INTRODUCTION

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements. As previously discussed, the Condensed Consolidated Statements of Operations and related discussions contained in this report have been re-cast to reflect the operating results of certain Western Canada Transmission & Processing natural gas gathering and processing facilities as discontinued operations for all periods presented. See Note 7 of Notes to Condensed Consolidated Financial Statements for further discussion.

Executive Overview

For the three months ended September 30, 2008 and 2007, Spectra Energy reported net income of $296 million and $234 million, respectively. For the nine months ended September 30, 2008 and 2007, Spectra Energy reported net income of $958 million and $666 million, respectively. The increase in net income for the three and nine-month periods primarily reflects the positive impact of higher NGL prices, which correlate to higher crude oil prices, during the first nine months of 2008 on the earnings from Field Services. Crude oil averaged $113 per barrel for the nine months ended September 30, 2008 versus $67 per barrel during the same period in 2007.

The highlights for the three months and nine months ended September 30, 2008 include:

• U.S. Transmission's earnings benefited from completed expansion projects and a customer bankruptcy settlement in the second quarter of 2008, offset by higher project development costs charged to expense, primarily in the third quarter 2008, as well as higher operating and administrative costs.

• Distribution results reflect higher storage and transportation revenues and a stronger Canadian dollar comparing the 2008 and 2007 periods.

• Western Canada Transmission & Processing earnings increased primarily as a result of higher volumes and stronger NGL prices related to the Empress processing plant and a stronger Canadian dollar.

• Field Services earnings reflect higher NGL prices, improved efficiencies and higher volumes, partially offset by lost revenues in the third quarter 2008 resulting from Hurricane Ike.

• Results for Other include costs associated with the spin-off of Spectra Energy in 2007, mostly offset by the favorable resolution of a legal matter in 2007 and higher benefits and incentive costs in 2008.

Spectra Energy reported $1.5 billion of capital and investment expenditures in the first nine months of 2008 of the approximately $2.2 billion that is projected for the full year, including expansion capital of approximately $1.6 billion. As of early November 2008, Spectra Energy's 2008 expansion projects are substantially complete, with returns on these projects expected to be at the high end of those originally anticipated. Expansion expenditures for 2009 are currently expected to be about one-half of the amount of 2008, mainly as a result of many of the larger projects coming into service in 2008 or early 2009. Spectra Energy continues to assess projected long-term market requirements and, based on the current assessment, believes that expansion expenditures will continue to support strategic objectives.

Through September 30, 2008, Spectra Energy has successfully issued approximately $1.8 billion of new long-term debt, completing the new long-term debt issuances expected for 2008. In addition, Spectra Energy continues to have ongoing access to over $2.5 billion in credit facilities and has continued to utilize commercial paper and revolving lines of credit as needed to fund liquidity needs throughout September and October 2008 when there has been significant general market disruption around credit.

On May 6, 2008, Spectra Energy's Board of Directors approved a share repurchase program, authorizing Spectra Energy to purchase in the aggregate up to $600 million of shares of its outstanding common stock. This share repurchase program was completed on August 8, 2008.

On July 3, 2008, Spectra Energy declared a 9% increase in its quarterly dividend from $0.23 to $0.25 per common share. The new annualized dividend rate is $1.00 per share, representing a nearly 14% increase over the 2007 level of $0.88 per share.

RESULTS OF OPERATIONS



                                                  Three Months                        Nine Months
                                               Ended September 30,                Ended September 30,
                                             2008               2007             2008              2007
                                                                   (in millions)
Operating revenues                        $     1,080        $      950       $    3,813        $    3,317
Operating expenses                                740               625            2,669             2,281
Gains on sales of other assets and
other, net                                         -                  5               32                 6

Operating income                                  340               330            1,176             1,042
Other income and expenses, net                    282               186              755               431
Interest expense                                  163               156              470               467
Minority interest expense                          15                15               46                41

Earnings from continuing operations
before income taxes                               444               345            1,415               965
Income tax expense from continuing
operations                                        145               110              453               312

Income from continuing operations                 299               235              962               653
Income (loss) from discontinued
operations, net of tax                             (3 )               3               (4 )              17

Income before extraordinary items                 296               238              958               670
Extraordinary items, net of tax                    -                 (4 )             -                 (4 )

Net income                                $       296        $      234       $      958        $      666

Three and Nine Months Ended September 30, 2008 Compared to Same Periods in 2007

Operating Revenues. Operating revenues for the three and nine months ended September 30, 2008 increased $130 million or 14%, and $496 million or 15%, respectively, compared to the same periods in 2007. The increases were driven primarily by:

• higher NGL prices associated with the Empress operations,

• the effects of a stronger Canadian dollar on revenues at Western Canada Transmission & Processing and Distribution, and

• expansion projects placed in service in late 2007 at U.S. Transmission.

