Spectra Energy Corp became an independent company in 2007 and will end its run not far into 2017 when it becomes part of Enbridge Inc. At the close of that period, just a little more than the time given to a two-term president, Spectra Energy has made an extensive case that companies leave legacies.
In the decade of operations since Spectra Energy spun off from Duke Energy Corp., the company has put in place about $19 billion in infrastructure, including major interstate pipeline and storage facilities that move natural gas, natural gas liquids and oil for customers in North America. The new infrastructure added to a core of assets strung between and through some of the best production zones and market centers in the country: the U.S. Northeast, the Marcellus Shale before it was the Marcellus Shale, Texas, eastern Canada and western Canada.
Beyond the physical monuments to energy, Spectra Energy has helped revolutionize the way pipeline companies are structured and the way they work with the public to get projects built. According to officials inside the company and out, Spectra Energy has excelled at finding business partners for its projects and working with the communities its pipelines cross. Spectra Energy has also worked with industry, government and communities to make the pipeline industry safer.
Spectra Energy Chairman, President and CEO Gregory Ebel
Source: Spectra Energy Corp
"Through a combination of acquiring assets and building assets, I think we really have built an amazing gas business," Spectra Energy Chairman, President and CEO Gregory Ebel said. "So we've made history from that perspective. Now it's about moving forward with the new Enbridge to make history again, and we couldn't be more excited about that."
In an interview with S&P Global Market Intelligence, Ebel divided the legacy of his company into three categories. "First of all, for our customers, Spectra has put billions of dollars of new pipeline capacity in place, which has allowed those customers to deliver energy at a cheaper cost to their consumers," Ebel said. "That's a big deal, especially in places like the Northeast." And not just cheaper, Ebel said, because gas has a lower environmental impact as a power generation and heating fuel than coal and oil.
"The second is a legacy of stable and disciplined returns for our investors," Ebel said. "Since I have taken over as CEO in late '08 and early '09, [North America has] gone through recessions and all kind of things, and yet we've been able to provide 270% total shareholder return for investors."
"From the time we launched in 2007," he said, "the enterprise value of the company has gone from about $25 billion to about $50 billion, doubling the enterprise."
"And obviously, now we're going to a combination that will create North America's largest energy infrastructure company," Ebel said. He said the new Enbridge will provide Spectra shareholders with 10% to 12% annual dividend increases and excellent growth prospects.
"The things that investors liked about Spectra Energy will exist in the future," Ebel said.
The third legacy Ebel identified was how the company provided its people with growth opportunities across North America in small towns and big cities, "jobs that never go offshore," he said.
The focus on people and partnerships helped make the company, Ebel said. With this focus, Spectra Energy helped push the pipeline industry in new directions. It was an early proponent of working with other companies.
"A lot of this has been thanks to partnerships," Ebel said. "What I mean by 'partnerships' is having some of our customers involved directly from an investment perspective. That wasn't always the case."
Ebel offered several examples. An alliance with Consolidated Edison Co. of New York Inc. was important to the development of the approximately $1.2 billion New Jersey-New York pipeline expansion that went into operation in 2013. "That was the first pipeline project to get into Manhattan in almost 40 years, lowering the cost of energy for folks in Manhattan," he said. "That partnership was critical because they had to build in Manhattan, obviously, and we had to build onto the island."
The NEXUS pipeline project, proposed as a 1.5-Bcf/d takeaway for the western side of the Marcellus and Utica shales, is a joint venture between Spectra Energy and DTE Energy Co. "Another great example of our utility customers working with us," Ebel said, "and, frankly, us letting them into the business in some respects."
One of Spectra Energy's partners is the company that created it, Duke Energy, which is working with Spectra Energy and NextEra Energy Inc. on the approximately $3.2 billion, 516-mile Sabal Trail pipeline, part of the larger Southeast Market Pipelines project. Sabal Trail is under construction.
Tom Williams, director of corporate media relations at Duke Energy, remembers when Spectra Energy split from his company, taking with it colleagues as well as assets. It had been a trendsetting move for an electric utility to buy a gas company. At the time of the separation in early 2007, Spectra Energy made up about a third of Duke Energy. But after liquidity drained from the market in the post-Enron era, Williams explained, it did not make sense to keep the two businesses combined. Now, 10 years later, Duke Energy is back together with Spectra Energy on Sabal Trail in Florida.
