Feb 3, 2011
Operator
Good morning. My name is Janet, and I will be your conference operator today.
At this time, I’d like to welcome everyone to the Spectra Energy Fourth Quarter 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. Thank you.
Mr. John Arensdorf, you may begin your conference.
John Arensdorf
Thanks, Janet, and good morning, everyone. I’m John Arensdorf, Chief Communications Officer for Spectra Energy.
I want to thank you for joining us today. We were with many of you a couple of weeks ago in New York when we provided an overview of our 2011 business and financial plans, and we’re pleased to share with you today our 2010 fourth-quarter and year-end results.
Leading our discussion today will be Greg Ebel, Spectra Energy’s President and CEO; and Pat Reddy, our Chief Financial Officer. Greg will begin by sharing his perspective on our 2010 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’ll find in the materials on our Web site, an appendix of information that we hope will be helpful to you.
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 factors that could cause those results to differ materially 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 at the end of the packet of information you have before you and on our Web site at spectraenergy.com.
With that, I’ll turn things over to Greg.
Greg Ebel
Thanks very much, John, and good morning, everybody. Thanks for being with us.
We are actually webcasting today from our gas control room here in Houston with rolling blackouts in Texas due to the cold weather. We do not want to risk our ability to have our call come through to you and it gets cut off.
And, of course, our gas control rooms all have their own back-up power to ensure that we can always deliver gas 365 days a year, seven days a week, 24 hours a day. And they are adding a little bit more of assistance today by ensuring that we can get our message out to investors.
So, thanks to the guys here in gas control for letting us use their conference room. 2010 was a very good year for Spectra Energy and our investors.
We delivered ongoing earnings per share for the year of $1.57, an 11% increase from our forecast of $1.42, and 33% better than our 2009 results. We successfully executed on our 2010 growth plan, placing into service five projects approaching $1 billion in capital expansion, completed on time and on budget with returns on capital employed well in excess of our targeted 10% to 12% range.
These projects will deliver about $200 million in annual EBIT. We maintained our investment grade balance sheet which allowed us to take advantage of a very attractive debt market.
And we issued more than $1 billion of debt at excellent rates. And then late in the year, we completed the dropdown of substantially all of our remaining interest in the Gulfstream System into Spectra Energy Partners, capitalizing not only on the strength of the MLP currency, but also realizing the embedded value of one our corporate assets.
We completed the acquisition of the Bobcat storage facility which further secures our premier storage position in the Gulf Coast. And over the next several years, we will expand Bobcat to its full potential.
DCP Midstream completed a number of key growth projects, resulting in not only strong cash generation, investment returns. And importantly, it also provided distributions of nearly $300 million to Spectra Energy during the year.
Cash flow that we in turn invested in additional fee-based projects. Last, but certainly not least, our shareholders realized a 28% total shareholder return for 2010, so, a year of solid results and steady growth.
And we're confident in the years ahead, and see significant opportunities across the system. Given our strong track record of execution, portfolio diversity and solid growth, we fully expect to profitably invest more than $5 billion in expansion capital over the next five years.
We are extremely well positioned to serve customer needs related to natural gas demand growth and the accelerating trend to convert coal and the oil-fired power generation to cleaner burning natural gas. Now, let's take a look at our fourth-quarter net income and EPS performance.
For the quarter, we delivered ongoing net income of $303 million or $0.47 per diluted earnings per share, compared with $218 million or $0.33 per share in the 2009 quarter. Both the full year and the fourth-quarter ongoing results reflect strong earnings growth from expansion projects brought into service in 2009 and 2010, the effects of improved commodity prices at DCP Midstream and a stronger Canadian dollar.
Beyond the positive effects of commodities and FX, the largest single driver of our earnings growth now and in the future is our project expansion program. We're moving forward with a number of important expansion projects like in Western Canada.
We completed 9 of the 10 Fort Nelson projects and construction is underway on the final and largest component of Fort Nelson North processing facility, which we expect to have come on line and in service in 2012. And just this week, we received approval for our Dawson processing plant, which will process raw natural gas from the southeast region of BC.
We met a major milestone on the New Jersey New York expansion project, when we filed our application with FERC in December and just two weeks ago we filed our FERC application for our TEAM 2012 project, which will move Marcellus supplies from Southwestern Pennsylvania eastward. As we announced a couple of weeks ago, DCP Midstream has signed long-term gathering and processing contracts in Eagle Ford.