Operating Expenses. Operating expenses for the three and nine months ended September 30, 2008 increased $115 million or 18%, and $388 million or 17%, respectively, compared to the same periods in 2007. The increases were driven primarily by:

• higher prices and volumes of natural gas purchased for the Empress facility,

• the effects of a stronger Canadian dollar at Western Canada Transmission & Processing and Distribution,

• an increase in project development costs as a result of the capitalization of previously expensed costs on northeast expansions in 2007, and increased operating and administrative costs at U.S. Transmission.

For a more detailed discussion of operating revenues and expenses, see the segment discussions that follow.

Gains on Sales of Other Assets and Other, net. Gains on sales of other assets and other, net for the three and nine months ended September 30, 2008 decreased $5 million and increased $26 million, respectively, compared to the same periods in 2007. The increase year-to-date, was primarily due to a 2008 second quarter customer bankruptcy settlement.

Operating Income. Operating income for the three and nine months ended September 30, 2008 increased $10 million, or 3%, and $134 million, or 13%, respectively, compared to the same periods in 2007 primarily as a result of higher NGL prices that benefited the Empress operations, a stronger Canadian dollar, a 2008 customer bankruptcy settlement, and higher earnings from expansion projects, partially offset by higher project development costs charged to expense as well as higher operating and administrative costs.

Other Income and Expenses, net. Other income and expenses, net for the three and nine months ended September 30, 2008 increased $96 million and $324 million, respectively, compared to the same periods in 2007. The increases represent higher equity in earnings from the Field Services segment, primarily reflecting higher commodity prices in 2008 compared to 2007.

Interest Expense. Interest expense for the three and nine months ended September 30, 2008 increased $7 million and $3 million, respectively, compared to the same periods in 2007, reflecting the successful completion of Spectra Energy's planned debt issuances in 2008 and a stronger Canadian dollar, partially offset by lower balances and rates on commercial paper, higher interest costs capitalized and increased benefits from interest rate swaps in 2008.

Minority Interest Expense. Minority interest expense for the nine months ended September 30, 2008 increased $5 million compared to the same period in 2007, primarily as a result of earnings from Spectra Energy Partners formed in July 2007.

Income Tax Expense from Continuing Operations. Income tax expense from continuing operations for the three and nine months ended September 30, 2008 increased $35 million and $141 million, respectively, as a result of higher earnings from continuing operations. The effective tax rate for income from continuing operations for the three months ended September 30, 2008 was 32.7% as compared to 31.9% for the same period in 2007. The lower effective tax rate in the prior period was primarily a result of an adjustment in the 2007 period for final 2006 tax returns in Canada. The effective tax rate for the nine months ended September 30, 2008 was 32.0% as compared to 32.3% for the same period of 2007.

Income (Loss) from Discontinued Operations, net of tax. Income from discontinued operations for the three and nine months ended September 30, 2008 decreased $6 million and $21 million, respectively. The year-to-date variance is driven by proceeds received from a litigation settlement in the second quarter of 2007. The decreases for three months and nine months ended September 30, 2008 also reflect the operating results of certain Western Canada Transmission & Processing natural gas gathering and processing facilities. In October 2008, Spectra Energy entered into an agreement to sell its interests in these facilities.

Extraordinary Items, net of tax. Extraordinary items, net of tax for the three and nine months ended September 30, 2007 reflected an extraordinary loss in the third quarter of 2007 of $4 million, net of tax. Union Gas received a decision from the OEB in 2006 that effectively caused a portion of its storage operations to become unregulated. As a result of an additional and related August 2007 decision from the OEB, Spectra Energy recorded an extraordinary loss to further remove the effects of storage regulation from the consolidated balance sheet.

Segment Results

Management evaluates segment performance based on EBIT from continuing operations, after deducting minority interest expense related to those earnings. On a segment basis, EBIT excludes discontinued operations, represents all profits from continuing operations (both operating and non-operating) before deducting interest and taxes, and is net of the minority interest expense related to those profits. Cash, cash equivalents and short-term investments are managed centrally by Spectra Energy, so the gains and losses on foreign currency transactions, and interest and dividend income on those balances, are excluded from the segments' EBIT. Management considers segment EBIT to be a good indicator of each segment's operating performance from its continuing operations, as it represents the results of Spectra Energy's ownership interest in operations without regard to financing methods or capital structures.

Spectra Energy's segment EBIT may not be comparable to similarly titled measures of other companies because other companies may not calculate EBIT in the same manner. Segment EBIT is summarized in the following table, and detailed discussions follow.

