Feb 4, 2010
Operator
Good morning. My name is Trinity and I will be your conference operator today.
At this time I would like to welcome everyone to the Spectra Energy 2009 Year-end 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. Mr.
Arensdorf, you may begin your conference.
John Arensdorf
Thanks Trinity and good morning, everyone. I am John Arensdorf, Chief Communications Officer for Spectra Energy, and I would like to thank you for joining us today.
As you know we were with many of you recently in New York providing an overview of our 2010 business and financial plan, and we're pleased to share with you today our 2009 fourth quarter and year-end results. Leading our discussion today will be Greg Ebel, President and CEO, and Pat Reddy, Chief Financial Officer.
Greg is going to begin by sharing his perspective on our 2009 performance and Pat will provide detail and context around our fourth quarter and year-end financial results. We'll move quickly through our presentation to allow ample time for your questions.
In addition to the slides we'll cover with you today you will find in the materials our website an appendix of information that we think you will find helpful. As you know, some of what we'll discuss today concerning future company performance will be forward-looking information within the meanings of the securities laws.
Actual results may materially differ from those discussed in these forward-looking statements and you should refer to the additional information contained in Spectra Energy's form 10-K and other filings made with the SEC concerning factor that is could cause those results to differ from those contemplated in today's discussion. In addition, today's discussion will include certain non-GAAP financial measures as defined under SEC Regulation G.
A reconciliation of those measures to the most directly comparable GAAP measures is available on our website at spectraenergy.com. With that let me turn things over to Greg.
Greg Ebel
Thank you, John. Good morning, everyone.
We appreciate you joining us today and I am pleased that we've got good results to share with you. 2009 was indeed a good year for Spectra Energy and our investors.
As you have seen, we reported ongoing fourth quarter net income of $217 million compared with a $197 million in 2008, about a 10% increase. And for all of 2009 we earned $1.18 per share beating our original forecast of $1.15 per share, even in light of other NGL prices and an equity offering early in the year.
The composition of our 2009 earnings under lines the power and resiliency of our diversified portfolio. Our investors benefited from ten projects we placed into service in 2009, projects that earning returns above our targeted level both today and I expect for the longer-term.
We began seeing improved commodity prices during the fourth quarter for Western Canada in Field Services and we're pleased that that momentum is continuing into 2010. We also took steps during 2009 to position our company for continued success over the longer-term.
Earlier in the year we bolstered our financial flexibility and we have consistently maintained adequate liquidity to fund all of our activities. We're achieving good growth, sustainable growth, from our core businesses.
And we financed strategic acquisitions through our MLPs, Spectra Energy partners and DCP Midstream partners. So, 2009 was a good year in and of itself and an even better year in terms of positive positioning it provided for consistent earnings growth.
During a year of uncertainty and economic downturn, Spectra Energy was able to rely upon its core strengths, a resilient forward-looking business model, financial strength and flexibility, diversity of robust sector leading businesses, and operational excellence. Consider the almost $3 billion in capital projects we signed in 2009.
Including the New Jersey, New York expansion, Time III, TEMAX, Team 2012 and the Fort Nelson expansions. All of these projects are under pinned by long-term binding fee-based contracts that will provide attractive returns.
In fact, last year we signed more contracts for new major natural gas infrastructure projects than any other company. That says a lot about our responsiveness to growing demand markets, our ability to expand our as set footprint and our commitment to grow value for investors and customers alike.
Even in challenging economic times. Let's take a look now what we're doing to ensure we deliver on our plans.
We're very clear on our long-term purpose and milestones needed to lead our sector as the company of choice and the investment opportunities of choice. We share this slide with you on January 22nd but want to reiterate it.
This year we'll deliver $1.42 in ongoing fully diluted earnings per share based on an average oil price of $80 a barrel and NGL price of $0.95 a gallon and a natural gas price of $5.50. We provided you with our sensitivities to these factors so that you can insert your own commodity assumptions.
For example, all things being equal if commodity prices and the Canadian dollar were to remain unchanged all year from about where they are today than our $1.42 EPS could move to the mid $1.50 range. We will of course maintain our annual dividend of at least $1 per share.
