Form 10-Q for quarterly period ended September 30, 2010
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-33007

 

 

SPECTRA ENERGY CORP

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   20-5413139
(State or other jurisdiction of incorporation)   (IRS Employer Identification No.)

5400 Westheimer Court

Houston, Texas 77056

(Address of principal executive offices, including zip code)

713-627-5400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of Common Stock, $0.001 par value, outstanding as of October 29, 2010: 648,221,917

 

 

 


Table of Contents

SPECTRA ENERGY CORP

FORM 10-Q FOR THE QUARTER ENDED

September 30, 2010

INDEX

 

          Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (Unaudited)

     4   
  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009

     4   
  

Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

     5   
  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009

     7   
  

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2010 and 2009

     8   
  

Notes to Condensed Consolidated Financial Statements

     9   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     47   

Item 4.

  

Controls and Procedures

     47   

PART II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     48   

Item 1A.

  

Risk Factors

     48   

Item 6.

  

Exhibits

     48   
  

Signatures

     49   

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on management’s beliefs and assumptions. These forward-looking statements are identified by terms and phrases such as: anticipate, believe, intend, estimate, expect, continue, should, could, may, plan, project, predict, will, potential, forecast, and similar expressions. Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

 

   

state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an effect on rate structure, and affect the speed at and degree to which competition enters the natural gas industries;

 

   

outcomes of litigation and regulatory investigations, proceedings or inquiries;

 

   

weather and other natural phenomena, including the economic, operational and other effects of hurricanes and storms;

 

   

the timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates;

 

   

general economic conditions, including the risk of a prolonged economic slowdown or decline, or the risk of delay in a recovery, which can affect the long-term demand for natural gas and related services;

 

   

potential effects arising from terrorist attacks and any consequential or other hostilities;

 

   

changes in environmental, safety and other laws and regulations;

 

   

results and costs of financing efforts, including the ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general market and economic conditions;

 

   

increases in the cost of goods and services required to complete capital projects;

 

   

declines in the market prices of equity and debt securities and resulting funding requirements for defined benefit pension plans;

 

   

growth in opportunities, including the timing and success of efforts to develop U.S. and Canadian pipeline, storage, gathering, processing and other infrastructure projects and the effects of competition;

 

   

the performance of natural gas transmission and storage, distribution, and gathering and processing facilities;

 

   

the extent of success in connecting natural gas supplies to gathering, processing and transmission systems and in connecting to expanding gas markets;

 

   

the effects of accounting pronouncements issued periodically by accounting standard-setting bodies;

 

   

conditions of the capital markets during the periods covered by the forward-looking statements; and

 

   

the ability to successfully complete merger, acquisition or divestiture plans; regulatory or other limitations imposed as a result of a merger, acquisition or divestiture; and the success of the business following a merger, acquisition or divestiture.

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than Spectra Energy Corp has described. Spectra Energy Corp undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per-share amounts)

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
         2010              2009              2010              2009      

Operating Revenues

           

Transportation, storage and processing of natural gas

   $ 707       $ 655       $ 2,113       $ 1,885   

Distribution of natural gas

     179         167         1,014         1,017   

Sales of natural gas liquids

     96         73         312         246   

Other

     37         38         123         106   
                                   

Total operating revenues

     1,019         933         3,562         3,254   
                                   

Operating Expenses

           

Natural gas and petroleum products purchased

     119         101         727         759   

Operating, maintenance and other

     322         265         958         785   

Depreciation and amortization

     165         149         482         429   

Property and other taxes

     72         66         220         197   
                                   

Total operating expenses

     678         581         2,387         2,170   
                                   

Gains on Sales of Other Assets and Other, net

     —           1         —           11   
                                   

Operating Income

     341         353         1,175         1,095   
                                   

Other Income and Expenses

           

Equity in earnings of unconsolidated affiliates

     98         60         297         267   

Other income and expenses, net

     7         12         17         35   
                                   

Total other income and expenses

     105         72         314         302   
                                   

Interest Expense

     159         160         476         456   
                                   

Earnings From Continuing Operations Before Income Taxes

     287         265         1,013         941   

Income Tax Expense From Continuing Operations

     69         54         242         260   
                                   

Income From Continuing Operations

     218         211         771         681   

Income From Discontinued Operations, net of tax

     1         1         17         3   
                                   

Net Income

     219         212         788         684   

Net Income—Noncontrolling Interests

     22         21         59         55   
                                   

Net Income—Controlling Interests

   $ 197       $ 191       $ 729       $ 629   
                                   

Common Stock Data

           

Weighted-average shares outstanding

           

Basic

     648         646         648         640   

Diluted

     650         647         650         641   

Earnings per share from continuing operations

           

Basic

   $ 0.30       $ 0.30       $ 1.10       $ 0.98   

Diluted

   $ 0.30       $ 0.30       $ 1.09       $ 0.98   

Earnings per share

           

Basic

   $ 0.30       $ 0.30       $ 1.13       $ 0.98   

Diluted

   $ 0.30       $ 0.30       $ 1.12       $ 0.98   

Dividends per share

   $ 0.25       $ 0.25       $ 0.75       $ 0.75   

See Notes to Condensed Consolidated Financial Statements.

 

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SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

 

     September 30,
2010
     December 31,
2009
 

ASSETS

     

Current Assets

     

Cash and cash equivalents

   $ 156       $ 166   

Receivables, net

     699         778   

Inventory

     371         321   

Other

     196         164   
                 

Total current assets

     1,422         1,429   
                 

Investments and Other Assets

     

Investments in and loans to unconsolidated affiliates

     2,003         2,001   

Goodwill

     4,236         3,948   

Other

     483         407   
                 

Total investments and other assets

     6,722         6,356   
                 

Property, Plant and Equipment

     

Cost

     21,428         19,960   

Less accumulated depreciation and amortization

     5,053         4,613   
                 

Net property, plant and equipment

     16,375         15,347   
                 

Regulatory Assets and Deferred Debits

     997         947   
                 

Total Assets

   $ 25,516       $ 24,079   
                 

 

See Notes to Condensed Consolidated Financial Statements.

 

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SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except per-share amounts)

 

     September 30,
2010
     December 31,
2009
 

LIABILITIES AND EQUITY

     

Current Liabilities

     

Accounts payable

   $ 353       $ 333   

Short-term borrowings and commercial paper

     982         162   

Taxes accrued

     50         139   

Interest accrued

     161         167   

Current maturities of long-term debt

     740         809   

Other

     779         885   
                 

Total current liabilities

     3,065         2,495   
                 

Long-term Debt

     9,277         8,947   
                 

Deferred Credits and Other Liabilities

     

Deferred income taxes

     3,232         3,113   

Regulatory and other

     1,655         1,634   
                 

Total deferred credits and other liabilities

     4,887         4,747   
                 

Commitments and Contingencies

     

Preferred Stock of Subsidiaries

     258         225   
                 

Equity

     

Preferred stock, $0.001 par, 22 million shares authorized, no shares outstanding

     —           —     

Common stock, $0.001 par, 1 billion shares authorized, 648 million and 647 million shares outstanding at September 30, 2010 and December 31, 2009, respectively

     1         1   

Additional paid-in capital

     4,701         4,700   

Retained earnings

     1,338         1,096   

Accumulated other comprehensive income

     1,430         1,328   
                 

Total controlling interests

     7,470         7,125   

Noncontrolling interests

     559         540   
                 

Total equity

     8,029         7,665   
                 

Total Liabilities and Equity

   $ 25,516       $ 24,079   
                 

See Notes to Condensed Consolidated Financial Statements.

