1. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
CORPORATE PARTICIPANTS
John Arensdorf
Spectra Energy – Vice President IR
Fred Fowler
Spectra Energy - President and CEO
Greg Ebel
Spectra Energy - CFO
CONFERENCE CALL PARTICIPANTS
Paul Fremont
Jefferies & Co. - Analyst
Josh Golden
JPMorgan - Analyst
Ross Payne
Wachovia - Analyst
Mark Caruso
Millennium - Analyst
John Kiani
Deutsche Bank - Analyst
Ella Vuernick
RBC – Analyst
Hsulin Peng
Luminus - Analyst
Operator
Good morning. My name is Felecia, and I will be your conference operator today. At this time, I
would like to welcome everyone to the Spectra Energy’s Third Quarter Earnings Conference
Call. All lines have been placed on mute to prevent any background noise. After the speakers'
remarks, there will be a question-and-answer session. (Operator Instructions)
Thank you. I would now like to turn the conference over to Mr. John Arensdorf, Vice President
of Investor Relations. Sir, you may begin.
John Arensdorf - Spectra Energy - IR
2. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
Thanks, Felecia. Good morning, everyone, and welcome to Spectra Energy's Third Quarter 2008
Earnings Review. We are very pleased that you have joined us today. Leading our discussion
today will be Fred Fowler, our President and Chief Executive Officer, and Greg Ebel, our Chief
Financial Officer. Sabra Harrington, our Vice President and Controller, is also with us today and
available to take your questions at the end of the call.
Fred is going to get us started by providing an overview of our third quarter results and will
provide some perspective on the current commodity markets. Greg will then delve into the
results by business segment, provide insight into our liquidity and credit positions, and update
you on the status of our 2008 expansion projects. We'll then open the lines for your questions.
Before we begin, let me take a moment to remind you that some of the things we will discuss
today concern future Company performance and include forward-looking statements within the
meanings of the securities laws. Actual results may materially differ from those discussed in
these forward-looking statements. You should refer to the additional information contained in
Spectra Energy's Form 10-K and in our other SEC filings concerning factors that could cause
these results to be different from those contemplated in today's discussion.
In addition, today's discussion includes certain non-GAAP financial measures as defined by SEC
Reg G. A reconciliation of those measures to the most directly comparable GAAP measures is
available on our Investor Relations website at SpectraEnergy.com. With that, I will turn the call
over to Fred.
Fred Fowler - Spectra Energy - President and CEO
Well, thank you, John, and good morning, everyone. As you've seen from our earnings release
this morning, we do have another excellent quarter to talk about today. Spectra Energy reported
ongoing earnings per share of $0.49. That's a 29 percent increase over the third quarter of 2007.
Our third quarter results reflect solid performance and growth from all of our business segments,
thanks in large part to strong commodity prices at our Field Services and our Western Canada
businesses.
Our year-to-date performance has already delivered ongoing earnings per share of $1.50, which
gives us confidence that we'll comfortably exceed our $1.56 per share 2008 employee incentive
target. That said, commodity prices have fallen off significantly over the last several weeks. The
12 month strip for oil is currently about $70 a barrel and 12 month natural gas strip is a little over
$7.50. And as you know, the relationship between natural gas liquids and oil is close to historic
lows. However, we do expect that relationship to return to more normal levels over time. In the
meantime, commodity prices and weather will be the most important drivers for our fourth
quarter earnings. Fortunately, I think that we are very well positioned to manage through the
current market volatility.
We continue to execute on our capital expansion program. In fact, we have substantially
completed all of our 2008 expansion projects and not only did we deliver these projects
as scheduled, but the projects themselves will deliver solid returns at the top end of our
10 percent to 12 percent return on capital target.
As for the remainder of our project portfolio, we remain on track and on schedule for the
most part. We do expect to see some shifting as our customers recalibrate.
I believe that we're very well served by having a portfolio of smaller and medium sized
expansion projects rather than one or two very large projects. It just gives you a lot more
flexibility in dealing with your capital expenditure plans.
