Aug 6, 2008
Executives
John Arensdorf - IR Fred Fowler - President and CEO Greg Ebel - CFO
Analysts
Nick O'Grady - Highbridge Lasan Johong - RBC Capital Market Ross Payne - Wachovia Paul Fremont - Analyst Barry Klein - Citigroup Paul Patterson - Glenrock Associates
Operator
Good morning. My name is Hamilton, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Spectra's second quarter 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).
I would now like to turn today's call over to Mr. John Arensdorf, Vice President of Investor Relations.
Sir, you may begin.
John Arensdorf
Thank you, Hamilton. Good morning, everyone, and welcome to Spectra Energy's second quarter 2008 earnings review.
We are very pleased that you could join 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. Both Fred and Greg will discuss our quarterly results and the progress we've made on our value enhancement program.
We'll 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.
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 Fowler
Well, thanks, John, and good morning, all. As you've seen from our earnings release this morning, we do have another excellent quarter to talk about today.
Spectra Energy reported earnings per share of $0.47, which, when you exclude a one-time special item, equates to ongoing earnings of $0.44 per share. That compares with ongoing earnings of $0.30 a share last year, so an impressive 47% increase.
Our second quarter results reflect strong earnings from all of our business segments. Each segment delivered growth and value for the quarter, and we continue to realize the positive effect of higher commodity prices, particularly in our Field Services and our Western Canadian businesses.
We do fully expect to significantly exceed our $1.56-per-share employee incentive target based on the commodity outlook for the foreseeable future. Given this strong commodity environment and assuming commodity prices stay in their current range through 2010, we would expect long-term compounded average annual EPS growth in the 8% range.
If you couple that with the dividend yield in the 3.5% range, this will provide total annual -- average annual shareholder return over the next several years of more than 10%. Again, these results, they do reaffirm our confidence in our business plan, as well as our capacity to execute that plan with consistency.
The positive elements of our business plan, I think, are evident in the value-enhancement program that we announced earlier this year. We told you in May of our plan to repurchase up to $600 million of Spectra Energy shares.
As of June 30, we had repurchased $284 million, or 10.5 million shares. The repurchase program, it is ongoing, and we do expect to complete the buyback in the third quarter.
We're likewise, well on track with our capital expansion plans. As we've told you, we are investing more than $4 billion in expansion projects between 2007 and 2010, an investment that will deliver more than 500 million in additional annual EBIT by 2011.
This year alone, we will complete and bring into service some $1.6 billion in new projects, which will provide about $200 million in new annual EBIT. I wanted to take just a couple of minutes to talk about the shale plays that are going on in North America.
It's an area that we're very focused on at this point, particularly where we enjoy strong existing asset positions, and we have several of those. On Texas Eastern and Tennessee, for example, those are very well positioned to take advantage of the developing Marcellus Shale play.
This week, we did announce a nonbinding open season for our proposed expansion on Texas Eastern to transport emerging Appalachian natural gas production to Northeast U.S. markets.
This follows a very successful open season that we held on the East Tennessee system earlier this year for their Greenway project, so our transmission assets, they really are very well positioned to offer those Appalachian producers in the southern end of that producing area access to via our East Tennessee system and then further north on the West Virginia and the Pennsylvania area via our Texas Eastern system. I think most of you know that Appalachia has a real long history of producing gas into these pipeline systems, and with the recent focus on the new technologies on producing the shale gas, we really do expect to enjoy continued and increasing production into our facilities in this region.
You know, it's a little early to predict how much gas will be developed out of these emerging shale plays, but we've had success in several regions via both our pipeline, as well as our gathering and processing businesses, and I think as these plays further develop, it really is going to provide us some very good opportunities for both incremental pipeline expansions, as well as gathering and processing infrastructure expansions, as well. DCP Midstream's assets, they are very strategically located in the Haynesville, the Barnett, and the Woodford regions, and they're also going to be looking to take advantage of potential opportunities in the Marcellus, the Huron, as well as other emerging plays.
