Spectra Energy
                          Fourth Quarter 2007 Earnings Review
                                       Transc...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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numbers by now, and I hope that you will ag...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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over to Greg Ebel. He is going to talk in m...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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for Union Gas. This was a favorable decisio...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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The next slide shows several important addi...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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dollar in 2008. This compares to an average...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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At the distribution business, $15 million o...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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we launched our company early in 2007. Our ...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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What are your natural gas prices? Oil price...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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The other thing that you are seeing, Lasan...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Greg Ebel

That is correct. There is about...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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There is just a natural decline in that bu...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Fred Fowler

It is not very much. The bigg...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Fred Fowler

Yes, we have not seen it yet....
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Okay. In terms of the distributions that a...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Greg Ebel

Right. It is a combination of t...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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that keeps the commodity price strong, Nat...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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but I think there will be a greater number...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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McMahon. Now, Fort Nelson, we continue to ...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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premium to the corporation. Is this a chal...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Just following up on a previous question m...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Greg Ebel

That would be correct.

Scott E...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Ross Payne with Wachovia Capital Markets

...
Spectra Energy
Fourth Quarter 2007 Earnings Review
February 6, 2008
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Faisel Khan

When you have talked in the p...
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spectra energy 4Q2007Transcript

  1. 1. Spectra Energy Fourth Quarter 2007 Earnings Review Transcript February 6, 2008 John Arensdorf Good morning, everyone. Welcome to Spectra Energy’s Fourth Quarter 2007 Earnings Review. Thank you for joining us today. We were with many of you recently in New York providing an overview of our 2008 business and financial plans, and we are pleased to share with you today our very positive 4th quarter and year end result. Leading our discussion today will be Fred Fowler, our President and Chief Executive Officer and Greg Ebel, our Chief Financial Officer. Also with us and available to take your questions at the end of the call are Martha Wyrsch, President and CEO of Spectra Energy Transmission and Sabra Harrington, our Vice-President and Controller. Fred will begin our discussion today by sharing his perspective on our very successful 2007. Then Greg will provide detail and context around Spectra Energy’s 4th quarter results and provide some detail showing how we expect to get from our 2007 earnings per share to our 2008 employee incentive target or $1.56. Of course, we will leave plenty of time 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, so you should refer to the additional information contained in Spectra Energy’s Form 10- K and in our other SEC filings concerning facts 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 Regulation G. A reconciliation of those measures to the most directly comparable GAAP measures is available on our Investor Relations website at www.spectraenergy.com. With that, I will turn the call over to Fred. Fred Fowler Thanks, John, and good morning everyone. Thanks for joining us today. I am pleased that we have great results to share with you. Spectra Energy has enjoyed an extremely successful first year underscored by strong financial results. You have seen the