We'll continue to effectively execute on our 2010 to 2012 capital expansion plan, placing some $900 million of projects into service in 2010, projects that will deliver returns on capital in excess of 12%. And as you can see, we're focused on superior execution in 2010.
We're also focused our sights on long-term success and achievement. We're looking at opportunities beyond 2012 and well into the future.
Some of those are regional opportunities like those who're acting upon in the Marcellus and Horn River basins and others are demand related like power conversions in the southeast similar to our northeastern Tennessee project where we're working with TVA to provide about 150 million cubic feet a day of firm capacity on East Tennessee to achieve a generating facility. As this project will be completed as SEP, I expect they will provide more details on the project during their call tomorrow.
We also have a slate of excellent projects self financed at DCP. We'll continue to use our MLPs as appropriate to take advantage of acquisition opportunities as they come along, as we did just like last week at DCP Midstream's MLP.
Over the next five years we see growth opportunities of at least $1 billion per year with returns on capital averaging 12% to 14%. These growth projects provide us with the confidence to tell our shareholders to expect a strong sustainable level of earnings growth this year and into the future.
We expect our compound annual EPS growth rate between 2010 and 2012 to be in the 8% to 10% range. That kind of EPS growth coupled with our attractive dividends should give investors the opportunity to realize annual total shareholder returns in the range of 12% to 14%.
That's a value proposition I believe our shareholders should find compelling today and over the longer-term. Let's take a look at our record of project execution.
You recall that when we launched Spectra Energy back in 2007, we committed to you to invest about $1 billion per year in fee-based businesses at an attractive return in the 10% to 12% range. While we're not only meeting those commitments, we're actually exceeding them.
Between 2007 and 2009 we have placed into service 42 fee-based expansion projects totaling more than $3 billion all while maintaining a strong balance sheet and improving credit metrics, and as I said earlier, going forward we see opportunities of at least $1 billion a year. In the next five years between 2010 and 2014 that implies that we could invest about $5 billion in expansion growth realizing incremental annual EBIT of $600 million to $700 million for return on capital in the 12% to 14% range.
By the end of 2014 we will have created incremental EBIT from our expansion capital program of well over $1 billion a year. Our focus on results, strategic growth and long-term positioning continues to yield results for investors, our customers, and the markets we serve.
With that let me turn things over to Pat to talk in more detail about the results from each of our business segments and provide some context around those results and how they bridge to 2010.
Pat Reddy
Thanks, Greg, and it is a pleasure to be with you this morning and to report on our fourth quarter results and our overall 2009 performance. As Greg told you, it has been a good year for us, a year of hard work, significant challenges, and attractive returns.
Let's take a look. As you seen in our earnings release Spectra Energy reported fourth quarter net income of $219 million or $0.34 per diluted share after moving the effective discontinued operations our ongoing earnings were $217 million or $0.33 per share.
For the year we delivered ongoing earnings of $758 million or $1.18 per share. The annual results reflect solid performance from our fee-based businesses.
The Company benefited from expansion projects placed into service in both 2008 and 2009, and while commodity price it is didn't meet the level included in our $1.15 per share guidance for the year, they did recover nicely toward the end of year and as Greg mentioned that momentum gives us a positive start to 2010. Let's review the results for each business segment in a little more detail beginning with our U.S.
transmission operations. U.S.
transmission reported fourth quarter 2009 EBIT of $204 million compared with $161 million in the fourth quarter of 2008. The 2008 period included a $44 million special item for an impairment of the Islander East project.
Ongoing EBIT for fourth quarter 2009 was $204 million, essentially flat with the prior year's quarter. The segment benefited by $34 million from EBIT on expansion projects like our J-2 expansion, [Stekman Rich], Moss Bluff and Egan, returning to offset by timing of O&M expenses including pipeline integrity and lower capitalized costs as well as a favorable customer settlement in the fourth quarter of 2008 related to our Maritimes & Northeast Phase V project.
Now let's turn to our distribution segment. Distribution reported fourth quarter 2009 EBIT of $96 million, compared with $90 million in the fourth quarter of 2008.
