SE-2015.03.31 10Q
Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
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  ý    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  ý    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 the Exchange Act.
Large accelerated filer  ý    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  ý
Number of shares of Common Stock, $0.001 par value, outstanding as of March 31, 2015: 671,327,206
 
 
 
 
 


Table of Contents


SPECTRA ENERGY CORP
FORM 10-Q FOR THE QUARTER ENDED
March 31, 2015
INDEX
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1.
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended
     March 31, 2015 and 2014
 
Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014
 
Condensed Consolidated Statements of Equity for the three months ended March 31, 2015 and 2014
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 


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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 represent management’s intentions, plans, expectations, assumptions and beliefs about future events. 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 are subject to risks, uncertainties and other factors, many of which are outside our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Factors used to develop these forward-looking statements and that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
state, provincial, 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 and oil 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 oil and related services;
potential effects arising from terrorist attacks and any consequential or other hostilities;
changes in environmental, safety and other laws and regulations;
the development of alternative energy resources;
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 related infrastructure projects and the effects of competition;
the performance of natural gas and oil transmission and storage, distribution, and gathering and processing facilities;
the extent of success in connecting natural gas and oil supplies to gathering, processing and transmission systems and in connecting to expanding gas and oil markets;
the effects of accounting pronouncements issued periodically by accounting standard-setting bodies;
conditions of the capital markets during the periods covered by 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 March 31,
 
2015
 
2014
Operating Revenues
 
 
 
Transportation, storage and processing of natural gas
$
842

 
$
887

Distribution of natural gas
607

 
626

Sales of natural gas liquids
66

 
187

Transportation of crude oil
84

 
71

Other
24

 
72

Total operating revenues
1,623

 
1,843

Operating Expenses
 
 
 
Natural gas and petroleum products purchased
432

 
528

Operating, maintenance and other
354

 
363

Depreciation and amortization
193

 
200

Property and other taxes
103

 
113

Total operating expenses
1,082

 
1,204

Operating Income
541

 
639

Other Income and Expenses
 
 
 
Equity in earnings of unconsolidated affiliates
24

 
161

Other income and expenses, net
20

 
9

Total other income and expenses
44

 
170

Interest Expense
159

 
178

Earnings Before Income Taxes
426

 
631

Income Tax Expense
101

 
164

Net Income
325

 
467

Net Income—Noncontrolling Interests
58

 
48

Net Income—Controlling Interests
$
267

 
$
419

Common Stock Data
 
 
 
Weighted-average shares outstanding
 
 
 
Basic
671

 
670

Diluted
673

 
672

Earnings per share
 
 
 
Basic
$
0.40

 
$
0.63

Diluted
$
0.40

 
$
0.62

Dividends per share
$
0.37

 
$
0.335















See Notes to Condensed Consolidated Financial Statements.

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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
 
Three Months
Ended March 31,
 
2015
 
2014
Net Income
$
325

 
$
467

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(492
)
 
(248
)
Non-cash mark-to-market net gain on hedges

 
2

Reclassification of cash flow hedges into earnings

 
2

Pension and benefits impact (net of taxes of $3 and $3, respectively)
6

 
7

Other
1

 

Total other comprehensive income (loss)
(485
)
 
(237
)
Total Comprehensive Income (Loss), net of tax
(160
)
 
230

Less: Comprehensive Income—Noncontrolling Interests
50

 
44

Comprehensive Income (Loss)—Controlling Interests
$
(210
)
 
$
186














































See Notes to Condensed Consolidated Financial Statements.

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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
 
 
March 31,
2015
 
December 31,
2014
ASSETS
 
 
 
 
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
409

 
$
215

Receivables, net
1,152

 
1,336

Inventory
174

 
313

Fuel tracker
58

 
102

Other
270

 
366

Total current assets
2,063

 
2,332

 
 
 
 
Investments and Other Assets
 
 
 
Investments in and loans to unconsolidated affiliates
2,943

 
2,966

Goodwill
4,595

 
4,714

Other
319

 
327

Total investments and other assets
7,857

 
8,007

 
 
 
 
Property, Plant and Equipment
 
 
 
Cost
28,434

 
29,211

Less accumulated depreciation and amortization
6,790

 
6,904

Net property, plant and equipment
21,644

 
22,307

 
 
 
 
Regulatory Assets and Deferred Debits
1,356

 
1,394

 
 
 
 
Total Assets
$
32,920

 
$
34,040


































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)
 
 
March 31,
2015
 
December 31,
2014
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
420

 
$
458

Commercial paper
615

 
1,583

Taxes accrued
125

 
91

Interest accrued
143

 
181

Current maturities of long-term debt
500

 
327

Other
914

 
1,169

Total current liabilities
2,717

 
3,809

 
 
 
 
Long-term Debt
13,178

 
12,769

 
 
 
 
Deferred Credits and Other Liabilities
 
 
 
Deferred income taxes
5,427

 
5,405

Regulatory and other
1,309

 
1,401

Total deferred credits and other liabilities
6,736

 
6,806

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
Preferred Stock of Subsidiaries
258

 
258

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

 

Common stock, $0.001 par, 1 billion shares authorized, 671 million shares outstanding at March 31, 2015 and December 31, 2014
1

 
1

Additional paid-in capital
4,963

 
4,956

Retained earnings
2,558

 
2,541

Accumulated other comprehensive income
185

 
662

Total controlling interests
7,707

 
8,160

Noncontrolling interests
2,324

 
2,238

Total equity
10,031

 
10,398

 
 
 
 
Total Liabilities and Equity
$
32,920

 
$
34,040












See Notes to Condensed Consolidated Financial Statements.