  2. 2. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 2 numbers by now, and I hope that you will agree that we delivered on the promises that we made to you when we launched Spectra Energy. We told you that we would achieve our $1.40 employee incentive target, EPS target. We exceeded that goal by 9% achieving annual ongoing EPS of $1.53 per share. We enjoyed strong earnings at all of our businesses and delivered an excellent 4th quarter with ongoing diluted EPS of $0.47. We told you that we were going to invest in expansion projects to the tune of $1 billion a year between 2007 and 2009. We kept that promise. Our actual expansion capital expenditures for 2007 totaled just over $1 billion. We placed 13 strategic new projects into service during the year with a total capital invested of about $650 million on those projects. These projects provided about $25 million of EBIT in 2007. We expect an incremental $50 million in 2008 for a total of $75 million of new EBIT. We expect these solid projects will deliver the 10-12% returns on capital employed that we have set for ourselves. Our expansion momentum will continue this year and in a big way. Just yesterday I think you saw us announce our Phase V capacity addition to the U.S. portion of our Maritimes and Northeast Pipeline. We have entered into an agreement with EnCana to expand the system to provide 170 billion cubic feet per day on a year- round basis with an additional 30 million cubic feet per day during the winter. This contract will provide EnCana with the means to bring its Deep Panuke gas to both the Atlantic Canada and the growing Northeast U.S. markets. At the same time that we have been investing in growth, we have reduced our corporate and administrative costs by $20 million during our first year, surpassing our commitment to achieve that level of savings by year-end 2008. We have maintained a strong investment grade balance sheet. We have increased our liquidity by more than $1.2 billion, which will help us execute on our capital expansion plans as well as take advantage of emerging opportunities. As we committed to you last year, we successfully launched our master limited partnership, Spectra Energy Partners. That was at a record yield of 5.45%. Net proceeds to Spectra for that were $345 million. I am proud of what we have accomplished on behalf of Spectra Energy’s investors during this first year. We clearly delivered on our 2007 financial, operational and investment commitments, and you can expect us to do the same in 2008. All of our businesses continue to provide strong, dependable results. We remain focused on expanding our footprint of high-performing assets, responding to the needs and opportunities of a demanding market and continually growing value for the investors and the customers that we serve. Our shareholders can expect a strong sustained level of earnings growth this year and into the future. Combined with a dividend yield of more than 3-1/2%, you can expect total shareholder return in the 10% range. That is a value proposition I believe our shareholders should find compelling over the long term. With that, let me turn things 2
  3. 3. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 3 over to Greg Ebel. He is going to talk in more detail about the results from each of our business segments. Greg Ebel Thanks, Fred, and good morning everyone. As I am sure you saw on our earnings release, Spectra Energy reported exceptionally strong 4th quarter results with net income of $291 million or $0.46 per diluted share. After removing the effect of special and extraordinary items and discontinued operations, ongoing earnings were $297 million or $0.47 per diluted share. Solid results from all of our businesses during the quarter resulted from project expansion growth and a favorable commodity environment. For the year we delivered ongoing earnings of $969 million or $1.53 per share reflecting strong revenues at U.S. Transmission and Union Gas, higher NGL gross margins at Western Canada and higher commodity prices at Field Services. I would like to review the results for each business segment in a little more detail. Let’s start with U.S. Transmission which reported 4th quarter ongoing EBIT of $221 million compared with $172 million in the 4th quarter of 2006. Strong revenues from U.S. pipeline and storage activities primarily reflecting higher demand for services and increased earnings from expansion projects drove the improvement. Higher commodity prices for gas processing associated with pipeline operations and lower project development expenses in the 4th quarter of 2007 also contributed to the increase. Year- end ongoing segment EBIT for U.S. Transmission of $894 million represents a 13% increase over the prior year. Now, let me turn to our distribution business, Union Gas. Distribution reported 4th quarter 2007 segment EBIT of $84 million, unchanged from the same quarter in 2006. Distribution benefited from increased customer usage due to colder weather as well as additional load from gas-fired power generation, higher rates and a strong Canadian dollar. These earnings contributions were offset by higher operating costs, including higher than expected unaccounted for gas; which is the difference between metered gas receipts onto the system, metered gas delivered off the system to customers and billing estimates. These monthly fluctuations typically self-correct over time, but as of the year end we had not seen the entire amount come back. Distribution’s year-end segment EBIT increased 22% over the prior year with annual EBIT of $322 million. I would also note that last month the OEB approved a five-year incentive rate mechanism 3
