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SE > SEC Filings for SE > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for SPECTRA ENERGY CORP.


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements.

Executive Overview

For the three months ended March 31, 2013 and 2012, we reported net income from controlling interests of $340 million and $333 million, respectively.

The highlights for the three months ended March 31, 2013 include the following:

U.S. Transmission experienced lower transportation and storage revenues and higher operating costs, substantially offset by higher earnings from expansion projects at Texas Eastern Transmission, LP (Texas Eastern),

Distribution's earnings benefited from higher customer usage as a result of colder weather and an increase in 2013 rates, partially offset by lower transportation revenues,

Western Canada Transmission & Processing's results reflected lower earnings in the conventional gathering and processing business, driven by anticipated lower contracted volumes and lower interruptible revenues, and lower earnings at Empress due primarily to lower propane sales prices,

Field Services earnings decreased mostly due to lower commodity prices and lower gathering and processing margins, partially offset by increased gains associated with the issuance of partnership units by DCP Partners and a reduction in depreciation expense attributable to an increase in the remaining useful lives of gathering, transmission, processing, storage and other assets during the second quarter of 2012, and

Liquid's results primarily reflect the earnings of Express-Platte from the date of acquisition in March 2013.

On March 14, 2013, we closed our acquisition of Express-Platte. Express-Platte forms a significant part of our new reportable business segment, "Liquids," which also includes our one-third ownership interests in Sand Hills and Southern Hills. See Notes 2 and 3 of Notes to Condensed Consolidated Financial Statements for further discussion.


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In the first quarter of 2013, we had $505 million of capital and investment expenditures in addition to the acquisition of Express-Platte. Excluding the acquisition of Express-Platte, we currently project approximately $2.2 billion of capital and investment expenditures for the full year, including expansion capital expenditures of approximately $1.4 billion. Expansion projects for 2013 are on track.

We are committed to an investment-grade balance sheet and continued prudent financial management of our capitalization structure. Therefore, financing these growth activities will continue to be based on our strong and growing fee-based earnings and cash flows as well as the issuance of long-term debt. We have access to approximately $1.5 billion available under our credit facilities as of March 31, 2013, to be utilized as needed for effective working capital management.

RESULTS OF OPERATIONS



                                                                  Three Months
                                                                Ended March 31,
                                                              2013           2012
                                                                 (in millions)
  Operating revenues                                        $   1,589     $    1,544
  Operating expenses                                            1,083          1,026
  Gains on sales of other assets and other, net                    -               1

  Operating income                                                506            519
  Other income and expenses                                       143            134
  Interest expense                                                149            157

  Earnings from continuing operations before income taxes         500            496
  Income tax expense from continuing operations                   130            137

  Income from continuing operations                               370            359
  Income from discontinued operations, net of tax                  -               2

  Net income                                                      370            361
  Net income-noncontrolling interests                              30             28

  Net income-controlling interests                          $     340     $      333

Operating Revenues. The $45 million, or 3%, increase was driven mainly by:

an increase in customer usage of natural gas largely due to weather that was 22% colder than in 2012, growth in the number of customers, an increase in 2013 rates as approved by the OEB and higher natural gas prices passed through to customers at Distribution, partially offset by

lower propane sales prices and lower sales volumes of residual natural gas and NGLs at the Empress NGL business and lower gathering and processing revenues due to anticipated lower contracted volumes and lower interruptible revenues at Western Canada Transmission & Processing, and

lower transportation revenues, primarily at Texas Eastern, and lower storage revenues, both at U.S. Transmission.

Operating Expenses. The $57 million, or 6%, increase was driven mainly by:

an increase in volumes of natural gas sold largely due to colder weather, growth in the number of customers and higher natural gas prices passed through to customers at Distribution, partially offset by

decreased volumes of natural gas purchases for extraction and lower input costs caused primarily by lower extraction premiums from the Empress operations at Western Canada Transmission & Processing.


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Operating Income. The $13 million, or 3%, decrease was mostly attributable to lower earnings in the conventional gathering and processing business driven by anticipated lower contracted volumes and lower interruptible revenues, and lower NGL earnings primarily due to lower propane sales prices related to the Empress operations at Western Canada Transmission & Processing, and lower transportation and storage revenues at U.S. Transmission. These decreases in operating income were partially offset by an increase in customer usage of natural gas due to colder weather, an increase in 2013 rates at Distribution and the acquisition of Express-Platte in the first quarter of 2013.