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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
 
Three Months
Ended March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
325

 
$
467

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
196

 
203

Deferred income tax expense
61

 
153

Equity in earnings of unconsolidated affiliates
(24
)
 
(161
)
Distributions received from unconsolidated affiliates
38

 
89

Other
170

 
(65
)
Net cash provided by operating activities
766

 
686

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(388
)
 
(374
)
Investments in and loans to unconsolidated affiliates
(15
)
 
(18
)
Purchases of held-to-maturity securities
(145
)
 
(198
)
Proceeds from sales and maturities of held-to-maturity securities
123

 
167

Purchases of available-for-sale securities

 
(13
)
Proceeds from sales and maturities of available-for-sale securities
1

 
5

Distributions received from unconsolidated affiliates
18

 
22

Other changes in restricted funds
2

 
7

Net cash used in investing activities
(404
)
 
(402
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from the issuance of long-term debt
994

 
300

Payments for the redemption of long-term debt

 
(284
)
Net decrease in commercial paper
(952
)
 
(102
)
Distributions to noncontrolling interests
(44
)
 
(39
)
Contributions from noncontrolling interests
58

 
6

Proceeds from the issuances of Spectra Energy Partners, LP common units
39

 
52

Dividends paid on common stock
(250
)
 
(228
)
Other
(9
)
 
5

Net cash used in financing activities
(164
)
 
(290
)
Effect of exchange rate changes on cash
(4
)
 
(2
)
Net increase (decrease) in cash and cash equivalents
194

 
(8
)
Cash and cash equivalents at beginning of period
215

 
201

Cash and cash equivalents at end of period
$
409

 
$
193

Supplemental Disclosures
 
 
 
Property, plant and equipment non-cash accruals
$
115

 
$
107










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, 2014
$
1

 
$
4,956

 
$
2,541

 
$
1,016

 
$
(354
)
 
$
2,238

 
$
10,398

Net income

 

 
267

 

 

 
58

 
325

Other comprehensive income (loss)

 

 

 
(484
)
 
7

 
(8
)
 
(485
)
Dividends on common stock

 

 
(250
)
 

 

 

 
(250
)
Distributions to noncontrolling interests

 

 

 

 

 
(44
)
 
(44
)
Contributions from noncontrolling interests

 

 

 

 

 
58

 
58

Spectra Energy common stock issued

 
1

 

 

 

 

 
1

Spectra Energy Partners, LP common units issued

 
6

 

 

 

 
29

 
35

Other, net

 

 

 

 

 
(7
)
 
(7
)
March 31, 2015
$
1

 
$
4,963

 
$
2,558

 
$
532

 
$
(347
)
 
$
2,324

 
$
10,031

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
$
1

 
$
4,869

 
$
2,383

 
$
1,557

 
$
(316
)
 
$
1,829

 
$
10,323

Net income

 

 
419

 

 

 
48

 
467

Other comprehensive income (loss)

 

 

 
(244
)
 
11

 
(4
)
 
(237
)
Dividends on common stock

 

 
(225
)
 

 

 

 
(225
)
Stock-based compensation

 
(2
)
 

 

 

 

 
(2
)
Distributions to noncontrolling interests

 

 

 

 

 
(39
)
 
(39
)
Contributions from noncontrolling interests

 

 

 

 

 
6

 
6

Spectra Energy common stock issued

 
3

 

 

 

 

 
3

Spectra Energy Partners, LP common units issued

 
10

 

 

 

 
36

 
46

Transfer of interests in subsidiaries to Spectra Energy Partners, LP

 

 

 

 

 
5

 
5

Other, net

 

 

 

 

 
(2
)
 
(2
)
March 31, 2014
$
1

 
$
4,880

 
$
2,577

 
$
1,313

 
$
(305
)
 
$
1,879

 
$
10,345





























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. The term “Spectra Energy Partners” refers to our Spectra Energy Partners operating segment. The term “SEP” refers to Spectra Energy Partners, LP, our master limited partnership.

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, and owns and operates a crude oil pipeline system that connects Canadian and U.S. producers to refineries in the U.S. Rocky Mountain and Midwest regions. We currently operate in three key areas of the natural gas industry: gathering and processing, transmission and storage, and distribution. We provide transmission and storage of natural gas to customers in various regions of the northeastern and southeastern United States, the Maritime Provinces in Canada, 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. We also own a 50% interest in DCP Midstream, LLC (DCP Midstream), based in Denver, Colorado, one of the leading natural gas gatherers in the United States based on wellhead volumes, and one of the largest U.S. producers and marketers of natural gas liquids (NGLs).

Basis of Presentation. The accompanying Condensed Consolidated Financial Statements include our accounts and the accounts of our majority-owned subsidiaries, after eliminating intercompany transactions and balances. 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, 2014, 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.