Greg will also discuss our strong liquidity position, another very important advantage for us. Our
financial strength and flexibility have really served us well during the recent economic turmoil.
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3. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
The credit facilities that we negotiated in 2007 have been invaluable. And I'm proud of the team
of employees who developed and delivered the financial safeguards that have helped us weather
this current cycle.
Our strong business results, solid balance sheet, good consistent cash flows, and our forward
momentum, they reaffirm our confidence in our business plan and our ability to deliver value to
our shareholders.
This is my last earnings conference call with you as CEO of Spectra Energy. It really has been
my pleasure to get to know so many of you. You've asked thoughtful questions, sometimes a
little tough, but always fair. And we've done our best to be candid and responsive. Next year I'll
be on the other side of the phone line listening as a deeply interested shareholder. And I have
every confidence in Greg's proven leadership and ability to navigate this company into the
future. In early October, Greg announced his senior leadership team. It's an extremely talented
group who will continue to deliver the results that you've come to expect from us. With that, let
me turn things over to Greg who will review the results of each of our segments.
Greg Ebel - Spectra Energy - CFO
Thanks very much, Fred. Good morning, everybody. There's no doubt, Fred, that you will be
deeply missed, both on an operations front and also by investors. And thanks to your leadership,
we've got a very solid foundation that both I and the entire team here at Spectra can be very
proud to build upon.
Looking at how we did for the quarter, Spectra Energy reported third quarter 2008 earnings of
$296 million, or $0.48 per share, compared with $234 million, or $0.37 per share in the third
quarter of 2007. After you remove the effect of special items and discontinued operations,
ongoing earnings for the quarter were $302 million, or $0.49 per share, compared with $240
million, or $0.38 per share last year. As Fred mentioned, that's a 29 percent increase in our
ongoing EPS. We're pleased with our performance for the quarter and again, we fully expect to
exceed our employee incentive target of $1.56 per share.
Let's take a look at the performance by business unit now, beginning with U.S. Transmission.
U.S. Transmission reported third quarter 2008 ongoing EBIT of $217 million compared with
$230 million in the third quarter of 2007.
The $13 million decrease in ongoing EBIT is primarily the result of a $26 million variance in
project development expenses. You'll recall that when we start projects, we expense the costs
until we're confident that the project will move forward to completion. At that time, we then
reverse the expenses and capitalize those development costs. So third quarter 2008 reflects
project costs expensed of $12 million, while third quarter 2007 reflects $14 million in net project
costs that were capitalized, for a $26 million negative effect on earnings quarter over quarter.
Excluding these project development costs variances, U.S. Transmission delivered strong
earnings growth from expansion projects and higher earnings from capitalized interest on
construction projects during the quarter partially offset by higher transmission storage and G&A
costs.
Now let's take a look at our distribution business.
Distribution reported ongoing EBIT of $44 million, compared with $40 million in the third
quarter of 2007. The segment benefited during the period from higher transportation and storage
revenues, reflecting the value customers seek in services offered on the Dawn system. We just
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4. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
completed two open seasons at Distribution. One is for another expansion on our Dawn Trafalgar
pipeline that would complete the fourth looping on that system in 2010, and the other for an
expansion of our Michigan-- expansion out of Michigan in partnership with DTE. Both of those
open seasons were well received by the market as we obtained strong interest from high quality
customers, many looking not only for transmission services, but storage services as well. We
expect that the phase-in of deregulation on roughly one third of our storage capacity will
continue to provide expansion opportunities for our Dawn facility.
With that, let's move to Western Canada.
Western Canada Transmission and Processing had another positive quarter with ongoing EBIT
of $113 million, compared with $101 million last year. The $12 million increase resulted
primarily from higher Empress earnings due to higher volumes and frac spreads, partially offset
by higher operating expenses.