 

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SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

     Nine Months
Ended September 30,
 
         2010             2009      

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 788      $ 684   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     493        440   

Deferred income tax expense

     62        125   

Equity in earnings of unconsolidated affiliates

     (297     (267

Distributions received from unconsolidated affiliates

     303        107   

Other

     (342     178   
                

Net cash provided by operating activities

     1,007        1,267   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Capital expenditures

     (881     (713

Investments in and loans to unconsolidated affiliates

     (6     (55

Acquisitions, net of cash acquired

     (492 )     (295

Purchases of held-to-maturity securities

     (850     —     

Proceeds from sales and maturities of held-to-maturity securities

     809        —     

Proceeds from sales and maturities of available-for-sale securities

     —          32   

Distributions received from unconsolidated affiliates

     12        148   

Receipt from affiliate – repayment of loan

     —          186   

Other

     (13     (43
                

Net cash used in investing activities

     (1,421     (740
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from the issuance of long-term debt

     2,625        3,405   

Payments for the redemption of long-term debt

     (2,502     (2,839

Net increase (decrease) in short-term borrowings and commercial paper

     821        (892

Distributions to noncontrolling interests

     (54     (153

Proceeds from the issuance of Spectra Energy common stock

     —          448   

Proceeds from the issuance of Spectra Energy Partners, LP common units

     —          208   

Dividends paid on common stock

     (487     (471

Other

     3        5   
                

Net cash provided by (used in) financing activities

     406        (289
                

Effect of exchange rate changes on cash

     (2     (10
                

Net increase (decrease) in cash and cash equivalents

     (10     228   

Cash and cash equivalents at beginning of period

     166        205   
                

Cash and cash equivalents at end of period

   $ 156      $ 433   
                
    

Supplemental Disclosures

    

Property, plant and equipment accruals

   $ 71      $ 49   

See Notes to Condensed Consolidated Financial Statements.

 

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SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In millions)

 

    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated Other
Comprehensive Income
             
          Foreign
Currency
Translation
Adjustments
    Other     Noncontrolling
Interests
    Total  

December 31, 2009

  $ 1      $ 4,700      $ 1,096      $ 1,686      $ (358   $ 540      $ 7,665   

Net income

    —          —          729        —          —          59        788   

Foreign currency translation adjustments

    —          —          —          114        —          13        127   

Unrealized mark-to-market net loss on hedges

    —          —          —          —          (31     —          (31

Reclassification of cash flow hedges into earnings

    —          —          —          —          1        —          1   

Pension and benefits impact

    —          —          —          —          18        —          18   

Dividends on common stock

    —          —          (487     —          —          —          (487

Stock-based compensation

    —          23        —          —          —          —          23   

Distributions to noncontrolling interests

    —          —          —          —          —          (54     (54

Other, net

    —          (22     —          —          —          1        (21
                                                       

September 30, 2010

  $ 1      $ 4,701      $ 1,338      $ 1,800      $ (370   $ 559      $ 8,029   
                                                       

December 31, 2008

  $ 1      $ 4,104      $ 899      $ 881      $ (345   $ 470      $ 6,010   

Net income

    —          —          629        —          —          55        684   

Foreign currency translation adjustments

    —          —          —          673        —          10        683   

Unrealized mark-to-market net loss on hedges

    —          —          —          —          (9     —          (9

Pension and benefits impact

    —          —          —          —          19        —          19   

Spectra Energy common stock issuance

    —          448        —          —          —          —          448   

Spectra Energy Partners, LP common unit issuance

    —          25        —          —          —          168        193   

Reclassification of deferred gain on sale of units of Spectra Energy Partners, LP

    —          59        —          —          —          —          59   

Dividends on common stock

    —          —          (487     —          —          —          (487

Stock-based compensation

    —          1        —          —          —          —          1   

Distributions to noncontrolling interests

    —          —          —          —          —          (157     (157

Contributions from noncontrolling interests

    —          —          —          —          —          2        2   

Other, net

    —          42        —          —          (2     (6     34   
                                                       

September 30, 2009

  $ 1      $ 4,679      $ 1,041      $ 1,554      $ (337   $ 542      $ 7,480   
                                                       

 

See Notes to Condensed Consolidated Financial Statements.

 

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SPECTRA ENERGY CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

The terms “we,” “our,” “us,” and “Spectra Energy” as used in this report refer collectively to Spectra Energy Corp and its subsidiaries unless the context suggests otherwise. These terms are used for convenience only and are not intended as a precise description of any separate legal entity within Spectra Energy.

Nature of Operations. Spectra Energy Corp, through its subsidiaries and equity affiliates, owns and operates a large and diversified portfolio of complementary natural gas-related energy assets, operating in three key areas of the natural gas industry: gathering and processing, transmission and storage, and distribution. We provide transportation and storage of natural gas to customers in various regions of the northeastern and southeastern United States, the Maritime Provinces in Canada and the Pacific Northwest in the United States and Canada, and in the province of Ontario, Canada. We also provide natural gas sales and distribution services to retail customers in Ontario, and natural gas gathering and processing services to customers in western Canada. In addition, we own a 50% interest in DCP Midstream, LLC (DCP Midstream), one of the largest natural gas gatherers and processors in the United States.

Basis of Presentation. The accompanying Condensed Consolidated Financial Statements include our accounts, our majority-owned subsidiaries where we have control and those variable interest entities, if any, where we are the primary beneficiary. These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, and reflect all normal recurring adjustments that are, in our opinion, necessary to fairly present our results of operations and financial position. Amounts reported in the Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods due to the effects of seasonal temperature variations on energy consumption, primarily in our gas distribution operations, as well as changing commodity prices on certain of our processing operations and other factors.

We have corrected the presentation of certain restricted cash balances in the accompanying condensed consolidated balance sheets. Restricted cash, totaling $30 million at December 31, 2009 that was previously classified as Cash and Cash Equivalents, is currently presented within Other Current Assets. Beginning and ending Cash and Cash Equivalents balances on the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 were also reduced by $9 million and $17 million, respectively, from amounts previously reported and Cash Used in Investing Activities for the nine-month period was reduced by $8 million. Management has concluded that these corrections are immaterial to our previously issued financial statements.

Use of Estimates. To conform with generally accepted accounting principles in the United States, we make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements. Although these estimates are based on our best available knowledge at the time, actual results could differ.

2. Acquisition

Bobcat Gas Storage. On August 30, 2010, we acquired the Bobcat Gas Storage assets and development project (Bobcat) from Haddington Energy Partners III LP and GE Energy Financial Services for a cash purchase price of $540 million, of which approximately $38 million was withheld at closing pending certain outcomes. The withheld amounts are recorded within Deferred Credits and Other Liabilities – Regulatory and Other on the Condensed Consolidated Balance Sheet at September 30, 2010.

 

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Strategically located on the Gulf Coast in southeastern Louisiana near Henry Hub, the Bobcat assets interconnect with five major interstate pipelines, including our Texas Eastern Transmission, LP pipeline, and complement our existing pipeline and storage portfolio in the region. Bobcat is part of the U.S. Transmission segment. Once fully developed and operational, these high-deliverability salt dome storage caverns will have a total working gas storage capacity of 46 billion cubic feet. Storage infrastructure such as Bobcat plays a vital role in meeting customers’ needs for managing demand swings on a seasonal basis, satisfying the increasing demand for natural gas-fired power generation and providing customers with the advantage and flexibility to access all the major markets in the United States.

The following table summarizes the preliminary fair values of the assets and liabilities acquired as of August 30, 2010. Subsequent adjustments may be recorded upon the completion of the valuation and the final determination of the purchase price allocation.

 

     Purchase Price
Allocation
 
     (in millions)  

Cash purchase price

   $ 540   

Working capital and other purchase adjustments

     7   
        

Total

     547   
        

Cash

     17   

Other current assets

     3   

Property, plant and equipment

     322   

Current liabilities

     (8

Deferred credits and other liabilities

     (4
        

Total assets acquired/liabilities assumed

     330   
        

Goodwill

   $ 217   
        

Goodwill related to the acquisition of Bobcat is deductible for income tax purposes.

Pro forma results of operations reflecting the acquisition of Bobcat as if the acquisition had occurred as of the beginning of the periods presented in this report do not materially differ from actual reported results.

Bobcat is a party to certain leases associated with its storage caverns that expire in 2036. Future minimum lease payments under these lease obligations total $47 million.