In fact, DCP's existing propane distribution business in the region around the Eastern Shale, I think, provides opportunities to build out that platform, as well. And I think, equally important, our Western Canadian business is extremely well aligned with both the emerging Horn River play and the current ongoing Montany play in British Columbia.
Again, some of these opportunities are further out on the horizon than others, they're definitely on our radar as future ways to continue to create value for Spectra Energy investors. Before I turn things over to Greg, I do want to express my confidence in his leadership.
As you know, I'm going to retire at the end of this year, and Greg will become President and CEO of Spectra Energy effective January 1 of '09. When we were spun off from Duke Energy, my commitment was to successfully launch Spectra Energy and to ensure a successful standup, to develop a strategy that delivers long-term value to shareholders, and to develop my successor.
And while we didn't have a firm timeline at that point, the Board and I feel that we are on target for all three of these objectives and that the time is right for this change in leadership. I'm extremely pleased that the Board did select an internal candidate who's ready and willing and able to be my replacement.
I am looking forward to moving on to the next phase of my life. Hopefully, I'm going to spend a little less time on airplanes and a little more time with family, but I will do so knowing that the Company really will be in good hands.
My goal, of course, is to successfully deliver on our '08 plan and to work closely with Greg on a smooth and seamless transition. We've created an office of the CEO, allowing Greg and I to collaborate closely during this transition period.
Again, our number-one job is to achieve and hopefully exceed all of the goals that we've set for this year and to chart a successful course forward. This transition period, it will provide Greg the opportunity to lead the strategic planning efforts for '09 and beyond so that we do enter 2009 fully prepared for the road ahead.
And I know that you're all anxious to hear what his plans are. He will be in a position to share that plan with you in the December to January timeframe.
But now back to the present. Let's hear from Greg on the results from each of our segments.
Greg Ebel
Thanks, Fred, particularly for those very kind words of confidence, and good morning, everyone. Fred has done a fabulous job since launching Spectra in January of 2007, and it is a real honor, humbling and extremely exciting for me to be taking over from someone so respected in the industry and with such a great track record of delivering value for investors, a track record that we sure plan to continue in 2009 and beyond.
With respect to this quarter, we are extremely pleased with our performance, and as Fred stated, we expect to significantly exceed our employee incentive target of $1.56 per share. As you can see here, Spectra Energy reported second quarter 2008 earnings of $294 million, or $0.47 per share, compared with a $196 million, or $0.31 per share in prior year's quarter.
After removing the effect of special items and discontinued operations, ongoing earnings for the quarter were $274 million or $0.44 per share, compared with a $192 million or $0.30 per share last year, again, a 47% increase in ongoing EPS. Special items included a $21 million after-tax gain on a bankruptcy settlement with Calpine this quarter and after-tax separation costs of $7 million in the 2007 quarter.
Now, let us take a look at our performance by business segment beginning with US Transmission. US Transmission reported second quarter 2008 EBIT of $244 million compared with $223 million last year.
The increase was primarily due to the bankruptcy settlement I mentioned earlier. Excluding that special item, ongoing EBIT for second quarter was $213 million.
Earnings from expansion projects, such as Northeast Gateway, TIME II and Egan, and the higher earnings as a result of capitalized interest on construction projects benefited the segment in the 2008 quarter. These increases were offset by increased transmission and storage operating costs and an $18 million in higher project development expense.
You will recall that when we start projects, we expense the costs until we are confident the project will move forward to successful completion. At that time, we would then reverse the expenses and capitalize those development costs.
In the second quarter of 2008, we had expenses of about $10 million, compared to a net capitalized amount of about $8 million in the second quarter of 2007. The difference is a quarter-over-quarter reduction in earnings of about $18 million.
The earnings effect of these development costs are driven by timing. As we continue executing on our capital expansion plan, these costs will reverse, improving earnings.
And when in service, the underlying projects in our $4 billion capital expansion plan will generate some $500 million in annual EBIT by 2011. Now, let me turn to our distribution business.
Distribution reported second quarter 2008 EBIT of $54 million, unchanged compared with second quarter 2007. The segment benefited during the period from higher transportation and storage revenues and a stronger Canadian dollar.
