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Spectra Energy Corp. Q2 2010 Earnings Call Transcript

Spectra Energy Corp. Q2 2010 Earnings Call Transcript

Spectra Energy Corp. (SE)

Q2 2010 Earnings Call

August 04, 2010 10:00 a.m. ET


John Arensdorf - IR

Greg Ebel - President & CEO

Pat Reddy - CFO

Tom O'Connor - President & CEO, DCP Midstream


Anthony Crowdell - Jeffries

Lasan Johong - RBC Capital Markets

Monroe Helm - Barrow Hanley

Ted Durbin - Goldman Sachs

Matthew Akman - Macquarie Research Equities

Faisel Khan - Citigroup

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Good morning, my name is Jasper and I will be your conference operator today. At this time I would like to welcome everyone to the Spectra Energy Quarterly Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. John Arensdorf. You may begin, sir.

John Arensdorf

Thanks, Jasper, and good morning, everyone. Welcome to Spectra Energy's second quarter 2010 earnings review. We're glad you joined us this morning. Leading our discussion today as usual, will be Greg Ebel, our President and Chief Executive Officer and Pat Reddy, our Chief Financial Officer. Both Greg and Pat will discuss our quarterly results, the progress and growth we have achieved year-to-date, as well as strategic opportunities we see on the horizon and of course we're going to leave plenty of time for your questions.

Before we begin, let me take a moment to remind you that some of the things we'll 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 factors that could cause these results to be different from those contemplated in today's discussion.

And 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

With that I'll turn the call over to Greg.

Greg Ebel

Thanks very much, John, and good morning everybody. As you have seen from our earnings release this morning, Spectra Energy delivered ongoing second quarter results of $174 million dollars or $0.27 per share.

As you know, we only provide annual EPS guidance but I can tell you that our second quarter performance exceeded our expectations and we're nicely ahead of where we thought we would be at this point in the year. We feel positive about the remainder of 2010, particularly with our typically strong fourth quarter yet to come.

In addition to meeting our earnings targets, we have been busy executing on future growth plans and delivering value. Key drivers for the quarter included, first, our core fee-based businesses, U.S. Transmission and Storage, Distribution, and Canadian Gathering and Processing performed well, up more than 10% from last year's second quarter.

You will hear the details from Pat shortly but the businesses are experiencing steady, profitable growth from expansion projects. You'll also recall that the vast majority of our 2010 EBIT will come from these fee-based businesses which support our dividend.

Second, commodity prices have improved significantly from the lows we saw in the second quarter of 2009, and our Field Services segment benefited from that improvement with earnings up significantly. Third, during the quarter we continued to actively execute on our growth plan through a strategic acquisition, project expansions at our fee-based businesses as well as growing the footprint at DCP Midstream.

I'll provide more detail on these in a moment, but will point out here that in sum they affirm the compelling earnings potential and strength of our portfolio of businesses. Spectra Energy continues to be ideally positioned in terms of expansion opportunities and we're realizing substantial growth.

I'd like to talk about one of those opportunities in development, our Bobcat Storage acquisition. In mid July we announced that we signed an agreement to acquire 100% of the Bobcat Storage assets and development project for $540 million. In addition to the $540 million, we expect to invest another 400 to 450 million to fully develop the Bobcat assets. Operating capacity for the two caverns currently in service stands at 18 Bcf.

Cavern 3 is under construction and expected to be in service in 2012 and we expect the project's full capacity to grow to 46 Bcf by 2015 when all five salt domes are fully developed. As you'd expect, the incremental returns in the final two caverns developed will be substantially higher than the first three and that supports the value of this project.

Caverns 1 and 2 are operational with about 85% of their capacity contracted and we'll contract the capacity of caverns 3, 4 and 5 closer to their in-service dates consistent with how storage in this market is typically contracted. We plan to finance this acquisition and development through a combination of cash and debt and expect to close the transaction by year end, subject to Hart Scott Rodino approval.

We're extremely pleased with this opportunity which supports our goal of deploying at least $1 billion a year in gross CapEx and which, upon completion should offer returns on capital employed in the 10% to 12% range.

Here is what drew us to the Bobcat acquisition and why it will deliver premium value to our customers and investors. Natural gas storage is key to our business and this project, once complete, will ensure Spectra Energy's position as one of the largest salt dome storage providers in the Southeast.

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