3. Business Segments

We manage our business in four reportable segments: U.S. Transmission, Distribution, Western Canada Transmission & Processing and Field Services. The remainder of our business operations is presented as “Other,” and consists of unallocated corporate costs, wholly owned captive insurance subsidiaries, employee benefit plan assets and liabilities, and other miscellaneous activities.

Our chief operating decision maker regularly reviews financial information about each of these segments in deciding how to allocate resources and evaluate performance. There is no aggregation within our defined business segments.

U.S. Transmission provides transportation and storage of natural gas for customers in various regions of the northeastern and southeastern United States and the Maritime Provinces in Canada. The natural gas transmission and storage operations in the U.S. are primarily subject to the Federal Energy Regulatory Commission’s (FERC’s) rules and regulations.

 

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Distribution provides retail natural gas distribution service in Ontario, Canada, as well as natural gas transportation and storage services to other utilities and energy market participants. These services are provided by Union Gas Limited (Union Gas), and are primarily subject to the rules and regulations of the Ontario Energy Board (OEB).

Western Canada Transmission & Processing provides transportation of natural gas, natural gas gathering and processing services, and natural gas liquids (NGLs) extraction, fractionation, transportation, storage and marketing to customers in western Canada and the northern tier of the United States. This segment conducts business primarily through BC Pipeline, BC Field Services, and the NGL marketing and Canadian Midstream businesses. BC Pipeline and BC Field Services operations are primarily subject to the rules and regulations of Canada’s National Energy Board (NEB).

Field Services gathers and processes natural gas and fractionates, markets and trades NGLs. It conducts operations through DCP Midstream, which is owned 50% by us and 50% by ConocoPhillips. DCP Midstream gathers raw natural gas through gathering systems located in nine major natural gas producing regions: Mid-Continent, Rocky Mountain, East Texas-North Louisiana, Barnett Shale, Gulf Coast, South Texas, Central Texas, Antrim Shale and Permian Basin.

Our reportable segments offer different products and services and are managed separately as business units. Management evaluates segment performance based on earnings before interest and taxes (EBIT) from continuing operations less noncontrolling interests related to those earnings.

On a segment basis, EBIT 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 short-term investments are managed centrally, so the associated realized and unrealized gains and losses from foreign currency transactions and interest and dividend income on those balances are excluded from the segments’ EBIT. Transactions between reportable segments are accounted for on the same basis as transactions with unaffiliated third parties.

 

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Business Segment Data

 

     Unaffiliated
Revenues
     Intersegment
Revenues
    Total
Operating
Revenues (a)
    Segment EBIT/
Consolidated
Earnings
from Continuing
Operations before
Income Taxes (a)
 
            (in millions)        

Three Months Ended September 30, 2010

         

U.S. Transmission

   $ 441       $ 1      $ 442      $ 231   

Distribution

     261         —          261        63   

Western Canada Transmission & Processing

     315         —          315        90   

Field Services

     —           —          —          70   
                                 

Total reportable segments

     1,017         1        1,018        454   

Other

     2         13        15        (23

Eliminations

     —           (14     (14     —     

Interest expense

     —           —          —          159   

Interest income and other (b)

     —           —          —          15   
                                 

Total consolidated

   $ 1,019       $ —        $ 1,019      $ 287   
                                 

Three Months Ended September 30, 2009

         

U.S. Transmission

   $ 425       $ 2      $ 427      $ 239   

Distribution

     244         —          244        48   

Western Canada Transmission & Processing

     260         —          260        84   

Field Services

     —           —          —          45   
                                 

Total reportable segments

     929         2        931        416   

Other

     2         10        12        (10

Eliminations

     2         (12     (10     —     

Interest expense

     —           —          —          160   

Interest income and other (b)

     —           —          —          19   
                                 

Total consolidated

   $ 933       $ —        $ 933      $ 265   
                                 

Nine Months Ended September 30, 2010

         

U.S. Transmission

   $ 1,337       $ 4      $ 1,341      $ 701   

Distribution

     1,260         —          1,260        282   

Western Canada Transmission & Processing

     959         —          959        278   

Field Services

     —           —          —          227   
                                 

Total reportable segments

     3,556         4        3,560        1,488   

Other

     6         36        42        (53

Eliminations

     —           (40     (40     —     

Interest expense

     —           —          —          476   

Interest income and other (b)

     —           —          —          54   
                                 

Total consolidated

   $ 3,562       $ —        $ 3,562      $ 1,013   
                                 

Nine Months Ended September 30, 2009

         

U.S. Transmission

   $ 1,241       $ 5      $ 1,246      $ 690   

Distribution

     1,236         —          1,236        240   

Western Canada Transmission & Processing

     770         —          770        223   

Field Services

     —           —          —          219   
                                 

Total reportable segments

     3,247         5        3,252        1,372   

Other

     5         31        36        (46

Eliminations

     2         (36     (34     —     

Interest expense

     —           —          —          456   

Interest income and other (b)

     —           —          —          71   
                                 

Total consolidated

   $ 3,254       $ —        $ 3,254      $ 941   
                                 

 

(a) Excludes amounts associated with entities included in discontinued operations.
(b) Includes foreign currency transaction gains and losses and the add-back of noncontrolling interests related to segment EBIT.

 

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4. Regulatory Matters

Maritimes & Northeast Pipeline, L.L.C. (M&N LLC). During 2009, M&N LLC filed a rate case with the FERC. The rate case included the impact of the Phase IV expansion facilities that went into service in January 2009 and resulted in lower recourse rates that went into effect in August 2009. In April 2010, the FERC approved a settlement that resolves all issues in the case. Although the settlement results in a reduction to M&N LLC’s recourse rates, the settlement will not have a material impact on consolidated results of operations.

Maritimes & Northeast Pipeline Limited Partnership (M&N LP). M&N LP initiated interim rates effective January 1, 2010 which were equal to final approved 2009 rates. Settlement on all 2010 issues, other than compensation for funds held in escrow, was reached in March 2010. Effective April 1, 2010, M&N LP received NEB approval of the interim rates related to the resolved issues. These 2010 interim rates are retroactive back to January 1, 2010. Final 2010 rates with respect to the issue of compensation for funds held in escrow will be determined after a hearing before the NEB. M&N LP filed an application with the NEB on July 26, 2010 seeking compensation for funds held in escrow and finalizing 2010 tolls. The NEB issued an order setting March 1, 2011 as the initial hearing date for the escrow issue.

Union Gas. In September 2010, Union Gas filed an application with the OEB seeking approval of its 2011 regulated distribution, storage and transmission rates, determined pursuant to the incentive regulation framework. The application proposes a delivery rate increase of less than 1% for a typical residential customer in Union Gas’ service territory effective January 1, 2011. This increase is primarily attributable to the removal of long-term storage revenues which were historically credited to these delivery rates. The OEB’s decision in the Natural Gas Electricity Interface Review required that the long-term storage revenues included in delivery rates be removed over a four-year period, starting in 2008.

5. Income Taxes

Income tax expense from continuing operations for the three months ended September 30, 2010 was $69 million, compared to $54 million for the same period in 2009, increasing primarily as a result of higher earnings from continuing operations and a higher effective tax rate when comparing the quarters. Income tax expense from continuing operations for the nine months ended September 30, 2010 was $242 million, compared to $260 million reported for the same period in 2009, decreasing primarily as a result of favorable tax audit settlements, partially offset by an increase in income tax expense due to higher earnings.

The effective tax rate for income from continuing operations for the three months ended September 30, 2010 was 24.0% compared to 20.4% reported for the same period in 2009. The effective tax rate for income from continuing operations for the nine months ended September 30, 2010 was 23.9% compared to 27.6% reported for the same period in 2009. The lower effective tax rate for the nine months ended September 30, 2010 was primarily due to favorable tax settlements, most notably an administrative change by the Canadian federal government that resulted in cash tax refunds from historical tax years and a reduction to the deferred tax liability.

No material net change in uncertain tax benefits was recognized during the nine months ended September 30, 2010. Although uncertain, no material increases or decreases in uncertain tax benefits are expected to occur prior to September 30, 2011.