Excluding the effect of a stronger Canadian dollar earnings were $7 million lower than in the 2008 quarter primarily the results of warmer weather. Despite a challenging economic year, Union's customer base grew at just over 1% adding a little more than 15,000 customers and the team did a great job in managing bad debt to keep it within our rate allowance.
Let's now look at our results in Western Canada. Western Canada transmission and processing reported fourth quarter 2009 EBIT of $120 million compared with $65 million in the fourth quarter of 2008.
Beyond the effect of the stronger Canadian dollar, which added $16 million to earnings this quarter compared with last year, the increase was due mainly to higher frac spreads affecting our Empress natural gas liquids revenues. The Empress frac spread for the quarter was $7.55 per MMBtu compared with $3.11 last year.
The segment also had improved sustainable results in the base gathering and processing business primarily driven by higher contracted volumes and revenues from expansions. This quarter's results reflect the resurgence of BC gathering and processing business, a positive trend that has just gotten started and should manifest itself through significant growth in this segment in 2010 and beyond.
Now let me turn to our Field Services business. Our Field Services segment which represents Spectra Energy's 50% interest in DCP Midstream had a solid quarter reporting EBIT of $77 million compared with $69 million in the fourth quarter of 2008.
Prior to the effects of the change in DCP Midstream partners mark-to-market results we saw an almost 77% increase in our half of DCP's Midstream's net income from $47 million in the fourth quarter of 2008 to 83 million in the fourth quarter of 2009. The increase in earnings was driven by higher commodity prices.
During the fourth quarter of 2009 crude oil averaged about $76 per barrel compared with $59 per barrel in the prior year quarter and the NGL to crude relationship averaged 53%, up from about 46% last year. Volumes were lower for the quarter we're seeing a positive turn around on that front with natural gas rigs within DCP's footprint up about 65% from the lows we saw in early 2009.
As we mentioned many times, Spectra Energy uses the cash it receives from DCP Midstream to help fund its fee-based capital expansions. We received distributions of $70 million in the fourth quarter and $100 million for the full year and in January we received an additional distribution of $75 million.
Now let's look at our other segment which is primarily comprised of our corporate governance costs and captive insurance and a few additional items. For the fourth quarter other reported ongoing net costs of $28 million compared with net costs of $21 million in the previous year's quarter.
The increase was primarily due to higher benefits costs. Interest expense for the quarter was $154 million compared with $166 million in the fourth quarter of 2008.
The decrease was primarily due to the benefit of lower realized interest rates and lower commercial paper balances partially offset by the effects of a stronger Canadian dollar during the 2009 quarter. The fourth quarter's effective tax rate was 28% compared with 19% last year.
The Canadian currency change from $1.21 last year to about $1.06 this year increasing fourth quarter after tax earnings by about $12 million. As of December 31st, 2009, our debt to total capitalization ratio stood at 55.7%.
We fully expect to be able to fund our CapEx program through a combination of internally generated funds and debt while staying within the 55% to 60% range that we have committed to. As of December 31st we had total capacity under our credit facilities of $2.7 billion and available liquidity of $2.3 billion.
So, that's an overview of our fourth quarter results and as you can see, we have had a solid quarter and year, so now let's review quickly our earnings expectations for 2010. Shown here are the components of our 2010 plan.
This is the chart we shared with you recently and it provides our projected EBIT and EBITDA detail for each of our business segments and all the information you need to see how we arrived at our EPS number of $1.42. We're confident that we'll see solid performance in each of our businesses this year and on into the future.
You're aware traditionally the first and fourth quarters have been our biggest delivering about 60% of our annual EBIT and that trend continues to apply to 2010. However, when we look at the earnings split between the first half and the second half of the year, in 2010 we expect slightly stronger earnings in the second half largely driven by new projects coming online later in the year and importantly volumes increasing at DCP Midstream towards the back end of the year.
So that should help you understand our quarterly distribution of our $1.42 per share. Our next slide will show you how we get from our ongoing net income in 2009 to our forecast net income in 2010.
We began with actual 2009 ongoing net income of $758 million which supports our $1.18 earnings per share and we then reconcile it to our 2010 projected net income of $925 million or $1.42 per share. First item is our 50% share of DCP Midstream earnings which is expected to be $195 million higher than last year primarily as a result of higher commodity prices in 2010.
