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By Avi Feinberg | 11-10-2011 12:00 AM

Rising Supply Should Keep Natural Gas Prices in Check

Production increases along with demand for cleaner-burning fuel has Spectra Energy CFO Patrick Reddy excited about the firm's prospects.

Avi Feinberg: Hi. I am Avi Feinberg, equity analyst with Morningstar, covering oil and gas pipelines. I'm at the Morningstar Management Behind the Moat Conference, and I am very pleased to be joined today by Patrick Reddy, the CFO of Spectra Energy.

Patrick Reddy: Thanks, Avi. Glad to be here.

Feinberg: Thanks, Pat. One thing that we really like about Spectra is your high-quality footprint. You have assets in many of the key emerging shale plays, be it the Marcellus, the Eagle Ford, the Horn River, and the Montney up in British Columbia. There are a lot of opportunities here and you've talked about spending $1 billion-plus per year to develop these opportunities. Can you talk a little bit more about that and what opportunities you are most excited about?

Reddy: Certainly. Well, the shale plays really are driving a lot of the supply push as we call it. One thing I would mention in passing is that, even with the economy being kind of lackluster and unemployment being at historically high rates, we are still seeing growth in the throughput on our pipeline systems where we are setting new peak day records during the winter. So, people are finding new ways to use natural gas. Our pipelines are full.

On the supply side, something that's really interesting in the last couple of years, the shale gas has become economical to produce through horizontal drilling techniques and hydraulic fracturing, which people have probably read about. That supply is available now. The interesting thing to me is that, the shale formations are really where the old conventional gas was. So, not surprisingly we have pipelines, we have gathering and processing, we have storage facilities that are near most of the new shale areas because that's where the conventional gas was. And we were there to take that during the last several decades.

So, in terms of areas that we are excited about, gosh, it's a long list. Up in British Columbia, there are two formations where we have increasing production; one is in the Horn River, which is in far north British Columbia; the other is in the Montney unconventional formation, and we are building a new plant in the Dawson area in two phases, investing about $200 million there and investing a total of about $1.5 billion in British Columbia between now and the end of 2013.

Down in the lower 48 states, we have our joint venture with Conoco DCP Midstream. They have a number of new processing plants that they are building, but are also constructing or about to construct two new natural gas liquids pipelines to relieve bottlenecks that currently exist between a collection point called Conway in Kansas and Mont Belvieu on the Gulf Coast. These natural gas liquids are used by petrochemical plants to make things like plastic. So, the NGLs have to get where the petrochemical plants are, and in our country they are mostly on the Gulf Coast. So, we are building two new pipelines to bring natural gas liquids from the Permian, from the Mid-Continent and from the Eagle Ford down to Mont Belvieu, where the producers get better prices for their product.

With that joint venture that I talked about, DCP Midstream, we've got $4 billion of projects in execution between now and 2013 and another $2 billion of potential projects. I would remind folks though that in that partnership, the funding of those investments comes from the partnership and from their master limited partnership, called DPM. That's its ticker symbol. We don't put cash into that business; they pay dividends to us.

Feinberg: Great. I noticed recently that Spectra just increased the dividend by about 8% during  the last quarter. Looking forward, you talked a little about earnings growth. Can you talk about the combination of earnings and dividend growth that you are targeting going forward and also the safety behind that dividend?

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