We have a very standard – this is not unique from a FERC perspective, this project. We've got a pretty well trod path in New England on projects, you know about it. Obviously AIM, that will be done this year, and then Atlantic Bridge next year. I don't expect anything unique on that front. I think this is much more about the innovative contracting structure here and the local requirements.

Okay, and then quickly if I could on Valley Crossing.

Yeah.

You addressed the opportunities upstream of the Nueces origin. I'm just thinking from your prospective, how do you further leverage Texas Eastern, it looks like there could be multiple source points for hydrocarbons, and there could be a meaningful from a return perspective opportunity for you guys to add some significant vertical integration there. Can you just identify that opportunity set for us?

Yeah. Well, I mean, let Bill speak to this. But I guess what I'd say is, if you look at our history, we build backbones, and we build ribs often, and this is a further extension actually of the Texas Eastern backbone, and so if you follow that backbone up, I think that's where the opportunity is. Bill, do you want to?

Yeah, Darren I mean, I think quite clearly we're tapping into an enormous market with the Valley Crossing project getting into – getting to the border of Mexico. And if you follow that back and you get to the Texas Eastern system and our vast infrastructure across the Gulf, we hit all if not most of the major supply areas, and eventually Mexico will probably do what it can do, to get back to those, and I think that puts us in a good position.

Okay.

Yeah, I think the header system there, Darren, is about 5 Bcf, I think there is 10 interconnects, so that's what it's all about, right? I mean, if you think it ultimately, we are – Valley Crossing, we're going where the lights – lights may not hopefully be built yet, but there is not – well they're there. They're not all powered by natural gas yet, but that's clearly where the Mexican government is going, and they're going to have to reach back into greater supply locations, and I think that's a real competitive advantage that we offer.

And then, last question, Greg. Just quickly on the financing, and I fully agree with you from a scale prospective, I mean, I think there is a tremendous amount of intrinsic opportunity there. But from a financing perspective, you've got many different tools at your disposal, and you could argue that it possibly could be considered to be financed at the SE level, and then maybe even drop down to SEP. Hypothetically, you could assume that SE would want to take more SEP units. Certainly from a tax liability management perspective, can you just give me your thoughts roughly on how you're thinking about that?

I think you just did. I think all those options are on the table, Darren. So, obviously, we want to achieve the lowest cost of capital, that's always what we do. If there's – if there is a delta between the cost of capital in SE and SEP, we may use that. I think it's fair to say ultimately, it's not surprising that you'd see this asset regardless of where it's initially financed in the SEP. But again, that's going to depend on the expectations of investors, both at SE and SEP. And frankly, whoever values it most; I guess that would make sense for us to finance it there. And as you pointed out, the tax situation is also a bit unique than it was a year ago.

Thank you.

Thank you.

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

Good morning.

Good morning, Ted.

Maybe just starting with NEXUS, and maybe the competitive dynamics into Dawn. TransCanada is now on record as potentially offering a discounted tariff from Empress to Dawn. And then, you got obviously the competitive pipeline out of the Marcellus; it's going to bring a lot of gas in there. Is there a potential that – that we might flood that market, maybe potentially rationalize some of the capacity that's getting built out of the Marcellus and the Dawn?

Well, I don't think, we'll flood that market; I mean it's a massive market. I remember some of that gas could flow right through the Dawn hub, and up the Dawn-Parkway system as you know. We're building a chunk there, and even further east. There's nothing new about TransCanada's offer that, I guess we've seen that multiple years, I think they'll be interesting whether they get up any take upon that. And as you know, there is always some gas that that's going to come from Western Canada. So, I don't see that as a big issue, Ted. I guess I would just remind folks of the interconnect, right? So we've got to think of being a half, Bill maybe it's even gone up a little bit along our pipeline. So, a bunch of the gas will get dropped off along the way. And I think I've said before, theoretically, if all the interconnects got used, there'd be no gas from NEXUS showing up at the Dawn. I don't expect that to be the case. So, I feel good that we've sized our pipe correctly, we've got the drop-offs along the way that are going to be utilized. Whether TransCanada or not as successful on that front, I don't think that's a heat issue from our perspective. We continue to be full steam ahead on that. I don't know, maybe some others have some larger pipes that they'd rationalized, but from our perspective, I think we've sized this right.

