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Spectra Energy (NYSE:SE)

Q3 2009 Earnings Call

November 6, 2009 10:00 am ET

Executives

John Arensdorf - Chief Communications Officer

Greg Ebel - President and CEO

Pat Reddy - CFO

Analysts

Ella Vuernick - RBC Capital Markets

Ross Payne - Wells Fargo

Matthew Aikman - Macquarie

Carl Kirst - BMO Capital

Faisel Khan - Citi

Mark Caruso - Millennium Partners

Operator

Good morning. At this time, I'd like to welcome everyone to the Spectra Energy third quarter 2009 Earnings Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions).

At this time, I would like to turn the call over to Mr. John Arensdorf, Spectra Energy's Chief Communications Officer. Please go ahead, sir.

John Arensdorf

Thanks, Celeste and good morning, everyone. Welcome to Spectra Energy's third quarter 2009 earnings review. We're pleased that you could join us today.

Leading our discussion today will be Greg Ebel, our President and Chief Executive Officer and Pat Reddy, our Chief Financial Officer. Greg and Pat will discuss our quarterly results and update you on our year-to-date progress and our future plans. Then we'll open the lines for your questions.

But as usual 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. 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.

In addition, our 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 Web site at spectraenergy.com.

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

Greg Ebel

Thanks very much, John, and good morning, everyone. As you've seen from our earnings release, Spectra Energy delivered very solid ongoing third quarter results of $190 million or $0.30 per share. We feel upbeat about our results for the quarter and for the year-to-date, particularly given the fact that 2009 has had its challenges, both, within and outside our sector, but we took steps to meet those challenges head on.

First, earlier this year, we bolstered our financial flexibility. Second, we're achieving good growth performance from our core businesses, which are providing us with cash flow, not only to fund our dividends, our operations and maintenance capital, but also partially fund our expansion capital.

Third, we've been able to use our MLP to finance accretive acquisition opportunity and expand our service offerings.

Fourth, we're managing our costs and have achieved our $50 million cost reduction target. About one-half of this is capital and the other half is operating costs.

We're successfully executing on our capital expansion project as well. These projects are earning returns above the high end of our stated range, and they will continue to provide earnings and cash flow for many years to come.

Our core fee-based business is storage, transmission, distribution and Canadian gathering and processing performed very well in the quarter. In fact, third quarter earnings for each of these areas were notably higher compared to last year's quarter.

After removing from ongoing earnings the effect of commodity prices and exchange rate differences, we saw quarter-over-quarter earnings growth in the 6% to 8% range.

You'll hear the numbers break down from Pat shortly, but these operations delivered solid results for our customers and shareholders, and as you know, the overwhelming majority of this year's $1.15 per share earnings expectation will come from these fee-based businesses.

All that said, commodity prices were dramatically lower in the third quarter of 2009 compared with the third quarter of 2008, when we saw record commodity prices. Although, crude oil prices have been on an upward climb lately, natural gas liquids prices have lagged crude for most of the year. We have, however, seen the NGL to crude relationship strengthen in recent weeks, and we're seeing some good signs that demand is starting to turn around.

Steam cracker utilization rates continue to increase, and we would expect propane inventories to start working themselves down as we move into the heating season. Both of these should have beneficial impacts to Empress and DCP Midstream. Still, we don't really expect to see a sustained recovery in NGL prices, until fundamentals of the economy recover, particularly the housing and auto industries.

With a good start to winter and commodity prices remaining around the range we're seeing today, we're comfortable that we'll achieve our $1.15 earnings per share goal.

I'm pleased to be able to tell you today that our 2009 capital expansion plan is substantially complete, so let's take a look at where we stand on that front.

As can see, we are in very good shape and ahead of the curve in terms of our portfolio of a growth project for the year. We've completed nine of our 10 expansion projects this year and the final one, West Doe III is expected to come into service in a few weeks. These well situated fee-based projects will deliver total annual EBITDA of about $80 million; $35 million this year and an incremental $45 million next year. We've completed all of these projects on time and on or below budget with returns and capital employed above the high end of our 10% to 12% range.

