spectra energy Transcript_Q12008

Spectra Energy Corp
Q1 2008 Earnings Call
Transcript
May 6, 2008

Operator

Good morning. My name is Molly, and I will be your conference operator
today. At this time, I would like to welcome everyone to the First Quarter
2008 Earnings 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 call over to John Arensdorf, Vice
President of Investor Relations. You may begin your conference.

John Arensdorf, Vice President of Investor Relations

Good morning, everyone, and welcome to Spectra Energy's first quarter
2008 earnings review. We are very pleased that you've joined us today.
Leading our discussion today will be Fred Fowler, our President and Chief
Executive Officer and Greg Ebel, our Chief Financial Officer. Also 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.

First, Fred and Greg will discuss our quarterly results and provide more
color around our strategic plans to enhance the value Spectra Energy
delivers to its shareholders. We will 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.

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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 J. Fowler, President and Chief Executive Officer

Well, thanks, John, and good morning, all. As you have seen from our
earnings release this morning, we delivered exceptional first quarter results.
Greg is going to take you through the numbers here shortly, but the key
takeaway is we reported ongoing earnings per share of $0.58, which is more
than 50% higher than the first quarter of 2007. As you know, we enjoyed the
benefits of robust commodity prices this quarter and a stronger Canadian
dollar, but we also experienced continued growth in our underlying
businesses. These exceptionally strong first quarter results and our very
positive outlook for the rest of the year provide us with a good opportunity
to enhance Spectra Energy's value proposition, and an opportunity to reward
our investors. You saw that we intend to take advantage of that opportunity
on your behalf. This morning, we announced two significant value
enhancing initiatives. First, our Board of Directors has approved a share
repurchase plan of up to $600 million. We anticipate the buyback to be a
combination of an open market purchase program and other transactions
such as an accelerated stock repurchase program. The execution of these
plans will, of course, depend on market conditions and our stock price over
the next several months. Thanks to our strong financial and cash standing,
we expect to execute the announced buyback without any additional
leverage. Today's actions send a clear message, I think, to financial markets.
Spectra Energy's stock represents a great buying opportunity.

We also announced that management has recommended to our Board of
Directors, an increase in our quarterly dividend from $0.23 to $0.25
effective in the third quarter of 2008. That would make our annualized
dividend -- it would take it from $0.92 a share to $1 per share. We would
expect to announce the Board's action on this recommendation in early July.
When formally approved, this increase together with the $0.04 annual
addition in January will represent an increase in the dividend this year alone
of close to 14%. We are making these moves from a position of financial
strength, driven by profitable growth, strong cash flows, as well as
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confidence in our long-term outlook. We will continue to execute on our
impressive slate of expansion projects that we have underway as well as
those on the drawing board. We have an exceptionally strong balance sheet
from which to grow and take advantage of the opportunities that will
inevitably arise, and we have the management will to take the kind of value
enhancing actions that you are seeing today.

Let me turn now to our first quarter earnings. Our first quarter earnings
growth and ability to deliver on plan paired with the outlook for continued
robust commodity pricing gives us confidence that we will exceed, and
perhaps significantly, our $1.56 employee incentive target for the year. As I
previously mentioned, all of our segments did perform very well and
consistent with our growth expectations. US Transmission is realizing EBIT
from the projects that were placed into service last year. These include
Northeast Gateway and the Time 2, just to name a couple of them.
Distribution continues to enjoy strong growth in its storage and its
transportation business, driven by both market dynamics and its mainline
expansions on its gas transmission system. Western Canada has a much
healthier outlook than we were facing last year. Today, we expect to capture
value associated with an improving production and drilling landscape that
we're seeing in Northeast British Columbia. And, Field Services made
significant progress toward improving both plant efficiencies and increasing
volumes.

We delivered our strong results in a period of unprecedented industry
growth, and as you know, that level of activity has put significant pressure
on material, labor and overall project costs. So, before I do turn things over
to Greg, I did want to update you on our overall growth portfolio, and
specifically the Southeast Supply Header project, which has faced a number
of cost challenges. Most recently, we've had above normal rainy weather, as
well as a number of workarounds that were related to delayed right-of-way
acquisition. They have driven up our costs. We now expect our half of SESH
to exceed our previous capital estimate of $500 million. We're finalizing the
estimates, but they could be higher by as much as 15 to 20%. As a result of
this changing cost environment, we have made several organizational and
process adjustments, just to be certain that we're giving this the level of
attention that it deserves. Excluding SESH, I think we've done a very good
job of cost containment. Since we've shared our 2008 plan with you in
January, we've seen projected cost increases of slightly more than 2% on all
of our other projects that we have in execution. And, I want to be sure that
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you know that we continue to expect returns on all of our projects in the
aggregate to be at the mid to upper end of the 10 to 12% range. So overall,
our capital expansion plan is well on track.