Next we expect projects placed into service in 2009 and '10 to provide 2010 incremental EBIT of about $130 million. This increase is roughly split 50-50 between U.S.
transmission and western Canada. We also expect to see an EBIT increase of about $35 million as a result of the stronger Canadian dollar.
These commodity expansion and currency items represent the significant drivers of our projected earnings increase in 2010. The next bar shows a decrease of $40 million related to development costs at U.S.
transmission. Last year we recorded a $40 million increase to earnings as a result of capitalizing project development costs which have previously been expensed.
In 2010 we have improved our processes around the evaluation of project development status which should result in earlier capitalization of development costs. Therefore, there are no significant expenses or income amounts related to development costs forecast for 2010 so you will see less year-over-year earnings volatility caused by these costs going forward.
Next our 2010 forecast includes additional pension expense of almost $30 million. This expense represents the accounting amortization of the effect of the significant declines in the market value of our pension assets over the last couple of years.
Our interest expense net of interest income is expected to increase by $20 million due to higher average debt balances in 2010. As you would expect, our higher estimated pretax earnings in 2010 produced additional income tax expense of $85 million and finally we have numerous other items totaling $18 million that take us to net income of 925 million or $1.42 per share.
During our recent meeting in New York we had a question on why our EBIT for U.S. transmission for 2010 did not appear to be growing much, so let me provide a little more detail to show thaw we are experiencing positive growth in that segment.
This chart shows U.S. transmission EBIT for 2007 to 2010 adjusted for a couple of items, project development costs and processing revenues on [Texas Eastern].
We're adjusting for these items to more clearly show that we're realizing good growth from the expansion projects we placed in service. Let me explain these adjustments a little further.
As discussed earlier we expect less income and expense effect from our project development costs going forward, so we prepared this graph as if prior year's development costs had all been capitalized when incurred and not run through the income statement. We have also adjusted our processing revenue as a result of increased volumes due to hurricanes and relatively high commodity prices, 2007 and 2008 included much higher than normal processing revenues.
So in order to see a better comparison of EBIT growth for 2007 to 2010, we have adjusted processing revenue to a more normalized level of about $80 million per year which is the amount in our 2010 guidance based on our commodity assumptions. As you can see we realized growth of 4.8% over the 2007 to 2010 period in our core U.S.
transmission business after adjusting for these items. This growth primarily reflects EBIT from new expansion projects placed in service over the last few years.
Now let's take a closer look at distributions growth. We invest in and finance our Canadian businesses using Canadian dollars and we earn Canadian returns.
As you know, the earnings from our Canadian businesses are converted to U.S. dollars for U.S.
financial reporting purposes. This conversion and fluctuating FX rates can make comparisons challenging.
So we've shown distribution in Western Canada's earnings for 2007, 2008 and 2009 along with our estimate for 2010 on the Canadian dollar basis. As you can see here, we're experiencing real growth at distribution on a Canadian dollar basis with EBIT increasing 4.2% from 2007 to 2010.
That level of growth is more attractive than you would normally expect to see in an LDC and as attributable to the fact that Union gas not only operates a successful distribution business but also a leading storage and transmission business. Finally let's look at our growth in Western Canada.
Again when you look at the underlying fee-based businesses in Canadian dollars, represented by the blue section of the bars on this page, you see strong growth in our western Canada segment. On a Canadian dollar basis the fee-based businesses grow at an impressive 12.2% from 2007 to 2010 reflecting strong contracted growth in the Horn River and Montney regions.
We've been layered on the Empress EBIT in Canadian dollars and we expect the growth in gathering and processing to continue beyond 2010 through increased utilization of existing facilities and the build out of new facilities to serve the long-term contracts we've recently signed as a result of increased drilling in the Montney and horn river basin areas. Doug bloom discussed these growth opportunities with you in detail when we rolled out our 2010 plan.
So, as you have seen it was a solid fourth quarter that capped a good year for Spectra Energy. Given these results we feel confident in our ability to deliver 2010 through 2012 EBIT growth in our Spectra Energy transmission business in the 7% to 9% range.