At the spin in early 2007, we told you we were going to grow our earnings by investing about $1 billion a year in fee-based businesses, at an attractive return in the 10% to 12% range, and we're meeting that commitment. Between '07 and '09, we've placed into service 42 fee-based expansion projects totaling more than $3 billion.

These projects will contribute annual EBIT of $380 million for a combined return on capital employed of greater than 12%. This demonstrated record of execution gives us a strong sense of confidence in our ability to deliver on our commitments to investors and a sense of optimism in our future growth.

Our focus on results, strategic growth, and long-term positioning continues to yield results for investors, our customers, and of course, the markets we serve. We continue to see very good growth opportunities for the foreseeable future. I'll give you a little more color on those opportunities and our current thinking on next year's commodity prices at the end of the call, but with that let me turn things over to Pat, who will brief you on the quarterly details for each of our segments. Pat?

Pat Reddy

Well thank you, Greg, and good morning, everyone. As announced earlier today, Spectra Energy reported third quarter 2009 ongoing earnings of $190 million or $0.30 per share compared with $302 million or $0.49 per share last year. As you can see on the slide, there were no significant differences between reported and ongoing earnings this quarter.

Our fee-based businesses performed in line with our expectations, but our overall results were challenged by the commodity sensitive businesses at Field Services and our Empress plant. New projects continue to contribute EBIT at U.S. Transmission. Distribution saw continued growth in storage and transportation revenues and Western Canada experienced growth in their base gathering and processing revenues.

Now let's take a closer look at our performance by business segment beginning with U.S. Transmission. U.S. Transmission reported ongoing third quarter 2009 EBIT of $239 million compared with $217 million in the third quarter of 2008. The segment showed significant benefit from business expansion as a result of growth projects we placed into service in 2008 and 2009.

In addition, we experienced a $33 million positive change in project development costs. In 2008, we recorded $12 million of development cost expense. In this quarter, we recorded a net benefit of $21 million, due mainly to the capitalization of costs associated with our TEMAX/TIME III project. These increases were partially offset by lower gas processing revenues resulting from lower prices and volumes due to the anticipated restoration of third-party processing capacity in the Gulf and a non-cash regulatory accounting adjustment related to our Southeast Supply Header project.

Many contracts for capacity on our system come due for renewal on October 31st and we're pleased that we have achieved 100% renewal rate among customers served by our U.S. pipelines.

Let's turn now to distribution. Distribution reported third quarter 2009 EBIT of $48 million compared with $44 million in the third quarter of 2008. Excluding the effects of the decline in the Canadian dollar, earnings were $6 million higher this quarter. This segment continued to benefit from higher storage and transportation revenues which were slightly offset by higher depreciation costs related to growth of the system.

Despite a challenging economic environment, Union Gas has added 15,000 customers this year and contrary to what one might expect Union's bad debt expense due to customer non-payments is remaining at a manageable level. Our bad debt expenses continue to run below the amounts included in our rates. A very good story in the midst of a recession.

Now let's turn to Western Canada. Western Canada reported third quarter EBIT of $84 million compared with $113 million during the third quarter of 2008. Excluding the effect of the weaker Canadian dollar, earnings were $24 million lower than in 2008.

Revenues improved in the fee-based gathering and processing business due primarily to stronger activity and increasing contracted revenues in the Fort Nelson and Grizzly Valley regions. However, these revenues were more than offset by lower interest earnings due mainly to lower frac spreads.

The average in for frac spread for the quarter was $6.75 compared with $10.86 in the third quarter of 2008. While frac spreads have been consistent with our expectations this year, we have seen a recent reduction in volumes at Impress was a result of lower volumes flowing eastbound from Alberta. We will watch activity around Empress closely as we continue to develop our 2010 plan, but we fully expect to meet our 2009 budget.

Now let me turn to Field Services. Field Services which represents our 50% interest in DCP midstream reported third quarter 2009 EBIT of $45 million compared with $239 million in the third quarter of 2008. The decrease in earnings was primarily driven by lower commodity prices.