Other Income and Expenses. The $9 million increase was attributable to higher allowance for funds used during construction (AFUDC) resulting from increased capital spending on expansion projects at U.S. Transmission, partially offset by lower equity earnings from Field Services. The lower equity earnings were mostly due to lower commodity prices and a decrease in gathering and processing margins, partially offset by an increase in gains associated with the issuance of partnership units by DCP Partners and a reduction in depreciation expense attributable to an increase of the remaining useful lives of DCP Midstream's gathering, transmission, processing, storage and other assets during the second quarter of 2012.

Interest Expense. The $8 million decrease was primarily due to increased capitalized interest resulting from our investments in Sand Hills and Southern Hills in the fourth quarter of 2012.

Income Tax Expense from Continuing Operations. The $7 million decrease was primarily a result of a lower Canadian effective tax rate. The effective tax rate for income from continuing operations was 26% in the first quarter of 2013 compared to 28% in the first quarter of 2012.

Net Income-Noncontrolling Interests. The $2 million increase was driven by the Spectra Energy Partners public sale of partner units and the transfer of a 38.76% interest in Maritimes & Northeast Pipeline, L.L.C. (M&N LLC) from Spectra Energy to Spectra Energy Partners, both in the fourth quarter of 2012.

For a more detailed discussion of earnings drivers, see the segment discussions that follow.

Segment Results

Management evaluates segment performance based on EBIT, which represents earnings from continuing operations (both operating and non-operating) before interest and taxes, net of noncontrolling interests related to those earnings. Cash, cash equivalents and investments are managed centrally, so the gains and losses on foreign currency remeasurement, and interest and dividend income on those balances, are excluded from the segments' EBIT. We consider segment EBIT to be a good indicator of each segment's operating performance from its continuing operations, as it represents the results of our ownership interest in operations without regard to financing methods or capital structures.


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Our 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
                                                                Ended March 31,
                                                             2013            2012
                                                                 (in millions)
U.S. Transmission                                          $     266       $     271
Distribution                                                     168             151
Western Canada Transmission & Processing                         111             138
Field Services                                                    88              93
Liquids                                                            6              -

Total reportable segment EBIT                                    639             653
Other                                                            (26 )           (29 )

Total reportable segment and other EBIT                          613             624
Interest expense                                                 149             157
Interest income and other (a)                                     36              29

Earnings from continuing operations before income taxes.   $     500       $     496

(a) Includes foreign currency transaction gains and losses and the add-back of noncontrolling interests related to segment EBIT.

Noncontrolling interests as presented in the following segment-level discussions includes only noncontrolling interests related to EBIT of non-100%-owned subsidiaries. It does not include noncontrolling interests 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
                                                                  Ended March 31,
                                                                                       Increase
                                                      2013             2012           (Decrease)
                                                         (in millions, except where noted)
Operating revenues                                 $       484       $     495       $        (11 )
Operating expenses
Operating, maintenance and other                           154             157                 (3 )
Depreciation and amortization                               72              70                  2
Gains on sales of other assets and other, net               -                1                 (1 )

Operating income                                           258             269                (11 )
Other income and expenses                                   41              31                 10
Noncontrolling interests                                    33              29                  4

EBIT                                               $       266       $     271       $         (5 )

Proportional throughput, TBtu (a)                          838             763                 75

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


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Operating Revenues. The $11 million decrease was driven by:

an $11 million decrease from lower transportation revenues primarily at Texas Eastern and lower storage revenues, and

a $9 million decrease in recoveries of electric power and other costs passed through to customers, partially offset by

a $7 million increase from expansion projects, and

a $2 million increase in processing revenues associated with pipeline operations primarily due to higher volumes.

Operating, Maintenance and Other. The $3 million decrease was driven by:

an $8 million decrease in electric power and other costs passed through to customers, partially offset by

a $5 million increase primarily due to higher employee benefit costs.

Depreciation and Amortization. The $2 million increase was mainly driven by expansion projects and capital expenditures.

Other Income and Expenses. The $10 million increase was primarily due to higher AFUDC resulting from increased capital spending on expansion projects.

Noncontrolling Interests. The $4 million increase was driven by the Spectra Energy Partners public sale of partner units and the transfer of a 38.76% interest in M&N LLC from Spectra Energy to Spectra Energy Partners, both in the fourth quarter of 2012.

EBIT. The $5 million decrease was driven by lower transportation and storage revenues and higher operating costs, substantially offset by higher earnings from expansions at Texas Eastern.

