Sandell Urges Spectra Energy to Take Further Steps to Unlock Value

Sees Intrinsic Value for Spectra Up To 40% Above Current Price

Jun 17, 2013, 10:25 ET from Sandell Asset Management

NEW YORK, June 17, 2013 /PRNewswire/ -- In reaction to Spectra Energy's (NYSE: SE) decision to drop its US Transmission assets into Spectra Energy Partners (NYSE: SEP), Sandell Asset Management's Chief Executive Officer Thomas E. Sandell sent the following letter to Greg Ebel, Chief Executive Officer of Spectra Energy Corp.  

The letter urges the firm to take further steps to unlock value including reviewing strategic alternatives for SE's Canadian operations (Westcoast Energy, Inc./WE) and DCP Midstream LLC (DCP).  Mr. Sandell also urged the firm to implement operational cost cuts across SE's entities that will reduce inefficiencies and boost profitability.

Mr. Greg Ebel Chief Executive Officer Spectra Energy Corp 5400 Westheimer Court Houston, TX 77056-5310 Cc: Mr. Pat Reddy, Chief Financial Officer; Board of Directors

Mr. Ebel,

We applaud you and the Board on the decision to drop Spectra's (SE) US Transmission assets into Spectra Energy Partners (SEP), as we believe that this long awaited move will marry the interests of SE and SEP, streamline executive management, and convert SEP into a world-class MLP, thereby garnering a valuation premium.  As you have also pointed out, this transaction will be materially beneficial to SEP's distribution and SE's dividend and dividend growth profile, driving equity value at both entities.

However, as our shareholder group (the "Sandell Group") advised you last month and discussed with you again last week, we believe that SE has an intrinsic value of $48 per share, or more than 40% over its current price, which we believe would be realized if you and the Board fully embrace and execute the additional steps we have outlined, transitioning SE into a pure GP HoldCo entity.  Indeed, existing GP HoldCo entities such as Williams Companies, Inc. (WMB), Kinder Morgan Inc. (KMI), and Oneok, Inc. (OKE) trade at a premium valuation as strategic allocators of capital in the fast-moving, competitive North American energy infrastructure landscape. 

The remaining steps in our 'Plan to Unlock Shareholder Value' include the following actions:

a)     Review strategic alternatives for SE's Canadian operations (Westcoast Energy, Inc./WE) including an IPO of WE.  WE is currently 100% owned by SE and files fully audited financials on SEDAR in Canada.  We believe an IPO of primary shares of WE would: i) highlight the premium valuations and lower cost of capital afforded to Canadian infrastructure companies; ii) simplify SE's corporate structure by allowing market participants to consistently value the Canadian businesses (as the value of SE's ownership of WE's shares) as opposed to the uneven valuation metrics employed currently; and iii) tie WE's executive compensation to WE share price performance, thereby promoting better strategic decision-making, efficiency and accountability.  Based on our analysis, we do not believe there will be negative financial or strategic implications of pursuing this structure, as currently the strategic relationship between SE's US assets and WE is limited and SE will continue to control WE through its significant share ownership;

b)     Review strategic alternatives for DCP Midstream LLC (DCP), including a sale/dropdown or IPO.  We believe there is both strategic and financial interest in SE's DCP stake as well as the potential to highlight the value of DCP's MLP-qualifying income through an IPO.  While we recognize that any strategic move would require the approval of DCP's other 50% owner, Phillips 66 (PSX), there are certain self-help actions that can be taken by SE to unlock DCP's hidden MLP valuation, namely a drop-down of its DCP stake into a related, SE-controlled MLP;

c)     Implement operational cost cuts across SE's entities that will reduce inefficiencies and boost profitability as management teams are more aligned with underlying operating asset performance and their related publicly-traded shares.

We presented these actions to you on May 16th, and analyzed their financial potential, in our White Paper, a copy of which can be found here:

Based on our discussions with other shareholders and a review of sell-side research last week, we believe there is considerable support for the execution of the balance of the Plan as we have laid out in our White Paper[1].

Moreover, we believe that the imperative for taking all the proactive steps in our Plan is made stronger by SE's poor relative shareholder returns versus peers, underperforming by 40%+ over the past three years, even after giving effect to the announcement of last week.  This performance is in stark contrast to CEO compensation, which has consistently ranked at the top amongst CEOs of the same peer group, demonstrating a complete lack of alignment between executive compensation and shareholder returns.  We believe it is both this lack of alignment and the CEO's beneficial ownership of only 0.04% of shares outstanding[2] that explains why SE has not engaged in all the actions its peers have already taken – the glaring absence of financial motivation for the CEO to do so. 

As we have mentioned, we have also formed a shareholder group and are now one of your largest shareholders.  As the Sandell Group, we intend to continue to promote change at SE for the benefit of all of its shareholders.  We have a strong track record of working collaboratively with management teams in your industry to unlock shareholder value and we would like to do so in this case as well.  However, should you fail to promptly take all the steps to maximize shareholder value as we have outlined in our Plan, we intend to pursue a change to the composition of the Board at the next annual meeting. 


Thomas E. Sandell Chief Executive Officer

[1] Some examples:

"We believe the company would do well to adopt a model more similar to WMB, TRGP, OKE, where assets largely reside at the MLPs and the C-Corp adopts a higher cash pay-out model to receive full valuation benefit." - Morgan Stanley

"Lastly, we can't help but wonder if the rationale/timing for this transaction opens up the door for something similar to occur at DCP Midstream/DPM within the SE structure." – Barclays

"We are curious if management plans to create a separate Canadian entity to further its transformation to a pure-play GP." – BoAML

[2] Per March 21st, 2013 proxy

SOURCE Sandell Asset Management