During the third quarter of 2009, crude oil averaged approximately $68 per barrel compared with approximately $118 per barrel in the prior year quarter and the NGL to crude relationship averaged 42% versus 51% in the third quarter of 2008.

Additionally, NYMEX natural gas averaged $3.39 per MMBtu compared with $10.24 during the same period in 2008. Third quarter results were also affected by higher interest expense and lower non-cash mark-to-market gains on hedges used to protect distributable cash flow at DCP Midstream's master limited partnership.

The decrease in earnings was partially offset by lower operating costs as a result of continued cost reduction initiatives. To date at the 100% level, DCP Midstream has realized about $70 million in cost savings compared to its forecast.

For the quarter, DCP Midstream paid distributions of $31 million to Spectra Energy and we expect to receive cash distributions totaling about $100 million for the full year in 2009.

So let me underline what I believe is an important point. Even in a year of low earnings, we are receiving healthy distributions from DCP Midstream, and we are funneling that cash into our growing fee-based businesses. The next slide shows several important additional items.

For the third quarter, other reported ongoing net costs of $10 million compared with $9 million in the previous year's quarter, we now expect other to be in the $80 million range for the year.

Interest expense for the third quarter was $160 million compared with $163 million for the third quarter of 2008. For the full year, we expect net interest to be about $80 million lower than the $680 million level we included in our 2009 earnings guidance.

Our effective tax rate this quarter was 20% compared with 32% in the third quarter of 2008. The lower effective tax rate this quarter is primarily the result of both favorable tax settlements and a higher proportion of earnings from Canadian sources which are taxed at a lower rate. We continue to expect our annual effective tax rate to be in the 29% to 30% range.

As mentioned earlier, the Canadian Dollar was weaker this quarter compared with the third quarter of 2008. The overall effect on net income was a reduction of about $3 million. As of September 30th, our debt-to-total capitalization ratio stood at 57%. Our total credit facility capacity and available liquidity was $2.7 billion.

I would note that as of September 30th, we had $450 million of cash on our balance sheet. We used that cash to pay off the $450 million maturity as Spectra Energy Capital, so on October 1st our available liquidity was $2.3 billion.

Our balance sheet and liquidity position are in excellent shape for us to pursue our growth plans in 2010 and beyond. In fact, our strong liquidity position eliminates the need for us to access the capital markets until 2011. That's not to say we won't do so if conditions are favorable. It just means we can be opportunistic in our timing.

Now, I'm going to turn things back over to Greg, who will share a few points about our current view of 2010.

Greg Ebel

Thanks, Pat. A pretty good third quarter and as you pointed out a good foundation from which to grow from. We're in the process of finishing our 2010 forecast, which we will finalize with our board toward year end and for our typical timing review with you earlier in the New Year.

But I do want to share with you our current thinking related to one key input, commodity prices. Our current commodity view has oil in the $70 range for next year, and importantly an NGL to crude relationship of about 55%. This equates to $0.92 per gallon for NGLs which is inline with where we've seen the comp to an NGL price today and the 2010 forward curve. And we're currently looking for natural gas prices to average about 550 next year.

A number of additional factors, of course, affect our forecast, so we'll be closely watching indicators such as volumes, customer growth, expansion projects, et cetera, across the company. However, if what we are currently seeing for commodities plays out, that should imply 2010 EPS growth of about 20% to 25% above our 2009 target. We'll continue to watch the forward curve and other indicators as to where commodity prices might be headed, so we may be modifying these assumptions as we discuss our plan with the Board.

In terms of capital expansion plans for next year and beyond, we have identified a number of specific projects for 2010 and 11, totaling about $1 billion in investment per year. We've talked to you before about our expectations for 2010 and 2011 projects, but we thought you might also be interested in our thoughts about opportunities for expansion post 2011.

This slide gives you a good sense of where new natural gas supply will come from in the years ahead and it depicts how well positions Spectra Energy's assets are in relation to emerging shale basins. So even beyond 2010 and 2011, we are optimistic that our capital expansion efforts will continue at about $1 billion per year.