Distribution



                                                          Three Months
                                                         Ended March 31,
                                                                            Increase
                                              2013             2012        (Decrease)
                                                (in millions, except where noted)
  Operating revenues                       $      699       $      597     $       102
  Operating expenses
  Natural gas purchased                           369              286              83
  Operating, maintenance and other                111              107               4
  Depreciation and amortization                    51               53              (2 )

  EBIT                                     $      168       $      151     $        17

  Number of customers, thousands                1,382            1,363              19
  Heating degree days, Fahrenheit               3,525            2,893             632
  Pipeline throughput, TBtu                       314              267              47
  Canadian dollar exchange rate, average         1.01             1.00            0.01


Table of Contents

Operating Revenues. The $102 million increase was driven by:

a $75 million increase in customer usage of natural gas primarily due to weather that was 22% colder than the same period in 2012,

a $16 million increase from growth in the number of customers,

a $16 million increase from higher distribution rates in accordance with an OEB rate order effective January 1, 2013, and

a $12 million increase from higher natural gas prices passed through to customers. Prices charged to customers are adjusted quarterly based on the 12 month New York Mercantile Exchange (NYMEX) forecast, partially offset by

a $9 million decrease as a result of the sharing of revenues realized from the optimization of upstream transportation contracts in accordance with the OEB rate order effective January 1, 2013.

Natural Gas Purchased. The $83 million increase was driven by:

a $56 million increase due to higher volumes of natural gas sold primarily due to colder weather,

a $14 million increase from growth in the number of customers, and

a $12 million increase from higher natural gas prices passed through to customers.

Operating, Maintenance and Other. The $4 million increase was primarily driven by higher employee benefit costs.

EBIT. The $17 million increase was largely the result of higher customer usage due to colder weather and an increase in 2013 rates as approved by the OEB, partially offset by lower transportation revenues.

Western Canada Transmission & Processing



                                                                    Three Months
                                                                  Ended March 31,
                                                                                       Increase
                                                      2013              2012          (Decrease)
                                                         (in millions, except where noted)
Operating revenues                                 $       408       $      466       $       (58 )
Operating expenses
Natural gas and petroleum products purchased               111              161               (50 )
Operating, maintenance and other                           143              131                12
Depreciation and amortization                               52               47                 5

Operating income                                           102              127               (25 )
Other income and expenses                                    9               11                (2 )

EBIT                                               $       111       $      138       $       (27 )

Pipeline throughput, TBtu                                  184              177                 7
Volumes processed, TBtu                                    175              179                (4 )
Empress inlet volumes, TBtu                                121              171               (50 )
Canadian dollar exchange rate, average                    1.01             1.00              0.01


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Operating Revenues. The $58 million decrease was driven by:

a $20 million decrease due to lower propane sales prices associated with the Empress NGL business,

a $17 million decrease due primarily to lower sales volumes of residual natural gas at the Empress operations,

a $16 million decrease in NGL sales volumes at Empress caused primarily by reduced customer demand for butane and normal butane, and

a $12 million decrease in gathering and processing revenues due primarily to anticipated lower contracted volumes and lower interruptible revenues, partially offset by

a $6 million increase in transmission revenues due primarily to expansion, and

a $3 million increase in carbon and other non-income tax expense from customers.

Natural Gas and Petroleum Products Purchased. The $50 million decrease was driven by:

a $21 million decrease in volumes of natural gas purchases for extraction at Empress,

a $20 million decrease as a result of lower input costs for the Empress facility caused primarily by lower extraction premiums, and

a $7 million decrease in volumes of make-up gas purchases at Empress primarily as a result of lower plant inlet volumes.

Operating, Maintenance and Other. The $12 million increase was driven by:

an $8 million increase due primarily to higher maintenance costs partially due to scheduling, and

a $3 million increase in carbon and other non-income tax expense.

Depreciation and Amortization. The $5 million increase was driven mainly by expansion projects placed in service and maintenance capital incurred.

Other Income and Expenses. The $2 million decrease was driven primarily by lower AFUDC resulting from decreased capital spending on expansion projects that are in progress.

EBIT. The $27 million decrease was driven mainly by lower earnings in the conventional gathering and processing business driven by anticipated lower contracted volumes and lower interruptible revenues, and lower earnings at the Empress NGL business due primarily to lower propane sales prices.