We likewise feel confident in our 2010 plan and in the fact that we have the financial capacity to execute that plan and deliver enhanced value to our shareholders this year and well into the future. With that let me turn things back over to Greg to wrap up before we move onto your questions.
Greg Ebel
Thanks a lot, Pat. I think you can see our confidence in our 2010 plan and our outlook going forward and here is really what makes Spectra Energy such a compelling investment opportunity.
We have an unbeatable track record of delivering results in a strong growth outlook. We all know that 2009 was a challenging year, yet Spectra Energy is starting 2010 with much better growth prospects than we had at the beginning of 2008.
That's right, not 2009 but 2008. That positioning and the ability to excel and grow across market and economic cycles, is fundamental to our success.
We have the advantage of the most strategically situated natural gas infrastructure assets in North America. We serve four of the five fastest growing demand markets in North America, and we're located in the midst of both expanding shale plays and conventional supply.
Can't bet beat that positioning, and you definitely couldn't build it today. We have an abundance of expansion opportunities.
Over the next several years we'll invest at least $1 billion annually in new growth projects that are manageable in size and align with our execution strength. And we'll deliver those projects with returns above our 10% to 12% range.
We see low risk steady growth momentum from our core fee-based businesses. On January 22nd you heard directly from two of those growth businesses, our Northeast U.S.
and Western Canadian operations, so you know we have excellent longstanding and productive relationships with our customers, relationship that have resulted in firm contracts and exceptionally high renewal rates. This core business with profitable steady growth which produces stable cash flow enables us to pay an attractive dividend which we expect to grow over time with earnings.
We're well-positioned financially, too, with strong cash flow and investment grade balance sheet, ample liquidity and excellent access to capital. Investors are also poised to reap the rewards of further commodity strengthening we see on the horizon.
And I will remind you again the improving commodity prices at DCP Midstream bolsters an already reliable source of cash to help fund Spectra Energy's growth prospects. Finally, natural gas is uniquely positioned to help address North America's energy and environmental challenges.
It is clean, abundant, reliable and domestically available and it will be vital to the improvement in North America's carbon footprint and the economy overall. Bottom line, we're executing on our plan, and we will continue to deliver the operational and financial targets we have committed to achieve.
When considering Spectra Energy, investors can reasonably expect to earn an annual total shareholder return in the 12% to 14% range from a company with almost 80% of its EBIT coming from low risk fee-based businesses. That's good value.
With that I will turn things back over to John so we can talk with you.
John Arensdorf
Okay Trinity, we're ready for the Q&A session. So if you could give the instructions on how to ask a question one more time.
Operator
(Operators Instructions). Your first question is from Lasan Johong.
Lasan Johong
Thank you. Nice quarter.
Wanted to ask you about kind of a little bit more, big picture stuff. You said 65% drilling rig increase in DCP areas.
Going forward in 2010, what kind of an increase or what kind of change are you predicting for drilling rig counts and activity in your sectors for 2010?
Greg Ebel
Maybe the way to look at it, and thanks for your comments, is really kind of volume increase because obviously that's where we make our money, and I think versus '09 Tom's business would see volumes increased by about 2% from '09. That will be probably more back end loaded because even as you saw in 2009 the result of big drop in the rig counts, you really didn't see any volume impact towards the last half of the year and then as things started to come back on with rigs it will take a little while for that to impact.
So think about 2% kind of growth from '09 to '10 with respect to volume comparisons.
Lasan Johong
I was trying to get at a productivity number or productivity measure for rigs, 1,600 rigs to 600 and I think it is back up to around 825. Wondering what you would need to sustain kind of level production going forward.
Pat Reddy
I am not sure I could answer that question for you. I think given the changes in rigs and going from vertical to much more horizontal, I think we're still going to have to see how that shapes out.
It seems to me getting back up into that range where we are now is going to for us is going to give us a couple of percent, but not sure I can help you.
Lasan Johong
Okay. On the commodities front, I am assuming that the company has limited ability to influence where its margins come from and it is more driven by self selection on natural selection by the producer who is choose to either drill more gas associated with liquids or just pure gas, correct?