However, these very positive operating increases were offset by a $15 million charge this quarter, as a result of an unfavorable regulatory decision from the Ontario Energy Board. This decision related to Union Gas's unregulated storage revenues collected between November 2006 and June 2008.
We are in the process of appealing and expect a decision by year-end. Now, moving on to Western Canada, Western Canada transmission and processing enjoyed a very positive quarter, with second quarter 2008 EBIT of $87 million, compared with $48 million last year.
This $39 million increase was due to several factors. We saw higher earnings at Empress due to a higher frac spread and volumes.
The second quarter 2008 frac spread was more than $2.50 higher than last year, and volumes were significantly higher this year due to a major turnaround at Empress that occurred during the quarter last year. The strong Canadian dollar also positively affected results, and a solid performance from gathering and processing resulted in increased revenues.
Now, let me speak to Field Services. Our Field Services business segment, which represents Spectra Energy's 50% interest in DCP midstream, saw another standout quarter, with ongoing EBIT of $216 million compared with $126 million last year.
You will notice that we have added more detail on the slide for the quarter. We have told you in the past that DCP Midstream Partners, MLP, hedges some of its commodity positions to protect cash distributions.
Those cash flow hedges are subject to mark-to-market to Canada. This is the first quarter that these hedges have had a material effect on earnings for Spectra, so the clarity and transparency that we have decided to show here on this non-cash item.
Before factoring in the effect of the mark on its MLP hedges, Field Services' EBIT was $117 million higher this year than last. This increase was driven primarily by higher NGL prices, which correlate to higher crude oil.
Crude oil averaged $124 per barrel in the second quarter 2008 versus $65 per barrel a year ago. The expected effect on EBIT from higher crude was mitigated somewhat by a lower NGL to crude relationship, which averaged 50% in this year's quarter compared with 68% last year.
And of course, we have seen a benefit from rising natural gas prices, as well. Natural gas averaged $11 per million BTU in the second quarter 2008, compared with an average of $8 last year.
This quarter's result also reflected improved plant operating efficiencies and over 5% higher processing volumes. As you may recall, last year, several plants were affected by severe weather, which decreased operating efficiencies and volumes.
This was not an issue this year. On all fronts, a very good quarter for DCP Midstream.
For the quarter, Field Services paid distributions of $444 million to Spectra Energy, which included the $250 million special dividend we received in April, and in July, we received an additional distribution of $110 million. Now, let me turn to "Other" which is primarily comprised of our corporate costs and captive insurance activities.
For the second quarter, "Other" reported net costs of $28 million compared with 26 in the second quarter 2007. The 2007 period included special items of $7 million in costs associated with the launch of Spectra Energy.
The increase in net costs in 2008 primarily resulted from higher insurance claims and higher benefit costs. That said, we are on track to meet our expectations for "Other" of between $80 and $90 million for the full year.
The next slide shows several important additional items. Interest expense for second quarter 2008 was $149 million, compared with $156 million for second quarter 2007.
The decrease resulted from lower interest rates on commercial paper and a higher capitalized interest cost. These decreases were partially offset by the effects of the stronger Canadian dollar on interest expense associated with our Canadian dollar debt.
Our effective tax rate this quarter was 31%, the same rate we saw in second quarter 2007 and in line with our annual expectations of 32% to 33%. As of June 30, our debt-to-total capitalization stood at approximately 57%, and we had total capacity under our credit facilities of $2.7 billion, as well as available liquidity of about $1.9 billion.
The Canadian currency change had a positive after-tax effect on earnings for second quarter 2008 of about $5 million compared with last year. We have given you an overview of our second quarter results, and as you can see, we had an exceptional quarter.
I want to also share another metric that we know is important to you. Our ongoing earnings before interest, taxes, depreciation, amortization or EBITDA by business segment.
For the second quarter of 2008, ongoing EBITDA was $765 million, compared with $625 million in the second quarter of 2007, a 22% increase due largely to the strong earnings of Field Services. On a year-to-date basis, our EBITDA is nearly $1.7 billion, compared to $1.3 billion last year, a healthy 27% increase.