All the more impressive, when you consider their other projects in the DJ and Permian basins. Building off last year’s $1.42 EPS target, we are on track to met the 7% to 9% growth rate we shared with you for 2010 to 2013 period, and it’s important to note that our investors are already benefiting from the fact that we have exceeded our 2010 EPS target and by doing so accelerated a portion of our growth plan for them.
When we met in New York a couple of weeks ago, I spoke of our track record of execution, a record that affirms our future expansion plan and provides investors with a strong degree of confidence in our ability to deliver. For example in early 2007, we told you we'd grow earnings by investing about $1 billion per year in fee based businesses at attractive returns in the 10% to 12% ROCI range.
As you can see here, we not only met that commitment, we exceeded it. Between 2007 and 2010, we placed into service 47 fee based expansion projects totaling $4 billion of investments, with combined ROCI of 14.5%.
We intend to continue that growth focus and going forward we see opportunities to invest more than $1 billion a year with more $5 billion in expansion projects expected over the next five years. These will provide incremental annual EBIT of between $500 million and $600 million.
By doing so between 2007 and 2015, we will have created cumulative incremental annual EBIT from our capital expansion program of well over $1 billion. That translates into return slightly above the high end of our expected returns across almost a decade of investing in growth.
So overall, we’re pleased with 2010 results, and our ability to continue our earnings growth in 2011 and beyond. So with that, let me turn things over to Pat, who will walk us through the numbers for the quarter and for the year as well.
Pat Reddy
Thanks, Greg, and it’s a pleasure to be here with you today to report on our fourth-quarter results and our overall 2010 performance. As Greg told you, it's been a good year for us, a year of hard work, solid growth and attractive returns.
As you’ve seen in our earnings release, Spectra Energy reported fourth-quarter net income of $320 million or $0.49 per diluted share. After removing the effect of special items and discontinued operations, ongoing earnings were $303 million or $0.47 per share.
For the year, we delivered ongoing earnings of slightly more than $1 billion, or $1.57 per share. The annual results reflect solid performance from our fee based businesses.
The company benefited from expansion projects placed into service in both 2009 and 2010, projects that are delivering solid earnings growth. We also benefited from higher commodity prices and a stronger Canadian dollar.
Together, those factors have given us a jump start to a good 2011. Now, let’s take a look at EBITDA for the quarter.
Ongoing EBITDA for the quarter was $840 million compared with $716 million in the fourth-quarter of 2009. EBITDA increased 17% in 2010 for both the quarter and the year.
These increases reflect the strong cash generation capacity of our businesses with every segment delivering its share. Now, we’ll take a look at our performance by business segment, beginning with US Transmission, which reported fourth-quarter 2010 earnings before interest and taxes of $247 million compared with $204 million in the forth-quarter of 2009.
The 2010 period included a $10 million special income item related to a customer bankruptcy settlement. Excluding that special item, ongoing EBIT for the fourth-quarter of 2010 was $237 million compared with $204 million in the prior year quarter.
Fourth-quarter ongoing earnings increased 16%, and expected year-end bump thanks to new projects like TEMAX, TIME III, and Algonquin East to West along with the acquisition of Bobcat storage. Year-end ongoing EBIT for US Transmission was $938 million compared with $894 million in 2009.
We have a deep bench of growth projects within the US Transmission segment, and we're steady progress across the board. Now let’s turn to Distribution, which reported ongoing fourth-quarter 2010 EBIT of $127 million compared with $96 million in the fourth-quarter of 2009.
This improvement is mostly attributable to a combination of factors, like lower operating costs, primarily fuel-related, and increase in storage and transportation revenues, and a stronger Canadian dollar. Year-end ongoing EBIT for Distribution increased nearly 22% from $336 million in 2009 to $409 million in 2010.
Turning to our results in Western Canada Transmission & Processing. That segment reported ongoing fourth-quarter 2010 EBIT of $131 million, compared with $120 million in the fourth-quarter of 2009.
The segment benefited from improved results in the base gathering and processing business, driven primarily by higher contracted volumes from expansions in the Horn River and Montney areas of British Columbia. Results also reflected the effect of a stronger Canadian dollar.
These increases were partially offset by lower earnings at the Empress natural gas liquids business. Year-end reported EBIT for Western Canada and processing was $409 million compared with $343 million in 2009, an increase of nearly 20%.
2011 promises to be another great year for our Western Canada segment as we see a full year's effect of the Horn River projects brought into service in late 2010. With solid growth projects underway and reliable contracted performance from existing assets, we feel very positive about this segment for 2011 and beyond.
Now, let me focus on our Field Services business, which represents Spectra Energy's 50% interest in DCP Midstream. Field Services had a solid quarter, reporting fourth-quarter 2010 EBIT of $108 million compared with $77 million in the fourth-quarter of 2009.