First, we continue to see real need for further capacity expansion in the Northeast. Second, opportunities are presenting themselves in the Marcellus Shale Basin. This shale play is coming on incrementally and Texas Eastern is well-positioned for incremental expansions to accommodate customer's needs as these emerging supplies develop.

For example, I expect we'll be in a position to make an announcement regarding our team project in the very near future and we believe there will be additional projects in the area beyond team.

Third, we know that the Florida market will need additional capacity due to the states growing conversion to natural gas fired power generation.

Fourth, in western Canada, you'll recall that we'll spend about $1 billion on our series of Fort Nelson projects. We've signed 10 producers for 790 million a day in that region and we will be seeing some incremental EBIT from the Fort Nelson expansion in 2010 which will increase through 2012 and beyond as facilities are brought into service and the contract volumes ramp up.

We're seeing significant drilling activity in this area and about 100 million a day is now flowing out of the Horn River Basin into our system. So we're seeing real results. And if the reserve levels in the Horn River and Montney turn out to be as prolific as projected, we would expect another round of fee-based gathering and processing facilities to be required in the 2012 to 2015 timeframe.

And finally, DCP Midstream is very well-positioned to serve producer needs in emerging areas like the Eagle Ford shale. DCP has available capacity there and is well-positioned to support producers in that region.

Our challenge won't be one of finding good projects, rather it will be deciding which projects to pursue that will provide the highest return to our investors and at prudent levels of risk.

I'm sure you'll have lots of questions around 2010 and beyond and we'll be prepared to discuss our plan in greater detail early in the New Year, so let me quickly wrap up.

Feel good about the results we shared with you today and I'm optimistic about the future, while the economic backdrop is less than ideal today. Our company is exceptionally well prepared to excel, to take full advantage of the opportunities, to serve growing markets and to create sustainable shareholder value. We're executing on our plan and we'll continue to deliver the operational and financial targets we've committed to you.

Our core businesses are experiencing steady profitable growth, stable cash flows from those businesses will enable us to pay an attractive dividend which we expect to grow over time and we're delivering a much needed product. As we all see clean and available energy alternatives, natural gas comes out on top. It's clean, abundant, reliable and domestically available and it needs to be part of the solution to our energy and environmental challenges.

I've been spending time in Washington and Ottawa lately delivering that message and I believe it's being heard. With that, we'd be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ella Vuernick with RBC Capital Markets.

Ella Vuernick - RBC Capital Markets

The first is could you just from slide seven you commented about a regulatory adjustment at SESH. Could you quantify that number?

Pat Reddy

Yes, Ella, this is Pat. The amount was $11 million and it related to the fact that we discontinued rate regulated accounting treatment for SESH this year and that was the amount of the charge.

Ella Vuernick - RBC Capital Markets

Okay. So it's a charge of $11 million?

Pat Reddy

Correct.

Ella Vuernick - RBC Capital Markets

Okay, very good. And I know that you mentioned that you would be giving us further guidance early in the year. I was wondering at this stage if you could give us further color into your outlook at DCP Midstream and western Canada for the field and services businesses both in terms of volume and pricing going into next year. I know you mentioned you're seeing some recovery, if you could give us some further clarity that would be very helpful.

Pat Reddy

Well, I think at this point probably only can speak to price. You know we're continuing to work in and around volumes. I did mention in western Canada, we're already starting to see about a 100 million a day coming out of the Horn River coming through our system.

There is no doubt ACO pricing has jumped pretty dramatically in fact last month or so, I think we're in the $450 range now for ACO. We did mention with respect to DCP what we're seeing today is about $0.92 NGL prices for next year, which would be consistent with about a $70 oil price, 55% correlation of crude to NGLs.

Again with volumes, we'll have to see where that goes. To date at DCP, the volumes this year versus last year are about flat. And so we'll just have to see how that shakes out as we look for planning for next year.

Operator

Your next question comes from the line of Ross Payne with Wells Fargo.

Ross Payne - Wells Fargo

I just wanted to ask you as REX makes its way all the way east, are you guys going to be able to pick up some of that volume as it does hit?