We know that EBITDA is an important element of valuation, so a few reminders as you do the calculations. US Transmission's ongoing EBITDA includes Spectra Energy's 50% share of Gulfstream's interest and DD&A, and Field Services' ongoing EBITDA reflects Spectra Energy's ongoing equity earnings from DCP Midstream plus half of DCP Midstream's interest, taxes and DD&A.
It is necessary for us to add these back to give you a true reflection of EBITDA since both DCP Midstream and Gulfstream are accounted for using the equity method. You can also find on our website this EBITDA schedule and the analysis of how these EBITDA amounts are calculated.
Next, we thought it might be helpful to look at a hypothetical example of the effect of higher commodity prices and what that does to Field Services' EBIT compared with our original forecast. Spectra Energy's employee incentive target is based on oil averaging $83 a barrel and natural gas averaging $8 per MMBtu for all of 2008.
As you are all well aware, both oil and gas have been substantially above these assumptions. For this example, and I really want to stress this is an example, not a forecast, we have assumed an annual crude oil price of $100 per barrel, natural gas price of $10 per MMBtu, and an annual NGL accrued relationship of 55%.
The sensitivities associated with commodity price changes at Field Services are listed at the bottom of this calculation. In this example, the sensitivity to a $1 per barrel change in oil and a 10% change in gas are just as we shared with you in January.
However, each percentage change in the NGL accrued relationship now equates to about $15 million because this sensitivity increases as oil prices increase. You can see if we assume that oil is at $100 per barrel for the year, we'd expect a $204 million increase in annual EBIT.
An assumed 55% correlation is lower than the 60% we assumed in January, so that a lower EBIT by about $75 million. And a $2 per MMBtu increase in natural gas prices for the year would add about $40 million.
Using these assumptions, all other things being equal, the hypothetical full-year increase in EBITDA at Field Services from the change in commodity prices alone is about $169 million. Of course, as crude and oil prices, natural gas prices and correlations change for the remainder of the year, so, too, will the results of this example.
You can see here that as of Monday, August 4, the settlement forward prices for crude is $117 for all of 2008. That is about $34 per barrel higher than the amount we assumed in our 2008 forecast.
In closing, we are pleased with the superior results we experienced in the second quarter. With a continuation of today's commodity prices, we are confident that the second half of 2008 will be equally impressive and rewarding for investors.
We are on a strong growth path, aimed at addressing the energy and infrastructure needs of North America. Our assets are strategically situated, and we enjoy highly favorable market dynamics.
We strongly believe in our ability to execute in the plant and drive out the operational growth and financial return targets we have set for ourselves and our shareholders. With that, we would be happy to take your questions.
Operator
(Operator Instructions) And our first question comes from the line of Nick O'Grady of Highbridge.
Nick O'Grady - Highbridge
Hi. Good morning.
Fred Fowler
Good morning.
Greg Ebel
Good morning.
Nick O'Grady - Highbridge
A couple question on NGLs. I don't know exactly what the percent of proceeds versus keep/hold balances, but I am curious about your thoughts on the ethane market.
It seems like ethane pricing, which makes up about 50% of the NGLs, is collapsing relative to crude, and maybe just another comment on the Canadian business on volumes going forward given that [dayco] pricing has continued to collapse and how that affects the percent of proceeds are?
Fred Fowler
Yes, I think from the standpoint of today in our joint venture with ConocoPhillips on the lower 48 gathering and processing, we're at about 90% of our processing is on percent of proceeds. The kind of the big exposure that we continue to have in our Western Canadian business is the Empress plan, which is on a keep/hold basis.
I think from the standpoint of NGLs, yes, there's no doubt that ethane's under pressure, but if you really look at kind of the crude relationship over the year, when crude went -- kind of took off on its jag, we saw for, I guess, the second quarter the overall composite barrel get down to about a 50% correlation versus crude oil. And actually, even with the pressure that ethane is under today, with the pullback in crude oil, we're seeing that relationship improve back, I think, to around the mid-50s at this point.