Use of Estimates. To conform with generally accepted accounting principles (GAAP) 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. Business Segments

We manage our business in four reportable segments: Spectra Energy Partners, Distribution, Western Canada Transmission & Processing and Field Services. The remainder of our business operations is presented as “Other,” and consists of unallocated corporate costs and employee benefit plan assets and liabilities, 100%-owned captive insurance subsidiaries and other miscellaneous activities.

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

The presentation of our Spectra Energy Partners segment is reflective of the parent-level focus by our CODM, considering the resource allocation and governance provisions associated with SEP’s master limited partnership structure. SEP maintains a capital and cash management structure that is separate from Spectra Energy’s, is self-funding and maintains its own lines of bank credit and cash management accounts. It is in this context that our CODM evaluates the Spectra Energy Partners segment as a whole, without regard to any of SEP’s individual businesses. These factors, coupled with a different cost of capital of our other businesses, serve to differentiate how our Spectra Energy Partners segment is managed as compared to how SEP is managed.


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Spectra Energy Partners provides transmission, storage and gathering of natural gas, as well as the transportation of crude oil and NGLs through interstate pipeline systems for customers in various regions of the midwestern, northeastern and southeastern United States and Canada. The natural gas transmission and storage operations are primarily subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC). The crude oil transportation operations are primarily subject to regulation by the FERC in the United States and the National Energy Board (NEB) in Canada. Our Spectra Energy Partners segment is composed of the operations of SEP, less governance costs, which are included in “Other.”

Distribution provides retail natural gas distribution service in Ontario, Canada, as well as natural gas transmission 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 transmission of natural gas, natural gas gathering and processing services, and NGL extraction, fractionation, transportation, storage and marketing to customers in western Canada, the northern tier of the United States and the Maritime Provinces in Canada. This segment conducts business mostly through BC Pipeline, BC Field Services, and the NGL marketing and Canadian Midstream businesses, and Maritimes & Northeast Pipeline Limited Partnership (M&N Canada). BC Pipeline and BC Field Services and M&N Canada operations are primarily subject to the rules and regulations of the NEB.

Field Services gathers, compresses, treats, processes, transports, stores and sells natural gas, produces, fractionates, transports, stores and sells NGLs, recovers and sells condensate, and trades and markets natural gas and NGLs. It conducts operations through DCP Midstream, which is owned 50% by us and 50% by Phillips 66. DCP Midstream gathers raw natural gas through gathering systems connecting to several interstate and intrastate natural gas and NGL pipeline systems, one natural gas storage facility and one NGL storage facility. DCP Midstream operates in a diverse number of regions, including the Permian Basin, Eagle Ford, Niobrara/DJ Basin and the Midcontinent. DCP Midstream Partners, LP (DCP Partners) is a publicly traded master limited partnership, of which DCP Midstream acts as general partner. As of March 31, 2015, DCP Midstream had an approximate 21% ownership interest in DCP Partners, including DCP Midstream’s limited partner and general partner interests.

Our reportable segments offer different products and services and are managed separately as business units. Management evaluates segment performance based on earnings from continuing operations before interest, taxes, and depreciation and amortization (EBITDA). Cash, cash equivalents and short-term investments are managed at the parent-company levels, so the associated gains and losses from foreign currency transactions and interest and dividend income are excluded from the segments’ EBITDA. Our segment EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate EBITDA in the same manner. Transactions between reportable segments are accounted for on the same basis as transactions with unaffiliated third parties.

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Business Segment Data
Condensed Consolidated Statements of Operations
 
Unaffiliated
Revenues
 
Intersegment
Revenues
 
Total
Operating
Revenues
 
Depreciation and Amortization
 
Segment EBITDA/
Consolidated
Earnings before
Income Taxes
 
(in millions)
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
Spectra Energy Partners
$
606

 
$

 
$
606

 
$
74

 
$
455

Distribution
662

 

 
662

 
45

 
192

Western Canada Transmission & Processing
353

 
17

 
370

 
62

 
161

Field Services

 

 

 

 
(17
)
Total reportable segments
1,621

 
17

 
1,638

 
181

 
791

Other
2

 
16

 
18

 
12

 
(15
)
Eliminations

 
(33
)
 
(33
)
 

 

Depreciation and amortization

 

 

 

 
193

Interest expense

 

 

 

 
159

Interest income and other

 

 

 

 
2

Total consolidated
$
1,623

 
$

 
$
1,623

 
$
193

 
$
426

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Spectra Energy Partners
$
581

 
$

 
$
581

 
$
73

 
$
429

Distribution
718

 

 
718

 
49

 
226

Western Canada Transmission & Processing
541

 
34

 
575

 
67

 
237

Field Services

 

 

 

 
130

Total reportable segments
1,840

 
34

 
1,874

 
189

 
1,022

Other
3

 
15

 
18

 
11

 
(17
)
Eliminations

 
(49
)
 
(49
)
 

 

Depreciation and amortization

 

 

 

 
200

Interest expense

 

 

 

 
178

Interest income and other

 

 

 

 
4

Total consolidated
$
1,843

 
$

 
$
1,843

 
$
200

 
$
631

 
 
 
 
 
 
 
 
 
 
3. Regulatory Matters

Union Gas. In December 2014, Union Gas filed an application with the OEB for the disposition of the 2013 energy conservation deferral and variance account balances. As a result of this application, Union Gas has a receivable from customers of approximately $8 million and $9 million at March 31, 2015 and December 31, 2014, respectively, which is reflected as Current Assets-Other on the Condensed Consolidated Balance Sheet. A written hearing concluded in April 2015, and an OEB decision is expected later this year.