EBIT by Business Segment



                                                   Three Months                      Nine Months
                                               Ended September 30,               Ended September 30,
                                              2008             2007             2008              2007
                                                                    (in millions)
U.S. Transmission                           $     213        $     230       $      683        $      673
Distribution                                       44               40              263               238
Western Canada Transmission &
Processing                                        113              101              333               218
Field Services                                    239              140              647               345

Total reportable segment EBIT                     609              511            1,926             1,474
Other                                              (9 )            (15 )            (57 )             (56 )

Total reportable segment and other EBIT           600              496            1,869             1,418
Interest expense                                  163              156              470               467
Interest income and other (a)                       7                5               16                14

Consolidated earnings from continuing
operations before income taxes              $     444        $     345       $    1,415        $      965

(a) Includes foreign currency transaction gains and losses, additional minority interest expense not allocated to the segment results and intersegment eliminations.

Minority interest expense as presented in the following segment-level discussions includes only minority interest expense related to EBIT of non-wholly owned entities. It does not include minority interest expense related to interest and taxes of those operations. The amounts discussed below include intercompany transactions that are eliminated in the Condensed Consolidated Financial Statements.

U.S. Transmission



                                                   Three Months                             Nine Months
                                               Ended September 30,                      Ended September 30,
                                                                Increase                                 Increase
                                          2008       2007      (Decrease)         2008       2007       (Decrease)
                                                             (in millions, except where noted)
Operating revenues                      $    402    $  386    $         16      $  1,205    $ 1,133    $         72
Operating expenses
Operating, maintenance and other             156       126              30           433        328             105
Depreciation and amortization                 58        57               1           174        162              12
Gains on sales of other assets and
other, net                                    -         -               -             32          1              31

Operating income                             188       203             (15 )         630        644             (14 )
Other income and expenses, net                39        41              (2 )          94         63              31
Minority interest expense                     14        14              -             41         34               7

EBIT                                    $    213    $  230    $        (17 )    $    683    $   673    $         10

Proportional throughput, Tbtu (a)            479       531             (52 )       1,596      1,641             (45 )

(a) Trillion British thermal units. Revenues are not significantly affected by pipeline throughput fluctuations, since revenues are primarily composed of demand charges.

Three Months Ended September 30, 2008 Compared to Same Period in 2007

Operating Revenues. The $16 million increase was driven primarily by:

• a $16 million increase from expansion projects placed in service in late 2007 and third quarter 2008, and

• a $6 million increase in processing revenues associated with pipeline operations, primarily from higher NGL prices.

Operating, Maintenance and Other. The $30 million increase was driven primarily by:

• a $19 million increase in operating and administrative costs including fuel, utilities, equipment repairs, benefit and software costs, and

• an $8 million increase in project development costs expensed when comparing the periods. In accordance with Spectra Energy's policy, project development costs are initially expensed until it is determined that recovery of such costs through regulated revenues of the completed project is probable, at which time inception-to-date costs of the project are capitalized and operating expenses are reduced.

Other Income and Expenses, net. The $2 million decrease was primarily a result of lower equity income attributable to the net capitalization of project development costs in 2007 on SESH and Gulfstream's Phase IV expansion projects totaling $18 million, mostly offset by the increased capitalization of interest associated with the SESH project.

EBIT. The $17 million decrease reflects higher project development expenses, primarily resulting from the capitalization of these expenses in the prior quarter, and increased operating and administrative costs, partially offset by higher earnings from expansion projects placed in service in late 2007 and higher earnings from capitalized interest on construction projects during the 2008 quarter.

Nine Months Ended September 30, 2008 Compared to Same Period in 2007

Operating Revenues. The $72 million increase was driven primarily by:

• a $46 million increase from expansion projects placed in service in late 2007 and third quarter 2008,

• a $9 million increase resulting from a stronger Canadian dollar, related to M&N LP.

Operating, Maintenance and Other. The $105 million increase was driven primarily by:

• a $50 million increase in project development costs, reflecting expensed project development costs of $28 million in 2008 and a net benefit of $22 million in 2007 due to the capitalization of previously expensed costs on northeast expansions during that period,

• a $35 million increase in operating and administrative costs including pipeline integrity, fuel, utilities, equipment repairs, labor and outside services and software costs, and

• a $16 million increase in ad valorem taxes primarily as a result of favorable valuations in 2007.

Depreciation and Amortization. The $12 million increase was driven primarily by expansion projects placed into service in 2007.

Gains on Sales of Other Assets and Other, net. The $31 million increase reflects a customer bankruptcy settlement in June 2008.

Other Income and Expenses, net. The $31 million increase was primarily a result of higher equity income from unconsolidated affiliates attributable to the capitalization of interest on construction projects and $7 million of lower project development costs charged to expense, both of which are primarily for the SESH project.