Pat Reddy

I guess we should define all the way east. I don't think all the way east.

Ross Payne - Wells Fargo

Right.

Pat Reddy

I think we're picking up as you know our TEMAX project. The big customer there would be Conoco which obviously is moving a lot of gas on REX. As that comes in, we're going to be picking up a good chunk of the volumes there.

I think between that and the volumes a couple other projects with some competitors have about two-thirds of that volume is being taken away. So we're more than getting our share on that front. The TEMAX project is moving forward full steam ahead and that's about a $700 million project that is part of our plans for the next couple years.

Ross Payne - Wells Fargo

Okay, great. Also, if you can just talk about the correlation going from the 40% range up into the 55% range, what do you think is going to be driving that?

Pat Reddy

Well, I think you've started to see a little bit of that move. I think the fact is, Ross that oil prices weren't moving and haven't been moving on much to do with U.S. domestic productivity, where NGLs, which is largely used here in the United States are driven by what is happening in the petrochemical industry and to the manufacturing industry.

So I think what you're starting to see is the impact of some growth or maybe we should say less decline in manufacturing here in the United States, therefore, the need for the natural gas liquids, particularly ethane and propane. And also, you're seeing impact of things wearing off the inventories that were built up after Ike last year.

So those combined are starting to move the NGL prices up in that $0.90 range. So again, the fact that we're saying $70 and 55% for next year is really just math, I guess if you had a different view on oil price, the NGL correlation would just move up and down.

Ross Payne - Wells Fargo

And Horn River, that will be done at Spectra, I assume, not at DCP. DCP is just lower 48; correct?

Greg Ebel

Absolutely. Remember in Western Canada, its all fee-based businesses. So just like our pipeline operation, the processing in Western Canada is built upon reservation charges for the plant. So it's not driven by the volumes on any particular day. It's driven by producers' long-term view, and in fact in the third quarter, we saw contracted volume revenues go up in Western Canada, even though I think the actual volumes we processed in Western Canada were down slightly.

So I think that gives you good insight on what processors are thinking, what producers are thinking, they'd like to make sure that they've got processing capacity, which I would argue a lot. I think it's pretty clear we've got the best position in that regard, and so they're signing up for contracted volumes.

Operator

Your next question comes from the line of Matthew Aikman with Macquarie.

Matthew Aikman - Macquarie

First of all, Pat, I wanted to ask you about your comment on the 100% renewal rates on, I guess, is that Texas Eastern is my first question? And second part of that question is, were those still at max rates?

Pat Reddy

They were still at max rates, yes.

Greg Ebel

Matt, it's Greg. That's both Texas Eastern and Algonquin.

Matthew Aikman - Macquarie

How do you guys, kind of, account for the fact that producers or customers generally shippers are renewing at those rates and to that extent given weakness lately in the natural gas market?

Greg Ebel

Well, a couple of things on that. First of all, our customers are both producers and LDCs, right? So the LDCs can do a lot of things, but not run out of gas in the middle of the winter. So it's critical and as we hit 10 out of 25 peak days last winter that they've got the capacity, they're also thinking long term as well. They need to have that gas available to them and short-term fluctuations in the price of natural gas aren't going to change their long-term view about that.

I think that it's also the critical position that Texas Eastern has to feed that northeast market, that last mile, that critical position is very difficult to replicate. And so people want to make sure that they maintain capacity on lines into those large markets.

I mean look throughout the Northeast, even with the economic challenges, you continue to see more gas-fired generation. You're going to continue to see the more use of natural gas for a variety of products, and therefore, people want to make sure that they have capacity into the region. So, I think that's what you're seeing when people sign up at max rates and see 100% renewal type rates.

Matthew Aikman - Macquarie

Okay, thanks. And my next question is more, I guess, of a strategic nature, and it revolves around the use of the master limited partnership, the cost of capital on the Spectra partnership, Spectra Energy Partners, and pretty much all the MLPs has really dropped. And I'm just wondering if that's changed your strategic thinking at all in terms of how you use that vis-à-vis your own balance sheet?