So, yes, while it's about as good as it would have been had you not seen the pressure on ethane, it's not to the point that I think it's dramatically hurting us at this point. But always a concern because, no doubt, where ethane goes, it goes into the petrochemicals as a base feedstock for ethylene, and ethylene is very driven by the economy and particularly the housing market.
So, yeah, it's a worry.
Nick O'Grady - Highbridge
And just as a follow-up to that, in Canada, in general, on a volumetric basis, have you seen, just it goes now roughly below or close to below marginal costs for Canadian production, so have you seen any falloff in volumes at this point that's a concern?
Fred Fowler
No noticeable falloff at this point.
Nick O'Grady - Highbridge
Okay, thanks.
Operator
Our next question comes from the line of Lasan Johong of RBC Capital Market.
Lasan Johong - RBC Capital Market
Thank you. Congratulations on a good quarter.
Fred, I'm going to be very sorry to see you go at the end of the year. And Greg, congratulations, and couldn't happen to a nicer guy.
Just a couple quick questions real simply. First of all, are there any cost escalation pressures on any of your major projects going forward, and is everything on schedule and on budget?
And could you give us a little update on Bronco?
Fred Fowler
Yes, I think from the standpoint, the short answer to your question, yes, there is cost pressure, and it's something we're spending an awful lot of time making sure that we manage and keep under control. Again, the one that has been the biggest problem for us, and I think we've been fairly transparent about it, has been our SESH project.
That one is winding down. It does look like we're going to come in around that 600 million number for our share that we've been talking to you about.
And while we do see pressure at other projects, I don't see any to the point that's raising great concern on our part and nothing schedule-wise that's going to have a huge impact. The stuff's moving along pretty nicely.
What was the second part? Bronco?
Yes, as we've said along, Bronco, as proposed, is not going to happen. We continue to look at what the opportunities are out of the Rockies.
As we've also said, we think there's -- obviously, there's more capacity that has to get built. It's a question of the market kind of ferreting out which project is it going to be and what direction is it going to go in.
Quite frankly, Lasan, in recent times, I think we've probably shifted a little more of our focus over to these shale plays just because they're emerging so quickly, and we are so well positioned in most of them. Just to give you a feel, up in the Appalachian, I think we've had -- in the last six months or so, we have had over 30 requests for interconnections into our Texas Eastern system, and that's kind of what drove us to announce that open season that we did yesterday is really we're getting so many requests for interconnects, and it's on a part of our system.
In many cases, it's on the laterals that run to our storage facilities, which run pretty full, particularly during winter months, that we know that we're going to have to have some expansions on the system. And that's what that open season is about.
Kind of like we did on the REX gas coming in. We held that series of open seasons that confused a lot of people, but we segmented the market, and as a result, handled a lot of that gas, and it's just a question of trying to figure out from the producers where do you want to put gas in, where do you want to take it out and over, and what time period do you want to do it?
And I think one of the reasons we're so well positioned on that is having an existing system we can increment expansions on it to fit the market as it does grow and comes on. So, quite frankly, we've been much more focused there, although, we continue to have people active in the Rockies.
Greg Ebel
Just the other thing besides, yesterday, DCP very much focused on the shales, too. You might have seen that they announced a potential project called the Haynesville Connector.
Lasan Johong - RBC Capital Market
Right.
Greg Ebel
That could be up to a B-and-a-half a day. So, it's right across the business that we're looking at that.
Lasan Johong - RBC Capital Market
Then let me follow up with a couple questions on the shale issue. Equitable Resources has been complaining rather loudly that nobody's paying attention to their play, but it looks like that's changing.
In the meantime, they've decided to go ahead and build out a gathering and transmission system of their own. Is there a chance that you would cooperate with Equitable to get that done, or is this going to be -- is there more than enough capacity for both projects?
Am I looking at this all weird?
Fred Fowler
No, I don't think so. I think Equitable is one of those companies that is -- because of its mix of businesses, it understands the importance of gathering and pipeline infrastructure to the production of natural gas, and what they have done is they have built out quite a bit of infrastructure to make sure they can produce that gas, and it's been a good competitive advantage to them.