Minority Interest Expense. The $7 million increase was driven primarily by earnings from Spectra Energy Partners formed in July 2007.

EBIT. The $10 million increase reflects a gain on a customer bankruptcy settlement, higher earnings from expansion projects and higher commodity prices for gas processing associated with pipeline operations. These increases were partially offset by an increase in project development costs charged to expense and increased operating and administrative costs.

Distribution



                                                    Three Months                              Nine Months
                                                Ended September 30,                       Ended September 30,
                                                                  Increase                                  Increase
                                          2008         2007      (Decrease)        2008         2007       (Decrease)
                                                              (in millions, except where noted)
Operating revenues                      $    280       $ 266    $         14      $ 1,433      $ 1,330    $        103
Operating expenses
Natural gas purchased                         97          98              (1 )        747          726              21
Operating, maintenance and other              93          91               2          284          252              32
Depreciation and amortization                 45          42               3          138          119              19
Gains on sales of other assets and
other, net                                    -            5              (5 )         -             5              (5 )

Operating income                              45          40               5          264          238              26
Other income and expenses, net                (1 )        -               (1 )         (1 )         -               (1 )

EBIT                                    $     44       $  40    $          4      $   263      $   238    $         25

Number of customers (thousands)                                                     1,300        1,280              20
Heating degree days (Fahrenheit)             264         226              38        4,815        4,701             114
Pipeline throughput, Tbtu                    153         137              16          631          590              41

Three Months Ended September 30, 2008 as Compared to Same Period in 2007

Operating Revenues. The $14 million increase was driven primarily by:

• a $5 million increase due to growth in the number of customers,

• an $11 million increase from higher natural gas prices passed through to customers without a mark-up, and

• a $13 million increase in storage and transportation revenues primarily due to favorable market conditions and growth of the transmission system, partially offset by

• a $14 million decrease in customer usage of natural gas.

Natural Gas Purchased. The $1 million decrease was driven primarily by:

• an $11 million decrease in customer usage of natural gas, and

• a $4 million decrease related to fuel used in operations, partially offset by

• a $3 million increase due to growth in the number of customers, and

• an $11 million increase related to higher natural gas prices passed through to customers without a mark-up.

Depreciation and Amortization. The $3 million increase was due to a higher asset base resulting primarily from completion of Phase II of the Dawn-Trafalgar expansion.

Gains on Sales of Other Assets and Other, net. The $5 million decrease was due to a gain on the sale of land in 2007.

EBIT. The $4 million increase was primarily attributable to higher storage and transportation revenues.

Nine Months Ended September 30, 2008 as Compared to Same Period in 2007

Operating Revenues. The $103 million increase was driven primarily by:

• a $146 million increase resulting from a stronger Canadian dollar,

• a $30 million increase due to growth in the number of customers, and

• a $32 million increase in storage and transportation revenues primarily due to favorable market conditions and growth of the transmission system, partially offset by

• a $63 million decrease from lower natural gas prices passed through to customers without a mark-up,

• a $22 million decrease in customer usage of natural gas, and

• a $15 million decrease due to an unfavorable decision from the OEB on unregulated storage revenues in the second quarter of 2008.

Natural Gas Purchased. The $21 million increase was driven primarily by:

• an $85 million increase resulting from a stronger Canadian dollar, and

• a $28 million increase due to growth in the number of customers, partially offset by

• a $63 million decrease related to lower natural gas prices passed through to customers without a mark-up, and

• a $20 million decrease in customer usage of natural gas.

Operating, Maintenance and Other. The $32 million increase was driven primarily by a stronger Canadian dollar.

Depreciation and Amortization. The $19 million increase was driven by:

• an $11 million increase resulting from a stronger Canadian dollar, and

• an $8 million increase due to a higher asset base resulting primarily from completion of Phase II of the Dawn-Trafalgar expansion.

Gains on Sales of Other Assets and Other, net. The $5 million decrease was due to a gain on the sale of land in 2007.

EBIT. The $25 million increase was primarily attributable to higher storage and transportation revenues and a stronger Canadian dollar.

Western Canada Transmission & Processing



                                                     Three Months                            Nine Months
                                                  Ended September 30,                    Ended September 30,
                                                                    Increase                              Increase
                                          2008         2007        (Decrease)       2008       2007      (Decrease)
                                                              (in millions, except where noted)
Operating revenues                       $   397       $ 298      $         99    $   1,174    $ 852    $        322
Operating expenses
Natural gas and petroleum products
purchased                                    136          67                69          384      240             144
Operating, maintenance and other             110          93                17          342      292              50
Depreciation and amortization                 37          35                 2          114       98              16
. . .