"We wished them well when we did the spin," Williams said. "And they have a been a good partner on Sabal Trail."
A project still waiting to move forward is the Access Northeast pipeline, a partnership with Eversource Energy and National Grid USA to expand gas transportation and storage services for electric power generation in New England. "The challenge of putting projects together needs partnerships on the ground: people that know the customers in the houses, right in the communities," Ebel said.
Partnerships have allowed Spectra Energy to bring projects together without straying far from deadlines set at the start of development. "That's quite a difference from what you see across the rest of the industry in the last 10 years," Ebel said.
Rick Smead, managing director for advisory services at RBN Energy LLC, backed up the idea that "excellence of project development" set Spectra Energy aside from other pipeline companies.
"It's been one of the most aggressive and successful growth pipelines in the country," Smead said. "Compared with its peers, Spectra is one of the best at managing the political and grassroots process of project development."
Long before any impact on the ground, Smead said, Spectra Energy has a program to reach out to communities and talk with stakeholders. The program was one of many improvements Spectra Energy made after a Southeast header project ran into cost overruns 10 years ago. "That caused Spectra to re-evaluate its whole project development process and to hire a vice president of project execution," Smead said. "What that has done is allow them to execute very successfully and very economically on projects, so that's been a real success story."
The ground game for developers of pipeline projects can be a fierce contest. In the Northeast, for example, businesses and energy consumer groups, construction unions, gas utilities and some electric utilities tend to support new gas pipeline infrastructure. Landowners along a proposed pipeline route, environmental groups, many power generators and LNG import terminal operators tend to oppose such projects. There are lawmakers on both sides.
Spectra Energy has often chosen low-profile projects, usually the expansion of a pipeline with more compression or parallel pipeline, over a new greenfield pipeline project that would cause more environmental impact and stir up more controversy.
Smead observed that Spectra Energy has been tested in New England, which has strong voices for pipelines and strong voices against. The proposed Access Northeast project is hanging in there after Kinder Morgan Inc.'s Northeast Energy Direct was forced out, but it remains a tough battle.
Tony Buxton, general counsel and spokesman for the Coalition to Lower Energy Costs and a partner with the Preti Flaherty Beliveau & Pachios law firm, said Spectra Energy has had success with pipeline projects in New England. Buxton said he hopes that continues with Access Northeast so consumers might see lower gas and electric power prices. He said his group is optimistic that Spectra Energy will finish the project.
"Their great success, quite frankly, is political. They are astute politically," Buxton said. That quality is "especially important as pipes attract substantial opposition, and that, in turn, creates controversy."
Donald Santa, president and CEO of the Interstate Gas Association of America, said experience in New England and New York has given Spectra Energy a "cutting-edge ground game," not only bringing in partners, but also working with local governments and stakeholders.
Another way Spectra Energy has distinguished itself is in service to customers. "On Texas Eastern, they were one of the first pipelines to have hourly nominations, which then synced up well with the power industry," Smead said. "So they have been innovative at meeting shippers' needs."
"The pipeline industry has had to become vastly faster on its feet," Smead said, as shale plays forced pipeline systems to turn around from configurations set down decades ago around conventional production areas.
Ebel served as INGAA chair from October 2011 to October 2012, Santa noted, and Spectra Energy has led many of the group's initiatives, including a pipeline safety effort launched after a fatal 2010 explosion on a Pacific Gas and Electric Co. gas line in San Bruno, Calif.
Santa said Spectra Energy Vice President Andy Drake has been a leader on pipeline safety. Drake is one of two transmission pipeline industry representatives on the U.S. Pipeline and Hazardous Materials Safety Administration's gas pipeline advisory committee, which also includes state officials and representatives of stakeholder groups. "That is strong evidence of their commitment to the betterment of the industry and their commitment to safety," Santa said.
One of the biggest changes in the energy industry in the past decade has been the rise of U.S. shale gas plays, with new technology and techniques revolutionizing production. Ebel said the increase in shale production gave Spectra Energy an advantage because it had a spread of infrastructure in place in those regions.