In April 2015, the OEB issued its decision on Union Gas’ application for an order approving an interruptible liquefied natural gas (LNG) service. The OEB determined that it would not regulate this service, as it was satisfied that there is LNG competition sufficient to protect the public interest and approved the proposed cross charges between the regulated and unregulated services until an application for new rates in 2019 is filed. At this time, Union Gas does not expect any material financial impact as a result of this decision.
4. Income Taxes

Income tax expense was $101 million for the three-month period ended March 31, 2015, compared to $164 million for the same period in 2014. The lower tax expense was primarily due to lower earnings and the effect of a weaker Canadian dollar. The effective income tax rate was 24% and 26% for the three-month periods ended March 31, 2015 and 2014, respectively.

There was no material net change in unrecognized tax benefits recorded during the three-month period ended March 31, 2015. Although uncertain, we believe it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $15 million to $20 million prior to March 31, 2016.

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5. 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.

The following table presents our basic and diluted EPS calculations:
 
 
 
Three Months
Ended March 31,
 
 
 
2015
 
2014
 
 
 
(in millions, except per-share amounts)
 
 
 
 
 
 
Net income—controlling interests
$
267

 
$
419

Weighted-average common shares outstanding
 
 
 
Basic
671

 
670

Diluted
673

 
672

Basic earnings per common share
$
0.40

 
$
0.63

Diluted earnings per common share
$
0.40

 
$
0.62

6. Accumulated Other Comprehensive Income

The following table presents the net of tax changes in Accumulated Other Comprehensive Income (AOCI) by component and amounts reclassified out of AOCI to Net Income, excluding amounts attributable to noncontrolling interests:
 
Foreign Currency Translation Adjustments
 
Pension
and Post-retirement Benefit Plan Obligations
 
Gas Purchase Contract Hedges
 
Other
 
Total Accumulated Other Comprehensive Income
 
 
 
 
(in millions)
 
 
 
December 31, 2014
$
1,016


$
(351
)

$
(3
)

$


$
662

Other AOCI activity
(484
)

6


3


(2
)

(477
)
March 31, 2015
$
532


$
(345
)

$


$
(2
)

$
185

 
 
 
 
 
 
 
 
 
 
December 31, 2013
$
1,557

 
$
(304
)
 
$
(11
)
 
$
(1
)
 
$
1,241

Reclassified to net income

 

 
2

 

 
2

Other AOCI activity
(244
)
 
7

 
2

 

 
(235
)
March 31, 2014
$
1,313

 
$
(297
)
 
$
(7
)
 
$
(1
)
 
$
1,008


Reclassifications to Net Income are primarily included in Other Income and Expenses, Net on our Condensed Consolidated Statements of Operations.

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7. Inventory

Inventory consists 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 as either a receivable or a current liability, as appropriate, for future disposition with customers, subject to approval by the OEB. The remaining inventory is recorded at the lower of cost or market, primarily using average cost. The components of inventory are as follows:
 
March 31,
2015
 
December 31,
2014
 
(in millions)
Natural gas
$
81

 
$
211

NGLs
22

 
28

Materials and supplies
71

 
74

Total inventory
$
174

 
$
313

8. 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 March 31,
 
2015
 
2014
 
(in millions)
Operating revenues
$
2,043

 
$
3,915

Operating expenses
1,991

 
3,645

Operating income
52

 
270

Net income (loss)
(6
)
 
203

Net income (loss) attributable to members’ interests
(37
)
 
165


DCP Partners issues, from time to time, limited partner units to the public, which are recorded by DCP Midstream directly to its equity. Our proportionate share of gains from those issuances, totaling $2 million and $48 million in the first quarters of 2015 and 2014, respectively, are reflected in Equity in Earnings of Unconsolidated Affiliates in the Condensed Consolidated Statements of Operations.
9. Marketable Securities and Restricted Funds

We routinely invest excess cash and various restricted balances in securities such as commercial paper, banker's acceptances, corporate debt securities, treasury bills and money market funds in the United States and Canada. We do not purchase marketable securities for speculative purposes; therefore we do not have any securities classified as trading securities. While we do not routinely sell marketable securities prior to their scheduled maturity dates, some of our investments may be held and restricted for insurance purposes, so these investments are classified as available-for-sale (AFS) marketable securities as they may occasionally be sold prior to their scheduled maturity dates due to the unexpected timing of cash needs. Initial investments in securities are classified as purchases of the respective type of securities (AFS marketable securities or held-to-maturity (HTM) marketable securities). Maturities of securities are classified within proceeds from sales and maturities of securities in the Condensed Consolidated Statements of Cash Flows.