6. Discontinued Operations

Discontinued operations includes the net effects of a settlement arrangement related to prior liquefied natural gas contracts and, during the first quarter of 2010, an immaterial income tax adjustment related to previously discontinued operations.

 

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The following table summarizes the results classified as Income From Discontinued Operations, Net of Tax, by segment, in the Condensed Consolidated Statements of Operations.

 

     Revenues      Pre-tax
Earnings
     Income
Tax
Expense
(Benefit)
    Income From
Discontinued
Operations,
Net of Tax
 
     (in millions)  

Three Months Ended September 30, 2010

          

Other

   $ —         $ 2       $ 1      $ 1   
                                  

Total consolidated

   $ —         $ 2       $ 1      $ 1   
                                  

Three Months Ended September 30, 2009

          

Western Canada Transmission & Processing

   $ 1       $ 1       $ —        $ 1   

Other

     22         —           —          —     
                                  

Total consolidated

   $ 23       $ 1       $ —        $ 1   
                                  

Nine Months Ended September 30, 2010

          

Other

   $ 107       $ 6       $ (11   $ 17   
                                  

Total consolidated

   $ 107       $ 6       $ (11   $ 17   
                                  

Nine Months Ended September 30, 2009

          

Western Canada Transmission & Processing

   $ 1       $ 1       $ —        $ 1   

Other

     88         3         1        2   
                                  

Total consolidated

   $ 89       $ 4       $ 1      $ 3   
                                  

7. Comprehensive Income

Components of comprehensive income are as follows:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
         2010             2009             2010             2009      
     (in millions)  

Net income

   $ 219      $ 212      $ 788      $ 684   

Other comprehensive income

        

Foreign currency translation adjustments

     228        468        127        683   

Unrealized mark-to-market net loss on hedges

     (13     (14     (31     (9

Reclassification of cash flow hedges into earnings

     —          4        1        —     

Pension and benefits impact

     6        (3     18        19   
                                

Total comprehensive income, net of tax

     440        667        903        1,377   

Less: comprehensive income—noncontrolling interests

     25        27        72        65   
                                

Comprehensive income—controlling interests

   $ 415      $ 640      $ 831      $ 1,312   
                                

8. Earnings per Common Share

Basic earnings per common share (EPS) is computed by dividing net income from controlling interests by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income from controlling interests by the diluted weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, stock-based performance unit awards and phantom stock awards, were exercised, settled or converted into common stock.

 

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The following table presents basic and diluted EPS calculations:

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
         2010              2009              2010              2009      
     (in millions, except per-share amounts)  

Income from continuing operations, net of tax—controlling interests

   $ 196       $ 190       $ 712       $ 626   

Income from discontinued operations, net of tax—controlling interests

     1         1         17         3   
                                   

Net income—controlling interests

   $ 197       $ 191       $ 729       $ 629   
                                   

Weighted-average common shares, outstanding

           

Basic

     648         646         648         640   

Diluted

     650         647         650         641   

Basic earnings per common share (a)

           

Continuing operations

   $ 0.30       $ 0.30       $ 1.10       $ 0.98   

Discontinued operations, net of tax

     —           —           0.03         —     
                                   

Total basic earnings per common share

   $ 0.30       $ 0.30       $ 1.13       $ 0.98   
                                   

Diluted earnings per common share (a)

           

Continuing operations

   $ 0.30       $ 0.30       $ 1.09       $ 0.98   

Discontinued operations, net of tax

     —           —           0.03         —     
                                   

Total diluted earnings per common share

   $ 0.30       $ 0.30       $ 1.12       $ 0.98   
                                   

 

(a) Quarterly earnings-per-share amounts are stand-alone calculations and may not be additive to year-to-date amounts due to rounding.

Weighted-average shares used to calculate diluted EPS includes the effect of certain options and restricted stock awards. Certain other options and stock awards related to approximately 10 million and 11 million shares for the three months ended September 30, 2010 and 2009, respectively, and 10 million and 12 million shares for the nine months ended September 30, 2010 and 2009, respectively, were not included in the calculation of diluted EPS. These options and stock awards were not included because either the option exercise prices were greater than the average market price of the common shares during these periods or performance measures related to the awards had not yet been met.

9. Marketable Securities and Restricted Funds

Held-to-Maturity (HTM) Marketable SecuritiesHTM marketable securities, totaling $168 million at September 30, 2010 and $121 million at December 31, 2009, are classified as Investments and Other Assets—Other in the Condensed Consolidated Balance Sheets. These securities, primarily Canadian government securities, are restricted funds pursuant to certain M&N LP debt agreements. These funds, plus future cash from operations that would otherwise be available for distribution to the partners of M&N LP, are placed in escrow until the balance in escrow is sufficient to fund all future debt service on the notes. The notes payable have semi-annual interest and principal payments and are due in 2019.

At September 30, 2010, the contractual maturities of outstanding HTM securities are less than one year. Purchases and sales of HTM marketable securities are presented on a gross basis within Cash Flows From Investing Activities on the Condensed Consolidated Statements of Cash Flows.

 

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Additional information regarding HTM investments follows:

 

    September 30, 2010     December 31, 2009  
    Gross
Unrealized
Holding
Gains
    Gross
Unrealized
Holding
Losses
    Estimated
Fair
Value
    Gross
Unrealized
Holding
Gains
    Gross
Unrealized
Holding
Losses
    Estimated
Fair
Value
 
    (in millions)  

Canadian government securities

  $ —        $ —        $ 168      $ —        $ —        $ 113   

Money market instruments

    —          —          —          —          —          8   
                                               

Total held-to-maturity investments

  $ —        $ —        $ 168      $ —        $ —        $ 121   
                                               

Other Restricted Funds. In addition to the HTM securities held in escrow described above, we had funds totaling $55 million at September 30, 2010, classified as Other Current Assets, that were also considered restricted funds, primarily related to insurance and M&N LP debt service requirements.

10. Inventory

Inventory consists primarily of natural gas and NGLs held in storage for transmission and processing, and also includes materials and supplies. Natural gas inventories primarily relate to the Distribution segment in Canada and are valued at costs approved by the OEB. The difference between the approved price and the actual cost of gas purchased is recorded in either accounts receivable or other current liabilities, as appropriate, for future disposition with customers, subject to approval by the OEB. The remaining inventory is recorded at cost, primarily using average cost. The components of inventory are as follows:

 

     September 30,
2010
     December 31,
2009
 
     (in millions)  

Natural gas

   $ 249       $ 219   

NGLs

     51         21   

Materials and supplies

     71         81   
                 

Total inventory

   $ 371       $ 321   
                 

11. Investments in and Loans to Unconsolidated Affiliates

Our most significant investment in unconsolidated affiliates is our 50% investment in DCP Midstream, which is accounted for under the equity method of accounting. The following represents summary financial information for DCP Midstream, presented at 100%:

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
         2010              2009              2010              2009      
     (in millions)  

Operating revenues

   $ 2,604       $ 2,073       $ 8,198       $ 5,806   

Operating expenses

     2,436         1,928         7,564         5,469   

Operating income

     168         145         634         337   

Net income

     108         93         435         158   

Net income attributable to members’ interests

     119         89         414         169   

In January 2009, DCP Midstream reclassified to equity certain deferred gains on sales of common units in DCP Midstream Partners, LP (DCP Partners). Our proportionate 50% share, totaling $135 million pre-tax, was recorded in Equity in Earnings of Unconsolidated Affiliates in the Condensed Consolidated Statement of Operations in the first quarter of 2009.

 

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In the first and third quarters of 2010, DCP Midstream recorded to equity gains on additional sales of common units of DCP Partners. Our proportionate shares, totaling $9 million and $11 million pre-tax, were recorded in Equity in Earnings of Unconsolidated Affiliates in the respective periods.