The increase in earnings was mostly driven by higher commodity prices and lower operating and maintenance costs, partially offset by the effect of lower volumes in the Mid-continent region. NGL prices were $0.10 per gallon higher this quarter compared with last year, reflecting higher crude prices.
However, NYMEX natural gas averaged about $3.80 per MMBtu versus $4.17 during the fourth-quarter of last year. We received distributions from DCP Midstream of $60 million in the quarter and $288 million for the full year.
Year-end ongoing EBIT for Field Services was $335 million compared with $161 million in 2009. Now, let me turn to other, which is mostly comprised of our corporate governance costs and captive insurance results and some additional items.
For the fourth-quarter, other reported a net benefit of $15 million, including a benefit of $31 million related to early termination of capacity contracts held on the Alliance Pipeline system. Excluding this special item, ongoing other EBIT for the fourth-quarter of 2010 was $16 million of net costs compared with net costs of $28 million in the fourth-quarter of 2009.
Fourth-quarter 2010 also benefited from lower overall corporate costs. Year-end net ongoing costs for other were $62 million, compared with $74 million in 2009.
On the bottom half of this slide, you will see additional items effecting net income, which include, the Canadian dollar increased fourth-quarter 2010 net income by about $5 million compared with the fourth-quarter of 2009. Interest expense for the quarter was $154 million unchanged from the fourth-quarter of 2009.
Fourth quarter 2010 ongoing income tax expense from continuing operations was $128 million compared with $92 million reported in the fourth-quarter of 2009. The increase resulted primarily from higher earnings.
As of December 31, 2010, our debt to total capitalization ratio stood at 56%. Going forward, we expect to be able to fund our CapEx program through a combination of internally generated cash and debt while keeping our leverage within the 55% to 60% range we have committed to.
As of December 31, we had total capacity under our credit facilities of $2.7 billion and available liquidity of about $1.6 billion. In other words, more than adequate to supplement our internally generated cash.
So, that’s an overview of our fourth-quarter results, and as you can see, we've had a good quarter and a good year. Before we move on to our 2011 expectations, I'd like to briefly recap our 2010 year-over-year ongoing EBIT results by reviewing a scorecard of our 2010 successes.
Our ongoing EBIT was $369 million greater than in 2009; an increase of 22%. Almost half of this increase came from Field Services, which benefited from higher commodity prices in 2010.
Distribution had lower operating cost primarily relating to fuel. Both US Transmission and Western Canada added EBIT from their expansion programs.
Finally, the stronger Canadian dollar benefited both Distribution and Western Canada. You will recall that our original 2010 ongoing earnings target was $1.42 per share.
In achieving our actual result of $1.57, we were helped by the following factors First, as you’ve heard today and throughout each of our quarterly updates, our businesses delivered operating results that exceeded our expectations. Second, the Canadian dollar was stronger than we had assumed in our plan, so we had some help from FX.
Finally, our income tax was lower than we planned, primarily due to a favorable tax settlement early in the year. All-in-all, we’re very pleased with our 2010 results and look forward to continuing success in 2011.
We shared these objectives in early December and again in our recent 2011 plan rollout in Europe, so I’m just going to take a moment for a quick recap. We’ve set our 2011 ongoing diluted EPS target at $1.65, approximately 15% above our 2010 target of $1.42.
Included in our $1.65 target is $0.20 of earnings from expansion projects, so, we’re expecting to see real and sustainable growth from our capital investments. We said previously that we would increase the dividend as we grew earnings and satisfied our pay out criteria.
And as you’ve seen, our Board of Directors recently declared a quarterly dividend of $0.26 per share. This increase is in line with our 2011 financial plan annual dividend assumption of $1.04 and represents a 4% increase over last year.
In 2011, we will continue executing on our ambitious growth plan, and we expect to commit, more than $1 billion in annual growth CapEx through 2015, generating long-term returns on capital employed at or above our stated 10% to 12% target range. Let’s turn now to our 2011 earnings expectations by line of business.
Shown here are the components of our 2011 plan. This is the chart we shared with you recently, which provides our projected EBIT and EBIDTA detail for each of our business segments and the other information you need to see how we arrived at our EPS number of $1.65.
We are confident that we will see solid performance in each of our businesses this year and into the future. Now let me walk you through assumptions as to how we expect to finance our expansion capital.
This schedule shows our expected primary sources and uses of fund. We expect to generate more than $1.7 billion in cash from net income adjusted for depreciation and amortization.