Greg Ebel

It hasn't changed at all for the following reason. We've always looked at our MLPs as a financing vehicle, and we use them when there's a better cost of capital. Obviously earlier this year, where Spectra stock price was, it was an easy decision to see Spectra Energy Partners buy the Ozark Pipeline. You know today, you look at it and maybe it's a bit of a wash in terms of the cost of capital. It has, obviously, a higher yield than we do, but you know, then anything you have to look at the debt costs too, what MLPs look at. So, whatever the best cost of capital is at that given point in time, we'll use it and the same at DPM.

If the cost of capital advantage is with the MLP, we're going to use it and you know SEP, obviously, I think has the lowest yield of any of the significant pipeline MLPs out there. And so, it's in a pretty favorite position to be able to react as those opportunities come forward. A key with SEP is we want to keep that in the pipeline and storage fee-based business, so we can see steady growth not only from organic opportunities, but also through acquisitions and then DPM is focused on the processing business.

Matthew Aikman - Macquarie

Okay, my last question is I guess maybe for Pat. It's around your own balance sheet and the weakening of the Canadian dollar last year caused the equity issuance, but now things have gone the other way and Canadian dollar has really strengthened, so do you see Spectra as having excess capital on its balance sheet that might be available for acquisitions?

Pat Reddy

I wouldn't say excess capital. I think we're very well capitalized, Matthew. We issued about $1.8 billion in net securities this last year including an equity offering. Our debt-to-cap has come down from 62% to 57%. We've got about $2.3 billion in net liquidity available to us, and so we're very well positioned to make acquisitions. As we talk about it, there is (inaudible), the challenge, of course, is getting you know, meeting the sellers' expectations for multiples on pricing and getting realistic price expectations. But from a balance sheet and a capitalization perspective, we're very well positioned.

Operator

Your next question comes from the line of Carl Kirst with BMO Capital.

Carl Kirst - BMO Capital

Just looking up at Alberta, the comment was made about certainly the volumes through Empress being lower, I guess field receipts are also down about 1.5 Bs, but is there any estimate of how much that volume drop has impacted the quarter?

Greg Ebel

I don't think it had a big impact, Matt, in the third quarter. I think what we're focused on and why Pat made that comment is really what will the impact be on next year as we said we feel pretty good about the budget for this year with respect to Empress. I think the thing to watch for is for next year what the impact will be vis-à-vis volumes going by the plant.

I think the Empress area there, as you know, we're just one of many plants typically seen kind of 6 Bs a day kind of passing by and I think that's more in the 4 billion cubic feet and 5 billion cubic feet right now, so will that continue? Obviously the prices in the third quarter I think ACO were sub $3 and now they're just sub $5, what the impact of that will have, all those are going into our thinking as we finalize the forecast for next year.

Carl Kirst - BMO Capital

Fair enough. Pat, if I could just get some little more detail on the U.S. Transmission side, you had broken out what the delta was as far as the change of capitalized costs. You also have the same delta or what the number was for the actual NGL component as well?

Pat Reddy

Yes. The offset for lower processing earnings was due to lower pricing and volumes and that's a total about $26 million; $20 million of that is due to price, $6 million is due to volumes.

Carl Kirst - BMO Capital

And I'm sorry that's a delta or that's actually what was realized in the quarter?

Pat Reddy

That's the delta.

Carl Kirst - BMO Capital

That's the delta, Okay. And then you guys got most of the questions already answered for me, but then maybe just one other not as if you need a new area or new opportunity with everything that you have going on. But as you maybe go back to British Columbia, it looks like we've got a lot of liquids rich gas coming out of the Montney as well.

Clearly, you guys have the competitive advantage in Horn River, but you also have this great skill set. I mean is that also an area that you're evaluating or just for various reasons it's more kind of Horn River and then down Eagle Ford, Marcellus, et cetera?

Greg Ebel

No, that's actually, Carl, good point. The Montney is an important region for us. In fact, West Doe I, II and III, which will come on this month are all Montney based and you know you see the Peace River pipeline is all that's Montney based. So I see the opportunities throughout and as you point out, we have a very strategic position there well placed to be able to take advantage of the growth.