12. Goodwill

We completed our annual goodwill impairment test as of April 1, 2010 and no impairments were identified. We primarily use a discounted cash flow analysis to determine fair value for each reporting unit. Key assumptions in the determination of fair value include the use of an appropriate discount rate and estimated future cash flows. In estimating cash flows, we incorporate expected long-term growth rates in key markets served by our operations, regulatory stability, the ability to renew contracts, commodity prices (where appropriate), and foreign currency exchange rates, as well as other factors that affect our revenue, expense and capital expenditure projections.

The following table presents activity within goodwill based on the reporting unit determination.

 

     December 31,
2009
     Increases (a)      September 30,
2010
 
     (in millions)  

U.S. Transmission

   $ 2,391       $ 255       $ 2,646   

Distribution

     831         17         848   

Western Canada Transmission & Processing

     726         16         742   
                          

Total consolidated

   $ 3,948       $ 288       $ 4,236   
                          

 

  (a) Increases consist of foreign currency translation and $217 million of goodwill at U.S. Transmission associated with the August 2010 acquisition of Bobcat. See Note 2 for further discussion.

13. Debt and Credit Facilities

Available Credit Facilities and Restrictive Debt Covenants

 

     Expiration
Date
     Total
Credit
Facilities
Capacity
     Outstanding at September 30, 2010      Available
Credit
Facilities
Capacity
 
           Commercial
Paper
     Revolving
Credit
     Letters of
Credit
     Total     
                          (in millions)                       

Spectra Energy Capital, LLC (a)

                    

Multi-year syndicated

     2012       $ 1,500       $ 841       $ —         $ 14       $ 855       $ 645   

Westcoast Energy Inc. (b)

                    

Multi-year syndicated

     2011         194         31         —           —           31         163   

Union Gas (c)

                    

Multi-year syndicated

     2012         486         110         —           —           110         376   

Spectra Energy Partners, LP

                    

Multi-year syndicated

     2012         500         —           230         —           230         270   
                                                        

Total

      $ 2,680       $ 982       $ 230       $ 14       $ 1,226       $ 1,454   
                                                        

 

(a) Credit facility contains a covenant requiring Spectra Energy’s debt-to-total capitalization ratio to not exceed 65%.
(b) U.S. dollar equivalent at September 30, 2010. The credit facility totals 200 million Canadian dollars and contains a covenant that requires the Westcoast Energy Inc. non-consolidated debt-to-total capitalization ratio to not exceed 75%.
(c) U.S. dollar equivalent at September 30, 2010. The credit facility totals 500 million Canadian dollars and contains a covenant that requires the Union Gas debt-to-total capitalization ratio to not exceed 75% and a provision which requires Union Gas to repay all borrowings under the facility for a period of two days during the second quarter of each year.

 

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The issuance of commercial paper, letters of credit and other borrowings reduces the amount available under the credit facilities.

Our credit agreements contain various financial and other covenants, including the maintenance of certain financial ratios. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. As of September 30, 2010, we were in compliance with those covenants. In addition, our credit agreements allow for acceleration of payments or termination of the agreements due to nonpayment, or in some cases, due to the acceleration of other significant indebtedness of the borrower or some of its subsidiaries. Our debt and credit agreements do not contain provisions that trigger an acceleration of indebtedness based solely on the occurrence of a material adverse change in our financial condition or results of operations.

14. Fair Value Measurements

The following table presents, for each of the fair value hierarchy levels, assets and liabilities that are measured and recorded at fair value on a recurring basis:

 

Description

  

Condensed Consolidated Balance Sheet Caption

   September 30, 2010  
      Total      Level 1      Level 2      Level 3  
          (in millions)  

Corporate debt securities

   Cash and cash equivalents    $ 67       $ —         $ 67       $ —     

Corporate debt securities

   Investments and other assets—other      19         19         —           —     

Derivative assets—interest rate swaps

   Investments and other assets—other      61         —           61         —     

Money market funds

   Investments and other assets—other      17         17         —           —     
                                      

Total Assets

   $ 164       $ 36       $ 128       $ —     
                                      

Derivative liabilities—natural gas purchase contracts

   Deferred credits and other liabilities— regulatory and other    $ 10       $ —         $ —         $ 10  

Derivative liabilities—interest rate swaps

   Deferred credits and other liabilities— regulatory and other      33         —           33         —     
                                      

Total Liabilities

   $ 43       $ —         $ 33       $ 10  
                                      

 

          December 31, 2009  

Description

  

Condensed Consolidated Balance Sheet Caption

   Total      Level 1      Level 2      Level 3  
          (in millions)  

Money market funds

   Cash and cash equivalents    $ 14       $ 14       $ —         $ —     

Corporate debt securities

   Cash and cash equivalents      50         —           50         —     

Derivative assets—natural gas purchase contracts

   Investments and other assets—other      15         —           —           15   

Derivative assets—interest rate swaps

   Investments and other assets—other      18         —           18         —     

Money market funds

   Investments and other assets—other      25         25         —           —     
                                      

Total Assets

   $ 122       $ 39       $ 68       $ 15   
                                      

Derivative liabilities—interest rate swaps

   Deferred credits and other liabilities— regulatory and other    $ 17       $ —         $ 17       $ —     
                                      

Total Liabilities

   $ 17       $ —         $ 17       $ —     
                                      

 

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The following table presents changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
         2010             2009             2010             2009      
     (in millions)  

Long-term derivative assets (liabilities)

        

Fair value, beginning of period

   $ 1      $ 24      $ 15      $ 36   

Total realized/unrealized gains (losses):

        

Included in earnings

     —          (1     (3     (5

Included in Investments and Other Assets—Other

     —          2        —          3   

Included in other comprehensive income

     (11     (6     (22     (15
                                

Fair value, end of period

   $ (10 )   $ 19      $ (10   $ 19   
                                

Total gains (losses) for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets/liabilities held at the end of the period

   $ —        $ (1   $ (2   $ (5
                                

Level 1

Level 1 valuations represent quoted unadjusted prices for identical instruments in active markets.

Level 2 Valuation Techniques

Fair values of our financial instruments that are actively traded in the secondary market, primarily corporate debt securities, are determined based on market-based prices. These valuations may include inputs such as quoted market prices of the exact or similar instruments, broker or dealer quotations, or alternative pricing sources that may include models or matrix pricing tools, with reasonable levels of price transparency.

For interest rate swaps, we utilize data obtained from multiple sources for the determination of fair value. Both the future cash flows for the fixed-leg and floating-leg of our swaps are discounted to present value. In addition, credit default swap rates are used to develop the adjustment for credit risk embedded in our positions. We believe that since some of the inputs and assumptions for the calculations of fair value are derived from observable market data, a Level 2 classification is appropriate.

Level 3 Valuation Techniques

We do not have significant amounts of assets or liabilities measured and reported using level 3 valuation techniques, which include the use of pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

Financial Instruments

The fair values of financial instruments that are recorded and carried at book value are summarized in the following table. Judgment is required in interpreting market data to develop the estimates of fair value. These estimates are not necessarily indicative of the amounts we could have realized in current markets.

 

     September 30, 2010      December 31, 2009  
     Book
Value
     Approximate
Fair Value
     Book
Value
     Approximate
Fair Value
 
     (in millions)  

Long-term receivables

   $ 119       $ 121       $ 116       $ 118   

Long-term debt, including current maturities

     10,017         11,598         9,756         10,690   

 

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The fair values of long-term debt consider the terms of the related debt absent the impacts of derivative/hedging activities. The book values of long-term debt include the impacts of certain “pay floating—receive fixed” interest rate swaps that are designated as fair value hedges.

The fair value of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable, short-term borrowings and commercial paper are not materially different from their carrying amounts because of the short-term nature of these instruments or because the stated rates approximate market rates.

During the 2010 and 2009 periods, there were no adjustments to assets and liabilities measured at fair value on a nonrecurring basis.

15. Commitments and Contingencies

Environmental

We are subject to various U.S. federal, state and local laws and regulations, as well as Canadian federal and provincial laws, regarding air and water quality, hazardous and solid waste disposal and other environmental matters. These laws and regulations can change from time to time, imposing new obligations on us.

