Spectra Energy’s SE decision to accelerate asset dropdowns to its master limited partnership, Spectra Energy Partners SEP , should provide a heady boost to the valuation of the MLP and a more moderate uplift for Spectra Energy.
Here’s what we know: On Mad Money yesterday afternoon, Spectra Energy’s CEO disclosed that Spectra’s board has approved a plan to drop down all of the company’s widemoat U.S. transmission and storage assets to Spectra Energy Partners by the end of the year. A follow-on press release stated that the drop-down will boost dividend growth for Spectra Energy to $0.12 a year from the prior target of $0.08 a year, and that the transaction will also allow SEP to raise its quarterly distribution by a penny a quarter, up from $0.0075 per quarter. More details will be provided on the second-quarter earnings call in August.
This is a marked acceleration and expansion of the $2 billion asset drop-down strategy announced earlier this year, as we estimate the value of drop-downs to be in the range of $11 billion-$13 billion, compared with Spectra Energy Partners’ current enterprise value of around $5 billion. We estimate Spectra’s U.S. transmission business will earn $1.4 billion in EBITDA this year, of which $300 million already accrues to SEP, given its interest in several of Spectra’s pipelines (SEP is consolidated in Spectra’s financial results). Our transaction estimate is based on 10-12 times multiples of incremental EBITDA to SEP; this compares with an 11 times multiple SEP paid Spectra for a stake in Spectra’s Maritimes & Northeast Pipeline last fall, and a 12.5 times multiple SEP is paying Spectra for a 50% stake in the Express-Platte crude oil pipeline.
Assumptions around these questions will drive the market’s assessment of value creation for this deal. First, what transaction price will be set, how will the deal or deals be structured and financed, and what will the timing be? Second, what tax implications will there be for Spectra in moving pipelines with low tax cost bases from a corporate structure into an MLP? Will there be tax leakage here? Third, what will Spectra do with the deal proceeds, and how will this affect ongoing capital spending requirements? And fourth, will new spending on U.S. transmission assets, where there is an $8 billion project backlog plus $2 billion in projects in execution, be consummated at the Spectra or SEP level following this drop-down?
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