I know that you're anxious for the details around both our earnings and our
value enhancements, so I'm going to turn things over to Greg.

Gregory L. Ebel, Chief Financial Officer and Group Executive

Thanks, Fred, and good morning, everyone. Since Fred has already covered
our quarterly highlights, I'm going to drive right into our segment results,
beginning with US Transmission. US Transmission reported first quarter
EBIT of $226 million compared with $220 million in the first quarter of
2007. The increase reflects earnings from expansion projects, higher gas
processing associated with pipeline operations and higher earnings resulting
from capitalized interest on construction projects. These increases are
partially offset by higher capitalization of project costs in the prior-year
quarter versus this year's quarter. Now let me turn to our Distribution
business.

Distribution reported first quarter EBIT of $165 million compared with $144
million in the first quarter of 2007. Distribution benefited from higher
storage and transportation revenues from the completion of expansion
projects and higher usage due to colder weather. But, the biggest driver of
the variance was the stronger Canadian dollar. These increases are partially
offset by higher operating costs including advanced spending for routine
integrity work conducted earlier in 2008 than in 2007, higher benefit costs
and an increase in the customer energy conservation program, which are
ultimately recovered in rates. Now let me move to Western Canada.

Western Canada reported first-quarter EBIT of $131 million compared with
$74 million in the first quarter of 2007. The increase is primarily due to an
improved frac spread that benefited our Empress operations, as well as a
stronger Canadian dollar. The Empress frac spread for the quarter averaged
$8.13 compared with $4.20 during last year's quarter. Base processing and
transportation revenues also remain solid. This quarter we saw relatively
stable volumes compared with a year ago.
Last year at this time you might recall we were looking at the prospects of
reduced volumes in drilling in our western Canadian gathering and
processing business. Today, based on strong land sales, the current outlook
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is more favorable, and we now expect increased future drilling in the areas
of Northeast British Columbia, where our facilities are located. Now let me
turn to Field Services.

Our Field Services segment, which represents Spectra Energy's 50% interest
in DCP Midstream, had a strong first quarter, reporting ongoing EBIT of
$192 million, more than double the $85 million in the first quarter of 2007.
This increase in earnings primarily resulted from favorable natural gas
liquids prices, which are closely correlated to crude oil. Crude oil prices
averaged $98 per barrel this quarter versus $58 per barrel during first quarter
2007, but this quarter's results also reflect improved operating efficiencies,
higher volumes and growth from acquisition. These non-commodity-related
earnings by themselves represent more than 10% of the earnings
improvement over last year. You may recall that first-quarter 2007
operating results were negatively affected by severe winter storms.
Fortunately, severe weather was not a key factor in this year's quarter.
DCP Midstream is a significant source of cash for Spectra Energy, and first
quarter was no exception. Field Services paid normal distributions of $112
million to Spectra Energy this quarter, and in April, DCP paid an additional
$250 million special dividend to Spectra Energy from the proceeds of debt
they were able to issue, given their very strong financial position.
Now let me turn to other, which is primarily comprised of our corporate
costs.

For the first quarter, other reported ongoing net costs of $20 million
compared with ongoing net costs of $12 million in the previous year's
quarter. This quarter's costs are in line with our projected corporate cost goal
of $85 million for the year.

The next slide shows several important additional items, and I'll cover a few
of the more significant ones. As of March 31st, our debt to total
capitalization stood at 54.6%, slightly below our 55% to 60% targeted range,
and we had available liquidity of almost $2 billion. The Canadian currency
change had a positive after-tax effect on earnings for the first quarter of
about $18 million compared with the first quarter 2007. On May 1st, we
repurchased the publicly held shares of Spectra Energy Income Fund in
Canada for approximately $275 million.

We have given you an overview of our first-quarter results, and you can see
we had a strong quarter. Now let's turn to our planned share buyback and
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dividend increase, which we believe will add value for both our shareholders
and our bondholders.

As Fred noted earlier, we announced two strategic actions today. First, our
Board of Directors has approved a plan to repurchase up to $600 million of
Spectra Energy shares, which would involve a combination of open market
purchases and other transactions such as an accelerated stock repurchase.
The components and execution of this plan will be determined based on our
assessment of market conditions. We're in an excellent position to fund this
stock repurchase without adversely affecting our balance sheet or credit
metrics. In fact, a substantial part of the $600 million has been pre-funded
with our first-quarter earnings and the $250 million special distribution from
DCP Midstream. We expect the remaining amount to be funded with a
combination of internally generated cash from earnings and some relatively
minor asset rationalization. We're confident that the buyback can be
completed with virtually no incremental debt.

