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Spectra CEO: Ready to Ramp-Up; 'Markets Will Recover'

In acknowledgment of the weak economy and drilling cutbacks by producers, Spectra Energy Corp. executives last Thursday emphasized the insulation from commodity price fluctuations enjoyed by the company's fee-based processing businesses, and they noted that 80% of Spectra customers have investment-grade credit ratings.

During a conference call to discuss fourth quarter and 2008 results CEO Greg Ebel said Spectra continues to see activity in the Marcellus Shale, adding that executives are "a little surprised" they haven't seen a slowdown in Western Canada's Horn River Basin and the Montney tight gas sands play. He said producers "know that the gas is there" and they have an eye on "longer-term development opportunities."

One financial analyst queried the executives for insight into producer plans. Tom O'Connor, CEO of DCP Midstream, a venture of Spectra and ConocoPhillips, said conversations with producers have revealed plans that vary by company. "I think most are consistent with what you're seeing in the public domain as they've announced their plans over the last month." O'Connor said producers are trying to remain flexible and are directing capital to the most profitable areas.

Spectra reported fourth quarter net income of $171 million, or 28 cents/share, compared with $291 million, 46 cents/share, in the prior year quarter. Net income in 2008 was $1.13 billion, or $1.81/share, an increase from $957 million, $1.51/share, in 2007.

About 18% of Spectra's EBIT (earnings before interest and taxes) is sensitive to commodity prices while 82% comes from fee-based businesses. Depending on the pipeline, between 93% and 98% of the company's U.S. transmission revenue comes from reservation charges, while the remainder is from usage charges and other sources.

"We delivered excellent financial results, executed extremely well on the completion of a record $1.8 billion in new projects and increased our dividend 14% during the year," said Ebel. "While we are not immune to today's market volatility, our strength permits us to continue completing our ongoing expansion plans and growing our core transmission, storage and distribution earnings over the long term."

The company's 2009 outlook includes a $1.15/share ongoing diluted earnings target, continued $1.00/share annual dividend and a 2009 capital expansion budget of $500 million. Spectra expects to place approximately $650 million of capital expansion projects into service by year-end, delivering annual EBIT of approximately $80 million, the company said.

While some projects have been deferred, Ebel noted that longer-term demand for pipeline and storage projects remains robust. "We're confident that markets will recover, and when they do we'll be ready to quickly re-engage our delayed projects and take advantage of additional opportunities," said Ebel, who is new to the CEO post as of this year (see NGI, Nov. 10, 2008).

Four credit facilities offer Spectra the availability of $2.6 billion, and available liquidity was about $1.4 billion at the end of 2008. Liquidity available at the end of 2009 is projected to be about $1.6 billion. Spectra is targeting more than $50 million in cost reductions, in part through restrictions on salary increases.

Spectra's U.S. transmission segment reported fourth quarter EBIT of $161 million, compared with $221 million in fourth quarter 2007. The decrease includes a $44 million special item for an impairment of the Islander East project caused by adverse legal rulings and unfavorable economic conditions.

The distribution segment reported fourth quarter EBIT of $90 million, compared with $84 million in fourth quarter 2007. Results reflect a continued increase in storage and transportation revenues, lower operating costs and increased customer usage as a result of colder weather, which was 13% colder than the 2007 quarter. The improvements were partially offset by a weaker Canadian dollar and earnings sharing with customers related to an incentive regulation framework implemented in 2008.

The western Canada transmission and processing segment reported fourth quarter EBIT of $65 million, compared with $141 million in fourth quarter 2007. Results reflected lower fractionation spreads at the company's Empress operations and a weaker Canadian dollar.

The field services segment reported fourth quarter EBIT of $69 million, compared with $188 million in fourth quarter 2007. The decrease was primarily driven by lower natural gas liquids (NGL) prices, which correlate to lower crude oil prices. Crude oil averaged $59/bbl in fourth quarter 2008 versus $91/bbl during the same period in 2007. In addition, the NGL-to-crude oil relationship decreased quarter over quarter, from 65% to 46%. The decrease from NGL prices was partially offset by noncash mark-to-market gains compared with mark-to-market losses in fourth quarter 2007.

During the quarter DCP Midstream paid distributions of $105 million to Spectra.

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