Like others in the energy industry, we and our affiliates are responsible for environmental remediation at various contaminated sites. These include some properties that are part of our ongoing operations, sites formerly owned or used by us, and sites owned by third parties. Remediation typically involves management of contaminated soils and may involve groundwater remediation. Managed in conjunction with relevant international, federal, state/provincial and local agencies, activities vary with site conditions and locations, remedial requirements, complexity and sharing of responsibility. If remediation activities involve statutory joint and several liability provisions, strict liability, or cost recovery or contribution actions, we or our affiliates could potentially be held responsible for contamination caused by other parties. In some instances, we may share liability associated with contamination with other potentially responsible parties, and may also benefit from insurance policies or contractual indemnities that cover some or all cleanup costs. All of these sites generally are managed in the normal course of business or affiliated operations.

Included in Deferred Credits and Other Liabilities—Regulatory and Other on the Condensed Consolidated Balance Sheets are accruals related to extended environmental-related activities totaling $15 million at September 30, 2010 and $16 million as of December 31, 2009. These accruals represent provisions for costs associated with remediation activities at some of our current and former sites, as well as other environmental contingent liabilities.

Litigation

Duke Energy Retirement Cash Balance Plan. A class action lawsuit was filed in federal court in South Carolina in 2006 against Duke Energy Corporation (Duke Energy) and the Duke Energy Retirement Cash Balance Plan. Various causes of action were alleged in the class action lawsuit, including violations of the Employee Retirement Income Security Act of 1974 (ERISA) and the Age Discrimination in Employment Act. These allegations arose out of the conversion of the Duke Power Company Employees’ Retirement Plan into the Duke Power Company Retirement Cash Balance Plan. The plaintiffs sought to represent present and former participants in the Duke Energy Retirement Cash Balance Plan. Various motions were filed by the parties, and the Court issued a series of rulings in 2008 denying the plaintiffs’ class certification motion, dismissing certain of the causes of action originally filed by plaintiffs and allowing other causes of action to proceed. As a result of these rulings, the plaintiffs re-filed a new Amended Class Action Complaint in 2008 asserting and re-pleading the three remaining claims which the Court allowed to proceed. In 2009, the Court issued an Order granting class certification for two of plaintiffs’ remaining claims and denying certification of the plaintiffs’ third breach of fiduciary claim. Both parties filed motions for summary judgment on April 1, 2010 with respect to the two claims that were certified for class action treatment and Duke Energy also filed a motion for summary judgment on the plaintiffs’ breach of fiduciary claims.

 

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A mediation between Plaintiffs and Duke Energy occurred on September 21, 2010 and an agreement was reached to resolve all claims remaining in the case. This agreement is subject to Court approval as it includes the resolution of the claims that were certified as class actions. In connection with our spin-off from Duke Energy in 2007, we agreed to share with Duke Energy any liabilities or damages associated with this matter that specifically relate to those Spectra Energy “participants” who are class members and who share in the described settlement. The amount applicable to us for the planned settlement is not expected to be material and therefore we believe that the final disposition of this matter will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Other Litigation and Legal Proceedings. We are involved in other legal, tax and regulatory proceedings in various forums arising in the ordinary course of business, including matters regarding contract and payment claims, some of which involve substantial monetary amounts. We have insurance coverage for certain of these losses should they be incurred. We believe that the final disposition of these proceedings will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Legal costs related to the defense of loss contingencies are expensed as incurred. We had no material reserves recorded as of September 30, 2010 or December 31, 2009 related to litigation.

Other Commitments and Contingencies

See Note 16 for a discussion of guarantees and indemnifications.

16. Guarantees and Indemnifications

We have various financial guarantees and indemnifications which are issued in the normal course of business. As discussed below, these contracts include financial guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. We enter into these arrangements to facilitate a commercial transaction with a third party by enhancing the value of the transaction to the third party. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on the Condensed Consolidated Balance Sheets. The possibility of having to perform under these guarantees and indemnifications is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events.

We have issued performance guarantees to customers and other third parties that guarantee the payment and performance of other parties, including certain non-wholly owned entities. In connection with our spin-off from Duke Energy, certain guarantees that were previously issued by us were assigned to, or replaced by, Duke Energy as guarantor in 2006. For any remaining guarantees of other Duke Energy obligations, Duke Energy has indemnified us against any losses incurred under these guarantee arrangements. The maximum potential amount of future payments we could have been required to make under these performance guarantees as of September 30, 2010 was approximately $421 million, which has been indemnified by Duke Energy, as discussed above. One of our outstanding performance guarantees expires in 2028. The remaining guarantees have no contractual expiration.

We have also issued joint and several guarantees to some of the Duke/Fluor Daniel (D/FD) project owners, guaranteeing the performance of D/FD under its engineering, procurement and construction contracts and other contractual commitments. D/FD is one of the entities transferred to Duke Energy in connection with our spin-off from Duke Energy. Substantially all of these guarantees have no contractual expiration and no stated maximum amount of future payments that we could be required to make. Fluor Enterprises Inc., as 50% owner in D/FD, has issued similar joint and several guarantees to the same D/FD project owners.

 

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Westcoast Energy Inc. (Westcoast), a wholly owned subsidiary, has issued performance guarantees to third parties guaranteeing the performance of unconsolidated entities, such as equity method investments, and of entities previously sold by Westcoast to third parties. Those guarantees require Westcoast to make payment to the guaranteed third party upon the failure of such unconsolidated or sold entity to make payment under some of its contractual obligations, such as debt, purchase contracts and leases. Certain guarantees that were previously issued by Westcoast for obligations of entities that remained a part of Duke Energy are considered guarantees of third party performance; however, Duke Energy has indemnified us against any losses incurred under these guarantee arrangements. The maximum potential amount of future payments Westcoast could have been required to make under those performance guarantees of unconsolidated entities and third-party entities as of September 30, 2010 was $63 million. Of these guarantees, $4 million expire in 2015 and the remaining have no contractual expiration.

We have entered into various indemnification agreements related to purchase and sale agreements and other types of contractual agreements with vendors and other third parties. These agreements typically cover environmental, tax, litigation and other matters, as well as breaches of representations, warranties and covenants. Typically, claims may be made by third parties for various periods of time depending on the nature of the claim. Our potential exposure under these indemnification agreements can range from a specified amount, such as the purchase price, to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. We are unable to estimate the total potential amount of future payments under these indemnification agreements due to several factors, such as the unlimited exposure under certain guarantees.

At September 30, 2010, the amounts recorded for the guarantees and indemnifications, described above, including the indemnifications by Duke Energy to us, are not material, both individually and in the aggregate.

17. Risk Management and Hedging Activities

We are exposed to the impact of market fluctuations in the prices of NGLs and natural gas purchased primarily as a result of our equity investment in DCP Midstream and our Empress operations in Canada. Exposure to interest rate risk exists as a result of the issuance of variable and fixed-rate debt and commercial paper. We are exposed to foreign currency risk from our Canadian operations. We employ established policies and procedures to manage our risks associated with these market fluctuations, which may include the use of forward physical transactions as well as other derivatives, primarily around interest rate exposures.

At September 30, 2010, we had interest rate hedges in place for various purposes. We had “pay floating—receive fixed” interest rate swaps with a total notional principal amount of $1,494 million to hedge against changes in the fair value of our fixed-rate debt that arise as a result of changes in market interest rates. These swaps also allow us to transform a portion of the underlying cash flows related to our long-term fixed-rate debt securities into variable-rate debt in order to achieve our desired mix of fixed and variable-rate debt. We also had forward-starting “pay fixed—receive floating” interest rate swaps with a total notional principal amount of $150 million to effectively lock in a fixed underlying interest rate in anticipation of the refinancing of a scheduled debt maturity. At Spectra Energy Partners, we had third-party “pay fixed—receive floating” interest rate swaps with a total notional principal amount of $40 million to mitigate our exposure to variable interest rates on loans outstanding under its revolving credit facility.