  4. 4. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 4 for Union Gas. This was a favorable decision for the company in that it creates a stable operating and regulatory environment to pursue growth and investment opportunities. Let us now turn to our Western Canadian operations. Western Canada Transmission and Processing enjoyed a strong 4th quarter with ongoing EBIT of $142 million compared with $76 million in the 4th quarter of 2006, an 87% increase quarter over quarter. The increase in EBIT primarily resulted from stronger NGL prices that benefited our Empress operations as well as higher segment earnings due to the strong Canadian dollar in the 4th quarter 2007. The Empress frac spread averaged approximately $10.00 during the 4th quarter 2007 compared with slightly more than $4.00 for the same quarter in 2006. Year-end ongoing segment EBIT for Western Canada increased 11% over the prior year with annual EBIT of $366 million. While some Western Canadian regions, including the area around our Fort Nelson plant, are experiencing volume reductions, we continue to see increased drilling around our Pine River and McMahon facilities. We are also seeing increased volumes as the result of de-bottleneck projects at several of our plants. Now, let me turn to Field Services. Our Field Services segment, which represents Spectra Energy’s 50% interest in DCP Midstream, had a strong quarter, reporting ongoing segment EBIT of $194 million compared with $119 million in the 4th quarter of 2006. The most significant benefit for the quarter was favorable oil prices, which averaged about $90 per barrel versus approximately $60 a barrel in 2006. This commodity pricing was partially offset by lower gathering and processing margins resulting from a changed contract mix in 2007 and some lower plant efficiencies. During the quarter, Field Services paid distributions of $260 million to Spectra Energy. Year-end ongoing segment EBIT for Field Services was $549 million. Now, let me turn to Other, which is primarily comprised of our corporate governance costs and captive insurance. For the 4th quarter Other reported ongoing net costs of $48 million compared with ongoing earnings of $5 million in the previous year’s quarter. Prior year ongoing results for the quarter included $24 million for management fees billed to Duke Energy affiliates during 2006 and mark-to-market gains on discontinued hedge contracts. Excluding these items, net costs were higher in the 4th quarter 2007 by $29 million, primarily due to increased corporate costs including higher employee incentive and benefit costs. 2007 ongoing net costs for Other were $89 million—below the $100 million we expected for our first year of operations. 4
  5. 5. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 5 The next slide shows several important additional items. Interest expense for the quarter was relatively flat compared with 4th quarter 2006, and 4th quarter 2007 income tax expense from continuing operations was $129 million compared with $42 million in the 4th quarter 2006. For the 2007 quarter, Spectra Energy’s effective tax rate was 31% compared with 15% in the prior year quarter. The lower tax rate for the prior period was primarily attributable to a tax benefit for the impairment of international investments that is no longer owned by Spectra; and an adjustment of U.S. tax on the repatriation of certain Canadian earnings. As of December 31, 2007, our debt to total capitalization stood at 55%. We fully expect to be able to fund our capex programs through a combination of internally generated funds and debt while staying within the 55-60% range we have committed to. As of December 31st, we had a total capacity under our credit facility of $2.7 billion and available liquidity of $1.9 billion. Finally, the Canadian currency had a positive net after-tax effect on earnings for the 4th quarter of about $14 million compared with the 4th quarter of 2006. We have given you an overview of our 4th quarter results, which, as you can see, we really did have a great quarter and a great year. The next several slides will show you how we get from the $1.53 in 2007 to $1.56 in 2008. Let us look at how those components for both years stack up. First, for reference, here is the slide we showed you in mid-January with side-by-side comparison of 2007 actual ongoing EBIT and 2008 forecast EBIT for each business segment, which we will break down into more detail on the next two slides. This slide rolls forward the $1.53 EPS to the $1.56 EPS by major drivers. It begins with the $969 million in ongoing net income for 2007 and reconciles it to our 2008 projected net income of $1 billion. We show major drivers affecting earnings and then show the effect of interest and taxes to get to the 2008 net income. We expect projects placed into service in 2007 to provide incremental 2008 EBIT of about $50 million, and projects placed into service in 2008 to provide about $90 million during the year; so that accounts for the first bar of $140 million in expansion projects. I will tell you how that splits out among the business units on the next slide. The next bar shows the effect of commodity prices and volumes. The $55 million represents a $95 million increase at Field Services and a $40 million decrease at our Empress facility in Western Canada. The Field Services increase assumes we have an average oil price of $83.00 for 2008 compared with $72.00 in 2007. The Empress number is based on an average frac spread of $7.25 in 2008. We are assuming parity of the U.S. dollar and the Canadian 5