The second leg of our value enhancement plan involves a recommendation
to our Board of Directors to increase our annual dividend from $0.92 per
share to $1 per share, beginning in the third quarter of this year. As Fred
mentioned, this action will represent an almost 14% increase in our dividend
this year. The dividend increase is also very much in line with our stated
60% dividend payout policy. After the effect of the share repurchase, the
cost of this dividend increase is expected to be less than $20 million in 2008.
We believe these two strategic moves serve to illustrate the underlying
value, earnings and cash generation potential of Spectra Energy, and they
reward our investors for their confidence in our company, a confidence we
certainly share.

Despite, a current realized and forward curve that would indicate oil at $110
per barrel for all of 2008, we have assumed a $90 per barrel price and have
also assumed that level will remain flat through 2010. Using those
assumptions coupled with the earnings from the successful completion of
our capital expansion projects, we expect to deliver EPS growth of about
8%. That, together with a dividend yield of 3% to 3.5%, takes our expected
total shareholder return to north of 10%. These are very positive moves
enabled by our first-quarter earnings, stronger than expected cash
distributions from DCP and our positive outlook for the balance of the year.
And, we'll execute on all these plans, while maintaining our solid
investment-grade credit metrics. I'll show you how that's possible by taking
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you through a revised projection of our cash flow for the year and the effect
of today's announcement on our credit metrics.

This slide starts with the 2008 cash flow forecast we rolled out in January.
We've added the incremental cash flow from stronger earnings, the
additional DCP dividend and the proceeds from asset rationalization.
We then subtracted the cash requirements of the share repurchase, the
Spectra Energy Income Fund acquisition and the incremental dividends. All
of this brings us to an external funding requirement for the year of about
$1.7 billion. This is about $200 million higher than our forecast at the start
of the year, due to the $275 million acquisition of the Spectra Energy
Income Fund. As you can see, after subtracting the $700 million of debt we
have already successfully issued this year, we are left with borrowing
requirements of less than $1 billion. Given that Spectra Energy Partners
borrows on their own behalf, we exclude their needs here, and as such, we
have only $600 million to finance for the remainder of the year, a very
doable amount. With the outlook for commodity markets for the rest of the
year, we will likely not need to even borrow at this level. It's also important
to note that we currently have about $2 billion in unused liquidity. Our
financial strength is a real competitive advantage, and we intend to use that
advantage when appropriate.

Looking now at the oil curve for all of 2008, you see that the current settled
and forward prices are about $20 a barrel above the revised $90 assumption,
we talked about earlier. Should the forward curve settle substantially higher
than our assumption, we would realize a substantially higher level of cash
and earnings. As a reminder, for every $1 increase in the crude oil price, we
realize $12 million in additional pre-tax earnings.

So, what does all this do for our credit metrics? Well, utilizing our revised
assumption for crude oil, our 2008 FFO to interest and FFO to debt coverage
ratios are stronger than those set forth in our 2008 outlook, we shared with
you in January. Those credit metrics are consistent with a strong BBB/Baa
balance sheet, and will improve if oil prices average above $90 this year. We
also indicate here our expected year-end debt balance to be approximately
$11 billion, about $400 million lower than we forecasted in January. We
finished 2007 stronger than expected, and we continue to perform.

We're extremely excited about executing on this plan and returning real
value to both our debt and equity holders.
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With that I'll turn things back over to Fred.

Fred J. Fowler, President and Chief Executive Officer

Well. Thanks, Greg. As you've heard, we delivered an impressive quarter,
driven by great operational and expansion performance as well as favorable
market dynamics and we're taking some decisive steps to realize value for
our investors. We believe strongly in our ability to execute on our plan and
drive out the operational, the growth and financial return targets that we've
set for ourselves, and then some.

Simply put, 2008 is shaping up to be an excellent year for Spectra Energy
and our investors.

With that we'll be happy to take your questions.

Q&A
Operator
[Operator Instructions] Your first question comes from the line of John
Kiani with Deutsche Bank.
<Q - John Kiani>: Good morning, Fred, Greg.
<A>: Good morning, John.
<Q - John Kiani>: I know you talked a little bit in your opening remarks
and also in your press release about your expectation to exceed the annual
employee incentive target for 2008. Can you give us a little bit of additional
color on, based on the fact that commodity prices and specifically crude oil
prices are at levels that are obviously meaningfully higher than what you
have included in your guidance, kind of coupled with the positive effect of
the buybacks, and also the beneficial NGL/crude oil relationship, what level
that might be relative to the employee incentive target you laid out at the
beginning of the year?
<A - Fred Fowler>: Well, maybe a couple of different ways to look at it,
John. One, I think the sensitivities we gave at the beginning of the year are
extremely helpful. So, depending on what your view is where oil is going to
be, on average, that dollar increase in crude should result in about $12
million of pre-tax earnings. Every $10 million in EBIT equates to about a
penny. So that's one. Maybe the other thing to consider as well is, the
dividend increase we are proposing is very much consistent with our 60%
payout. So those are two things that might give you some bookends around
where we are seeing the year come out.
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<Q - John Kiani>: That's helpful. And then, as far as the -- the growth rate
is concerned, I think you mentioned 8%. Can you remind us of what your
original growth rate was?
<A - Greg Ebel>: We were originally speaking of 5% to 7% compound
annual growth rate. But again, with – as projects come in and as we see
some commodity forecasts looking higher than our original $83, that gives
us the view that it could be 8% compound annual growth over the three-year
period.
<Q - John Kiani>: Okay. That's very helpful, and then final question is on
Empress. Obviously that asset has been performing very well, even up until
very recently. What's your view on how core Empress is, longer-term, to the
Spectra portfolio?
<A - Fred Fowler>: It's like any other asset, John. We continually look at
assets and have what we believe is a whole value. If we find people that are
willing to monetize things at values higher than we see as a whole value,
we'll consider it. And I would put that in the same class as all -- as virtually
most of our assets.
<Q - John Kiani>: Okay. Thanks, Fred. Thanks, Greg.
<A>: All right, John.