Greg Ebel
Yeah, that's correct. We have, we've got 40,000 contracts or so, let's call it maybe 50,000 contracts at DCP and they all have different types of terms and you have minimums in certain areas, but the contracts are determine whether they're fee-based, POP or key hole.
But you're right the producers have to beyond that producers have to actually put the capital to work to bring the volume to us.
Lasan Johong
And so the only way Spectra and DCP can influence that mix is by choosing to go into a particular basin that has a particular bend to that drilling program, correct?
Greg Ebel
I think that's correct, and I think one of the powers of a company like DCP, for example, is that you have 58 plants in multiple basins, so if you look at 2010, again, going back to those volumes where you might see say a decline in places like the Mid-Continent where you will see increases in the north Gulf Coast and the Permian type region which have more oily plays to them which people are interested in the production in that regard as well.
Lasan Johong
So the question becomes do you have a preference or choice on where you want to grow more going forward?
Greg Ebel
Well, liquids rich, is obviously a place where we like to be. Obviously when you're getting a percent of proceeds, that's where you would like to be.
I think we're in those regions. Of course obviously paying attention not only to the shale areas we're already in but new place, so if we can get activity going on in (inaudible) and I know we've looked at a variety of times at places like Marcellus.
Lasan Johong
But Marcellus is not exactly liquids rich, is it?
Greg Ebel
No, that's right, so that's the issue. Can you achieve the same type of business model in the Marcellus, and it depends which side of the Marcellus you're in.
Operator
Your next question is from Steve Maresca.
Steve Maresca
My question, you talked about in your Investor Day a lot of your opportunities in the Northeast with TEMAX and Time III and Team 2012 and the New Jersey, New York expansions. Can you talk about what percent of capacity you talked about is contracted and spoken for already?
Greg Ebel
Virtually everything we have spoken about is contracted, so TEMAX, obviously long-term contracts, Conoco being the big off taker there. If you look at New Jersey, New York completely contracted with conEd, Chesapeake and Statoil.
Team range would be the big contracted party there, so we don't put pipe in the ground until it is fully contracted, and I guess that's the point we were making. We haven't just announced projects.
We've actually signed long-term commitments as you know and that's where the value is created all kinds of opens seasons and announcements get made but can you actually bring the customers in and can you provide them with a service that will allow them to commit to long-term contracts?
Steve Maresca
Okay. Thank you.
And on switching topics quickly, Pat, you had mentioned potentially the debt markets this year for SE of about $1.6 billion if I remember correctly, correct me if I'm wrong. Is there something in terms of timetable you want to get that done and is that something you would do all at once?
Pat Reddy
We're kind of evaluating that, Steven. We have got $800 million worth of debt maturities that kind of come throughout the year with about $300 million at Texas Eastern at the back end of the year in the fourth quarter.
We're thinking about doing prefunding given how attractive rates are today, but looking at forward starting swaps and some alternatives, and we haven't decided that yet.
Steve Maresca
Okay. My final question and we'll switch back to you, Greg.
You seem to have a lot of opportunities right now for the foreseeable future for Spectra. You have mentioned in the past that you thought SE has a better cost of capital than SEP.
I guess how do you think about cost of capital one versus the other and is it something that you would consider using that MLP as a way for you guys to raise capital others have done that as well? Maybe you could discuss that.
Greg Ebel
For sure. So let me just clarify lower cost of capital.
I think you are missing one word, long-term. So, today I would argue that, yeah, I think it is fair to say that SEP may have a lower cost of capital today given where it is in the splits, etcetera, but longer-term, and I think you see that across the MLP market that in fact you see a convergence of cost of capital.
So we have set up SEP to be a financing node and just like any other financing element inside the company to utilize it to grow the overall company and I think you have seen that through some of our acquisitions and the organic growth there with what is that current time at lower cost of capital. Now, as we grow the comp of the overall SE, obviously we're going to be spending a lot of capital, and when you retain a lot of capital and you obviously not paying out all your cash flow, that's better to do that at a corporate level.
We see that through 2014. Now, somewhere down the road and 2014 is a long ways away you didn't have any growth prospects and all you were going to do was generate cash which is not a bad thing, then you might think of structures at that point in time, but I would, both DPM, SEP are very complementary to SE overall.