  6. 6. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 6 dollar in 2008. This compares to an average in 2007 of $1.07 Canadian per U.S. dollar. We expect to see an EBIT pickup of about $50 million from this more favorable exchange rate. About $30 million of this will happen at Union Gas, and about $20 million is at our Western Canadian operations. Next, we will take a look at the items that will bring you back to the billion dollars in net income for 2008. First, it is important to remember that when we start projects, we expense the costs until we are confident that the project will move forward to successful completion and startup. At that time, we reverse expenses and capitalize those development costs. In the long run, this results in a timing difference since the net effect on the income statement should be zero. In 2007, we capitalized the previously expensed amounts for several projects which provided a net benefit of about $20 million. In 2008, we expect the net amount to be an expense of about $25 million, so you can see there is a $45 million delta year over year. While it may show as a year-to- year variance, it really is good news since we are continuing to invest in new projects as we execute on our expansion program. In 2007, our Tax Department succeeded in negotiating a number of favorable tax settlements with local and state taxing authorities; settlements that allowed us to recognize about 30 million in EBIT. The timing of these settlements is always difficult to predict, but we have not assumed any settlements for 2008. Our U.S. pipelines benefited from additional processing volumes as a result of facilities, owned by others, continuing to be down due to the hurricane damage from the 2005 season. Those affected facilities will be back up in service in early 2008. As a result, even in the strong pricing environment, we expect to see about a $20 million reduction in these processing revenues. The full year minority interest in our MLP will reduce EBIT by about $10 million. Interest, income taxes and other miscellaneous items balance out to our billion dollars. Now, let us look at the roll forward of EBIT. Starting with our ongoing 2007 EBIT of $2,042 million, we show EBIT change by business segment. The Field Services change of $101 million is substantially due to the $95 million uplift in commodity prices. We told you in January that the sensitivity to a dollar change in oil would be about $12 million for 2008, all other things being equal; so when you look at the $11.00 per barrel increase we assumed in 2008 from the 2007 average, you might expect a commodity increase of about $130 million, but we assumed a lower correlation of NLGs to oil in 2008, approximately 60%, than we averaged in 2007 which was 64%. 6
  7. 7. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 7 At the distribution business, $15 million of the increased EBIT is due to pipeline expansion and storage. Growth in the base business and increased rates account for $13 million, and $30 million is FX. The U.S. Transmission EBIT reduction may not be intuitive at first, so let us walk through those components. Starting with the $894 million of ongoing EBIT we realized in 2007, we subtract the net project development cost reversals of $20 million, the property tax benefits of 30 million, high processing results of $20 million and the incremental effect of a full year’s minority interest on the MLP’s earnings of about $10 million to come to 814. To that amount you should add about $105 million EBIT from pipeline and storage expansion projects, and when you then take out the $25 million in project development costs in 2008 and other costs, you come to our projected 2008 ongoing EBIT of $870 million. Our U.S. Transmission segment is fully benefiting from the CapEx projects placed into service and realizing the 10-12% returns on new projects we have discussed. At our Western Canadian operation, the small reduction in EBIT is made up of increased EBIT from expansion projects and FX of about $40 million, which is evenly split. This is offset by the reduction of EBIT at Empress of about $40 million. The frac spread at Empress is about the same in 2007 and 2008. We expect to see reduced volumes this year. That is because we gained some volumes for our accounts last year, volumes that a third party was unable to utilize due to downstream operational issues on their end. We do not expect those additional volumes to be available to us in 2008. Other reductions are around the processing operations in our Fort Nelson area, which is experiencing reduced producer activity and additional budgeted turnaround costs. I hope this gives you a better feel for the various components of our 2008 plan compared to the 2007 actual results. Now, I am going to turn things back over to Fred. Fred Fowler Thanks, Greg. Spectra Energy’s growth story is pretty simple, and it is consistent. We expect to invest about $1 billion a year in CapEx for expansion projects. We will finance this CapEx from cash flow from operations and debt, and we will harvest the 10-12% EBIT returns from those projects as we place them into service. We are executing on this plan and fully expect to deliver the 5-7% earnings growth that we promised when 7
  8. 8. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 8 we launched our company early in 2007. Our 2008 employee incentive target is $1.56 a share. That is an 11% increase over our 2007 target of $1.40. We have told you that we are committed to growing our dividend as we grow our business. Last month we increased our annual dividend by $0.04, bringing it to $0.92 a share. We will continue growing our business in 2008 as we execute on the aggressive capital expansion plans that we have laid out for you. In addition to the projects and growth between 2008 and 2010, we are looking at longer term opportunities as well. We will deliver those that create strong earnings growth and long-term value for our investors. A key component of our 2008 long-term incentive is based on total shareholder return that compares favorably to a group of peer companies, so you can trust that we are dedicated to delivering results. Again, as we have shown you today, Spectra Energy enjoyed a great quarter, a great first year; and we are very excited and ready to deliver on the tremendous promise that we see for 2008. With that, let us open the floor for questions. Lasan Johong with RBC Capital Market Good morning. Congratulations on a good quarter and a good year. A couple of quickies: Greg, you had mentioned that CapEx this