Okay, great. And then coming back to Valley Crossing, and maybe I missed this, but are the returns on this $1.5 billion to be in line with what you would normally look for or have you adjusted this a bit given the concentrated counterparty that you're working with? And then, would you consider actually investing in country, that's when your competitors again that have decided to actually go in into Mexico and invest there? Would you rather to stay north of the border?

So, on the first question, absolutely, this is right in line with our 6x to 8x EBITDA build. I think – and one would maybe expect that. So, good returns there. Obviously, there was other competition, but I think what we offered, what we delivered, and maybe obviously our cost of capital advantage kept some competitors away from this process at this point in time, so that's good. On the aside, I'd expect no different returns from this project. In fact, I'd say, probably is a little better returns than what we see in some of the Northeast projects on this project, and obviously, intrastate law not easier has some less onerous requirements to get built so that's positive as well, Ted. With respect to in-country, absolutely, we'd be interested in the – that's all a discussion of risk. What we have seen to-date is other investors or other pipeline companies willing to take much higher risks for much lower returns and with $10 billion in backlog here that didn't seem to be a great idea at this point in time for us. So we'll continue to look at that, but obviously we want to balance the risk profile with the returns and typically higher risks to get you higher returns, not the other way around.

That make sense. I'll leave it with that. Thank you.

Thanks, Ted.

Your next question comes from the line of Brian Gamble from Simmons & Company. Your line is open.

Good morning, guys.

Good morning, Brian.

First one for you on Valley Crossing one more if I may. The – I guess, look through over the longer term into Mexico's plan, electric generation needs, clearly this is a big project for them and for SEP specifically. Can you talk about, I guess the longer term discussions with CFE, does this project come, I guess halfway to meeting what they're expecting from a longer term electrification plan or are there other projects like this essentially that could come to fruition over time that you guys may have a leg-up on already now that this one is in the bush?

Yeah, absolutely. I think, this probably gets them to at least that 2019, 2020 timeframe Brian, but there is no doubt that they will be looking for more opportunities as those gas markets both on the power side, but I didn't say industrial and consumer uses as well require more and more gas, and that's why, I never take it for granted. Obviously, we like our competitive position with this pipe, but I think the upstream opportunities along Texas Eastern, back into the supply areas, and particularly, in suppliers who are going to be looking for outlets. So as you know, folks in the MidCon, in the Permian and in the Eagle Ford and such, and even I guess she goes as far as the Haynesville if you wanted to, less desire for that gas in the Northeast, given all the product up there, and the Mexico market is perfect. So, I don't see another major project in say 2019, but if you start to get it to 2020, this pipeline is going to be utilized fully on day one. They'll be looking for additional growth opportunities and we think our pathway is going to be extremely competitive. So, I – it's always good to have the backbone, Brian, building the ribs of the backbone is key. That's the basis of our entire strategic positioning.

Greg, I mean, maybe focusing on backlog or maybe sticking in the U.S. from a kind of Southeast power pool standpoint, we've seen a pretty big shift year-over-year and it seems to continue to favor natural gas generation, I mean, throughout the Southeastern market. You've got Sabal Trail down there that starts to move gas around a little bit. I guess what other additional opportunities or additional avenues are you guys looking at that maybe I guess in response to the dramatic change in the power generation mix that we've seen over the last 12 months to 18 months?

Sure. Bill, do you want to take a shot at that?

Yeah. I think in a number of areas, we're extremely strong. I think the Southeast is one that love to get a penetration into and so we're work in that area hard. You may remember, few years back we had the Renaissance project that we did a fairly high subscription rate, we got close, but didn't quite get there, and we would be willing to try that again, because you're right there is a ton of coal conversion and new gas that's going to be going on the southeast, and we think we will be a player there, but probably need a good, fairly large critical mass to get it.

Yeah. So, I think, what Bill is saying between Sabal and some of the activities that are going on there, you're probably meeting that market. But as you start again get into that 2019-2020 timeframe, all of those power producers are going to be moving more and more gas, I think, I may even stand corrected, by I think very shortly, if not now. Southern in FPL, NextEra, will be the largest buyers of natural gas just about anywhere, definitely in North America, that's going to continue to need infrastructure. And equally so, it's not so much, and I think you point this out, it's not so much about necessary demand growth with rather anemic economic growth, you might be focused on that, but it's really about fuel switching and diversity of supply, as we've seen with Sabal, sure there is one pipe in through Gulfstream, some people talked about maybe expanding Gulfstream, but people want multiple sources of infrastructure and supply, and I think that's going to create opportunities too, and one thing it's a utility and you are seeing those challenges in the Northeast. You can't run out of gas in the winter that's just a requirement to have it. So, I think the opportunities are there and, but as Bill said, we're not number one in the Southeast, yet. I think we're making good progress there and obviously Sabal helps us, but I see that as an opportunity for us to use not only our cost of capital, our competitive position, our execution of successes to hone in some of those markets and that's what we're looking to do.