So in some respects, you know just like in the United States and Canada, the shale plays have gone South to North in terms of development and that's what you're seeing going on. So you're actually seeing some of the Montney play has already kicked in and I would hope and expect the guys running that operation, Doug and the gang out there will definitely secure some more projects in that region as well.

Carl Kirst - BMO Capital

And if I could just a sort of last follow-up on that, Greg, would you care to rank order, perhaps what you think, you know as you look out beyond 2011, I mean you've got a you know whole slue of areas. You know was it kind of as you listed Marcellus first, Florida second, BC third, or would you shift that a little bit?

Greg Ebel

Well, I think the great thing about our footprint is that in any one year, not all of them are actually the big capital spend. For example, in the last couple of years, most of our capital spend has been in Florida or the Southeast, shall we say, and in Ontario. In the next couple years, 09 and '10 and perhaps '11, you're going to see much more in western Canada and the Northeast.

And so the great thing is at any one point in time with our set of assets, we see opportunities. So I don't think it's an either/or, I think it's as producers and customers look at their own opportunities the timing could make all of them run but typically you see one or two doing well at any point in time.

Our issue, you know, you're going to spend about a $1 billion a year. Last year, we spent actually a $1.8 billion. Let's make sure we do projects that have consistent good returns and we deliver them on time and on budget. And I think having done 42 projects in the last three years, we've learned a lot that perhaps we may not have learned if you only had three or four projects. So I think the real advantage is that multi-geographical base and the ability to do many projects well that really give us those returns.

Operator

Your next question comes from the line of Faisel Khan with Citi.

Faisel Khan - Citi

Just a following up on the Empress volumes, so is it fair to say the sequential decline in Empress Inlet volumes from second quarter to third quarter was more a result of gas pricing around the ACO hub? Is that a fair statement?

Greg Ebel

Yes, I think that's fair. I mean to the extent that western Canadian producers you know either shut in stuff or just lay down rigs, I think that's entirely fair. As you know, TransCanada pipeline that goes by there saw big declines in volume throughput. So I think that's fair. How that all shakes out next year? I think given the volatility and commodity prices this year, we'll just have to see, Faisel, what the impact is for next year.

Faisel Khan - Citi

And then on the steel services side and this looks sequentially volumes went up both in terms of NGL production and gas gathering process. Just curious what's driving that because obviously prices came down in the third quarter.

Greg Ebel

Yes, the important thing to think, I mean basically, they were about flat, but you're right. You see some uptick. But remember last third quarter we had Ike and so that had an impact on volumes. And so you know I think if you look Q2 to Q3, they're probably pretty flat.

Faisel Khan - Citi

Okay, got you. And then I guess in terms of what you guys are seeing in some of these areas in the panhandle of Texas and then Oklahoma, there has been a fair amount of activity, especially kind of wet gas. What's your excess capacity to process liquids and gas in that kind of panhandle sort of central area of the U.S.?

Greg Ebel

Well, I don't know if I have a number for you off the top of my head, but maybe we can get you something for that. I think if you look in areas like Eagle Ford and stuff there is probably a couple hundred million a day that we have in terms of capacity. But you know what I feel very good about the position that DCP has that anything that producers need for us is that we're going to be able to put it through our plants.

And you know, DCP, while it does not get any cash and in fact, it gives cash to the shareholders both us and Conoco, it continues to tap CapEx itself. And, in fact, it's CapEx run you know between $350 million and $400 million. So it's continuing to pick up capacity and tie-ins as well.

Faisel Khan - Citi

Great. And then just on the favorable tax settlement, how much of the kind of tax rate going from 30% to 20%, how much of that was a favorable tax rate?

Pat Reddy

About half of the improvement relates to favorable tax settlements and the other half relates to the fact that our business mix you know has changed. For the first two quarters, we were using an effective tax rate closer to 30%.

Faisel Khan - Citi

Right.

Pat Reddy

And that was reflecting our budget for the year which had a significantly higher contribution from field services than has turned out to be the case. So in the third quarter, we made an adjustment which kind of looks at the whole year and says where do we think we're going to come out. We still feel like we're going to be in the 29% to 30% range.