Operator
Your next question comes from the line of Lasan Johong with RBC Capital
Markets.
<Q - Lasan Johong>: Good morning. Nice results. A couple of questions.
First, on the drilling in British Columbia, can you give us a little bit more
color on what kind of volume increase are you expecting, how long do you
think this will last? Is there any chance of the Alberta tax burden affecting
British Columbia?
<A - Greg Ebel>: Well, I don't think we're prepared today to give you some
views on volumes. But I guess some – if you look at the Horn River Basin
and the Montney region, we're seeing some very significant land purchases.
I think over the last little while, you are looking at -- probably over the last --
it has accelerated into this year and last year, we are starting to push $1
billion in land purchases. And for a lot of money for players like the EOGs
and Devons and Apaches, EnCana's of the world to put dollars in. So that
gives us a lot of confidence. With respect to the tax in British Columbia, we
would expect that that would flow through, that that would just be a cost of
operations, if you will, which would then flow through to the end users or
producers, if you will.

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<Q - Lasan Johong>: But that does definitely have a dampening effect on
exploration programs and exploitation programs anywhere?
<A - Greg Ebel>: Yeah...
<Q - Lasan Johong>: Alberta?
<A - Greg Ebel>: Well, and as you know, in Alberta you've got two. In
Alberta, you've got the royalty issues, which has probably pushed more
activity into British Columbia, which fortunately, is where the bulk of our
assets are. And then the carbon tax in British Columbia has an impact as
well. But still, as we are seeing robust prices, new technologies and some of
the promise of some of these plays in Western Canada, that does bode well
for us, in our view.
<Q - Lasan Johong>: True, true. Why do a $600 million a share repurchase
program when you are in the need for $600 million of additional funding?
<A - Greg Ebel>: Well, I guess we look at it a couple of ways. One, we
started out the year with debt balances below where we thought we would
be. We're currently below our target in terms of what we thought our credit
metrics and balance sheet would be. And, since we didn't feel a need that in
fact we had to pay down debt, paying down debt right now would be CP,
which would be about a 2% after-tax return. And then, we also have great
confidence in the earnings and cash generations of the Company. And as
such, we think it sends that signal and represents a very good investment
opportunity for us at this point in time.
<Q - Lasan Johong>: Then why not borrow money to invest in more
projects?
<A - Greg Ebel>: Well, remember, a project takes 18 to 24 months to
actually bring to fruition and bring on earnings. So an impact, if we started a
project today, we might not see that impact for 12 to 24 months. We can see
the impact of this $600 million repurchase much quicker once it's executed.
So, again, that seems to be the better choice of dollars. As you see, earnings
impacted by the projects coming on this year -- recall, we'll bring on $1.5
billion this year in new projects that will produce, next year, $200 million in
earnings. I would expect you'd continue to see the balance sheet actually
strengthen. And as such, I don't see that limiting our ability to go out, access
capital markets and invest in more opportunities that come along.
<A - Fred Fowler>: Yeah, Lasan, then for me, it was -- in my opinion, we
had excess cash sitting on the balance sheet and if we would view what we
are doing here as a third-party acquisition, we would be all over it. So why
not do it on your own?
<Q - Lasan Johong>: True. So what you're suggesting is that this is not a
signal to us that you don't have projects to invest. You are saying you do
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have a lot of projects to invest, but circumstances on your balance sheet
would make this a much more immediate impact to shareholders?
<A - Fred Fowler>: Exactly.
<A - Gregory Ebel>: And not restricting our ability to invest in additional
projects, which we're constantly looking at.
<Q - Lasan Johong>: Good, good. One last question -- effect of Canadian
dollars on your numbers for the quarter, and kind of what your assumptions,
are going forward on the dollar -- Canadian dollar/US dollar relationship?
<A - Gregory Ebel>: The impact was about $18 million after-tax in the first
quarter versus last quarter and our assumption is just parity. And I think, if
you'd look, you'd see the Canadian dollar seems to have settled into it, just
about that range.
<Q - Lasan Johong>: Thank you.
<A - Fred Fowler>: If you recall, Lasan, first quarter last year the Canadian
dollar was under a little pressure.
<Q - Lasan Johong>: Yes, yes. Great. Thank you very much.
<A - Fred Fowler>: Thank you.