year is going to be a billion plus going forward, but it looks like by our estimates to have about $1.8 billion in operating cash flow, so how much more CapEx spending are you going to do beyond the billion dollars that I am not accounting for that would get you to borrow money; and how much money are you going to end up borrowing? Greg Ebel Let me work those in reverse. We are going to borrow approximately $1.4 billion. The total CapEx number that I guess you should be looking at would be about—and this would include SEP which gets consolidated, Lasan, so maybe that is not where you are picking it up. It would be about $1.9 billion for expansion, and that includes about $400 million at SEP; and then $550 million of maintenance capital, so you are probably not picking up that piece. On January 17th we put out that slide, so that might be helpful to take a peek at that. Actually, it shows projected cash flow and the CapEx and the maintenance at expansion including SEP. Lasan Johong 8
  9. 9. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 9 What are your natural gas prices? Oil prices, I thought, was 83 and frac spread was 7.20? Greg Ebel Right. Lasan Johong What is your natural gas price assumption embedded in your business model? Greg Ebel It is about $8.00. Lasan Johong Eight dollars? Okay. So you are expecting some fairly large cost increases. Greg Ebel You mean in terms of at the Empress plant? Lasan Johong Yes, and generally Field Services. Greg Ebel Yes, you do see some higher cost at Empress, that is for sure, as gas prices go up even though oil is going up faster; hence the frac. Your cost to running the Empress plant does go up. That is absolutely correct. Fred Fowler 9
  10. 10. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 10 The other thing that you are seeing, Lasan, is in this price environment, producers are just demanding that they get more of it, so we are seeing margin pressure from that direction as well. Lasan Johong So they want to have the upside potential on the frac spreads. Fred Fowler They want to share. Lasan Johong Share it. Okay. Fred Fowler They want a bigger share than they have gotten in the past just because of how big the margins have gotten. Greg Ebel We have taken that into account looking at 2008. Lasan Johong Also on the distribution business, I am assuming part of that upside is FX? Greg Ebel Yes, the upside between 2007 and 2008? Lasan Johong Yes, 2007 and 2008. 10
  11. 11. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 11 Greg Ebel That is correct. There is about a $30 million increase from FX hitting the distribution business in 2008 versus 2007. Lasan Johong So it is actually net of FX is only like $28 million bump up in EBIT? Greg Ebel Yes. Lasan Johong That is it for me. Thank you. Congratulations. Ross Payne with Wachovia Capital Markets. How are you doing, guys? First question on Field Services is it looks like it is going to be up 18% year over year. Can you speak to volumes as well? Obviously, you have given us kind of your commodity expectations, but is there volume growth at DCP Midstream? Fred Fowler I think on an overall basis, slight volume growth but fairly flat; and it moves in different areas. Ross Payne Okay, because you are going to lose some, I guess, around the hurricane areas and pick up in other areas? Fred Fowler 11
  12. 12. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 12 There is just a natural decline in that business, you know. As you see reservoirs decline, you have kind of a natural decline in the level of business that you have from it, so you have to go out and regenerate new business to replace that. Greg Ebel The other thing to think about, Ross, year over year is we had a substantial weather impact in 2007. I think it was about $30 million for Spectra’s account, so we would not expect, obviously, to see that happen, so that is one reason why you got pick up too. Ross Payne Okay. Also, you obviously benefited from a stronger Canadian dollar. Is that because of your hedges? Second of all, was that embedded in the Western Canadian numbers as well as distribution? Greg Ebel We do not hedge the Canadian dollar. Remember, we have a natural hedge because all our Canadian businesses are financed with Canadian dollar debt, so income goes up but so does interest expense; income goes down as a result of currency; so does interest expense. The real impact in 2007 from FX was mainly in Western Canada. That is because the Canadian dollar really did not move up until the last half of the year. Union makes most of its earnings in the 1st quarter, so the low Canadian dollar—in fact, it was lower forecast in the 1st quarter—hurt Union; so the biggest pick up was really at Western Canada. I think the total bottom line number would have been about $17 million for the year after tax, net income. Ross Payne Okay, great. That is it for me guys. Thanks. Faisel Khan with Citigroup Good morning. I know you guys made an acquisition in Field Services, I think MEG, for about $600 million or so. Is there any way to quantify how much that acquisition contributed to your earnings in the 4th quarter? 12