Our primary uses of cash will be for maintenance CapEx and to pay our common stock dividend with a significant contribution to expansion capital expenditures left over. And as we move through three year financial plan period, the cash contribution almost doubled by the end of 2013, allowing an increasing portion of our growth to be funded by internally generated cash.
In the meantime, we will use a combination of short and long-term debt to fill the gap. Our strong liquidity position will be enhanced by approximately $215 million of cash flow that we anticipate from extension of the bonus depreciation provision that was enacted in late 2010.
The President signed the extension into law after our plan was approved by the Board. So those dollars are in addition to the cash flow reflected in our plan.
Now I want to spend a few minutes reconciling our ongoing 2010 earnings results to our 2011 plan. Let’s begin with actual 2010 ongoing net income of a little over $1 billion, which supports our $1.57 earnings per share, and compare that to our 2011 projected net income of about $1.1 billion or $1.65 per share.
First, you can see that the ongoing successful execution of our capital expansion program will be the biggest contributor to earnings growth with $155 million of incremental EBIT expected this year. The increase is split roughly 50-50 between US Transmission and Western Canada.
Next, we expect a nice contribution from DCP Midstream's expansion efforts, which reflects slight commodity price improvement as well as underlying growth. Moving across the page, the next bar reflects an increase in pension expense of about $10 million.
This expense increase reflects amortization and the effect of the significant declines in the market value of our pension assets over the last few years. Next our 2011 plan calls for slightly weaker Canadian dollar versus the average for 2010.
As discussed during our presentation in New York a few weeks ago, we expect our Empress plant to contribute $15 million of EBIT in 2011, a decrease of approximately $30 million from 2010, primarily due to decreasing volumes from conventional basins in Western Canada and higher extraction premiums. As we continue to grow our fee-based earnings, Empress is becoming a smaller part of our Western Canadian business and now represents less than 15% of anticipated EBIT from that business unit.
We have other items totaling $35 million reflecting numerous small adjustments that I won't go into. And finally, our 2011 expected income tax rate is forecasted to be about 29% which is higher than our 2010 rate of 27%, which reflected a favorable tax settlement in 2010.
This difference in tax rate applied to our incremental earnings results in a $75 million increase in tax expense compared to 2010. And some of these items takes us to net income of about $1.1 billion or $1.65 per share.
As you've heard today Spectra Energy delivered a year of strong results across our business segments in 2010 and we had a clear line of sight on our areas of focus and opportunity for 2011. From our perspective, here's what makes Spectra Energy such a compelling investment opportunity.
As our results over the last several years is shown, we have a proven track record of action and execution. We are deploying the levels of capital that we committed to, bringing projects into service on time and on budget, generating returns at/or above anticipated levels.
And we have the financial wherewithal to act on opportunities, and operate and maintain our assets to the highest standard. We have a diversified portfolio of businesses, assets, and market positions, which we believe to be without equal in our sector and we have a solid foundation from which we are successfully realizing consistent growth and value creation.
When considering Spectra Energy as a whole, investors can expect to earn a 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. We think that’s a compelling value proposition and we look forward to delivering value and growth to our investors this year and well into the future.
So, with that we’ll now open up the lines and I look to forward to entertaining your questions.
John Arensdorf
Janet, could you give the instructions on asking a question again, please?
Operator
Our first question comes from the line of Carl Kirst.
Carl Kirst
Thank you. Good morning, everybody.
I guess one of the places where we were light, for the fourth-quarter, you guys had great results here. I'm trying to get a better understanding, how much of the incremental EBIT that came out of the gas utility side was from the transportation and storage versus sort of the more traditional Union Gas?
I guess, I’m trying to figure out, if that had specifically to do with some of the inclement weather we had in the fourth-quarter and whether or not a potential for getting a little bit of extra icing on the cake, if you will, might be here in the first quarter as well.
Greg Ebel
I think, Carl, the bulk of the beat was really in the distribution side of things as opposed to the S&T side of things. S&T was helpful, as was currency.
But between those two, sort of double the benefit was on the distribution side, again, driven by lower operating costs, largely, the fuel benefits that we had and a little bit of margin and some O&M. So, it was really on the S&T side that was the big driver.
And you’re right; obviously, the winter started very nice. I think we’re 10% or so colder in January, so that’s obviously positive to the Distribution operations as well.
Carl Kirst
Great. One just micro housekeeping for Pat.
With respect to the interest expense, Pat, can you break out, of the $600 million guidance, how much of that benefits from capitalized interest?
Pat Reddy
For capitalized interest, Carl, I don’t think we have that level of detail available this morning.
Carl Kirst
No problem, I can circle back later.