Operator
Your next question comes from the line of Ross Payne with Wachovia.
<A>: Ross?
<Q - Ross Payne>: Can you hear me?
<A>: Yes.
<Q - Ross Payne>: Okay.
<A>: We're not hearing you now, Ross.

Operator
Okay. His question was withdrawn. Your next question comes from the line
of Scott Engstrom with Blenheim Capital Management.
<Q - Scott Engstrom>: Good morning.
<A>: Good morning.
<Q - Scott Engstrom>: I'm trying to remember that line about patience
being a virtue, and I feel very virtuous today. A question about -- at Field
Services, on the volume growth. How much of that was organic? How much
was, say, from the momentum acquisition? How should we thinking about
the volume growth there? And, I know there were some weather issues last
year as well.
<A - Fred Fowler>: Yes, it's a combination of all three of those. Probably,
order of magnitude, a third, a third and a third.

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<Q - Scott Engstrom>: Okay, roughly split. Okay great. Then, just thinking
about again the commodity exposure, the slide you guys gave in January,
and now you talked about, Greg, $1 change in crude and $12 million of
EBIT. Just trying to think of how to use that over the course of the year. I
mean year-over-year, we saw a $40 rise in crude, which would have implied
a $480 million increase in EBIT at Field Services. I know there's been
restructuring of the contracts, etcetera. But, is that sensitivity useful on a
quarter-over-quarter basis, or does it only apply relative to the forecast of
$83? I mean how they -- how can I use that sort of between -- throughout the
year?
<A - Gregory Ebel>: It's not great through quarter-over-quarter. I would
suggest you work off the $83 and change price that we gave you, and take
whatever your assumption is on oil and use the $12 million associated with
that. As you point out, there's contractual changes that occur year-over-year,
some correlation changes. So we've focused on $83 and 60% correlation.
And I would suggest that's probably, your best -- the best way for you to
look at that.
<Q - Scott Engstrom>: Then, thinking about the sensitivity at Empress, the
$0.50 per change in frac is $16 million of EBIT. You had almost a $4 year-
over-year change there, implying an uplift -- I'll use round numbers – of
about $125 million. But we didn't see that in Western Canada, either. So --
<A - Fred Fowler>: That would be on an annual basis, not a quarterly basis.
You'd have to divide by 4.
<Q - Scott Engstrom>: Okay, thank you. But that is more applicable year-
over-year. I could see that, or is that just against the 7.25?
<A - Gregory Ebel>: I'd encourage you to use it against the 7.25, our
original forecast, because, remember, you also have a change in currency
that we talked about as well. I think you are better off, looking against the
7.25. And think about it on an annualized basis. Volumes change quarter-to-
quarter. But I think, as you look forward for the rest of the year, you want to
think about the full year and think off our base assumptions, would be my
suggestion.
<Q - Scott Engstrom>: And then one question at distribution. How much of
the -- what was kind of the year-over-year weather impact in EBIT terms?
Do you have that?
<A - Gregory Ebel>: About $5 million.
<Q - Scott Engstrom>: Okay. And, do you have the EBIT for Canadian
dollar, just in distribution, not sort of net for the whole Company? Do you
have it EBIT at distribution?

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<A - Gregory Ebel>: That was about $20 million, as I recall, is what you
would see. So you've got some pluses and minuses, but currency ran around
$20 million on the EBIT basis, at least in terms of earnings.
<Q - Scott Engstrom>: And that's just that Distribution, or does that include
--
<A - Gregory Ebel>: No, that's just that distribution.
<Q - Scott Engstrom>: Okay, so $5 million of weather, $20 million of
Canadian dollar. So you would have had some other on the cost side
offsetting that? Is that --
<A - Greg Ebel>: Yes. Maybe the way to look at it is, in terms of upsides,
you've got some currency around $20 million, you've got transportation,
revenue and weather around $10 million, and then you have about $10
million of cost changes to get you around that $20 million increase?
<Q - Scott Engstrom>: Was there any uplift in storage or --
<A - Greg Ebel>: Yes; we -- the benefits of bringing on the Dawn-Trafalgar
expansions and the first phase of the storage that was coming into -- not just
market-based rates, but benefiting the Corporation. Those also helped
earnings this year versus last year.
<Q - Scott Engstrom>: So, as I think about all those pluses and minuses,
there's a big uplift in your guidance for distribution this year, year over year.
Was this within plan, excluding kind of weather and the Canadian dollar?
<A - Greg Ebel>: Very much. I think you'll -- you start to see, as we
indicated, a nice a substantial increase in distribution driven by those
expansion, which, as you may recall -- that's a 5 Bcf plus pipeline, and we're
seeing a 20% expansion between last year and the next couple of years as
well as some storage coming in. So all of that's been taken
into account.
<Q - Scott Engstrom>: All right, great. Thanks guys.
<A - Greg Ebel>: And remember, we assumed the Canadian dollar would
be at parity.
<Q - Scott Engstrom>: Okay.