But I think that, realistically, you just saw the announcement where they did a deal on Tennessee yesterday on the Kentucky production. I think it's just a question of if people come to them, I think their preference would be to have pipelines and gatherers and processors do that work so they could commit their capital to their drilling programs.
I don't want to speak for them, but that's kind of the message that I've seen. It's been more that they've done it because they weren't getting the response, and they wanted to make sure that they could produce their gas production.
Lasan Johong - RBC Capital Market
It sounds like you're going to take over some of that role that Equitable was planning to do on the transmission side.
Fred Fowler
We'd love to.
Lasan Johong - RBC Capital Market
That sounds great. On the Field Service business, obviously, crude oil and natural gas price are both coming under some pressure.
Is that going to change kind of the outlook? It doesn't sound like it will, but I always want to make sure that things aren't changing because of commodity issues.
Fred Fowler
We never did plan our business around $1.40-a-barrel crude oil. We planned it around for the balance of the year around 90.
Where it's going to shake out, who knows? Commodities can do crazy things.
In our opinion, going to $1.45 was pretty crazy. But, we'll see where these things go, but it was definitely due for a pullback.
It was a question to me of a market trying to find the clearing price. At what point do you start destroying demand because, quite frankly, we've had high enough oil prices for a period of time that we couldn't get a supply reaction to build a production cushion at today's demand levels, and so what finally happened was the market testing to see what it took to destroy demand.
It looked like 145 started doing a pretty good job of it.
Lasan Johong - RBC Capital Market
That sounds great. Greg, one last question for you.
What kind of your thoughts on looking for a replacement for the CFO role that you've undertaken so far?
Greg Ebel
Well, about an hour after the announcement was made, we started that search, and we are taking that on right now. The average search for a CFO these days, I'm told, takes about 120 days.
I think with the opportunity here at Spectra, hopefully, we'll be able to do that a little bit quicker, but I fully expect that we'll be up and ready to go January 1 with the CFO and team in place.
Lasan Johong - RBC Capital Market
Are you looking at internally or externally or both?
Greg Ebel
Well, right now, we're looking externally. We've got some great candidates internally, as well, but I think, as always, strengthening the bench from a financial perspective, there are some great candidates that I think we can attract from the inside, as well.
Lasan Johong - RBC Capital Market
Great. Thank you.
Greg Ebel
Thank you.
Operator
Our next question comes from the line of Ross Payne of Wachovia.
Ross Payne - Wachovia
How are you doing, guys?
Fred Fowler
Pretty good, Ross. How are you?
Ross Payne - Wachovia
Good. First question, and by the way, Fred, you'll be missed in January, and Greg congratulations…
Fred Fowler
Well, thank you.
Ross Payne - Wachovia
Greg, and look forward to that, the future with you guys. On the first question, obviously, DCP is moving some decent distributions up to you.
What do you expect the -- I mean is that going to be an ongoing situation over the next 18 to 24 months?
Fred Fowler
Yeah, it's a function of two things, how good are crude oil -- how good are liquids prices going to be is one of the drivers. But, also, we're starting to see some pretty compelling opportunities in that part of the business with these shale plays and how they're positioned.
I think they may be absorbing more of their capital internally than we've seen in recent years, where we've clearly been dividending it out and reinvesting in our gas transmission business. A little early to give you any specifics, but again, some of the opportunities that we're starting, that are starting to emerge there have pretty compelling returns to them.
Ross Payne - Wachovia
That makes sense. Also, on the Marcellus play, how big of a CapEx situation might that be for the expansion of Texas Gas and other projects in the area?
Fred Fowler
Yes, Ross, I think it's just a little early to know. Overall, I think it's going to be a good opportunity, a good-sized opportunity.
It's a question of what will the timing be as to how you sequence it because there are a lot of issues that have to be dealt with in developing the Marcellus production. It's not going to happen all at once; it will take a period of years.
My own opinion is, I think, it's a pretty exciting opportunity with pretty big upside, but my own opinion is it will happen over a period of years, not in one huge slug.
Ross Payne - Wachovia
Okay. And Fred, what are some of the biggest issues you see with that?