Pat Reddy
Okay.
Carl Kirst
All right. Thanks, guys.
Operator
Your next question comes from the line of Craig Shere with Tuohy Brothers Investment.
Craig Shere
It seems like the seasonal spreads on gas keep narrowing. Are you able to comment on more generally the market to contract out new storage capacity and multi-year contracts and then a couple of clean-up items for Pat?
Greg Ebel
On the storage side, there is no doubt; obviously, storage values aren’t what they were a couple of years ago. I think the benefit the way we look at this is that our storage contracts don’t all run year-to-year, on average, they are a couple of years out.
So, we’ve never kind of captured the levels we saw a few years ago. But no doubt Craig, they are light right now.
And so we’re not signing up a lot of long-term contracts right now. If I think about just what we’ve done on the storage front over the last few years, and definitely with the acquisition, it's definitely focused out longer-term as we see more activity in the different regions, power supply, I think is going or the power generation is really going to drive the values of storage, if you will.
So, yes, we’ve seen in storage, storage values are definitely down from where they were 18 months ago.
Craig Shere
Okay. Understood.
Appreciate that. I don’t know if you can comment on all these things, but probably the easiest one, can you remind us what the gain on DPM equity issuance was that flowed through to the equity income?
And can you speak to what Bobcat storage contributed in the fourth-quarter? And I realize there is a one-time benefit for taxes in the year.
But at the beginning of the year, the guidance was 30% and now we're guiding 29% in 2011, can you just kind of comment on the broader shifts, geographical or what's going on there?
Greg Ebel
All right, good. With respect to the gain on DPM equity issuances, the way to think about that is that we had about $10 million pick-up in the quarter, about $30 million for the year, and that is going to occur anytime partners issues equity because in essence, what we're reflecting is the difference between our bases in those units, and the market value that those shares are issued at, so, that's the nature of the gain.
And so as you'll recall, DPM had some equity issuances last year. As we go forward and DCP execute on its growth plans, I would expect to see that DCP and partners would do financing in tandem on kind of a joint venture basis where the partnership can raise debt and the MLP can raise equity, and overall keep the balance sheet of the combined entities where it needs to be, so, that's what behind that.
You asked about Bobcat's contribution to EBIT in the fourth-quarter. And it was about $4 million.
And then with respect to the change, the slight decrease in our expected tax rate from 30% to 29%, that really just reflects, to your point, the changing composition of our income, as our Canadian income grows, our effective tax rate comes down because as you know the statutory rate in the US is 35%, it’s currently 19% in Canada, and schedule to go down to 18% I believe in 2012, so that’s really the reason for that.
Craig Shere
Great, thank you.
Operator
Your next question comes from the line of Jonathan Lefebvre with Wells Fargo.
Jonathan Lefebvre
Good morning, guys. Very nice quarter.
Pat Reddy
Thanks.
Jonathan Lefebvre
Just a quick housekeeping, first, on the cash flow from operations, Pat, you said that you’re going to benefit from the bonus depreciation and I didn’t catch that number. And I am just wondering how you see that impacting 2012 as well.
Pat Reddy
The combined number this year is $215 million, that’s $200 million from investments that we will make in 2011, and $15 million for investments we made in 2010 when we weren’t anticipating extension or we didn’t have extension bonus depreciation, so it's $215 million in combination. For 2012, as you know at this point the bonus depreciation is scheduled to drop back to 50% from 100%, it would probably be more like on the order of $100 million given our projected spent in 2012.
Jonathan Lefebvre
Got you, thanks. And then Greg, maybe just a few comments on Sandhills, I know that we've been hearing from processors that with the growth we’re seeing from the Bone Springs, Avalon that processors are going to have difficulty expanding capacity without that takeaway line.
I’m just wondering if that’s consistent with what you’re seeing and hearing, and obviously, you had good indications on the non-binding open season and just wondering when we might see a green light on that project.
Greg Ebel
Yes, it’s probably going to be a few months still before we get the go-ahead, but you’re absolutely right. That’s the total rationale behind that pipeline.
Obviously, it’s a nice increment as well on side of what we’re trying to do in the Eagle Ford, so, we’ll have to see. The firm commitments, we're out there trying to seek those right now, I’m hopeful that Tom and the guys will be able to nail that down in the next couple of months.
Jonathan Lefebvre
Okay. And then just as a follow-up, you said you'd look at using DPM to help finance this, would you also look at bringing in equity partners as it’s a pretty large project?