Operator
Your next question comes from the line of Ross Payne with Wachovia.
<Q - Ross Payne>: Can you guys hear me better than...
<A>: Yes.
<Q - Ross Payne>: Okay. Thank you. It seems like your cost inflation is
somewhat isolated to the Southeast Supply Header. Can you talk about --
you obviously had weather issues, other issues with labor and any other
inefficiencies relative to your earlier expectations?
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<A - Fred Fowler>: Not at this point. It's primarily being driven, again, by
the fact -- that's virtually a cost-plus contract, so we're at risk for any kind of
delays and primarily these weather and these -- and this right-of-way. We
had -- as a result of right-of-way acquisitions taking longer than anticipated,
what we would have to do was breakdown the equipment and crews and
move them around to where we had right-of-way secured. But each time that
you do that, it cost you a day to break it down, it cost you a day to set it back
up. So it just pass data cost. And therefore, your efficiency drops.
<Q - Ross Payne>: Sure. Okay.
<A - Fred Fowler>: That's the two primary drivers.
<Q - Ross Payne>: Okay. In general, given the amount of CapEx you guys
have going into '09, do you have any expectations there on what kind of cost
creep you may see?
<A - Fred Fowler>: I would -- to me, I think it would be somewhere along
the lines of what we've experienced here on our other projects, ex-SESH.
<Q - Ross Payne>: Okay. Great, guys..
<A - Fred Fowler>: SESH was a project that was just during that period
where we saw the huge cost fly-up, and it was one where, because of
competitive pressures, we had to assume a lot of that risk. Most of the later
projects were not in that set of circumstances.
<Q - Ross Payne>: Okay. All right. That's helpful. Thank you.

Operator
Your next question comes from the line of Matthew Akman with Macquarie.
<Q - Matthew Akman>: Thanks very much. On US Transmission, the
quarter was up year over year. I think your guidance at the beginning of the
year was for that business to be slightly down, mostly because of one-time
items from last year. Is that still applicable, or is that improving?
<A - Fred Fowler>: Well actually, Matt, it has improved, and driven a lot
by -- we still have a little bit of gas processing that gets done in the regulated
transmission part of our business, some of the old legacy stuff from the old
model. And that is what has got us above plan at this point. Everything else
is on plan.
<Q - Matthew Akman>: Is that a frac spread-sensitive business?
<A - Fred Fowler>: No.
<Q - Matthew Akman>: Okay. Is it sustainable?
<A - Fred Fowler>: It basically, it's a long gas liquids position --
<Q - Matthew Akman>: Okay.
<A - Fred Fowler>: On like a percent-of-proceeds type contract, but it's all
liquids.
Spectra Energy Corp
May 6, 2008
14

<Q - Matthew Akman>: Okay, thanks for that. And then, I wanted to shift
to Western Canada. We're seeing, really, kind of a sea shift in activity there,
here in Canada and you guys have assets that seem to be very well
positioned. Can you please just maybe talk for a minute about the kinds of
opportunities you probably have underutilized assets there that can fill up?
And also, you bought in the fund, so there are other consolidation
opportunities there for you.
<A - Greg Ebel>: Sure, we could speak to that, and Martha is on the line,
too. She may want to chime in as well. But you look at our plants, and I
think you're right; we are well-positioned, particularly in the Northeast
British Columbia. We really see that area bucking the trend of what you see
in the rest of the Western Canadian Sedimentary Basin. So our -- the big
plants, Fort Nelson, the capacity there -- we haven't fully filled that capacity
there right now. But the opportunities look quite good and much better than
they were a year ago. Plants like McMahon were running full out, which is
over 600 million cubic feet a day plant. That's very positive. That's in the
Fort St. John/Peace River Arch area. And again, the Grizzly Valley -- very
positive what we're seeing going on there. And we've got the big Pine
River plant there, which is about 400, 450 million cubic feet a day. So all
those plants, I would agree, are extremely well-positioned. As I mentioned
earlier, when you see things like the Horn River Basin being compared to
the Barnett Shale, I'll let the producers decide that, but that's obviously very
positive. And then the Montney play that's being discussed is also attracting
really strong producer interest. So there's a lot of work left to be done. It's
early days, obviously. But I would agree with your assessment that things
look a lot more favorable than they did a year ago.
<A - Fred Fowler>: We currently have two plant expansions ongoing in the
BC.
<Q - Matthew Akman>: Okay.
<A - Martha Wyrsch>: Matthew, The only thing I would add is that, we
have both sweet and sour gas processing capability in those areas, which is a
real plus for us as well because not all of this new gas is sour. But we also
have sweet processing. So I think we're well-positioned.
<Q - Matthew Akman>: Okay. Thanks for that. And then my last question
is just kind of on the bottom line. Greg, you talked about 8% growth. Can
you just clarify -- is that 8% over last year's number? And then, is that based
on $90 oil?
<A - Gregory Ebel>: Yeah. I'm looking not one year to the next, so to
speak. I'm looking, obviously, the way numbers are looking maybe a little
better than that, than where we ended up versus last year. I'm looking, really,
Spectra Energy Corp
May 6, 2008
15