AFS Securities. AFS securities are as follows: 
 
Estimated Fair Value
 
March 31, 2015
 
December 31, 2014
 
(in millions)
Corporate debt securities
$
23

 
$
23

Money market funds

 
1

Total available-for-sale securities
$
23

 
$
24


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Our AFS securities are classified on the Condensed Consolidated Balance Sheets as follows:
 
 
Estimated Fair Value
 
 
March 31, 2015
 
December 31, 2014
 
 
(in millions)
Restricted funds
 
 
 
Investments and other assets—other
$

 
$
1

Non-restricted funds
 
 
 
Current assets—other
3

 
3

Investments and other assets—other
20

 
20

Total available-for-sale securities
$
23

 
$
24


At March 31, 2015, the weighted-average contractual maturity of outstanding AFS securities was less than two years.

There were no material gross unrealized holding gains or losses associated with investments in AFS securities at March 31, 2015 or December 31, 2014.

HTM Securities. All of our HTM securities are restricted funds and are as follows:
 
 
Estimated Fair Value
Description
Condensed Consolidated Balance Sheet Caption
March 31, 2015
 
December 31, 2014
 
 
(in millions)
Banker's acceptances
Current assets—other
$
49

 
$
38

Canadian government securities
Current assets—other
27

 
30

Money market funds
Current assets—other
10

 
3

Canadian government securities
Investments and other assets—other
93

 
101

Total held-to-maturity securities
$
179

 
$
172


All of our HTM securities are restricted funds pursuant to certain M&N Canada and Express-Platte debt agreements. The funds restricted for M&N Canada, plus future cash from operations that would otherwise be available for distribution to the partners of M&N Canada, are required to be placed in escrow until the balance in escrow is sufficient to fund all future debt service on the M&N Canada 6.90% senior secured notes. There are sufficient funds held in escrow to fund all future debt service on these M&N Canada notes as of March 31, 2015.

At March 31, 2015, the weighted-average contractual maturity of outstanding HTM securities was less than one year.

There were no material gross unrecognized holding gains or losses associated with investments in HTM securities at March 31, 2015 or December 31, 2014.

Other Restricted Funds. In addition to the portions of the AFS and HTM securities that were restricted funds as described above, we had other restricted funds totaling $12 million at March 31, 2015 and $13 million at December 31, 2014 classified as Current Assets—Other. These restricted funds are related to additional amounts for insurance. We also had other restricted funds totaling $9 million at March 31, 2015 and $6 million at December 31, 2014 classified as Investments and Other Assets—Other. These restricted funds are related to funds held and collected from customers for Canadian pipeline abandonment in accordance with the NEB’s regulatory requirements.

Changes in restricted balances are presented within Cash Flows from Investing Activities on our Condensed Consolidated Statements of Cash Flows.

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10. Debt and Credit Facilities
Available Credit Facilities and Restrictive Debt Covenants  
 
Expiration
Date
 
Total
Credit
Facilities
Capacity
 
Commercial Paper Outstanding at March 31, 2015
 
Available
Credit
Facilities
Capacity
 
 
 
 
(in millions)
Spectra Energy Capital, LLC (a)
2019
 
$
1,000

 
$
494

 
$
506

SEP (b)
2019
 
2,000

 
121

 
1,879

Westcoast Energy Inc. (c)
2019
 
315

 

 
315

Union Gas (d)
2019
 
394

 

 
394

Total
 
 
$
3,709

 
$
615

 
$
3,094

 ___________
(a)
Revolving credit facility contains a covenant requiring the Spectra Energy Corp consolidated debt-to-total capitalization ratio, as defined in the agreement, to not exceed 65%. Per the terms of the agreement, collateralized debt is excluded from the calculation of the ratio. This ratio was 58% at March 31, 2015.
(b)
Revolving credit facility contains a covenant that requires SEP to maintain a ratio of total Consolidated Indebtedness-to-Consolidated EBITDA, as defined in the credit agreement, of 5.0 to 1 or less. As of March 31, 2015, this ratio was 3.8 to 1.
(c)
U.S. dollar equivalent at March 31, 2015. The revolving credit facility is 400 million Canadian dollars and contains a covenant that requires the Westcoast Energy Inc. non-consolidated debt-to-total capitalization ratio to not exceed 75%. The ratio was 33% at March 31, 2015.
(d)
U.S. dollar equivalent at March 31, 2015. The revolving credit facility is 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. The ratio was 64% at March 31, 2015.

The issuances of commercial paper, letters of credit and revolving borrowings reduce the amount available under the credit facilities. As of March 31, 2015, there were no letters of credit issued or revolving borrowings outstanding under the credit facilities.

Our credit agreements contain various 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 March 31, 2015, 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.
Debt Issuances. On March 12, 2015, SEP issued $500 million of 3.50% unsecured notes due 2025 and $500 million of 4.50% unsecured notes due 2045. Net proceeds from the offering were used to repay a portion of outstanding commercial paper, to fund capital expenditures and for general corporate purposes.