Greg Ebel
I don’t think so. I think between the equity that DPM can issue and the balance sheet that DCP has to raise debt, we don’t see any need for partners outside, and frankly, we wouldn't want to dilute the earnings opportunity there.
As we talked about in New York, I don’t think that will have any negative impact on the distributions coming back up both to Spectra Energy and Conoco. So, we've passed through that pretty well, and I don’t see any need for outside equity if we issue equity at DCP, it will be through DPM.
Jonathan Lefebvre
Got you. Thanks for the time, guys.
Greg Ebel
Thanks.
Operator
Your next question comes from Becca Followill from US Capital Advisors.
Becca Followill
On the Alliance, the $31 million (technical difficulty) can you talk a little bit more about that, is that a one-off deal, and you're replacing that with another contract, just give us a little more background?
Pat Reddy
Sure, Becca. The $31 million relates to capacity that Westcoast took on the Alliance pipeline.
And when we acquired Westcoast that came along with it. But, we recognize at the time of the acquisition and as well Westcoast had an equity interest in the pipe, which is sold back in 2003.
So, under purchase accounting, we knew the value of it was under water in a sense that Westcoast and Union were paying rates that were higher than the capacity could be released at. So, we set up a provision under FAS 141 that controls in the case of business combination.
And that liability was being amortized over a 20 year period. Well, fast forward and as of the end of 2010, Westcoast had the opportunity to tender a termination notice.
Now, it doesn’t take effect for five years. So we’re going to continue to remarket capacity for the next five years, and we will have small gains and losses on that, but we report through our other business segment, so the $31 million is representing the obligation that we’re going to avoid for the 15 years after the five years is up.
And so, we wouldn’t expect to book another gain related to that. I think we've kind of taken care of it all in this entry.
Greg Ebel
Becca, its Greg. All the alliance contracts were structured that way, so in 2010, you could turn back your remaining obligation, so we just decided to trigger that.
Becca Followill
On your 2011 guidance, does it include any additional gains (inaudible) or wouldn’t that be incremental to those?
Greg Ebel
It does not. You're referring to the fact that if they have additional equity issuances, we book additional gains.
We didn’t budget for that.
Becca Followill
All right. Thanks, guys.
Greg Ebel
Thanks, Becca.
Operator
Your next question comes from the line of Ted Durbin with Goldman Sachs.
Greg Ebel
Hey, Ted.
Ted Durbin
Hi, guys. Wondering, if you can just give us an update, I apologize if I missed this, on your ethane pipeline proposal, when you might think to get an answer from some of the producers on signing up contracts, and what volumes you'd need to really go forward?
Greg Ebel
Yes, I can say that despite us working hard on this one and still think we've got the best project that is definitely something out there still a little bit. I think it's going to be mid-year before we get any clarity on that.
That pipes going to run around $800 million, $1 billion dollar type range. I think the final sizing really is going to depend on what kind of firm commitments we can get.
Ted, we're not going to go and try to structure the pipe such that we end up having a much overcapacity. So, I think we'd be kind of 60,000 barrels a day to be able to make that pipeline work or commitments for that anyways, Ted.
Ted Durbin
Okay, that's actually very helpful. And then if I can just come back to the distribution piece, I know we talked about this before, but you had the big jump year-over-year in EBIT, but then guidance looks like it's coming down about $20 million.
Can you just talk about that delta between what we did in '10 versus where we're going in '11 for distribution?
Pat Reddy
Ted, there are a number of ins and outs that we took into account in the budget. But the biggest single item is the savings that was experienced this year in fuel used for compression.
We're exposed to changes in volume. And so, if volume is up or down, and we use more or less fuel, we're at risk for that.
That's not part of earning sharing. And so, that was the most significant difference.
About $24 million last year that we’re not budgeting in 2011.
Greg Ebel
Yes, the other piece to think about is FX, I know this is a little counterintuitive, Ted, but we actually, remember, our budget forecast is, foreign exchange rate stand at U.S. $1.05, and so, even though we were seeing the Canadian dollar run around parity, that’s actually about a $10 million hit.
So, net-net, that’s why you are seeing the drop down of about $20 million. On a Canadian dollar basis, it's down about $10 million, which is largely related to the items that Pat spoke to
Ted Durbin
I see. Okay, that’s helpful.
Thanks very much.
Operator
(Operator instructions) Your next question comes from the line of Faisel Khan with Citi.
Faisel Khan
Just going back to the distribution segment one more time, the uptick in pipeline throughput, I think you may have answered this in the first question, what caused that large uptick in throughput sequentially, I'm sorry, year-over I should take it, 220 to 248?
Pat Reddy
220 to 248, you are talking about volume?