Through the third quarter of this year, Empress has delivered EBIT of approximately $150
million. As you're probably aware, frac spreads have come off recently, but we have continued to
see good throughput as the Empress plant which is currently running at capacity. We do
anticipate however having only about two thirds of the Empress capacity available for about a
month during the fourth quarter due to some maintenance.
In addition to the strong Empress results we've seen this year, the base Western Canadian
gathering and processing business continues to perform very well.
Now let me speak to Field Services.
Our Field Services segment, which represents Spectra Energy's 50 percent interest in DCP
Midstream, saw another strong quarter, with ongoing EBIT of $239 million compared with $143
million in the third quarter of 2007. The 67 percent increase resulted from several factors.
About $80 million in favorable commodity pricing
$25 million in derivative timing gains associated with the gas marketing positions
a $23 million favorable mark-to-market effect on the hedges that MLP, DCP Midstream
Partners, has in place to protect cash distributions, and this totally, almost totally reverses
the second quarter $25 million mark-to-market loss that we saw.
Finally, offsetting these were about $25 million of lost business as a result of Hurricane Ike and
higher O&M costs.
Crude oil averaged $118 a barrel in the third quarter of 2008 compared with $76 a barrel in 2007.
The NGL to crude relationship was about 51%, down from 62 percent in 2007. We also
benefited from higher natural gas prices this quarter. Natural gas averaged about $10 in Q3 2008,
compared with a little over $6 in Q3 2007.
For the quarter, Field Services paid distributions of $269 million to Spectra Energy.
It's worth taking a closer look at the potential effect of crude oil prices on our 2008 earnings, so
let's review the current settled and future oil prices for 2008.
You're all aware that DCP Midstream's 2008 forecasted earnings were based on oil averaging
$83 a barrel for 2008 and an NGL to crude relationship of 60 percent. This slide indicates that,
based on current settles and forward prices, it looks like oil will average a little over $100 per
barrel for all of 2008. And it looks like the NGL to oil relationship may settle at about 52 percent
for the full year.
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5. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
During our second quarter earnings call, we reviewed a hypothetical example of the effect of
commodity prices and correlation to changes on DCP Midstream’s earnings. That example is in
the appendix to this presentation on our website along with a summary of our 2008 commodity
sensitivities.
Now, let me turn to quot;Other,quot; which is primarily comprised of our corporate costs and captive
insurance activities.
For the third quarter, quot;Otherquot; reported ongoing net costs of $9 million compared with net costs
of $10 million in the third quarter 2007. Last year's third quarter included special items of $5
million in costs associated with the launch of Spectra Energy. We continue to expect 2008
corporate costs to be in the $80 million to $90 million range.
Let's now take a look at our ongoing EBITDA.
For the third quarter 2008, ongoing EBITDA was $829 million compared with $709 million in
the third quarter 2007. On a year to date basis, our EBITDA is nearly $2.5 billion, compared
with $2 billion last year.
We know that EBITDA is an important element for valuation and a good indicator of cash
generation by the business.
As you can see, for the quarter, the total EBITDA increased by almost 17 percent from last year's
third quarter. Year-to-date EBITDA is up a very healthy 24 percent.
Interest expense for the third quarter 2008 was $163 million, compared with $156 million for the
third quarter 2007, reflecting the successful completion of our planned long-term debt issuances
for all of 2008.
Our effective tax rate this quarter was 33 percent – in line with our annual expectation of 32 to
33 percent.
And as of September 30, our total debt to total capitalization stood at approximately 59.6%
The Canadian currency change had a slightly positive after-tax effect on earnings for the third
quarter of 2008 of about $1 million, compared with the third quarter of 2007. However, we've
seen the Canadian dollar weaken significantly since September 30.
I expect that you're keenly interested in Spectra Energy's liquidity position, so let me turn our
attention to where we stand on that important front.
This slide details our four credit facilities at: Spectra Capital; Westcoast; Union Gas; and Spectra
Energy Partners. As of September 30, 2008, we had total capacity under our credit facilities of
$2.7 billion, and available liquidity of $1.7 billion.