Our equity investment affiliate, DCP Midstream, also has risk exposures primarily associated with market prices of NGLs and natural gas. DCP Midstream manages these risks separate from Spectra Energy, and utilizes various risk management strategies, including the use of commodity derivatives.

Other than interest rate swaps described above, we did not have any significant derivatives outstanding during the nine months ended September 30, 2010.

 

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18. Employee Benefit Plans

Retirement Plans. We have a qualified non-contributory defined benefit (DB) retirement plan for U.S. employees and non-qualified plans for various executive retirement and savings plans. Our Westcoast subsidiary maintains qualified and non-qualified, contributory and non-contributory DB and defined contribution (DC) retirement plans covering substantially all employees of our Canadian operations.

Our policy is to fund our retirement plans on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan participants or as required by legislation or plan terms. We made discretionary contributions of $30 million to our U.S. retirement plans in the nine-month period ended September 30, 2010 and made no contributions for the same period in 2009. We do not anticipate making any further discretionary contributions to the U.S. plans during 2010. We made total contributions to the Canadian DC and qualified DB plans of $51 million during the nine months ended September 30, 2010 and $44 million during the same period in 2009. We anticipate that we will make total contributions of approximately $70 million to the Canadian plans in 2010.

Qualified Pension Plans—Components of Net Periodic Pension Cost

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
         2010             2009             2010             2009      
     (in millions)  

U.S.

        

Service cost benefit earned

   $ 2      $ 2      $ 8      $ 7   

Interest cost on projected benefit obligation

     6        7        19        20   

Expected return on plan assets

     (7     (9     (23     (25

Amortization of loss

     2        2        6        4   
                                

Net periodic pension cost

   $ 3      $ 2      $ 10      $ 6   
                                

Canada

        

Service cost benefit earned

   $ 4      $ 3      $ 12      $ 9   

Interest cost on projected benefit obligation

     11        10        34        28   

Expected return on plan assets

     (11     (11     (34     (31

Amortization of loss

     5        1        13        2   

Amortization of prior service costs

     —          —          1        1   
                                

Net periodic pension cost

   $ 9      $ 3      $ 26      $ 9   
                                

Non-Qualified Pension Benefits Plans—Components of Net Periodic Pension Cost

 

     Three Months
  Ended September 30,  
     Nine Months
Ended September 30,
 
         2010              2009              2010              2009      
     (in millions)  

U.S.

           

Interest cost on projected benefit obligation

   $ —         $ —         $ 1       $ 1   
                                   

Net periodic pension cost

   $ —         $ —         $ 1       $ 1   
                                   

Canada

           

Service cost benefit earned

   $ —         $ —         $ 1       $ 1   

Interest cost on projected benefit obligation

     1         1         4         3   

Amortization of net actuarial loss

     1         —           1         —     
                                   

Net periodic pension cost

   $ 2       $ 1       $ 6       $ 4   
                                   

 

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Other Post-Retirement Benefit Plans. We provide certain health care and life insurance benefits for retired employees on a contributory and non-contributory basis. Employees are eligible for these benefits if they have met age and service requirements at retirement, as defined in the plans.

Other Post-Retirement Benefit Plans—Components of Net Periodic Benefit Cost

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
         2010             2009             2010             2009      
     (in millions)  

U.S.

        

Service cost benefit earned

   $ 1      $ 1      $ 1      $ 1   

Interest cost on accumulated post-retirement benefit obligation

     2        3        8        10   

Expected return on plan assets

     (1     (1     (4     (4

Amortization of net transition liability

     1        1        3        4   

Amortization of loss

     —          —          1        1   
                                

Net periodic other post-retirement benefit cost

   $ 3      $ 4      $ 9      $ 12   
                                

Canada

        

Service cost benefit earned

   $ 1      $ —        $ 3      $ 1   

Interest cost on accumulated post-retirement benefit obligation

     2        2        5        4   

Amortization of past service cost

     (1     —          (1     —     
                                

Net periodic other post-retirement benefit cost

   $ 2      $ 2      $ 7      $ 5   
                                

19. Consolidating Financial Information

Spectra Energy Corp has agreed to fully and unconditionally guarantee the payment of principal and interest under all series of notes outstanding under the Senior Indenture of Spectra Energy Capital, LLC (Spectra Capital), a wholly owned, consolidated subsidiary. In accordance with Securities and Exchange Commission (SEC) rules, the following condensed consolidating financial information is presented. The information shown for Spectra Energy Corp and Spectra Capital is presented utilizing the equity method of accounting for investments in subsidiaries, as required. The non-guarantor subsidiaries column represents all wholly owned subsidiaries of Spectra Capital. This information should be read in conjunction with our accompanying condensed consolidated financial statements and notes thereto.

 

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Spectra Energy Corp

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2010

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Total operating revenues

   $ —        $ —        $ 1,019       $ —        $ 1,019   

Total operating expenses

     8        —          670         —          678   
                                         

Operating income (loss)

     (8     —          349         —          341   

Equity in earnings of unconsolidated affiliates

     —          —          98         —          98   

Equity in earnings of subsidiaries

     202        319        —           (521     —     

Other income and expenses, net

     —          (6     13         —          7   

Interest expense

     —          51        108         —          159   
                                         

Earnings from continuing operations before income taxes

     194        262        352         (521     287   

Income tax expense (benefit) from continuing operations

     (3     60        12         —          69   
                                         

Income from continuing operations

     197        202        340         (521     218   

Income from discontinued operations, net of tax

     —          —          1         —          1   
                                         

Net income

     197        202        341         (521     219   

Net income—noncontrolling interests

     —          —          22         —          22   
                                         

Net income—controlling interests

   $ 197      $ 202      $ 319       $ (521   $ 197   
                                         

 

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Spectra Energy Corp

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2009

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Total operating revenues

   $ —        $ —         $ 933       $ —        $ 933   

Total operating expenses

     2        —           579         —          581   

Gains on sales of other assets and other, net

     —          —           1         —          1   
                                          

Operating income (loss)

     (2     —           355         —          353   

Equity in earnings of unconsolidated affiliates

     —          —           60         —          60   

Equity in earnings of subsidiaries

     192        272         —           (464     —     

Other income and expenses, net

     1        —           11         —          12   

Interest expense

     —          52         108         —          160   
                                          

Earnings from continuing operations before income taxes

     191        220         318         (464     265   

Income tax expense from continuing operations

     —          28         26         —          54   
                                          

Income from continuing operations

     191        192         292         (464     211   

Income from discontinued operations, net of tax

     —          —           1         —          1   
                                          

Net income

     191        192         293         (464     212   

Net income—noncontrolling interests

     —          —           21         —          21   
                                          

Net income—controlling interests

   $ 191      $ 192       $ 272       $ (464   $ 191   
                                          

 

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Spectra Energy Corp

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2010

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Total operating revenues

   $ —        $ —        $ 3,562       $ —        $ 3,562   

Total operating expenses

     13        1        2,373         —          2,387   
                                         

Operating income (loss)

     (13     (1     1,189         —          1,175   

Equity in earnings of unconsolidated affiliates

     —          —          297         —          297   

Equity in earnings of subsidiaries

     737        1,101        —           (1,838     —     

Other income and expenses, net

     —          (4     21         —          17   

Interest expense

     —          153        323         —          476   
                                         

Earnings from continuing operations before income taxes

     724        943        1,184         (1,838     1,013   

Income tax expense (benefit) from continuing operations

     (5     206        41         —          242   
                                         

Income from continuing operations

     729        737        1,143         (1,838     771   

Income from discontinued operations, net of tax

     —          —          17         —          17   
                                         

Net income

     729        737        1,160         (1,838     788   

Net income—noncontrolling interests

     —          —          59         —          59   
                                         

Net income—controlling interests

   $ 729      $ 737      $ 1,101       $ (1,838   $ 729   
                                         

 

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Spectra Energy Corp

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2009

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Total operating revenues

   $ —        $ —        $ 3,254       $ —        $ 3,254   

Total operating expenses

     7        1        2,162         —          2,170   

Gains on sales of other assets and other, net

     —          —          11         —          11   
                                         

Operating income (loss)