Faisel Khan
Volume, yes.
Greg Ebel
It was just slightly (inaudible), slightly colder weather, to more feeding of power plants, nothing in particular. Frankly, just a little better economics year-over-year, Faisel.
So, remember, all that capacity is accounted for with the dollars, the contracts that we have on that. So, even with a little bit of increase in volume it's actually not going to cause a massive increase in terms of the revenues really little bit better S margin we were able to as opposed to the T margins on the transmission side.
Faisel Khan
And of course, you also talked about the fuel savings, that’s also a big part of it too?
Greg Ebel
Yes, absolutely, and you know, as Pat said, that’s all about the efficient operations, really spectacular year from an efficiency perspective, and we just haven’t budgeted that for 2011, but obviously, the guys and gals would go out there and see if they can run it equally efficiently in 2011. If they do, that’s an upside.
Faisel Khan
Okay. And then on the Western Canadian Transmission & Processing segment, the year-over-year uptick in both pipeline throughput and processed volume, are those all the new contracts that you guys have kind of labeled out in your press release?
Pat Reddy
Yes.
Faisel Khan
Was there any decline associated with those volumes, did you have declining volumes too, and then you made that up with new contracts, or was…
Pat Reddy
That’s exactly correct.
Greg Ebel
Grizzly Valley would saw some declines. And then obviously the pickups with the Fort Nelson projects.
And things like the T-North Expansion as well. Again, remember, Faisel, (inaudible) just in processing in Canada, so that’s all contracted for us.
So, you may not always see a change in the volumes. The key is the change in the contracted volumes.
So actual throughput may not move much, but the dollars can still go up.
Pat Reddy
To that point, Faisel, in our guidance we took into the account the fact that we had some significant contract renewals in 2011 related to the conventional basins like Grizzly Valley that Greg mentioned. I think what we’re seeing is some ratcheting around of declining volumes from the conventional areas and increasing volumes from the non-conventional including the shales like the Horn.
Faisel Khan
And then just to clarify, on the Field Services, the $10 million gain from the DCP unit, that was an after-tax number or a pretax number?
Pat Reddy
No, that’s EBIT, so it’s pretax or EBT.
Faisel Khan
So, it wouldn’t be equity earnings, because your equity earnings are after-tax as it is, right?
Pat Reddy
They’re pretax, they’re above the tax line.
Faisel Khan
Got you. Okay, great.
Thanks a lot. Appreciate it.
Operator
(Operator instructions) Your next question comes from the line of Elvira Scotto with Credit Suisse.
Elvira Scotto
Thanks.
Greg Ebel
Hi, Elvira.
Elvira Scotto
Just a quick follow-up on the Marcellus ethane pipeline project, we’ve seen that there’ve been a lot of projects proposed and still haven’t heard any kind of which one is moving forward. Do you think that’s a function of maybe production growth in the Marcellus is ramping a little slower than initially anticipated or increased blending capabilities or what do you think is kind of driving this?
It seems like there has been delay in sort of a solution being announced.
Greg Ebel
Well, I think all those things. I think obviously commodity prices being weaker than what people had hoped for at least from a gas perspective.
Obviously, there's slightly slower ramp-up in the production. Look, producers until they are certain they have got a market, and we think obviously the Gulf Coast market is a logical place to go given the size of the market there, they are not going to sign up for fixed charges associated with pipeline, so I think this is going to continue to shake out over the next several months and maybe even 12 months before there is a definitive planning.
This is a new area where drilling is occurring and obviously, as you all know, publicity around that, there is challenges there, so I think all those things add up to a slightly slower build out, which doesn’t say anything about the huge resource that actually still exist.
Elvira Scotto
So, based on those comments in what you are seeing, when do you think a solution would be needed, number one? And then number two, assuming that your solution is the one that moves forward, what timeframe would you need to actually get it in service?
Greg Ebel
Most of our pipeline is (technical difficulty) after you get project signed up, they are typically 12 months to 18 months. There’s an all new type, as you know, we reviewed some of our partners pipe El Paso, some of our rights of way capability, so, it’s not Greenfield, but I would say after we sign up, it's kind of 12 months to 18 months.
And the problem doesn't exist today per second, but it's on the door step, so sometime I think over the next 12 months to 18 months. So if we need to make a decision or the industry makes a decision where it wants to go.
I think we were seeing this is like a 2014 project, wasn't the kind of timeframe we’re looking at over here.
Elvira Scotto
Okay, great, thanks a lot.
Operator
Your next question comes from Carl Kirst with BMO Capital.
Greg Ebel
Hey, Carl.