You'll recall that during 2007 we entered into revised revolving credit arrangements which put
facilities in place for five years to provide the liquidity we expect to need between now and
2012. We took that step to prepare for market situations exactly like the one we're going through
and it's proven to be an invaluable tool that has assisted us in times when the commercial paper
market became uncertain.
We also negotiated these facilities with some 20 different banks so we wouldn't be dependent on
any single institution's financial situation. In early September we quickly moved into the debt
markets and for the remainder of our 2008 debt issuances out of the way, about a week before
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6. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
the credit crisis really took a dramatic turn. And while the last couple of months have been
challenging, we're pleased that we now have access to the commercial paper market at
reasonable rates.
We have a solid balance sheet, more than adequate liquidity, and steady cash flows. In fact the
fourth and first quarters typically tend to be our strongest cash flow months. So I feel good about
our financial position in these unsteady markets. We fully expect to be able to continue funding
our expansion plans and we've got no need to borrow in the long term debt market until mid year
2009, and no plans to issue equity in the foreseeable future.
Let's take a quick look at our long term debt maturities.
This slide shows you our long term debt maturities for the remainder of 2008 as well as for 2009
and 2010. As you can see, we have no requirements for the remainder of 2008. We have about
$150 million coming due at Spectra Energy Capital in the first quarter of 2009, but nothing
significant until our $500 million maturity in the fourth quarter of 2009.
So on balance, we're in a very solid position to ride out these financial markets. Given our strong
liquidity, we have the ability to watch the capital markets over the next several months and
access them when it's opportunistic to do so.
We regularly update you on the status of our expansion projects. And as Fred mentioned, we
have essentially completed our slate of 2008 projects as scheduled. You will recall that 2008
represented our largest year of capital spending on expansion growth. So we're extremely pleased
to now put these projects to work for our customers and investors. And most notably, these
projects are realizing returns at the top of our 10 to 12 percent ROCE target range – which means
long term value and growth.
Let me give you a quick update on these projects:
By year end, U.S. Transmission will have successfully placed in service a number of key
projects this year including Gulf Stream Phase III, Egan Storage (Cavern 4), Southeast Supply
Header, Maritimes and Northeast Phase IV, Glade Spring Expansion, TIME II, and Ramapo. In
addition, we placed the initial portion of Gulf Stream Phase IV into service and expect it to be
fully in service by January 1.
Union Gas growth projects are likewise on track. The Tribute Storage project is complete; Phase
III of the Dawn-Trafalgar expansion should come into service next month, and the Dawn Storage
Deliverability project is scheduled to come online in mid January.
In Western Canada, we completed the Pine River Phase III expansion and placed it into service
earlier this week, and we're confident that we'll complete West Doe Phase II by the end of this
month.
As you can see, this is a healthy portfolio of projects totaling $1.7 billion. We estimate 2008
EBIT from these projects in the $90 million range and an incremental $110 million in EBIT in
2009. On an annual basis, the EBIT from these projects will total some $200 million.
As we originally outlined, we expect to spend about $1.7 billion in expansion expense by the end
of this year. Next year, our level of expansion capital will be more modest, in the $800 million to
$900 million range. Again, this is in line with our expectations and well timed in terms of market
and economic shifts we're seeing. We're very pleased to have gotten so much of the “heavy
lifting” done this year.
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7. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
In summary, our growth plan remains on course to meet the expanding energy infrastructure
needs of North America. We'll work closely with our customers to ensure we remain responsive
to their evolving needs and we'll continue to rely upon the financial and management flexibility
that helps us successfully navigate through changing market cycles. We look forward to sharing
our future views and projections with you when we bring our 2009 plan to you early in the New
Year.
Our assets continue to be strategically situated and we're well positioned to take advantage of
emerging shale plays and our portfolio allows us to serve some of the best customers in the
fastest growing markets on the continent. With that, we can open the lines for your questions.