     (7     (1     1,103         —          1,095   

Equity in earnings of unconsolidated affiliates

     —          —          267         —          267   

Equity in earnings of subsidiaries

     633        953        —           (1,586     —     

Other income and expenses, net

     1        23        11         —          35   

Interest expense

     —          161        295         —          456   
                                         

Earnings from continuing operations before income taxes

     627        814        1,086         (1,586     941   

Income tax expense (benefit) from continuing operations

     (2     181        81         —          260   
                                         

Income from continuing operations

     629        633        1,005         (1,586     681   

Income from discontinued operations, net of tax

     —          —          3         —          3   
                                         

Net income

     629        633        1,008         (1,586     684   

Net income—noncontrolling interests

     —          —          55         —          55   
                                         

Net income—controlling interests

   $ 629      $ 633      $ 953       $ (1,586   $ 629   
                                         

 

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Spectra Energy Corp

Condensed Consolidating Balance Sheet

September 30, 2010

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
     Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —        $ 3       $ 153      $ —        $ 156   

Receivables (payables)—consolidated subsidiaries

     (50     225         (175     —          —     

Receivables (payables)—other

     (5     1         703        —          699   

Other current assets

     2        35         530        —          567   
                                         

Total current assets

     (53     264         1,211        —          1,422   

Investments in and loans to unconsolidated affiliates

     —          73         1,930        —          2,003   

Investments in consolidated subsidiaries

     10,189        13,419         —          (23,608     —     

Advances receivable (payable)—consolidated subsidiaries

     (2,695     3,420         (373     (352     —     

Goodwill

     —          —           4,236        —          4,236   

Other assets

     37        64        382       —          483  

Property, plant and equipment, net

     —          —           16,375        —          16,375   

Regulatory assets and deferred debits

     1        14         982        —          997   
                                         

Total Assets

   $ 7,479      $ 17,254       $ 24,743      $ (23,960   $ 25,516   
                                         

Accounts payable—other

   $ —        $ 102       $ 251      $ —        $ 353   

Short-term borrowings and commercial paper

     —          1,192         142        (352     982   

Accrued taxes payable (receivable)

     (197     195         52        —          50   

Current maturities of long-term debt

     —          9         731        —          740   

Other current liabilities

     61        51         828        —          940   
                                         

Total current liabilities

     (136     1,549         2,004        (352     3,065   

Long-term debt

     —          3,320         5,957        —          9,277   

Deferred credits and other liabilities

     145        2,196         2,546        —          4,887   

Preferred stock of subsidiaries

     —          —           258        —          258  

Equity

           

Controlling interests

     7,470        10,189         13,419        (23,608     7,470   

Noncontrolling interests

     —          —           559        —          559  
                                         

Total equity

     7,470        10,189         13,978        (23,608     8,029   
                                         

Total Liabilities and Equity

   $ 7,479      $ 17,254       $ 24,743      $ (23,960   $ 25,516   
                                         

 

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Spectra Energy Corp

Condensed Consolidating Balance Sheet

December 31, 2009

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
     Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —        $ —         $ 166      $ —        $ 166   

Receivables (payables)—consolidated subsidiaries

     (28     248         (220     —          —     

Receivables (payables)—other

     (4     2         780        —          778   

Other current assets

     6        6         473        —          485   
                                         

Total current assets

     (26     256         1,199        —          1,429   

Investments in and loans to unconsolidated affiliates

     —          74         1,927        —          2,001   

Investments in consolidated subsidiaries

     9,319        12,538         —          (21,857     —     

Advances receivable (payable)—consolidated subsidiaries

     (2,063     2,440         (30     (347     —     

Goodwill

     —          —           3,948        —          3,948   

Other assets

     38        30         339        —          407   

Property, plant and equipment, net

     —          —           15,347        —          15,347   

Regulatory assets and deferred debits

     1        15         931        —          947   
                                         

Total Assets

   $ 7,269      $ 15,353       $ 23,661      $ (22,204   $ 24,079   
                                         

Accounts payable (receivable)—consolidated subsidiaries

   $ —        $ 41       $ (41   $ —        $ —     

Accounts payable—other

     1        93         239        —          333   

Short-term borrowings and commercial paper

     —          388         121        (347     162   

Accrued taxes payable (receivable)

     (93     54         178        —          139   

Current maturities of long-term debt

     —          9         800        —          809   

Other current liabilities

     64        64         924        —          1,052   
                                         

Total current liabilities

     (28     649         2,221        (347     2,495   

Long-term debt

     —          3,282         5,665        —          8,947   

Deferred credits and other liabilities

     172        2,103         2,472        —          4,747   

Preferred stock of subsidiaries

     —          —           225        —          225   

Equity

           

Controlling interests

     7,125        9,319         12,538        (21,857     7,125   

Noncontrolling interests

     —          —           540        —          540   
                                         

Total equity

     7,125        9,319         13,078        (21,857     7,665   
                                         

Total Liabilities and Equity

   $ 7,269      $ 15,353       $ 23,661      $ (22,204   $ 24,079   
                                         

 

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Spectra Energy Corp

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2010

(In millions)

 

    Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES

         

Net income

  $ 729      $ 737      $ 1,160      $ (1,838   $ 788   

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

    —          —          493        —          493   

Equity in earnings of unconsolidated affiliates

    —          —          (297     —          (297

Equity in earnings of subsidiaries

    (737     (1,101     —          1,838        —     

Distributions received from unconsolidated affiliates

    —          —          303        —          303   

Other

    (215     178        (243     —          (280
                                       

Net cash provided by (used in) operating activities

    (223     (186     1,416        —          1,007   
                                       

CASH FLOWS FROM INVESTING ACTIVITIES

         

Capital expenditures

    —          —          (881     —          (881

Investments in and loans to unconsolidated affiliates

    —          —          (6     —          (6

Acquisitions, net of cash acquired

    —          —          (492     —          (492

Purchases of held-to-maturity securities

    —          —          (850     —          (850

Proceeds from sales and maturities of held-to-maturity securities

    —          —          809        —          809   

Distributions received from unconsolidated affiliates

    —          —          12        —          12   

Other

    —          —          (13     —          (13
                                       

Net cash used in investing activities

    —          —          (1,421     —          (1,421
                                       

CASH FLOWS FROM FINANCING ACTIVITIES

         

Proceeds from the issuance of long-term debt

    —          —          2,625        —          2,625   

Payments for the redemption of long-term debt

    —          —          (2,502     —          (2,502

Net increase in short-term borrowings and commercial paper

    —          799        22        —          821   

Distributions to noncontrolling interests

    —          —          (54     —          (54

Dividends paid on common stock

    (487     (3     —          3        (487

Distributions and advances from (to) affiliates

    709        (607     (99     (3     —     

Other

    1        —          2        —          3   
                                       

Net cash provided by (used in) financing activities

    223        189        (6     —          406   
                                       

Effect of exchange rate changes on cash

    —         —          (2     —          (2
                                       

Net increase (decrease) in cash and cash equivalents

    —         3        (13     —          (10

Cash and cash equivalents at beginning of period

    —         —          166        —          166   
                                       

Cash and cash equivalents at end of period

  $ —       $ 3      $ 153      $ —        $ 156   
                                       

 

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Spectra Energy Corp

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2009

(In millions)

 

    Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES

         

Net income

  $ 629      $ 633      $ 1,008      $ (1,586   $ 684   

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

    —          —          440        —          440   

Equity in earnings of unconsolidated affiliates

    —          —          (267     —          (267

Equity in earnings of subsidiaries

    (633     (953     —          1,586        —     

Distributions received from unconsolidated affiliates

    —          —          107        —          107   

Other

    53        203        47        —          303   
                                       

Net cash provided by (used in) operating activities

    49        (117     1,335        —          1,267   
                                       

CASH FLOWS FROM INVESTING ACTIVITIES

         

Capital expenditures

    —          —