  13. 13. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 13 Fred Fowler It is not very much. The bigger part of that acquisition was the Barnett Shale piece. It has somewhat of a hockey stick to it but one that we firmly believed in because of the acreage that we have under contract there is primarily EOG, and we are a believer in their story because we are of the opinion—and Conoco-Phillips’ group has supported us and helped us on this—that EOG is the producer that has really figured out how to produce the Barnett Shale. Early on there is not a lot of impact. It comes on really in year three. That is where you start seeing good impact from them. Faisel Khan Okay, so when I am looking at the volume you are reporting at Field Services, there is not much of a contribution from those? Fred Fowler Right. Faisel Khan Okay, so that is something it will deliver in the future as Barnett production kind of ramps up. Fred Fowler Yes. Faisel Khan Taking a step back and looking at overall liquids production at your Canadian processing business and at your U.S. processing business, what are you seeing from your customers that are consuming those liquids? Is demand still fairly stable from your chemicals and your refineries? Is there any softness given the economic slowdown we are seeing right now? 13
  14. 14. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 14 Fred Fowler Yes, we have not seen it yet. Faisel Khan Okay. Why do you think we have not seen it yet? Fred Fowler I would say that, most of this stuff ends up in world markets, and I think we just have not seen the slowdown in world markets yet. I think that is probably the big unknown. I think there are probably two unanswered questions. Number one, how tough is the period that we are going into in the U.S.? Depending on what that is, how will that impact the overall world economy? While we are not a big part of the growth in the world economy, we are still one of the larger markets in the world economy; so if you saw a very severe recession in the U.S., I think it would probably have to leak over into the world economy some. Faisel Khan Okay. On the U.S. Transmission side in your press release, you talked about how higher commodity prices for gas processing helped the pipeline operation. Is that significant at all? Generally, I do not associate commodity prices with the U.S. Transmission operations. Fred Fowler There are a couple of plants that we have that are in the old regulated portion of our business. A certain amount of the gas has to get processed so that it meets pipeline quality; so there are two plants that we still have in the regulated part of our business. Greg Ebel For the quarter, Faisel, we probably picked up $12-15 million there versus 2006. Faisel Khan 14
  15. 15. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 15 Okay. In terms of the distributions that are paid out for Field Services, you said $260 million for the quarter. On average, is it fair to assume half a billion dollars a year in distributions in that business? What is the run rate? Greg Ebel I think you should look at 90% net income as the way to look at that. Faisel Khan Okay. In terms of the interest expense number that you threw up on your slide 12 of $60 million, the incremental interest expense, what is driving that large increase? Fred Fowler It is funding the expansion on gas transmission. The way I kind of think about it is go over to the first line and look at that 140. That is what it is costing us to finance that 140 of expansion projects. Faisel Khan I take it you are assuming kind of a 50/50 capitalization of the new projects. Greg Ebel No, remember, we retain about 40% of our net income, right? Sixty percent is paid out in dividends. The remainder that we need, we are actually borrowing externally; so that is why you see large borrowing. You do see debt up year over year, so that is driving, as Fred said, as we put capital to work. You will see the same thing; we will borrow $1.4 billion in 2008, and hence you are going to see that change of about $60 million in interest expense. It is a good thing. Faisel Khan You are funding expansion projects with retained earnings, and then the rest is being financed with debt. 15
  16. 16. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 16 Greg Ebel Right. It is a combination of the two. Faisel Khan Okay, great. Thanks for the time guys. Nathan Judge with Atlantic Equities I just have a question. You said that your assumption for the relationship to oil prices was going to be 60%. I think historically it has been about 66% or so. Is there a breakdown of that relationship, or is that just conservatism? Fred Fowler We felt that the actual commodity price at the time was fairly high, and typically when you see oil—particularly when it is oil driven—there is a tendency for the relationship to reduce. What I am trying to say is, in times of very high oil prices, you will typically see a disconnect between gas liquids and crude. Nathan Judge What would be your earning sensitivity in a dramatic slowdown or possibly a deep recession in the United States? Greg Ebel I think that the real sensitivity you would see is really if you believed that had an impact on commodity prices. Remember, most of our pipelines in the U.S. are long-term contracts, in the distribution business is if you thought people would dramatically reduce their heat intake; but in the short term it is not dramatic on those two businesses, so you have to make an assumption whether that moves commodity prices down. Commodity prices have stayed pretty strong. You also remember that commodity price is generally trading in U.S. dollars, so if you believe the U.S. dollar is going to remain weak, maybe 16