They're used in excellent news for good acquisition vehicles up to a size, remember there is only so much capital you can issue out of an MLP even a large MLPs have proven thaw can't go out and issue $1 billion dollars of equity out of a large MLP today and I think you could do that if you wanted to at a large C Corp. So I think they're complementary.
I think it is a timing issue who has the best cost of capital at any point in time, and I can assure you we'll take a look at the best cost of capital inside the corporation each and every day.
Operator
Your next question is from Matthew Akman.
Matthew Akman
Thank you. A couple questions on the breakdown of segmented EBIT growth in slides 14 through 16.
First on U.S. transmission in past years there was this processing revenue, and but in '09 there wasn't because of market conditions.
Is it possible that we'll see that maybe bounce back to something positive going forward given maybe volume and your price improvements?
Pat Reddy
On U.S. transmission the volumes are fairly constant.
It was really just in 2007 and 2008 as a result of hurricane that disabled another party's processing plant. We had unusually high volumes that were directed to us, and once that other plant came back online, those volumes reverted, and so our throughput is fairly constant and our processing revenues should run at about 80 million a year.
It is kind of our run rate without a lot of fluctuation.
Matthew Akman
So the commodity price impact there wasn't significant, Pat?
Pat Reddy
It is really more fee-based income.
Matthew Akman
Okay. Thanks.
My other question is on Western Canada, so your slide 16 pretty significant increase this year you're looking for over last year from fee-based EBIT and in fact when you look at the increase if you're looking at 12% kind of returns capital, that would have implied a $400 million to $500 million investment in that business, but I don't recall the company making that, so is it fair to assume that a lot of this is just from volume improvements on Fort Nelson?
Pat Reddy
It is a combination. Remember, we have spent a lot of money in the Montney so a lot of those West Doe projects have kicked in, but also let's remember that we're starting to see the front end of the Fort Nelson projects come in, and the front end has some reach start of existing assets, so obviously you see much better returns from the front end, and then as we move out to 2011 and 2012 and build the big new processing plant, those returns aren't quite as robust.
So you kind of get a little bit of front end loading with respect to the results in Western Canada and you start to see that in 2010 which is great. More cash earlier is always good.
I think you probably see close to $60 million of uptick just from expansion projects, and that’s some things that offset it. You will have a little bit like turn around and things like that, but really a big pickup just from the expansion projects, and the other thing is producers I think are being quite smart by contracting up volumes, and you even saw that in the fourth quarter.
So as you know, it may not be fully utilized yet once they're contracted people are paying a reservation charge, and that's obviously very beneficial for us as opposed to just people picking up interrupt I believes, and I think that's a really strong indicator to us that in fact things in the Horn River are accelerating quite nicely.
Operator
Your next question is from Ted Durbin.
Ted Durbin
Hi just staying on slide 16 there, the drop off on the commodity base side of things, is that volume or I think your frac is pretty similar but maybe I missed something there?
Greg Ebel
The frac is down versus what we realized in 2009. Volumes pretty well hasn't changed too much.
Ted Durbin
Okay. So it is really just sort of see the similar volumes to what you saw in '09?
Greg Ebel
Right, there is a turn around we expect to see in 2010 as well, so that’s got some impact but the daily volume change is not a big one.
Ted Durbin
Okay. And just on the O&M side on U.S.
transmission, a little higher this quarter. Is that do you see any kind of that coming back at all in '10?
Anything one time you consider or is that kind of a good run rate going forward?
Pat Reddy
Yeah. I was going to say, Ted, I think the 2010 forecast is a better run rate going forward, and 2008 we had in the fourth quarter some adjust adjustments to our O&M that could have been done more ratably during the year, so really was just timing on the full year basis, so our run rate I think is good going forward.
Ted Durbin
Okay and then just small one. In terms of the, I think you said $7 million for weather and distribution.
Is that kind of what's driving the pickup then at distribution? Is it just customer growth or is it more weather if we look at your 2010 outlook?
Pat Reddy
Customer growth and storage and transportation revenues that have continued to grow FX is also a help in assuming that the Canadian dollars $1.10 instead of $1.14 in 2009. That gives us some pickup as well.