Matters Affecting Future Western Canada Transmission & Processing Results

Certain commodity prices, specifically NGLs, have fluctuated in 2012 and 2013, and are generally lower than prior year levels. Our Empress NGL business is significantly affected by fluctuations in commodity prices. We updated our Empress NGL reporting unit's impairment test using recent operational information, financial data and April 1, 2013 commodity prices, and concluded there was no impairment of goodwill. The updated fair value of our Empress NGL reporting unit was substantially in excess of its carrying value as of April 1, 2013. Should NGL prices decline significantly from recent levels and further reduce earnings at the Empress NGL business, this could result in a triggering event that would warrant a re-testing of impairment for goodwill relating to the Empress NGL reporting unit, which could result in an impairment.


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Field Services



                                                                    Three Months
                                                                   Ended March 31,
                                                                                      Increase
                                                       2013            2012          (Decrease)
                                                          (in millions, except where noted)
Equity in earnings of unconsolidated affiliates      $      88       $      93      $         (5 )

EBIT                                                 $      88       $      93      $         (5 )

Natural gas gathered and processed/transported,
TBtu/d (a,b)                                               6.9             7.2              (0.3 )
NGL production, MBbl/d (a,c)                               396             412               (16 )
Average natural gas price per MMBtu (d,e)            $    3.34       $    2.74      $       0.60
Average NGL price per gallon (f)                     $    0.74       $    1.00      $      (0.26 )
Average crude oil price per barrel (g)               $   94.66       $  102.84      $      (8.18 )

(a) Reflects 100% of volumes.

(b) Trillion British thermal units per day.

(c) Thousand barrels per day.

(d) Average price based on NYMEX Henry Hub.

(e) Million British thermal units.

(f) Does not reflect results of commodity hedges.

(g) Average price based on NYMEX calendar month.

EBIT. Lower equity earnings of $5 million were mainly the result of the following variances, each representing our 50% ownership portion of the earnings drivers at DCP Midstream:

a $35 million decrease from commodity-sensitive processing arrangements due to decreased NGL and crude oil prices, net of increased natural gas prices,

a $12 million decrease in gathering and processing margins attributable to weather and third-party outages in 2013, lower recoveries and efficiencies, and unfavorable volumes in certain of DCP Midstream's geographic regions due to volume decline, and

an $11 million decrease attributable to unfavorable results from gas and NGL marketing, partially offset by

a $22 million increase in gains associated with the issuance of partnership units by DCP Partners in 2013 compared to 2012,

a $20 million increase due to decreased depreciation expense as a result of changes to the remaining useful lives of DCP Midstream's gathering, transmission, processing, storage and other assets during the second quarter of 2012. The key contributing factor to the change is an increase in estimated remaining economically recoverable commodity reserves, resulting from advances in extraction processes as well as improved technology used to locate commodity reserves,

a $6 million increase in earnings from DCP Partners as a result of mark-to-market gains on derivative instruments used to protect distributable cash flows and growth, and

a $5 million increase attributable to a decreased interest expense due to higher capitalized interest in 2013, and decreased income tax expense.


Table of Contents

Liquids



                                                            Three Months
                                                          Ended March 31,
                                                                             Increase
                                               2013            2012         (Decrease)
                                                 (in millions, except where noted)
  Operating revenues                         $      13        $    -        $        13
  Operating expenses
  Operating, maintenance and other                   5             -                  5
  Depreciation and amortization                      1             -                  1

  Operating income                                   7             -                  7
  Other income and expenses                         (1 )           -                 (1 )

  EBIT                                       $       6        $    -        $         6

  Express pipeline receipts, MBbl/d                207             -                207
  Platte total pipeline deliveries, MBbl/d         212             -                212
  Platte PADD II deliveries, MBbl/d                167             -                167
  Canadian dollar exchange rate, average          1.01             -               1.01

Express-Platte, acquired in March 2013, forms a significant part of the Liquids segment, along with our direct equity investments in Sand Hills and Southern Hills.

EBIT. The $6 million increase was primarily the earnings of Express-Platte from the date of acquisition.

Other



                                                    Three Months
                                                  Ended March 31,
                                                                 Increase
                                         2013       2012        (Decrease)
                                                   (in millions)
             Operating revenues          $  15      $  21      $         (6 )
             Operating expenses             44         49                (5 )

             Operating loss                (29 )      (28 )              (1 )
             Other income and expenses       3         (1 )               4

             EBIT                        $ (26 )    $ (29 )    $          3
. . .
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