at over the next three years compound annual growth, on average, to range
about 8%, and that is looking at $90 oil.
<Q - Matthew Akman>: Okay. Okay. Thanks very much.
<A - Gregory Ebel>: Thank you Matt.

Operator
Your next question comes from the line of Paul Patterson with Glenrock
Associates.
<Q - Paul Patterson>: Good morning guys.
<A>: Good morning.
<A>: Good morning, Paul.
<Q - Paul Patterson>: Most of my questions have been answered, but I just
wanted to make sure I didn't miss something here. It looks like you guys are
being conservative with the price of oil here. Just in general, assuming that
the prices were stayed higher what would you guys use the extra cash for? I
mean how should we think about the potential for extra cash above your
projections being deployed? You guys have lots of opportunities, it seems.
On the other hand, you guys are buying back stock and stuff.
<A - Gregory Ebel>: I think we would look at it based on the situation and
time, and we've got the same principles we came to this decision. We could
look at additional investment opportunities, of which we think there are
numerous. We could -- if we felt it was a wise investment decision, you
could avoid issuing debt. And obviously, depending on our
Board's views, you can look at dividends as well, and buybacks and
acquisitions. So I don't think we'd take any off the table...
<A - Fred Fowler>: I think it's whichever opportunity is available at the
time.
<Q - Paul Patterson>: Okay, well I guess that's a good problem to have.
Okay great, thanks.
<A - Gregory Ebel>: Thank you.

Operator
Your next question comes from the line of Rick Gross with Lehman
Brothers.
<A - Gregory Ebel>: Hi, Rick.
<Q - Rick Gross>: Good morning. My question is in and around maybe the
forward-looking dividend policy at DCP. You've got a special dividend in a
pretty robust commodity environment and that's been, at least in our
estimation, an asset that's been fairly heavily equity capitalized. It generates
a lot of free cash. And I'm just curious as to whether or not this, we'll call it
Spectra Energy Corp
May 6, 2008
16

nonrecurring dividend, could become more recurring and serves as more of a
periodic cash injection to buy in more stock over time.
<A - Fred Fowler>: Yeah. Again, Rick, I think it depends on what we see
as opportunities. Clearly, in recent times, we have felt that asset values got
way too pricey in that particular part of the business and we made a
conscious decision that we weren't going to play in that market as a result.
The fact that we built our position at the low end of the commodity cycle,
obviously our assets are throwing off tremendous cash flow at this point.
And we just feel that the opportunities that we've seen recently in our gas
transmission business have been better. But going forward, if you see an
adjustment -- and I would tell you that Greg and I just were at a Board
meeting last week. They had a couple of fairly compelling investment
opportunities still within their kind of their ongoing annual capital spend
level that we use for them. But if we start seeing very good returns in that
business, better than we're seeing here, it could go the other way as well.
<A - Gregory Ebel>: Yeah. I think the key is -- our key and the focus, the
policy is sort of about 90% of net income and cash would be redistributed
out. And you pointed out that DCP has strong metrics. Indeed, it does. If you
look at their debt to EBITDA numbers today versus other peers – and
frankly, we look at it as a privately held MLP, if you will. They are very
well-positioned to either provide more distributions to the parents or to use
that cash for investments. What we don't see is any requirement from cash
from the parents, which both to Conoco and ourselves, is very important.
<Q - Rick Gross>: Okay. Thank you.
<A>: Thanks Rick.

Operator
Your next question comes from the line of Mark Caruso with Millennium.
<Q - Mark Caruso>: Yes, great quarter. I just wanted to -- you had updated
the sensitivity for oil and raised the assumption to 90. I was curious your
thoughts on gas, since gas has moved a lot. I remember the original EBIT
was a $0.10 change in gas, it's around $2 million in EBIT. I just wanted to
start there and then ask about the buyback second.
<A - Fred Fowler>: Yeah, I think, I'm probably the last person in the world
you should ask about prices because I'm so lousy at predicting them. I think
it has finally dawned on some of the financial players that if crude oil is
going to sustain at this level, gas really has been selling at too much of a
discount. It looks like you have seen some of the investment type money
move over into gas. And to me, it's just hard -- as long as we're seeing these
kind of crude oil values, to see any big downward pressure on natural gas,
Spectra Energy Corp
May 6, 2008
17