"That is probably the single biggest beneficial change to Spectra Energy," Ebel said. "And that is still playing out today and will for many years to come, to the benefit of customers, employees and investors."
Smead agreed that part of Spectra Energy's success can be attributed to the pipeline equivalent of good genes. "Overall," he said, "they are just lucky where their pipelines are."
Another change has been illustrated by the fights over Access Northeast and just about every other major gas transmission line project reviewed by FERC in the last few years, what Ebel described as "the challenges of actually getting pipeline in the ground, politically but also locally." He said, "That has moved the pipeline industry from taking 12 to 18 months to put major projects in place 10 years ago to today, when it is more of a 24-to-36-month process."
Ebel said Spectra Energy and other pipelines have to understand what these challenges mean for customers. "I'm not saying it's good or bad, but it's definitely lengthened the time-to-benefits for consumers," Ebel said. "Particularly for those who pay the most for energy — you know, single parents and businesses struggling — to get that cheaper energy into their back yard, it is taking us longer to do that."
A third change in the industry, and one Spectra Energy had a large part in, is the rise of master limited partnerships as a business structure. "Spectra has a long history here," Ebel said. "Within six months of us launching, we created a major MLP [Spectra Energy Partners LP], and we have a history in our predecessor companies of using MLPs.
"But that was '07, and the plethora of MLPs since then has really changed the financial dynamics and the way in which pipelines are financed," Ebel said. "I think it's been generally positive, but, in some respects, cheap money has also perhaps changed the competitive dynamics for some, and only those people who have a stable, steady approach to this have done well. You see that in things like Spectra Energy Partners."
Energy industry changes will bring a future that looks much different for pipeline companies. "Often your customers on the supply side are now drilling for oil, gas and producing NGLs, where in the past it was much more segmented," Ebel said. "That means that the pipeline companies of the future that are going to win need to provide a complete menu of services to their customers at both ends of the pipes. If your customers want NGLs, you have to be able to provide those. If your customers want oil transportation, you have to be able to provide that. If they want gas transportation, you have to be able to provide that and processing and storage.
"And that really underlies the strategic focus of the new Enbridge, where it will be able to — right across North America, from virtually every supply basin to every demand basin — provide customers with access to midstream services of all types," Ebel said. "That is going to mean excellent things for our customers, who will be able to do one-stop shopping, and it's going to mean good opportunities for investors.
"You are going to have one company with this balanced approach in multiple jurisdictions," Ebel said.
Ebel called the combination of Spectra and Enbridge a "strength merger." Going back to the time it takes to build projects, Ebel said, "you have to be a company with considerable wherewithal to be able to manage the more challenging and complex regulatory, political and construction environments that are out there today."
Smead said it makes sense for the two energy giants to come together. "Right now, the pipeline industry is replete with growth prospects," Smead said, "but the challenges in getting new pipe built are bigger than they've ever been. Where we go from here is something of a jump ball for all of the companies."
Buxton said Spectra Energy agreed to be acquired because "the game is going to go to people who have larger, more diversified revenue bases." The interesting question, the attorney said, is what Spectra Energy will look like after Enbridge absorbs it.
Enbridge and Spectra Energy have much in common, including a commitment to safety, Ebel noted. The staff moving to Enbridge, Drake among them, will make sure the Spectra Energy legacy lives on. The board will be 60% Enbridge and 40% Spectra Energy. "That was a very deliberate action to ensure the two cultures not only stay aligned but also benefit from their history," Ebel said.
"I'll continue as chairman of the new Enbridge," Ebel said. "Al Monaco [Enbridge's CEO] will be CEO of the new company."
In the new Enbridge, Bill Yardley, Spectra Energy's president of U.S. gas transmission and storage, will run the entire North American gas business, and Spectra Energy's gas team will largely stay intact. Ebel said Enbridge, with its deep experience and wide infrastructure footprint on the oil side, will run the liquids business.
"So the gas business will be based out of Houston and the liquids business based out of Calgary," Ebel said. "So I think you're getting that bicultural, cross-border benefit that existed with Spectra in the new Enbridge, as well."