QUESTION AND ANSWER
Operator
(Operator Instructions) Paul Fremont, Jefferies & Company.
Paul Fremont - Jefferies & Co. - Analyst
Thank you. You talk about a 51% correlation in the third quarter and that still represents some
lower oil prices in the third quarter than where they had been second quarter. Can you give us a
sense of where those correlations are now in the fourth quarter? And are you seeing any evidence
in a declining oil price environment that that correlation is improving?
Fred Fowler - Spectra Energy - President and CEO
Yes, it's up slightly, Paul, but still in the low 50s. What we're really kind of struggling with right
now in the gas liquids markets is the impacts from the hurricane of shutting down the
petrochemical industry here along the Gulf Coast. We still have several of the liquid factories
down. And as a result, we saw pretty good inventory increase, particularly on ethane. So we're
trying to work through that. But overall, yes, as the big down move in crude has happened, we've
seen slight improvement in the correlation.
Paul Fremont - Jefferies & Co. - Analyst
And so would you expect to see significant improvement next year if the current level of oil strip
holds?
Fred Fowler - Spectra Energy - President and CEO
Yes, I think if history is any indicator, we would expect that. We've gone back and looked at data
for the entire decade and we've really never seen a period of time that lasted very long at
correlations in the low 50 percents. This is really the first time in this decade we've seen that. But
it's been, this decade has been an extremely volatile decade with energy pricing. I'd guess
directionally we would expect to see the correlation improve.
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8. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
Greg Ebel - Spectra Energy - CFO
Yes. I think, what the market is trying to figure out is how much of the decline in correlations is
related to hurricane issues and as such, build-up in inventories, and how much is related to
economic downturn. I think that will become clearer over the next couple of months.
Paul Fremont - Jefferies & Co. - Analyst
And then one other question with respect to sort of the higher current borrowing cost
environment. What does that do to the potential economics of new projects?
Greg Ebel - Spectra Energy - CFO
Well obviously the big bulk of our projects we put in place this year, that $1.7 billion, and that
building is already done, so that doesn't have an impact on those projects. Next year we'll have to
see what the impact is, but I think the real challenge that we'll face and we'll have to address will
be in 2010 and beyond, Paul, because those are the projects that we're looking at now. And
whether we've got long term increase in costs of capital and borrowing costs.
Fred Fowler - Spectra Energy - President and CEO
Yes, clearly, Paul, if the costs, long term capital costs go up, we have to see an improvement on
returns on projects because simply, we don't make a big enough spread to absorb it.
Paul Fremont - Jefferies & Co. - Analyst
Thank you.
Fred Fowler - Spectra Energy - President and CEO
The big question then is, will that increase hurt the economics and see a slowdown in projects?
Operator
Josh Golden, JPMorgan
Josh Golden - JPMorgan - Analyst
Good morning, this is Josh Golden, JPMorgan. Just a quick question. You touched on your 2008
projects, but more importantly, can I get a feel for what you're budgeting right now for CapEx
for 2009? And I'm looking at your liquidity situation, so I sort of want to know where you're
going to be in terms of free cash flow positive or negative next year matched up with your
maturities and what's available under revolver. But for 2009 CapEx, can I get a feel for what
that's going to be?
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9. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
Greg Ebel - Spectra Energy - CFO
Yes, we're finishing those plans, so some of that I'll save until we come out in January. But right
now it looks like we're going to be more in the range of $800 million to $900 million. So
substantially below where we were this year.
Josh Golden - JPMorgan - Analyst
So that's maintenance and growth CapEx?
Greg Ebel - Spectra Energy - CFO
No, that's expansion CapEx. Maintenance capital typically runs in the $500 million, $550 million
range. Again, that's the stuff that we're just looking at now, and again, late this year and early in
January, we'll come out with final numbers on that. But the expansion piece is the big change
that we're going to see '08 over '09.