Fred Fowler
Well, I think water being one of them.
Ross Payne - Wachovia
Okay, okay.
Fred Fowler
And you're dealing in pretty environmentally sensitive areas where they haven't been dealing with these issues in a big way in recent times. So, it will take time for all that to ferret out.
Ross Payne - Wachovia
Okay.
Fred Fowler
Probably the producers are the better people to ask that question of, actually.
Ross Payne - Wachovia
Okay. All right.
And three just quick questions together. Can you opine on the mark-to-market losses at DCP, how big they might have been?
Second of all, Union Gas, I assume that's a one-time event there? That's not going to be an ongoing decrease.
And if you could also just expand on what the transmission project development costs of 18 million were during the quarter? Thanks.
Greg Ebel
It is just with respect to the mark-to-market on Field Services, we put that in there. It was about $25 million, which you can see on the slide.
So, remember that we have an indirect interest in that MLP of about 15%, so that was the number on that front. With respect to Union, the impact was about $15 million, as we indicated.
It really is, as you know, we had a very positive storage deal in November 2006, and we had read that such that we'd be phasing in all the old long-term storage deals that weren't used for franchise customers starting in '08 so that by 2011, we'd have 100%. But any new long-term storage deals that were ex franchise, we would immediately be able to book 100% of those.
The (inaudible) had a different view in the last few weeks, and so we had to go back and change those. We're appealing that, so that may go back our way, but if it doesn't, by the time we get to 2011, we will just have phased in both the new and the old deals.
For the rest of this year, there could be about a $10 million impact because, obviously, we've been thinking about booking, we would book those revenues for the remainder of the year, as well.
Ross Payne - Wachovia
And the transmission project?
Greg Ebel
Yes, on the transmission project side, net, it was about an $18 million negative impact. If you're looking for the specific number for the year or for the quarter, it was about a $10 million impact.
So that of 18 and about $10 million negative impact in the second quarter of 2008.
Ross Payne - Wachovia
Okay, thanks, guys. Very good quarter.
Greg Ebel
Thank you.
Operator
Our next question comes from the line of Paul Fremont.
Paul Fremont - Analyst
Thank you. First of all, congratulations on the quarter, and Greg, congratulations.
Really, two questions. One, it looks like in Transmission there was a $32 million gain on asset sale during the quarter.
If you could give us a little detail on that? And second of all, can you just update us on any regulatory reviews, either in the U.S.
or in Canada?
Greg Ebel
Sure. With respect to the gain at Transmission, that was the bankruptcy settlement with Calpine, so that was virtually all of it.
I think it was $31 million of the $32 million.
Paul Fremont - Analyst
Okay.
Greg Ebel
So that accounts for that piece. On the rate story side, I think the big one was the one we just mentioned with respect to Union Gas.
There are no other major regulatory cases pending either in the U.S. or Canada on that front.
Paul Fremont - Analyst
Okay. Thank you very much.
Greg Ebel
Okay. Thanks, Paul.
Operator
Our next question comes from the line of Faisel Khan of Citi.
Barry Klein - Citi
This is actually Barry Klein. Congratulations to Greg.
Had a couple questions, most of mine have been answered, though. With regard to SESH, do you have a date for the in-service yet?
It's coming up soon, right?
Fred Fowler
Yes, it will be late third quarter.
Barry Klein - Citi
Late third quarter. And with the correlations between the oil and the NGL prices at 50%, that's a bit below historical levels, probably because they're not increasing at the pace of the oil price.
But do you see those -- as the oil prices come back down, are you seeing those correlations sort of revert back to historical levels, you know, 55% or 60%? Or are they staying at that low 50% level?
Fred Fowler
The last that I looked, they were back to the mid-50s.
Barry Klein - Citi
Okay, got you. All right.
Thanks a lot.
Fred Fowler
Thank you.
Operator
(Operator Instructions) Our next question comes from the line of Paul Patterson of Glenrock Associates.
Paul Patterson - Glenrock Associates
Good morning, guys.
Fred Fowler
Morning, Paul.
