Investing in Energy Infrastructure

Energy Infrastructure
“A Pipe Dream Come True: Spectra Energy Corp.”
By Byron King,Whiskey and Gunpowder

I like to begin at the beginning, so let’s begin in 1904, when a man named James Buchanan Duke established the Catawba Power Co. to serve customers in North Carolina. The following year, James and his brother Benjamin Newton Duke founded the Southern Power Co., which became known as Duke Power. Many decades later, and many mergers and acquisitions down the road, Duke Power merged with PanEnergy in 1997 to form Duke Energy. Keep in mind the century of time during which Duke Energy and its forbears were building a system.

On Jan. 3, 2007, Duke Energy (DUK: NYSE) spun off its gas business to form the company that is our pick of the month, Spectra Energy Corp. (SE: NYSE).

Duke Energy shareholders received one share of Spectra Energy for every two shares of Duke Energy that they held. And the rest of us have to go out and buy our shares on the market. But what exactly is Spectra Energy?

Energy Stock Report-What Is Spectra Energy?

Spectra Energy (SE: SYSE) is a pipeline company with an unmatched portfolio of North American natural gas transmission, processing and storage assets. Its management team hails mostly from its days as a subsidiary of Duke Energy and is experienced and savvy, particularly in navigating its way though the heavily regulated world of energy transmission.

By virtue of its extensive pipeline system, Spectra Energy is now one of the premier natural gas midstream companies in both the U.S. and Canada. Spectra Energy employs about 7,300 and has its headquarters in Houston. Spectra Energy owns more than 17,500 miles of natural gas transmission pipelines, and approximately 250 billion cubic feet (Bcf) of storage capacity in the United States and Canada.

Spectra Energy’s wholly owned businesses include a number of great old names in the pipeline and gas transmission business, such as Texas Eastern Transmission, Algonquin Gas Transmission, East Tennessee Natural Gas, Union Gas, BC Pipeline Division, BC Field Services Division, Natural Gas Liquids Division and Market Hub Partners. The company also has significant ownership interests in DCP Midstream, Maritimes & Northeast Pipeline, Gulfstream Natural Gas System and a financial resource called the Spectra Energy Income Fund.

Energy Stock Report-The Big Picture, a Dream Come True

Sometimes a picture is worth a thousand words, so here is a copy of the Spectra Energy system map:

Quite frankly, as a lifelong student of natural resources, this map all but takes my breath away. What a layout! As this map makes clear, Spectra consists of a vast system of gathering lines and processing facilities, transmission trunk lines and underground storage capacity and distribution businesses. Just look at those pipelines that parallel the Texas and Louisiana coastlines. And note the major trunk lines that follow the spine of the Appalachians up into Pennsylvania, and thence over to New Jersey and New York and beyond into New England. From Boston, the pipeline follows the coast of Maine up to the Canadian Maritimes and Halifax. Note the underground storage, the propane terminals, the natural gas liquids line across southcentral Canada and the extensive gathering and transport system in British Columbia. This transmission and storage system is a dream come true.

For close to a century, Spectra and its corporate predecessor companies have developed critically important pipelines, storage and related energy infrastructure that connect natural gas sources to premium markets and customers. It would be all but impossible for a new company to assemble such a system of lines today.

So are you interested in owning shares of a company with extensive natural gas transmission capacity along a set of transmission corridors through some of the major markets of two countries that cannot be duplicated? Here it is.

Energy Stock Report-More Details

Spectra’s core customers include local distribution companies along its trunk lines, gas marketers and traders, natural gas producers (in such major gas-producing regions as the Gulf Coast, Sable Island, the Appalachians, midcontinent and western Canada), gas-fired electric generators and millions of other residential, commercial and industrial customers.

Spectra Energy owns and operates significant gas reservoir and salt cavern natural gas storage capabilities, including one of North America’s most prominent storage facilities, in Dawn, Ontario. Underground storage adds a large measure of flexibility and reliability to Spectra’s system, and the company is expanding its storage capacity to meet growing market demand for storage services.

Through the above-mentioned Union Gas, an integrated natural gas distribution, storage and transmission company located in Ontario, Spectra Energy serves about 1.3 million residential, commercial and industrial distribution customers.

In western Canada, Spectra Energy’s British Columbia pipeline and field services operations utilize more than 3,500 miles of integrated raw gas gathering and sales gas transmission lines, and five world-class processing plants to process and transport about 2 billion cubic feet of natural gas per day (Bcf/d). Spectra Energy’s midstream operation owns interests in 13 processing plants and more than 1,000 miles of gathering pipeline in the growing Western Canadian Sedimentary Basin in British Columbia and Alberta. The company’s Empress System in western Canada includes 2.4 Bcf/d of natural gas liquids extraction and fractionation facilities, and related liquids transportation and storage operations.

Spectra Energy is working on numerous projects to expand its system, and most notably is one of the leading players in developing and serving, through its pipeline system, any new liquefied natural gas (LNG) facilities that will be constructed in the U.S. Northeast or Canada, or along the Gulf Coast. There is much opposition to LNG siting from many factions in the U.S. However, it is all but a given that eventually the U.S. will have to cut the red tape and build LNG facilities somewhere near either its southern pipeline systems or its largest natural gas market, the New Jersey-New York-New England market. When that happens, the LNG will have to move through some pipeline somewhere, and in all likelihood, the pipeline will be owned by Spectra Energy.

Energy Stock Report-The Numbers

Spectra Energy is currently trading in the range of $25.50 per share. It has a published profit margin of 12.3%, which is relatively high for its industry. The company is paying a dividend yield of 88 cents per year, or 3.4%, comparable to other well-respected pipeline companies such as Kinder Morgan and TransCanada. There are 630 million shares outstanding, giving the company a market capitalization of about $16 billion. The company has been publicly traded for less than three months, hence there are no quarterly earnings released as of the date of this article. Institutions hold about 6% of the stock.

Standard & Poor’s believes that Spectra Energy’s relatively high amount of regulated natural gas transmission pipeline and smaller amount of utility earnings “will lead to a relatively smooth earnings stream.” Argus projects 9% earnings growth over the next three years, and rates

Spectra Energy as a “value” play.

Spectra Energy’s strong presence in Canada, and particularly in western Canada, gives it the added bonus of being a play on both Canadian oil and gas development and indirectly in Canadian tar sands development, as well as a generally appreciating Canadian dollar. Like all companies that move natural gas, Spectra Energy is exposed to changes in the price of the substance. But we at Outstanding Investments believe that natural gas prices are headed higher in the long term, and that this will create more demand to move gas. That is, the requirement will remain strong, and in all likelihood grow, to move natural gas through transmission corridors from where the price may be lower to where it will command higher prices.

In the next article, Byron discusses long distance transmission systems and how they will continue to revolutionize the American utility sphere…

Until we meet again…
Byron King