Josh Golden - JPMorgan - Analyst
So in total roughly you say about $1.4 billion, $1.5 billion of CapEx in total between growth and
maintenance?
Greg Ebel - Spectra Energy - CFO
Yes, $1.3 billion to $1.5 billion.
Josh Golden - JPMorgan - Analyst
So somewhere between $500 million and $600 million in dividends so you're looking between
the two of them roughly at $2 billion?
Greg Ebel - Spectra Energy - CFO
That would be a fair comment.
Josh Golden - JPMorgan - Analyst
Okay. Given the decline in crude prices, with the growth projects that are coming on this and in
service next year, do you think that you'll be breakeven on cash flow? Because to me it looks
like, from my calculation, it looks like you might need to come to the market next year.
Greg Ebel - Spectra Energy - CFO
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10. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
We had expected that we would come to the market next year, but again, we'll finalize those
plans. But again, we don't see any need to do that before about the midyear next year, Josh.
Josh Golden - JPMorgan - Analyst
Okay, just one last question on SESH financing for that, is that all put in
Greg Ebel - Spectra Energy - CFO
No, but the partners have financed that on their own balance sheet to date, so I put that
separately. Whether we do project financing for that is something we're looking at. The same
with Maritimes, so those are two things that have already been financed, so it's not like there's a
cash drag there. Whatever we do there obviously would be beneficial coming back to the
partners.
Josh Golden - JPMorgan - Analyst
Okay, and then one just last small question. Lehman was a participant in several of your
facilities. Have you started to engage any of the other banks about trying to make up for their
shortfall?
Greg Ebel - Spectra Energy - CFO
Yes, we made up about a third of Lehman's already at Spectra Energy and we're in discussions
with other banks on the remainder of that. No single financial institution has more than 10
percent of our facility; so again, we thought that was important when we set that up last year.
Josh Golden - JPMorgan - Analyst
Okay, then sorry, I just want to ask one more question. Can you talk to me a little bit about
Spectra Energy Partners, how you view the MLP? Given what's happened in the MLP unit
market, how do you view the cost of capital of that vehicle relative to a C-Corp at this point?
Fred Fowler - Spectra Energy - President and CEO
Yes, obviously it's increased pretty dramatically. We have said all along that we want to have
that as another financing node, but only when it makes sense. And in our opinion right now it
doesn't make sense to be issuing any kind of equity at either one of our MLPs. However, they do
have enough debt facilities that take care of their organic growth needs -- SEP has some nice
ones. So again, when a market makes sense, we'll go back to it. When it doesn't, we're not
dependent on it.
Josh Golden - JPMorgan - Analyst
Okay, thank you.
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Third Quarter 2008 Earnings Review
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Operator
Ross Payne, Wachovia.
Ross Payne - Wachovia - Analyst
Most of my questions have been asked, but can you give us any kind of indication of what you
think distributions will be like from DCP Mid up to you guys in '09?
Greg Ebel - Spectra Energy - CFO
You know what, Ross, I can't at this point. Until we finalize those budgets, that's something that
I'm going to have to hold off until later in the year. But obviously, it's going to be partially driven
by where commodity prices end up. If they are significantly lower, I think you get lower
distributions. If they're significantly higher, you're going to get higher distributions. But give us
until the end of the year to clarify those and we'll come out and make sure you're well aware of
that right at the start of the year.
Ross Payne - Wachovia - Analyst
Sounds good. Thanks.
Operator
Mark Caruso, Millennium
Mark Caruso - Millennium - Analyst
Good morning, guys, I just had two quick questions. One was, as far as sensitivities go, is there
any reason why the sensitivities would change as we look out to next year? I know you're still
kind of going through the plan, but I just was trying to think for those of us looking ahead for
next year as we try to work things around the lower commodity prices, would the sensitivities
change much at this point?