although I would say that I think gas in the US trades much more on
fundamentals than crude oil does.
<Q - Mark Caruso>: Have you guys factored in higher gas prices? Is that
all part of the 8% that you mentioned earlier?
<A - Greg Ebel>: Well, that sensitivity still holds true, I think for
simplicity. Now you've seen a slight drop in the correlations from 60 to
around 58, and you'd see the increase in gas to what we gave you to -- what's
the current price today, 10, 10.25? So, those are a bit of an offset, but indeed
that sensitivity is still alive and well, and something that is appropriate for
you to consider.
<A - Fred Fowler>: But we don't fine-tune it quite to that level. The big
impact that we have is on the gas liquids.
That's our big position.
<Q - Mark Caruso>: Thanks. And then as far as the buyback goes, you had
mentioned it's partially pre-funded. Any limitations for, I guess, as soon as
you could -- as far as how soon you could start it up? It's just a matter of
market conditions, or I mean, there is no other limitations beyond that?
<A - Greg Ebel>: That would be correct.
<Q - Mark Caruso>: Got you, perfect. Thanks so much.
<A - Greg Ebel>: Thank you.

Operator
[Operator Instructions]. Your next question comes from the line of Dennis
Coleman of Banc of America Securities.
<Q - Dennis Coleman>: Thanks. Good morning.
<A>: Good morning.
<A>: Good morning.
<Q - Dennis Coleman>: I wonder -- I just – if you can just help me with the
numbers on slide 13 and a couple of things you said there. We're showing a
financing need increased by $245 million. And then you made the comment
that your target is $11 billion of debt at year end.
<A>: Correct.
<Q - Dennis Coleman>: About $400 million lower. And I guess I'm
missing how we are getting a higher financing need and a lower debt
balance.
<A - Greg Ebel>: Well, it's actually, where we ended up the year was much
stronger. When we came out in January, we were telling you approximately
$11.4 billion, where we would be in 2008. And in fact, that was before,
obviously -- it was very early January, before we've had actually closed the
book. So we finished the year stronger. So if you look at December -- the
Spectra Energy Corp
May 6, 2008
18

easy way to look at December I am sorry, March 31st, you're talking about a
$9.3 billion in debt. Add the 1.7 billion because we really hadn't issued any
debt through March 31st, and you get approximately $11 billion.
<Q - Dennis Coleman>: Perfect. Okay. And then, so that the remaining
$600 million need you had talked about doing as much as 500 million in
Canada. And you said something about maybe no borrowing at some level,
and I wasn't quite sure which level you were referring to, and maybe that's
it?
<A - Gregory Ebel>: Yes. What I'm saying, we've issued 200 million in
Canada and $500 million from Spectra Capital, currently. And as such, what
we're saying is that $600 million -- that could be in Canada and the United
States. But I think what I was saying was that, if we continue to see the
commodity prices where they are right now, you could see that we not even
borrow this amount of money. That sort of depends on cash generation, and
as we have indicated, at $90 oil this is the number you would see.
Obviously, I think the current forward curve is around $110 per barrel. That
would produce both earnings and cash that would lower our borrowing
requirement.
<Q - Dennis Coleman>: Okay. So obviously, a lot of other people have
asked those questions, trying to get at that cash flow number, and that's
pretty clear. So it's conceivable that there isn't any additional capital markets
needs at the Spectra Capital level?
<A - Gregory Ebel>: That's conceivable. And again, we will look at market
conditions, and you can see where things are going for next year. So it's
really a timing issue, but your assumption is correct.
<Q - Dennis Coleman>: Okay. And when do you look at that? What is...
<A - Gregory Ebel>: What I think right now -- right now I think, yes, we'd
look to the last half of the year and figure out where we go from there.
<Q - Dennis Coleman>: Very good. That's what I had. Thanks.
<A - Gregory Ebel>: Thank you.

Operator
[Operator Instructions].
<A – John Arensdorf>: Molly, it appears there are no more questions?
Operator
There are no further questions at this time.

John Arensdorf, Vice President of Investor Relations
Thanks, everyone, for joining us today. We appreciate your being on the
call. As always, if you have any additional questions after the call, you can
Spectra Energy Corp
May 6, 2008
19

feel free to call either Patti Fitzpatrick or me; this is John Arensdorf. Just a
reminder, that on Monday, May 19th, we're going to be in New York for a
breakfast, and then we're going to go onto Boston for a lunch, so we've sent
out invitations to that. If you haven't already done so, please let us know
whether you will be able to attend, and we look forward to seeing you at that
time. Thanks again, everyone.

Operator
This concludes today's conference call. You may now disconnect.

Spectra Energy Corp
May 6, 2008
20

spectra energy Transcript_Q12008

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