  17. 17. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 17 that keeps the commodity price strong, Nathan. The SEP business that Martha runs would not see a dramatic move in the short term. Fred Fowler Probably the impact there would be that it would slow our growth rate in the future, but as far as really any short term earnings impact, it should be fairly negligible. Nathan Judge As an associated question along with the LNG question earlier, I think one of the expectations that I have had is about new storage expansions really ramping up. How is that progressing from your point of view looking out forward in interest from suppliers? Are you seeing increased interest in storage, and where are we in that part of the cycle? Fred Fowler Yes, we do continue to see it. I think when it will really hit big time, Nathan, will be when LNG starts really coming in in larger volumes, which in our opinion looks like it is probably going to be in the 2011-12 range. I think that is when the market is going to fully appreciate the need and the value of storage. It is one of the reasons that we continue to be very bullish on storage, but at the same time trying to temper how much risk we are willing to take to build it. Nathan Judge Fair enough. Finally, as you look across the market, there are quite a few new entrants into the gas transmission business. Spectra is obviously one of the larger companies out there. What is your view on consolidation and your portfolio of assets? How do you see that perhaps in the next several years? Fred Fowler If you think about our business, Nathan, it is really two businesses. It is our gas transmission business that we have 100% of, and then it is our gathering and processing joint venture with Conoco-Phillips. The gas transmission sector in the U.S. is a fairly consolidated business. There could be opportunities that arise going forward, 17
  18. 18. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 18 but I think there will be a greater number of opportunities probably over in the gathering and the processing part of the business. I think we have made it fairly clear from our belief in recent times because of the markets and what they were allowing people to do - created a tremendous amount of master limited partnerships. In our opinion, there are more of them than there really are assets to grow them. We think that there will probably be a consolidation in that sector coming fairly soon because of lot of these newer MLPs have been backed by private equity. Those guys are typically pretty smart and savvy in knowing when it is time to harvest. Nathan Judge Is that comment somewhat related to the number of deals that have been coming to you, or is that just a general comment about the overall market? Fred Fowler I think probably a little of both. Nathan Judge Thank you very much. Matthew Akman with Macquarie A question on your Western Canadian business; we have not seen drilling really pick up in Western Canada overall. What is your view on 2008 and what is in your guidance in terms of volumes on your system? Obviously, we have seen the base and overall is just kind of being stagnating in the northeast B.C. region where you guys pick up volume still remains fairly strong, but what is in your guidance and what is your view on that? Martha Wyrsch Matthew, we have seen continued strong drilling up in the Grizzly Valley around the Pine River facilities, as you know; so we do not see any decline in throughput in the plant. In fact, we saw an up tick last year in those facilities. The same has been true at 18
  19. 19. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 19 McMahon. Now, Fort Nelson, we continue to be pretty flat, and we do not see an up tick in drilling there. Greg Ebel I think you see that in that forecast on that roll-forward chart. Really, the decline is really the one plant where we see the reductions, and as Martha said, the other two areas we see continued strong growth. Fred Fowler And actually have some expansion projects in those other two areas. I think kind of a net-net overall we see it as fairly flat. Two areas that are improving; the largest one, though, is actually declining but kind of overall has us flat there. Greg Ebel It is a good thing to be in northeast British Colombia as opposed to perhaps on the other side of the border right now. Matthew Akman What is your view on the demand pull in terms of lots of proposals for LNG coming on around the Pac Northwest? Is your view that that will come on or do you think you will be okay there? Martha Wyrsch We have seen very strong continued usage and in fact, an up tick in usage on the pipeline mainline system and right now, those LNG projects do not seem to have enough sort of true reality to them that they are impacting our throughput at all. Matthew Akman Last, on Canada overall, Canadian Energy infrastructure assets seem to be trading at a pretty big premium to your stock, and even your income fund seems to be trading at a 19
  20. 20. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 20 premium to the corporation. Is this a challenge or an opportunity? If it is an opportunity, how could you maybe capitalize on it? Greg Ebel I think it is definitely a challenge. I would suggest that it is a huge opportunity for investors. I do not think there is any reason why there should be that delta in value. I think we need to spend more time with folks up there, and I think we need to spend more time with, obviously, investors here to explain the good quality business we have. From the income fund perspective, it is a relatively small element of the business, so I am not sure the income fund element is a driver. Matthew Akman Okay, thanks. Those are my questions. Scott Engstrom with Blenheim Capital Management Good morning. Greg, when you were going through, did you mention what your actual realized spread was at Empress frac spread in 2007? Greg Ebel I think it was $7.15 would have been the frac. Scott Engstrom So in the 2008 guidance, it is essentially flat. It is $7.25 versus the $7.15. Is that right? Greg Ebel Correct. As we indicated, we have some volumes that we realized in 2007 that we will not realize in 2008. We do not have all the capacity in that plant, so we will lose some of that which is why you see it coming down. Scott Engstrom 20