We saw this quarter a $45 million contribution from field services which was double the $24 million that we earned in the second quarter. So an improving trend there and still feel like our tax rate will be about 29% to 30% for the full year.

Faisel Khan - Citi

Got you. And does foreign currency have kind of any impact on it, clearly, if you're getting more of your earnings on the Canadian side of the border then and that will flow to the bottomline. I'm just trying to conceptualize that to some degree.

Pat Reddy

No, it has a net income impact within the translation. It shaved about $3 million off our Canadian earnings for the fact that the Canadian dollar wasn't quite where we budgeted for the year. But it doesn't really affect our tax rate.

Faisel Khan - Citi

Okay, got you. And in terms of your EPS, your kind of EPS looks into next year up to 20% to 25%, what's going to be the mix of, I know clearly some of that is a lot of commodities, but a lot of it also is growth projects that you guys have outlined in your presentation. In terms of the growth projects coming online, what's the mix between your expected mix of earnings between U.S. and Canadian projects?

Greg Ebel

Well, I think, Faisel, until we kind of get all of the numbers finalized, I'll hedge with you and say give us the opportunity to come back in February and I'll lay that all out for you.

Operator

(Operator Instructions). Your next question comes from the line of Mark Caruso with Millennium Partners.

Mark Caruso - Millennium Partners

Hi, guys. Just two quick questions, one is more of a clarification but Faisel asked most of my text questions, but I just want to make sure that I heard you right. So as far as we think about for 2010, should we think more of a normalized mix in terms of for the tax rate for next year until you give us clarity?

Pat Reddy

Yes. I continue to assume about 29% to 30% for next year with a restoration of a more normal business mix.

Mark Caruso - Millennium Partners

Okay, great. And then the last question I have is just about M&A. Both you and Greg talked about M&A a little bit and you said that you know there is some of the expectations around multiples, but one thing I'm curious about is your partner at DCP has talked about asset sales and I was wondering as you sort of look across the landscape and look at midstream and pipeline opportunities. If there was something to happen there, how that would factor into your thought process?

Pat Reddy

Well, you know, obviously, I think Conoco is better to speak about what they're interested in doing, but I'm sure not aware of any interest they have vis-à-vis the processing business. I'm very pleased with them as a partner, as a 50/50 partner. Obviously, we're not really looking to up our commodity exposure.

But vis-à-vis other opportunities they maybe looking at, you know pipeline is obviously that's our right in the fair way, so we'll look at that. But as you mentioned, you know price is always the factor here. The great thing is we do not need acquisitions to get the type of growth that we're seeing. That will be incremental or we can do it to the bottomline.

Operator

You have a follow-up question from the line of Carl Kirst with BMO Capital.

Carl Kirst - BMO Capital

A clarification on the interest expense. Pat, this year, we're tracking about $80 million under 2009 guidance. I was just wondering what was behind that if that was kind of a capitalized interest issue, if we were just having better rates than what was originally baked in the guidance, but just trying to get a little more color.

Pat Reddy

No, it's not really around capitalized interest. It's the fact that while we have higher long-term debt balances we have significantly reduced short-term debt balances. We have very little commercial paper outstanding. Part of that was helped by the equity offering earlier in the year, but our cash flow from operations has been very strong. And so, it's really just lower short-term debt balances and lower interest rates.

Operator

(Operator Instructions). And we have no further questions at this time.

Greg Ebel

Okay. Thank you very much for joining us on the call today. We appreciate it very much. I want to remind you that next Tuesday, November 10th, we're going to be in New York for lunch and on Wednesday, the 11th, we're going to have a gathering here in Houston in our offices for breakfast. So we'd be very pleased if you could join us at one of those occasions. And if you haven't already done so, I'd appreciate it if you'd RSVP.

With that, we're going to look forward to seeing you next week and thanks for joining us today.

Operator

Ladies and gentlemen, this concludes today's Spectra Energy third quarter 2009 earnings conference call. You may now disconnect.

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