Fred Fowler - Spectra Energy - President and CEO
Yes, it's a little early to answer your question on the crude oil and gas sensitivities. We can
speak to is correlations. Obviously ,the lower the price of oil, the lower the impact on the change,
a downward change in correlation. In the past, I think we've put out a chart, did we not, that kind
of showed the range there?
Greg Ebel - Spectra Energy - CFO
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Third Quarter 2008 Earnings Review
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Yes, and it falls in that $80 range. It's about $12 million for each change of $1 change in the
price of oil. And same on correlation it's about that, maybe slightly higher, obviously when
you're at $100 oil, a 1 percent change on $100 oil is obviously a lot bigger than a 1 percent
change on $80 oil
Mark Caruso - Millennium - Analyst
Gotcha. And then as far as ethane rejection, I know you talked earlier about the hurricanes,
we've seen some news about Equistar, the Lyondell company, talking about shutting down some
units because of poor economics. I just want to see, are you seeing any more of that? And just
kind of what you're seeing in ethane rejection in general?
Fred Fowler - Spectra Energy - President and CEO
Yes, we're starting to see ethane rejection and I think in the winter as gas prices go up, you'll
probably see more. The one phenomenon that we have seen is the industry convert more from
keepwhole processing to percent of proceeds contracts. You don't see the switch happen as
quickly as you did under keepwhole. But it is starting to happen. And again, as we've seen gas
prices increase, it makes it a more obvious thing to do.
Mark Caruso - Millennium - Analyst
And have you guys been trying to renegotiate some contracts as some more fee based? Or is that
even possible in this environment?
Fred Fowler - Spectra Energy - President and CEO
On the old stuff we really haven't. On new stuff, it has. We have been gearing our new business
more toward a fee basis when we can. But really, we don't feel the market conditions are right to
try to convert from the old, from a percent of proceeds over to the fee basis.
Mark Caruso - Millennium - Analyst
Gotcha. Great. Thanks so much.
Operator
John Kiani, Deutsche Bank.
John Kiani - Deutsche Bank - Analyst
Good morning. In the past you've provided a useful kind of strategic metric where you talked
about building or development of assets was more economical, generated better returns on
capital because you could do it at a lower multiple of EBITDA than you could buy for. And now
I'm wondering with the market having shifted so dramatically, has that changed significantly?
And is it more economical or cheaper to perhaps buy or acquire, especially considering the
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Third Quarter 2008 Earnings Review
November 6, 2008
distress in the MLP sector as well? I mean obviously your own equity cost of capital has gone up
meaningfully with your stock down here, but I'm wondering what your recent and latest thoughts
are on that concept that you've talked about in the past.
Greg Ebel - Spectra Energy - CFO
Well definitely that gap has closed because you're right, we've talked about you can build at
seven or eight times EBITDA and sometimes less than that. And you couldn't buy other than 10
or 12 times EBITDA. So now if you could buy where some stock is trading and some guys are
trading at three, four, five times EBITDA, I would suggest you take that execution risk. At least
long-term execution risk. But as you pointed out, you've got some capital market challenges. So I
would say the gap that existed previously is much smaller and as such it makes it at least equally
attractive to look at acquisition opportunities if you think you can transact.
Fred Fowler - Spectra Energy - President and CEO
People are very reluctant to come off asset values. It typically takes stress to make that happen.
I think we're in the process of people hoping that they're going to get better values than they can
probably get in today's market.
John Kiani - Deutsche Bank - Analyst
So then maybe to your point, if the current market persists for a little while longer, you think that
could eventually change where there's a realization that these might be some more normalized
asset values for a reasonable timeframe? And then taking that a step further, that could be sort of
a triggering event that creates some opportunities for you all?
Fred Fowler - Spectra Energy - President and CEO
Yes.
John Kiang - Deutsche Bank - Analyst
Okay, great. Thanks. That's very helpful.
Operator
(Operator Instructions) Ella Vuernick, RBC.