Operator
Your next question is from Carl Kirst.
Carl Kirst
Thanks. Good morning, everybody.
Just a few mop-up questions, maybe Pat's starting with the distribution which you were just on. Is it possible to say on that Canadian delta 2010 over 2009 how much is coming from the storage component and as well I didn't know if you happen to have this off the top of your head what the actual ROE realized for Union gas was in 2009 and what's baked into the 2010 assumption?
Pat Reddy
Our authorized return is 854, and we did earn about 300 basis points above that. We were into the sharing band at 9010 with our customers, and in terms of the return on equity for 2010, I don't have that handy, but it would be about the same level I believe on a budgeted basis in 2010 as 2009.
Okay.
Carl Kirst
Okay. So that didn't necessarily revert to the base, you think it just going to be similar performance.
Greg Ebel
Yeah, long-term rate there deal there, right, Carl, so that's providing that opportunity, so the first 200 basis points goes to the investor, the next 100 basis points you split between customers and the investor.
Pat Reddy
FX next year helps us to the tune of about $20 million in on a budgeted basis.
Carl Kirst
And then with respect to the storage delta?
Pat Reddy
That helps us by about $6 million.
Carl Kirst
Okay. One other question if I could just switching to the U.S.
pipes and appreciate the continued detail and breakout of the processing and development costs. Perhaps this really isn't very volatile but can you give us a sense of what the park and loan or optimization component was over the last two years and what's baked into the 915 expectation?
Pat Reddy
It is fairly small. It is not that significant a piece of their revenue.
Operator
(Operators Instructions). Your next question comes from Jonathan Lefebvre.
Jonathan Lefebvre
Just quickly on the tax rate for 2009, it looks like it ran a little below the guidance that you had given. What drove that and then just do you have that same type of flexibility going into 2010?
Incompetent you're estimating about 30%.
Pat Reddy
That's correct. For the full year our effective tax rate was about 27.8%.
When you take out the income from non-controlling interest, it is 29.5%, and very close to the 30% that we're we have budgeted for 2010, and you always have adjustments that take place, for example, you may have noticed that in the fourth quarter of 2008 the effective tax rate was only 19%, and that's because in 2008 we had some adjustments when is we filed the 2007 tax return. So you always have things that are kind of in and out as you fine tune your effective tax rate during the year.
Greg Ebel
I think Jonathan as you look forward the 30% is rate for modeling purposes. I think the benefit if it comes will be in Canada, and part of that depends on how the earnings break dawn because the Canadian corporate tax rates are much lower than they are in the United States, so I think that run rate that Pat gave you is right, but I think you've got Canadian corporate tax rates dropping from kind of the low 20s to the high teens if you will over the next couple of years.
But exactly how that plays out, have you to figure out, A, does the Canadian government stick with that because they have deficits as well and, B, how exactly do our earnings break down. I would use the 30% going forward but we might be able to do a little better.
Jonathan Lefebvre
Makes sense. And then this morning you mentioned that potentially increasing the dividend may be possible either later this year or early 2011 which kind of jives with our numbers, but just trying to get a sense if you can maybe rank that dividend increases versus maybe some other shareholder friendly options as share repurchases or debt buybacks, things like that?
Greg Ebel
I don't see share repurchases in the outline right now, but definitely, look; this is something that I think boards always talk about on a regular occasion. I don't think we'll take this up with the board until middle of the year and then with effect of see how things shake out.
As you know we've look to kind of be in the 60% - 65% payout range, so you obviously don't want to get too far ahead of that, but I think that's probably a discussion we'll have with the board later this year and figure out what to do. I don't think I said we would look at increasing the dividend this year.
I think, again, that's something that the board will look at in the middle of the year and see where we are at that point in time.
Operator
(Operators Instructions). At this time we have no questions.
Greg Ebel
Okay. Well, thank you very much for joining us this morning.
We really appreciate it. As always, if you have any additional questions, you can feel free to give Patrick or me a call, and with that, again, thanks for joining us.
Operator
Thank you for participating in today's teleconference. You may now disconnect.