Paul Patterson - Glenrock Associates
Most of my questions have been answered, but just to understand the OEB decision, there's a 10 million impact going forward this year, is that correct? stay the same?
Greg Ebel
Assuming we don't -- that would be assuming we don't win the appeal. Obviously, a written appeal, we could reverse this and book the $10 million.
You know, I'm saying that as we put our plans together, we would have assumed, and we did assume, that we'd be booking any new long-term storage deals that were ex franchise in our numbers. If this decision stands, then obviously, we'll have to phase those in.
Again, you're going to get 100% of that by the time the full phase-in done, but we'd assumed on new deals we'd get 100% immediately.
Paul Patterson - Glenrock Associates
Okay. And then what about 2009?
Greg Ebel
Well, it wouldn't, obviously, we'd be phasing in. We'd be in the 50% level in 2009, but we'll obviously take that into account.
We'll know what the regulatory decision is before we finalize our '09 plans.
Paul Patterson - Glenrock Associates
Okay, but I mean it'll be just to get a sense as to what the impact would be from the decision. Would it be -- where would it roughly be?
How would we basically -- how should we think about that if it were to stand and how it might impact you…?
Greg Ebel
Well, if you looked at the total year impact this year, call it around 20 million bucks because we were only getting 25% of that benefit, if next year we were getting 50%, I think you'd be kind of in the $15 million range for next year.
Paul Patterson - Glenrock Associates
Okay. Thanks a lot, guys.
Greg Ebel
Okay, thanks.
Operator
Next, we have a follow-up from the line of Lasan Johong of RBC Capital.
Lasan Johong - RBC Capital Market
Thank you. I'm starting to hear some rumblings about E&P companies cutting back on CapEx spending because gas prices have come down rather precipitously.
Is this something that you can also collaborate? And if so, when do you think that this impact will start to hit DCP Midstream's?
Fred Fowler
I think it just depends on how long they stay down. I mean I personally haven't seen, I mean other than the stuff I read in the press, but I haven't, I mean, we at this point just haven't seen any huge impact on it.
Lasan Johong - RBC Capital Market
That's good.
Fred Fowler
I mean if you really think about it, this decrease in gas prices is less than a month old, so people react quickly but typically not that quickly.
Lasan Johong - RBC Capital Market
So you think the capital budgets are pretty well set for obviously the balance of this year but for '09, as well, then?
Fred Fowler
Yes, but I think they'll constantly look at them.
Lasan Johong - RBC Capital Market
Excellent.
Fred Fowler
But I mean there's no doubt that if you see a drop-off in drilling, with the decline rates that we have these days, typically, it comes pretty quickly.
Lasan Johong - RBC Capital Market
So, you're saying that even if we do have a drop, I mean, gas prices, they adjust relatively very quick and drilling will pick up again because decline rates are very quick these days?
Fred Fowler
Yes.
Lasan Johong - RBC Capital Market
Excellent. Thank you.
Operator
(Operator Instructions).
John Arensdorf
Hamilton, it sounds like they don't have any further questions?
Operator
No questions at this time, sir.
John Arensdorf
All right. Well, thank you very much for joining us on the call today.
Before we leave, I want to tell you about a few educational opportunities that we're going to bring to you to provide additional insight into various segments of our business. On August 21, we've scheduled a conference call at 9 AM Eastern, 8 AM Central, for Julie Dill, president of Union Gas, to provide a deeper dive into the distribution segment of our business, Union Gas.
You should have received an invitation by e-mail earlier this week. And I'd also like to ask you to save 3:30 PM Eastern Time on Monday, September 22, when we'll bring Tom O'Connor, President and CEO of DCP Midstream, and Rose Robeson, their CFO, to New York to provide you more details around the Midstream business.
And we're going to be sending out e-mail invitations to this one a little bit closer to that date. And we hope to provide a similar event a little later this year for the Western Canadian business, but again, we'll provide more information as we firm up the details on that one.
So, again, thank you for joining us today, and as always, if you have any additional questions, please feel free to call Patti Fitzpatrick or me. Thank you.
Operator
Thank you for attending and participating in today's conference. You may now disconnect.