Investor Relations Frequently Asked Questions
February 5, 2009
Questions Regarding Fourth Quarter 2008:
• Why did U.S. Transmission’s ongoing earnings decrease for 4Q08 compared with
o U.S. Transmission reported fourth quarter 2008 ongoing EBIT of $205 million,
compared with $221 million in the fourth quarter 2007. U.S. Transmission’s
earnings decreased due to:
• lower processing earnings due to lower volumes and pricing,
• higher development costs associated with ongoing pipeline and storage
• excluding these, U.S. Transmission delivered strong earnings growth
from expansion projects
• What was the driver of Distribution’s increase in earnings for fourth quarter 2008
compared to the prior year?
o 4Q08 ongoing segment results were $6 million higher compared with 4Q07
primarily a result of increased storage and transportation revenues, lower
operating costs and increased customer usage as a result of colder weather
o these increases were offset by an unfavorable foreign currency exchange and
earnings sharing with customers related to the incentive regulation framework
which was implemented in 2008
• What were the drivers for Western Canadian Transmission and Processing for
4Q08 vs. 4Q07?
o Western Canada Transmission & Processing’s ongoing EBIT was $65 million,
compared with $141 million last year. Western Canada Transmission &
Processing earnings decreased primarily as a result of:
• lower earnings at Empress due to a lower frac spread
• and an unfavorable foreign currency exchange
• What were the earnings drivers at Field Services in 4Q08 vs. 4Q07?
o Field Services’ ongoing EBIT was $69 million, compared with $195 million in the
fourth quarter of 2007. The decrease primarily resulted from:
• unfavorable commodity pricing
• offset by favorable DCP Midstream Partners hedge Mark-to-Market
Crude oil averaged $59 a barrel in fourth quarter 2008, compared with $91 a
barrel in the 2007 quarter. NGL to crude relationship for fourth quarter 2008 was
46 percent, down from 65 percent in the 2007 quarter. Natural gas averaged
about $6.95/MMBtu during both quarters.
For the quarter, Field Services paid distributions of $105 million to Spectra
• What was your net effective income tax rate in 4Q08 compared to 4Q07?
o Our effective tax rate was 20% for 4Q08 compared to 31% for 4Q07. The full
year effective tax rate for 2008 was 32%. The lower tax rate this quarter was
primarily due to favorable adjustments in 2008 for final 2007 tax returns and
lower 2008 state income tax.
• What was the effect of the Canadian Dollar Exchange Rate for the fourth quarter
o For this quarter, the net after tax effect was about $15 million unfavorable
compared with 4Q07. Year-to-date, the net after tax effect is a positive $9
• What is the current level of credit facilities, the available capacity and total
liquidity at 12/31/08?
o Our total credit facilities at 12/31/08 totaled $2.6 billion with available capacity of
$1.4 billion. Total available liquidity is about $1.4 billion.
• What was interest expense for 4Q08 compared with 4Q07?
o Interest expense was $166 million for both 4Q08 and 4Q07. Interest on higher
debt balances in 2008 was offset by the effects of a lower Canadian dollar.
• What were your capital expenditures for 4Q08 and all of 2008?
o Our 4Q08 capital expenditures totaled $495 million, $280 million for expansion
and $215 million for maintenance.
o For all of 2008, we’ve spent $1,500 million on expansion and $530 million for
maintenance, for a total of $2,030 million.
Questions Regarding the 2009 Outlook:
• What is your 2009 EPS target?
o Our 2009 EPS target is $1.15.
• What are the commodity/currency price assumptions in the 2009 forecast?
o DCP Midstream commodity assumptions:
• Crude Oil: $55 / Bbl (WTI)
• NGL/Crude price relationship: 60%
• Natural Gas: $6.00 / MMBtu (NYMEX)
o Empress Frac Spread: ~ $4.75 / MMBtu
o Canadian Dollar/US Dollar: C$1.20/$1.00
• What are the sensitivities for these prices?
o DCP Midstream:
• $1.00 / Bbl change in oil = ~ $11 MM change in EBIT
• Each percentage change in NGL/Crude relationship = ~ $8 MM (at $55 /
Bbl oil price)
• $0.10 / MMBtu change in natural gas = ~ $2.5 MM change in EBIT
o Empress frac spread: $0.50 / MMBtu change in frac = ~ $16 MM EBIT
o Canadian Dollar/US Dollar: $0.01 change in Fx rate = ~ $3 MM change in Net
• What are the major drivers affecting the decrease from ongoing earnings in 2008
of $1.83/share to the 2009 EPS of $1.15?
o Even though we expect to recognize earnings in 2009 from expansion projects
placed in-service, this increase is more than offset by lower commodity prices at
Field Services and Western Canada (Empress) and the effect of the lower
• What will be your expansion capex spending in 2009?
o In 2009, expansion capex will be ~$500 million.
• For additional information regarding Spectra Energy’s 2009 Outlook, refer to the
investor’s section of our website at www.spectraenergy.com.
• How do I derive the price relationship between NGL prices and crude oil prices?
o Using hypothetic assumptions of an oil price at $100 per barrel and an average
NGL price of $1.43 per gallon, it is first necessary to come up with a gallon price
equivalent for crude oil. This is done by dividing $100/barrel oil by 42 (the
number of gallons in a standard barrel). So, at $100 oil, this equals $2.38 per
gallon ($100/42). In this hypothetical example, the relationship of liquids prices
to crude would equal 60% ($1.43/$2.38).
• Based upon public information available, how can an investor estimate the
Empress frac spread?
o A simple proxy for Empress' frac spread is the difference between Mt.
Belvieu propane and Alberta (AECO) gas in US$/MMBtu. One way to
estimate this would be to take the NYMEX Propane price converted to
$/MMBtu less the combination of the NYMEX Natural Gas price and the
NYMEX Clearport Alberta Basis Swap price (to get an Alberta outright
price equivalent). Note the gas prices are already in $/MMBtu.
In formula terms:
NYMEX Propane in $/gallon * ~10.92 gallons/MMBtu = Propane in $/MMBtu
(NYMEX Henry Hub Natural Gas plus NYMEX Clearport Alberta Basis Swap
Based upon 1/23/09 Nymex most recent settle for Mar contract month
Contract NYMEX Conversion MMBTU
Month Price Rate Price
Propane Mar '09 0.716 10.92 7.82
NG HH Mar '09 4.662 4.66
NG Alberta Basis Swap Mar '09 -0.3000 -0.3000
Natural Gas Price at Alberta 4.36
Estimated Frac Spread (7.82-4.36) 3.46
This example computes the frac spread for only one contract month. Be
advised that this provides an indication only, given the lack of forward
market liquidity for propane.
Actual Empress’ earnings are impacted by other operational factors such
as fuel costs, freight costs, other O&M, volumes processed and NGL
inventory volumes and value.
• What are Spectra Energy’s expected returns for capital projects?
o Overall, our project returns on capital employed (ROCE) will average between
10-12% (ROCE= EBIT/Capital Employed). We have two different categories of
Organic (bolt-on or expansion of an existing project) – These typically
produce ROCE in the low to mid teens
Greenfield – (construction of a new asset) – These typically produce high
single digit ROCE
• What are Spectra Energy’s current credit ratings?
o Moody’s: Spectra Energy Capital’s Senior Unsecured debt rating is Baa1, its
Commercial Paper is P-2 and TETLP’s Senior Unsecured debt rating is A3 --
o S&P: Spectra Energy Capital’s Senior Unsecured debt rating is BBB the
operating subsidiaries Senior Unsecured debt is BBB+ -- Outlook: Stable