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11. Fair Value Measurements
The following 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
March 31, 2015
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Corporate debt securities
Cash and cash equivalents
$
191

 
$

 
$
191

 
$

Corporate debt securities
Current assets—other
3

 


 
3

 


Commodity derivatives
Current assets—other
43

 

 

 
43

Interest rate swaps
Current assets—other
2

 

 
2

 

Commodity derivatives
Investments and other assets—other
6

 

 

 
6

Corporate debt securities
Investments and other assets—other
20

 

 
20

 

Interest rate swaps
Investments and other assets—other
35

 

 
35

 

Total Assets
$
300

 
$

 
$
251

 
$
49



Description


Condensed Consolidated Balance Sheet Caption
December 31, 2014
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Corporate debt securities
Cash and cash equivalents
$
85

 
$

 
$
85

 
$

Corporate debt securities
Current assets—other
3

 

 
3

 

Commodity derivatives
Current assets—other
57

 

 

 
57

Interest rate swaps
Current assets—other
2

 

 
2

 

Commodity derivatives
Investments and other assets—other
21

 

 

 
21

Corporate debt securities
Investments and other assets—other
20

 

 
20

 

Interest rate swaps
Investments and other assets—other
22

 

 
22

 

Money market funds
Investments and other assets—other
1

 
1

 

 

Total Assets
$
211

 
$
1

 
$
132

 
$
78


The following 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 March 31,
 
2015
 
2014
 
(in millions)
Derivative assets (liabilities)
 
 
 
Fair value, beginning of period
$
78

 
$
(3
)
Total gains (losses):
 
 
 
Included in earnings
6

 
(4
)
Included in other comprehensive income
(6
)
 
3

Purchases
1

 

Settlements
(30
)
 
(1
)
Fair value, end of period
$
49

 
$
(5
)
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 and liabilities held at the end of the period
$
(16
)
 
$
(3
)


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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, including our long-term debt, 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 a third-party source 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

Level 3 valuation techniques 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.

The derivative financial instruments reported in Level 3 at March 31, 2015 consist of NGL revenue swap contracts related to the Empress assets in Western Canada Transmission & Processing. As of March 31, 2015, we reported certain of our NGL basis swaps at fair value using Level 3 inputs due to such derivatives not having observable market prices for substantially the full term of the derivative asset or liability. For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in
Level 3. This includes derivatives valued using indicative price quotations whose contract length extends into unobservable periods.

The fair value of these NGL basis swaps is determined using a discounted cash flow valuation technique based on a forward commodity basis curve. For these derivatives, the primary input to the valuation model is the forward commodity basis curve, which is based on observable or public data sources and extrapolated when observable prices are not available.

The significant unobservable inputs used in the fair value measurements of our Level 3 derivatives are the forward NGL basis curves, for which a significant portion of the derivative’s term is beyond available forward pricing. At March 31, 2015, a 10¢ per gallon movement in underlying forward NGL prices, primarily propane prices, would affect the estimated fair value of our NGL derivatives by $15 million. This calculated amount does not take into account any other changes to the fair value measurement calculation.

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. 
 
March 31, 2015
 
December 31, 2014
 
Book
Value
 
Approximate
Fair Value
 
Book
Value
 
Approximate
Fair Value
 
(in millions)
Note receivable, noncurrent (a)
$
71

 
$
71

 
$
71

 
$
71

Long-term debt, including current maturities (b)
13,641

 
15,308

 
13,060

 
14,446

__________
(a)
Included within Investments in and Loans to Unconsolidated Affiliates.
(b)
Excludes capital leases, unamortized items and fair value hedge carrying value adjustments.

The fair value of our long-term debt is determined based on market-based prices as described in the Level 2 valuation technique described above and is classified as Level 2.


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Table of Contents


The fair values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, note receivable-noncurrent, accounts payable 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 three month periods ended March 31, 2015 and 2014, there were no material adjustments to assets and liabilities measured at fair value on a nonrecurring basis.
12. Risk Management and Hedging Activities

We are exposed to the impact of market fluctuations in the prices of NGLs and natural gas purchased as a result of our investment in DCP Midstream, the ownership of the NGL marketing operations in western Canada and processing operations associated with our U.S. pipeline assets. 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 derivatives, mostly around interest rate and commodity exposures.

DCP Midstream manages their direct exposure to market prices separate from Spectra Energy, and utilizes various risk management strategies, including the use of commodity derivatives.

Other than interest rate swaps and commodity derivatives as described below, we did not have significant derivatives outstanding during the three months ended March 31, 2015.

Interest Rate Swaps

At March 31, 2015, we had “pay floating—receive fixed” interest rate swaps outstanding with a total notional amount of $1,199 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 interest payments related to our long-term fixed-rate debt securities into variable-rate interest payments in order to achieve our desired mix of fixed and variable-rate debt.

Information about our interest rate swaps that had netting or rights of offset arrangements are as follows:
 
March 31, 2015
 
December 31, 2014
 
Gross Amounts
Presented in
the Condensed
Consolidated
Balance Sheets
 
Amounts Not
Offset in the
Condensed
Consolidated
Balance Sheets
 
Net
Amount
 
Gross Amounts
Presented in
the Condensed
Consolidated
Balance Sheets
 
Amounts Not
Offset in the
Condensed
Consolidated
Balance Sheets
 
Net
Amount
Description
(in millions)
Assets
$
37

 
$

 
$
37

 
$
24

 
$

 
$
24


Commodity Derivatives

At March 31, 2015, we had commodity mark-to-market derivatives outstanding with a total notional amount of 151 million gallons. The longest dated commodity derivative contract we currently have expires in 2017.