  21. 21. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 21 Just following up on a previous question more looking beyond sort of the temporal issues at Empress for volumes between picking up some volumes last year that, due to a competitor and losing some for maintenance this year, is there a way to think about the volumes beyond sort of last year and this year? What should we be thinking about volumes more long term there? Greg Ebel Just be clear, we are seeing good volumes at the plant; in fact, the increase as you went through the back half of the year. It is just that we do not own the full capacity at the plant—100% if you will, so while the plant saw good volumes and we expect to see those volumes, in fact, grow a little bit, it is just that we will not be able to realize 100% of the plant. We will just get our proportion of capacity from the plant. Scott Engstrom A question on the Other line: It looks like maybe the 4th quarter you had kind of a high- class problem. If I look at the quarter by quarter, first quarter was a drag of 12 million and 19 million and 10 million. Fourth quarter jumps up to a $48 million drag. You mentioned incentive payments. Can you break that down a little bit? Is there any reason to think that that has jumped between the 3rd quarter and the 4th quarter on an ongoing basis? Greg Ebel No. As you know, you plan your incentive payments. I think about our target of $1.40 as the year accelerates, and you see where things head up; and, obviously, the 4th quarter we had a very strong year, so you then accrue for how the year is coming out; but you do not do that obviously early in the year unless you see something dramatic that would suggest you are going to do so much better. I think there is more a timing issue there than anything. Scott Engstrom Okay, so the first three quarters of the year are more like your kind of ongoing rate? I know you are guiding for $85 million drag for the year. That all still holds? 21
  22. 22. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 22 Greg Ebel That would be correct. Scott Engstrom Okay. On your 50% of management bonus for your peer group comparison, do you have, off the top of your head, who your peer group actually is? Greg Ebel For 2007, it was a smaller group that, I think, had Enbridge, TransCanada, Southern Union; but going forward it has about 19 companies, a bunch of them that would be in the utility industry—about half; and then the folks directly in our sector would be folks like El Paso, Enbridge, Equitable, OneOk, Sempra, Southern Union and Williams. You have got a good mix there. Scott Engstrom Thank you. Lastly, just going back to the big picture question about hedging, it just seems to me, one of the lessons of last year is that there is a little bit of asymmetric payoff for you guys with respect to commodity prices; meaning as prices have gone up here favorably for the company and for shareholders, producers, as you have mentioned many times, have been asking for more of that margin. My sense is that if it goes the other way, producers are not going to be so quick to want to share the margins on the down side. I am just wondering if the experience of oil running up into the high 90s, 100s have changed the way you are thinking about hedging given that asymmetric payoff for shareholders? Fred Fowler No, it is something that we continue to evaluate, but we still believe that not hedging is the way to go. Scott Engstrom Okay. Thanks very much. 22
  23. 23. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 23 Ross Payne with Wachovia Capital Markets Greg, just a bookkeeping item here; what do you see is depreciation for 2008? Greg Ebel The total depreciation number for 2008 is going to run around $600 million. If you give me a second, I can probably dig up the exact amount. If not, we will get it to you. It should be around $600 million, Ross. Ross Payne Okay, that is great. Helps us get to the EBITDA. Thanks. Faisel Khan with Citigroup One more question: On your current processing infrastructure in the U.S., you mentioned that in the past those processing plants are less efficient than some of the new plants that are up and running. Do the economics make sense to retrofit or refurbish those old vintage plants? Fred Fowler That is part of kind of our ongoing business plan every year, and we have done some of that virtually every year. Faisel Khan Okay, fair enough. Thanks. Fred Fowler The other one that we have done a lot recently is just redirecting gas from less efficient plants to more efficient plants because we had done some capacity additions in the past. 23
  24. 24. Spectra Energy Fourth Quarter 2007 Earnings Review February 6, 2008 Page 24 Faisel Khan When you have talked in the past about how you have been changing your contract mix a little bit, it is not moving POP to fee-based? It is moving keep-whole to fee-based, right? Fred Fowler Yes. Faisel Khan Okay. Thanks. John Arensdorf Dennis, it appears there are no more questions. Dennis Yes, sir, that is correct. John Arensdorf Thank you everyone for joining us on the call today. As always, if you have any additional questions, feel free to give me a call or Patti Fitzpatrick. We will be happy to help you. I just want to remind you that Thursday of next week we are going to be in New York for a breakfast and in Boston for a lunch where you will have an opportunity to ask additional questions you might have. We would be very happy to see you there. If you have not already signed up, if you would let us know you are going to attend, we would appreciate it. Hope to see you in New York or Boston next week, and with that, we will end the call. End of call 24

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