Just one quick follow-up, if you think, if you re-propose Renaissance as it was originally proposed, do you think you could get what you needed now to get it through?

Don't know. It doesn't appear to be a go at this point in time, there is some changes around people, different ownership structures, all that kind of stuff, but I can assure you it has not been scratched from our drawing board, but we obviously don't have that in the backlog at this point in time. It will be needed ultimately.

Appreciate it, guys. Have a good one.

Thanks, Brian.

Your next question comes from the line of Kristina Kazarian from Deutsche Bank. Your line is open.

Good morning, guys.

Hi, Kristina.

Two questions, follow-up kind of one of the questions earlier, you guys obviously at the SEP level used the ATM for the expense leader in the quarter. Can you just give me some color on how much capacity you guys are thinking you have left there, and do you think it's having any material impact on that valuation as well?

John?

Well, Kristina, we've issued about $360 million roughly under the SEP ATM in the year, and periodically as you need to we can refresh that amount. I would say that it – that our rollout back in February, we mentioned that we intended to finance projects at SEP about 50/50 with debt and equity, consistent with maintaining our credit rating, and the returns on the cost to capital that we used on our projects. And so we kept the SEP ATM turned on during the year, it's off currently because of the earnings blackout, but we'd expect that that would come back on and we could use it opportunistically to top up between now and the end of the year. With respect to the potential for overhang, I don't know. I think most of the MLPs out there are using these to raise equity, of course, we have smaller float sense that parent owns about 77% of the shares outstanding, so that's obviously a factor. But it's very cheap cost of capital for us in terms of the equity issuance cost, it's less than 1% as opposed to doing an overnight or a bought deal, and it allows us to, if you will, dribble out the equity as we needed, and not frontload and get out ahead of ourselves. So – but it's great that we've got the ability to toggle; you saw us do that in April with $480 million purchase of SEP units by SE that was partly driven by tax considerations with bonus depreciation. So, I think we're just kind of keep our options open on that, Kristina.

Perfect. And then, I know we've talked a lot about Access Northeast. But when I think about which of the milestones are needed to actually move it into the execution phase, which are those and then can you just give me a quick reminder as well. I think we're still watching the Algonquin tariff case at FERC. What's the timing here, and what does that mean for the project either way?

Yeah, Kristina it's Bill. So, I'd say milestones kind of in order would be, let's get through the Massachusetts SJC. That decision probably coming in the next – within the next month or so. If that's a go, then I think we've got a lot of momentum. Connecticut's RFP will be decided in the fall, and Rhode Island will issue their decision on the contract that National Grid submitted probably by the end of October. All that points to a late fourth quarter, I would say movement into execution of the project. So that's – I would say that's – those are probably the biggest milestones. In terms of FERC, I think I would expect a decision sooner rather than later on that. There has been a lot of – a fair amount of publicity around it, but in reality, I mean, this is something that is tariff waiver that frankly the LDCs enjoy now in a different form, but same concept in order to facilitate retail unbundling. So I would expect a positive decision there, and while it wouldn't derail the project for sure, because there are alternatives, it's just administratively more challenging.

Perfect. Thanks, Bill. I always appreciate your expertise.

Your next question comes from the line of Danilo Juvane from BMO Capital Markets. Your line is open.

Thank you. Most of my questions have been hit. Just had one quick follow-up. With respect to the equity distribution at SEP, should we expect that the number that you reported this quarter to be the run rate going forward? I know that last quarter, there was something funky with the timing of that distribution as well. I was just trying to figure out how that looks on a go forward basis here.

You are talking about the distributions from equity investment, Danilo, there was something unusual in the first quarter relating to SESH and Gulfstream, and it had to do with the change from quarterly distributions to monthly, and so our distributions this quarter are down about $15 million as a result of that change. But by the end of the year, we'll be exactly on track to our – to the number we had in our rollout in February. So, it's really just a timing between the quarters.

Okay, so, the $32 million is that sort of an appropriate run rate to think about for the balance of the year there?

In turn, yes. That's right.