Carl Kirst
Thanks for the time, guys. Just a quick follow-up actually back on to Union for a second.
I didn’t know if for the full year we could delineate what was from Union and what was from Transportation and Storage, and ultimately I guess I was trying to get a little bit of flavor clearly, TransCanada is going through the challenges and issues, and one of the outcomes of that may or may not be changes in short-term near short-haul transportation terraces you guys know. Depending on what ultimately is the resolution of that over the next 12 months or so.
I'm trying to figure out if there is any exposure that you guys would have from potentially higher rates there, and if that's something that will do at the end of the day might impact as $5 million, $10 million of EBIT, not really a big deal, or if it potentially could be larger?
Greg Ebel
Well, first of all, just remember the way that contract works out there, a couple of comments on that. With respect to would it impact us, I'd say the answer is no, because any extra cost we use on TransCanada gets flow through to our customer base, that's one.
So two, though, obviously, we don’t want higher rates on TransCanada impacting the competitiveness of Dawn. Unfortunately, Dawn is hooked up to multiple pipelines across the North America, so, Alliance coming through to Chicago, Vector coming up through Empire back through, so there is multiple areas, which makes Dawn so valuable.
Look, I think pipelines being strong across the board in the best world, but I don’t see it having a significant, if any impact from EBIT perspective. It's only longer-term, making sure that there is good liquidity at Dawn would be my only concern.
And then going back to the other question –
Pat Reddy
Carl, when we compare 2010 to 2009, the EBIT pickup from Storage and Transmission was $8 million. And as we looked at 2011 we think order of magnitude will probably be $6 million above this year.
So, it’s worth talking about, but it’s not the biggest driver.
Carl Kirst
Those are the increments right, Pat, so that’s not an absolute, that’s a relative…
Pat Reddy
That’s correct. That’s not the absolute.
It's the increment year-over-year.
Carl Kirst
Great, thanks for the color, guys.
Operator
Your next question comes from Anthony Crowdell with Jefferies.
Anthony Crowdell
Just I guess a follow-up or a question on the guidance of Empress EBIT. I mean, your forecast right now is $50 million, is that what we should assume now long-term, or is there like do you think additional downside exposure to that?
Pat Reddy
I think given what we’re seeing in terms of frac spread, values of liquid, and even we’ve taken into account where we are on volumes on that, but say $50 million seems to be about right, definitely we didn’t you see any changes at this point in time, we’ve had a good ability to track volumes to our plants there. From our forecast perspective, let’s put it this way that we kind of see $50 million as a flat volume number right now.
Anthony Crowdell
Great, thank you.
Operator
Your next question comes from William Adams with FAMCO.
William Adams
Yes, I just had a question on the proposed DCP Sandhills pipeline. Can you give us a feel for what the cost would there be?
I know you’re talking about 100,000 to 120,000 barrels a day of capacity. When does the open season, when that’s scheduled to be completed?
And then also, with the partnership with DPM be involved in the financing of that project?
Greg Ebel
So, the open season has already happened, so now we’re trying to get longer-term commitments. We have not set a capital cost on that project.
Yes, that’s something that obviously based on the type of commitments we can give and discussions with producers, we'll size the pipe positions in that 100,000 to 125,000 barrels perspective. So, it’s going to be a few months yet before we nail that down, and obviously, the open season is done, we’re now getting out there and see if we can get the (technical difficulty) from producers.
William Adams
Would the partnership be involved in that project?
Greg Ebel
Yes, the expectation is that, going forward, lot of these projects, but again, we've used the valuable currency at DPM, why it makes sense to help finance projects and obviously, good balance sheet of DCP to help finance it from (inaudible).
William Adams
Okay, thanks so much.
Operator
(Operator instructions) Your next question comes from Louis Shamie with Zimmer Lucas.
Louis Shamie
Hi, guys. Just a little bit of a follow-up question on the issue of Empress.
So that $50 million number, is that an EBIT, EBITDA, and I would just be interested in what the associated gross margin number is coming off of Empress?
Pat Reddy
The $50 million is EBIT. Louis, we don’t disclose gross or net margins, it's highly competitive and sensitive information.
So, we just stop at the EBIT line.
Louis Shamie
Okay, thank you.
Operator
There are no further questions at this time.
John Arensdorf
Okay. Well, if that’s the case, thank you everyone for joining us on the call today.
We appreciate it and as always if you have any follow-up questions after the call, please free to call either Roni Cappadonna or me, and we'll be happy to help you out. Thanks.
And we’ll speak again next quarter.
Operator
This concludes today conference. You may now disconnect your lines.