Ella Vuernick, RBC - Analyst
Good morning. I wanted to follow up on some questions regarding DCP Midstream. You shared
with us quite a bit of detail about impacts of the new commodity price environment and
correlations. I wonder if you can share with us also any color you have about any overall change
in production and drilling activities, if you're seeing any impacts of that in the current economic
environment through the end of this year and into '09?
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14. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
Fred Fowler - Spectra Energy - President and CEO
We haven't seen huge impact in our areas. Obviously, I think some of the newer areas, the
Haynesville-- you know, you've seen some announcements where people are pulling back. I
think you're probably going to see some announcements maybe in the Marcellus that people are
going to be pulling back. But in our existing areas, quite frankly we haven't seen huge impact
yet.
Ella Vuernick, RBC - Analyst
Thank you very much. I also have one follow up question. Have, do you have any updates in
terms of specific quantifiable impact from the hurricanes for both this quarter and next?
Greg Ebel - Spectra Energy - CFO
The biggest impact was at DCP where we saw about a $12 million impact for our account in the
third quarter. You may see $5 million or $6 million of impact next year, or next quarter, but
nothing particularly significant for the transmission business. There may be some capital costs,
but nothing significant and I wouldn't expect it to be material to the company either from an
earnings or capital perspective.
Ella Vuernick, RBC - Analyst
Great. Thank you very much.
Operator
Hsulin Peng.
Hsulin Peng, Luminus - Analyst
Hsulin Peng, - . Hi. I know you had mentioned that your foreign, the Canadian dollar exchange
rate impact previously was $3 million for your net income per penny change for 2008. And I was
wondering if that's a good proxy to use for 2009. And also second question is that you have also
mentioned this EPS growth of 8% long term. And how does commodity price movement impact
that?
Greg Ebel - Spectra Energy - CFO
On the exchange rate, we will look at that again at the end of the year. I don't I think that's going
to change materially, so I think the numbers that you used are pretty even. That's a net income
change that one penny equals $3 million of net income. But again, we'll see where the exchange
rate ends up closer to the end of the year and talk to you about that in January. Yes, there's no
doubt that commodity prices are substantially different. That's going to change how we look at
EPS growth. But overall, we've been looking at EPS growth over a number of years, and it's not
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15. Spectra Energy
Third Quarter 2008 Earnings Review
November 6, 2008
really a straight line type number. You've seen stronger than EPS growth, higher than 8 percent
in the last year and in 2007 as well. So commodity prices are one impact, but again, we'll talk to
folks about that early in the New Year.
Fred Fowler - Spectra Energy - President and CEO
The power of Spectra Energy is the mix of our businesses, which deliver a nice yield and good
moderate growth. Again, in those years where you don't have necessarily the growth, particularly
looking at '09 without trying to tell you where it's headed, but just based on stock values, our
yield is up pretty nicely. So, if you still look at the combination of growth and yield, the total
shareholder return should be in that high single to low double digit range that we continue to talk
about.
Hsulin Peng, Luminus - Analyst
Great. Thank you.
Operator
(Operator Instructions).
John Arensdorf - Spectra Energy - IR
Felicia, it sounds like there are no more questions today, so we'll go ahead and end the call.
Thank you so much for joining us today, everyone. Before we leave the call, I do want to let you
know that we are not going to go forward with the breakfast in New York or lunch in Boston that
we had previously scheduled for next Wednesday, the 12th. When we set up those meetings, we
didn't realize that we were conflicting with the last day of EEI, so our RSVPs for these meetings
have been quite sparse.
Fred and Greg and I will, however, be at the Bank of America Conference in Key Biscayne on
Thursday, the 13th. So we hope to see a number of you there. And of course we'll bring you our
2009 outlook to you in New York shortly after the first of the year, so we hope to see all of you
there as well. Again, thanks for joining us today, and as always, if you have any additional
questions, please feel free to call Patti Fitzpatrick or me. Thank you.
Operator
Ladies and gentlemen, this does conclude today's Spectra Energy’s Third Quarter Earnings
Conference Call. At this time you may disconnect.
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