Information about our commodity derivatives that had netting or rights of offset arrangements are as follows:
 
March 31, 2015
 
December 31, 2014


Gross 
Amounts

Gross
Amounts
Offset

Net Amount Presented in the Condensed Consolidated Balance Sheets
 

Gross 
Amounts
 
Gross
Amounts
Offset
 
Net Amount Presented in the Condensed Consolidated Balance Sheets
Description
(in millions)
Assets
$
134


$
85


$
49

 
$
169

 
$
91

 
$
78

Liabilities
85


85



 
91

 
91

 


Substantially all of our commodity derivative agreements outstanding at March 31, 2015 and December 31, 2014 have provisions that require collateral to be posted in the amount of the net liability position if one of our credit ratings falls below investment grade.


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Table of Contents


Information regarding the impacts of commodity derivatives on our Condensed Consolidated Statements of Operations are as follows:
 
 
 
 
Three Months
Ended March 31,
Derivatives
 
Condensed Consolidated Statement of Operations Caption
 
2015
 
2014
 
 
 
 
(in millions)
Commodity derivatives
 
Sales of natural gas liquids
 
$
7

 
$
(3
)
13. 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 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 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.
Litigation
Litigation and Legal Proceedings. We are involved in 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 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 for legal matters recorded as of March 31, 2015 or December 31, 2014 related to litigation.
Other Commitments and Contingencies
See Note 14 for a discussion of guarantees and indemnifications.
14. 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 our 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-100%-owned entities. In connection with our spin-off from Duke Energy Corporation (Duke Energy) in 2007, 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 March 31, 2015 was approximately $406 million, which has been indemnified by Duke Energy as discussed above. One of these outstanding performance guarantees, which has a maximum potential amount of future payment of $201 million, expires in 2028. The remaining guarantees have no contractual expirations.

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Table of Contents


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 in place at the time of our spin-off from Duke Energy. D/FD is one of the entities transferred to Duke Energy in connection with our spin-off. 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, issued similar joint and several guarantees to the same D/FD project owners.
Westcoast Energy Inc. (Westcoast), a 100%-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 agreements, 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.
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, 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.
As of March 31, 2015, the amounts recorded for the guarantees and indemnifications described above are not material, both individually and in the aggregate.
15. Issuances of SEP Units

During the three months ended March 31, 2015, SEP issued 0.8 million common units to the public under its at-the-market program and approximately 16,000 general partner units to Spectra Energy. Total net proceeds to SEP were $40 million (net proceeds to Spectra Energy were $39 million). In connection with the issuances of the units, a $10 million gain ($6 million net of tax) to Additional Paid-in Capital and a $29 million increase in Equity-Noncontrolling Interests were recorded during the three months ended March 31, 2015. Spectra Energy’s ownership in SEP remained approximately 82% following the issuances.

The following table presents the effects of the issuances of SEP units:
 
 
Three Months
Ended March 31,
 
 
2015
 
2014
 
 
(in millions)
Net income-controlling interests
 
$
267

 
$
419

Increase in additional paid-in capital resulting from issuances of SEP units
 
6

 
10

Total net income-controlling interests and changes in equity-controlling interests
 
$
273

 
$
429

16. Employee Benefit Plans

Retirement Plans. We have a qualified non-contributory defined benefit (DB) retirement plan for U.S. employees and non-qualified, non-contributory, unfunded defined benefit plans which cover certain current and former U.S. executives. 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.

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Table of Contents


Our policy is to fund our retirement plans, where applicable, 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 contributions of $5 million to our U.S. retirement plans in both of the three month periods ended March 31, 2015 and 2014. We made total contributions to the Canadian DC and DB plans of $9 million in the three months ended March 31, 2015 and $16 million in the same period in 2014. We anticipate that we will make total contributions of approximately $22 million to the U.S. plans and approximately $30 million to the Canadian plans in 2015.
Qualified and Non-Qualified Pension Plans—Components of Net Periodic Pension Cost
 
Three Months
Ended March 31,
 
2015
 
2014
 
(in millions)
U.S.
 
 
 
Service cost benefit earned
$
5

 
$
5

Interest cost on projected benefit obligation
6

 
6

Expected return on plan assets
(10
)
 
(10
)
Amortization of loss
2

 
3

Net periodic pension cost
$
3

 
$
4

 
 
 
 
Canada
 
 
 
Service cost benefit earned
$
8

 
$
7

Interest cost on projected benefit obligation
11

 
13

Expected return on plan assets
(17
)
 
(17
)
Amortization of loss
7

 
6

Net periodic pension cost
$
9

 
$
9


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 March 31,
 
2015
 
2014
 
(in millions)
U.S.
 