Okay. All right, thank you. That's it from me. Thanks.

Your next question comes from the line of Jean Ann Salisbury from Bernstein. Your line is open.

Hi, I'm trying to understand how much exposure to rising NGL prices on SE has? Is it correct to say that because of the debt covenant at DCP, the exposure from DCP is minimal through at least 2019 from a distributable cash standpoint?

Yes, absolutely. Yeah, we don't – at SE proper we'd have no exposure to NGLs, either up or down. That's all at DCP, and obviously it's got its own rating as you know, and the debt covenants at SE don't affect that. And as you would have seen in our three-year plan, we have not expected anything material from DCP on a go-forward basis.

Okay, great. Thanks.

Thank you.

And then, just another one on Rover and NEXUS, they have very similar FERC review timelines, I was wondering whether in your ongoing discussions with FERC, you've heard any indication either way – of if they're thinking of the combined impact of the projects or treating them as completely individually?

I think they've looked at those completely individually. I think there was a phone call that involved FERC Commissioner Tony Clark by one of the Houses this week, and I think he spoke to that directly actually. So, remember very different markets. I know a lot people look at Dawn, but remember our project is going arguably just a little bit west and then straight north; the competitive projects are out there going to Defiance and serving quite different markets.

Okay, great. That's all from me. Thanks.

Thank you.

Your next question comes from the line of Michael Blum from Wells Fargo. Your line is open.

Hey, good morning. Just ...

Hi, Michael.

I think the only thing that was uncovered that I wanted to talk about was just – so obviously the D.C. Court of Appeals remanded the income tax allowance issue back to the FERC regarding ownership of pipelines inside of the partnership structure. I was just wondering if you guys can comment, just generally, your thoughts on how this plays out, and then the affect that FERC did change its policy, how that would impact the SEP? Thanks.

Yeah. As you know I think the FERC folks have a lot of opportunity here to look at this, and I personally don't think they'll make a change in how to deal with this. But I think there's a couple of unique elements to Spectra, and the first one is 75% or 80% of our MLP is owned by the C-Corp, and as such we already pay the taxes, so the impact would be rather a minimal to us. And then B, we don't have any cases like that sitting before the FERC today, so I wouldn't expect, we're not looking for changes in rates or structures, and the vast majority of all our new contracts, obviously not the vast majority, virtually all of them, are negotiated rates. So I'd say at least for a company like Spectra Energy if they went an unexpected route, I don't think it would have a material – it would not have a material impact on Spectra Energy.

Great. Thank you.

Thanks, Michael.

And Greg I had a clarification based on Danilo's question, I may not have understood the last part about the run rate. Let me just say as I mentioned, we'd be on track to get about the $160 million that we had budgeted for the full year. For the first six months, we're about little under a $100 million, so that's what we got two-thirds in the first six months of that and the balance in the second six months. So I wouldn't take anyone of the quarters and annualize it.

Your next question comes from the line of Nick Raza from Citi. Your line is open.

Thank you. Most of my questions were answered, but I have just a couple of add-ons folks. First off on the AIM , could you just give us a status update and just how you guys are still scheduled to make the in-service date in November?

Yeah, absolutely. We're full steam ahead, as you know, it's a challenging environment out there, but as you know, we've got all of our permits, where we expect to be in service on November 1, and I would say nothing that we've seen has really surprised us, we've worked up there for a long period of time and expect to see us in service the 1st of November.

Okay. Awesome. And then I guess the question that I had was – the access to Northeast project, is there an opportunity there to sort of build out the Vermont, I think you'll recall there was some mention of serving that market as well, if you guys could talk about that?

We're ways – we're ways away from Vermont, we – the Algonquin system that traverses New England, which is our pipelines kind of comes up through Southern New England and through Connecticut, Rhode Island and up to Boston. It would be a long pull to get a pipe to Vermont from our system for probably what is a small amount of load and so I would not look for us to do that anytime soon.

Okay. Fair enough. That's all I had guys. Thank you.

There are no further questions at this time. I turn the call back over to the presenters.

Great, well, Luke, thanks very much, and thanks, everyone, for joining us on the call today. We're going to be seeing many of you, I know, next week at a conference and then the following week at the City MLP Conference as well. So we'll look forward to seeing you then. In the meantime, if you have any additional questions, please don't feel – don't hesitate to give Roni Cappadonna or me a call. Have a good and safe day. Thanks very much.

This concludes today's conference call. You may now disconnect.