 
 
Interest cost on accumulated post-retirement benefit obligation
$
2

 
$
2

Expected return on plan assets
(1
)
 
(1
)
Net periodic other post-retirement benefit cost
$
1

 
$
1

 
 
 
 
Canada
 
 
 
Service cost benefit earned
$
1

 
$
1

Interest cost on accumulated post-retirement benefit obligation
1

 
1

Net periodic other post-retirement benefit cost
$
2

 
$
2

Retirement/Savings Plan
In addition to the retirement plans described above, we also have defined contribution employee savings plans available to both U.S. and Canadian employees. Employees may participate in a matching contribution where we match a certain percentage of before-tax employee contributions of up to 6% of eligible pay per pay period for U.S. employees and up to 5% of eligible pay per pay period for Canadian employees. We expensed pre-tax employer matching contributions of $3 million in both of the three month periods ended March 31, 2015 and 2014 for U.S. employees and $3 million in both of the three month periods for Canadian employees.

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17. Condensed 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 100%-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 consolidated subsidiaries of Spectra Capital. This information should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and notes thereto.

Spectra Energy Corp
Condensed Consolidating Statements of Operations
(Unaudited)
(In millions)

 
Spectra
Energy
Corp
 
Spectra
Capital
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
Total operating revenues
$

 
$

 
$
1,624

 
$
(1
)
 
$
1,623

Total operating expenses
2

 

 
1,081

 
(1
)
 
1,082

Operating income (loss)
(2
)
 

 
543

 

 
541

Equity in earnings of unconsolidated affiliates

 

 
24

 

 
24

Equity in earnings of consolidated subsidiaries
263

 
421

 

 
(684
)
 

Other income and expenses, net
(2
)
 

 
22

 

 
20

Interest expense

 
61

 
98

 

 
159

Earnings before income taxes
259

 
360

 
491

 
(684
)
 
426

Income tax expense (benefit)
(8
)
 
97

 
12

 

 
101

Net income
267

 
263

 
479

 
(684
)
 
325

Net income—noncontrolling interests

 

 
58

 

 
58

Net income—controlling interests
$
267

 
$
263

 
$
421

 
$
(684
)
 
$
267

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Total operating revenues
$

 
$

 
$
1,844

 
$
(1
)
 
$
1,843

Total operating expenses
4

 

 
1,201

 
(1
)
 
1,204

Operating income (loss)
(4
)
 

 
643

 

 
639

Equity in earnings of unconsolidated affiliates

 

 
161

 

 
161

Equity in earnings of consolidated subsidiaries
415

 
635

 

 
(1,050
)
 

Other income and expenses, net
(1
)
 
1

 
9

 

 
9

Interest expense

 
65

 
113

 

 
178

Earnings before income taxes
410

 
571

 
700

 
(1,050
)
 
631

Income tax expense (benefit)
(9
)
 
156

 
17

 

 
164

Net income
419

 
415

 
683

 
(1,050
)
 
467

Net income—noncontrolling interests

 

 
48

 

 
48

Net income—controlling interests
$
419

 
$
415

 
$
635

 
$
(1,050
)
 
$
419




23

Table of Contents


Spectra Energy Corp
Condensed Consolidating Statements of Comprehensive Income
(Unaudited)
(In millions)

 
Spectra
Energy
Corp
 
Spectra
Capital
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
Net income
$
267

 
$
263

 
$
479

 
$
(684
)
 
$
325

Other comprehensive income (loss)
1

 

 
(486
)
 

 
(485
)
Total comprehensive income (loss), net of tax
268

 
263

 
(7
)
 
(684
)
 
(160
)
Less: comprehensive income—noncontrolling interests

 

 
50

 

 
50

Comprehensive income (loss)—controlling interests
$
268

 
$
263

 
$
(57
)
 
$
(684
)
 
$
(210
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Net income
$
419

 
$
415

 
$
683

 
$
(1,050
)
 
$
467

Other comprehensive income (loss)
2

 

 
(239
)
 

 
(237
)
Total comprehensive income, net of tax
421

 
415

 
444

 
(1,050
)
 
230

Less: comprehensive income—noncontrolling interests

 

 
44

 

 
44

Comprehensive income—controlling interests
$
421

 
$
415

 
$
400

 
$
(1,050
)
 
$
186





24

Table of Contents


Spectra Energy Corp
Condensed Consolidating Balance Sheet
March 31, 2015
(Unaudited)
(In millions)
 
 
Spectra
Energy
Corp
 
Spectra
Capital
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash and cash equivalents
$

 
$
1

 
$
408

 
$

 
$
409

Receivables—consolidated subsidiaries
60

 

 
25

 
(85
)
 

Receivables—other
2

 
2

 
1,148

 

 
1,152

Other current assets
11

 
1

 
490

 

 
502

Total current assets
73

 
4

 
2,071

 
(85
)
 
2,063

Investments in and loans to unconsolidated affiliates

 

 
2,943

 

 
2,943

Investments in consolidated subsidiaries
14,393

 
20,590

 

 
(34,983
)
 

Advances receivable—consolidated subsidiaries

 
4,772

 
1,160

 
(5,932
)
 

Notes receivable—consolidated subsidiaries

 

 
3,198

 
(3,198
)
 

Goodwill

 

 
4,595

 

 
4,595

Other assets
37

 
26

 
256

 

 
319

Net property, plant and equipment

 

 
21,644

 

 
21,644

Regulatory assets and deferred debits