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| SE > SEC Filings for SE > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements. As previously discussed, the 2008 data contained in the Condensed Consolidated Financial Statements and the related information presented in this report have been recast to reflect the reporting requirements of a new accounting standard related to noncontrolling interests that was adopted on January 1, 2009. See Note 21 of Notes to Condensed Consolidated Financial Statements for further discussion.
Executive Overview
During 2009, our fee-based businesses at U.S. Transmission, Distribution and Western Canada Transmission & Processing have continued to perform well by meeting the needs of our customers and generating increased earnings and cash flows as a result of successful expansion projects placed into service. Commodity prices have continued to negatively affect the comparison to 2008 for our Field Services segment and the Empress operations at Western Canada Transmission & Processing.
For the three months ended September 30, 2009 and 2008, we reported net income from controlling interests of $191 million and $296 million, respectively. For the nine months ended September 30, 2009 and 2008, we reported net income from controlling interests of $629 million and $958 million, respectively. The decreases for the three and nine-month periods primarily reflect lower earnings from Field Services and Western Canada Transmission & Processing, as a result of lower NGL prices associated with lower crude oil prices in 2009. Crude oil averaged $57 per barrel for the nine months ended September 30, 2009 versus $113 per barrel during the same period in 2008. The decrease in earnings for the nine-month period in 2009 was partially offset by the recognition of a $135 million deferred gain ($85 million after-tax) in the first quarter of 2009 associated with partnership units previously issued by DCP Partners, as well as third-quarter and year-to-date earnings from growth projects.
Highlights for the three months and nine months ended September 30, 2009 include:
• U.S. Transmission's earnings benefited from expansion projects placed into service late in 2008 and in 2009 and lower project development costs, partially offset by lower gas processing revenues in 2009 and a customer bankruptcy settlement in the second quarter of 2008,
• Distribution results reflect a weaker Canadian dollar and an earnings sharing settlement in the second quarter of 2009 related to prior year earnings, partially offset by higher storage and transportation revenues,
• Western Canada Transmission & Processing earnings decreased primarily as a result of lower NGL prices related to the Empress processing plant and a weaker Canadian dollar, partially offset by higher gathering and processing revenues,
• Field Services earnings reflect lower NGL and natural gas prices in 2009, partially offset by the recognition of a deferred gain associated with partnership units previously issued by DCP Partners, and
• Other reported lower expenses in the nine months ended September 30, 2009.
In the first nine months of 2009, we reported $768 million of capital and investment expenditures, excluding the $295 million acquisition of NOARK. As of November 1, 2009, we have successfully completed substantially all of our 2009 capital projects. We project approximately $1.1 billion of capital and investment expenditures for the full year, including approximately $600 million of expansion capital expenditures and excluding the acquisition of NOARK. Our 2010 capital budget is expected to be reviewed by our Board of Directors in December 2009. Subject to their approval, we expect to increase our expansion capital spending to approximately $1 billion in 2010 as we continue to pursue opportunities around new natural gas supply volumes.
Through September 30, 2009, Spectra Energy has issued approximately $1.0 billion of new long-term debt, completing the new issuances expected for 2009. We have approximately $2.4 billion available under our credit facilities and expect to continue to utilize commercial paper and revolving lines of credit, as needed, to fund our liquidity needs through 2010. We currently have no debt issuances planned for 2010 other than refinancings of debt maturities, but may access the markets if conditions are favorable.
In May 2009, Spectra Energy Partners acquired all of the ownership interests of NOARK from Atlas for approximately $295 million in cash. In the second quarter of 2009, Spectra Energy Partners issued 9.8 million common units to the public, representing limited partner interests, and 0.2 million general partner units to Spectra Energy, resulting in net proceeds of $212 million and a reduction of our ownership interest in Spectra Energy Partners from 84% to 74%. The proceeds were used to partially repay the funds borrowed in connection with the acquisition. See Note 2 of Notes to Condensed Consolidated Financial Statements for further discussion.
In February 2009, in order to further protect our capitalization structure against a potential extreme decline in the Canadian dollar, we issued 32.2 million shares of our common stock and received net proceeds of $448 million.
RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(in millions)
Operating revenues $ 933 $ 1,080 $ 3,254 $ 3,813
Operating expenses 581 740 2,170 2,669
Gains on sales of other assets and other,
net 1 - 11 32
Operating income 353 340 1,095 1,176
Other income and expenses 72 282 302 755
Interest expense 160 163 456 470
Earnings from continuing operations
before income taxes 265 459 941 1,461
Income tax expense from continuing
operations 54 145 260 453
Income from continuing operations 211 314 681 1,008
Income (loss) from discontinued
operations, net of tax 1 (2 ) 3 (1 )
Net income 212 312 684 1,007
Net income-noncontrolling interests 21 16 55 49
Net income-controlling interests $ 191 $ 296 $ 629 $ 958
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Three and Nine Months Ended September 30, 2009 Compared to Same Periods in 2008
Operating Revenues. Operating revenues for the three and nine months ended September 30, 2009 decreased by $147 million, or 14%, and $559 million, or 15%, respectively, compared to the same periods in 2008. The decreases were driven primarily by:
• the effects of a weaker Canadian dollar on revenues at Western Canada Transmission & Processing and Distribution, and
• lower NGL prices associated with the Empress operations at Western Canada Transmission & Processing, partially offset by
• higher earnings from expansion projects placed into service late in 2008 and in 2009 at U.S. Transmission.
Operating Expenses. Operating expenses for the three and nine months ended September 30, 2009 decreased by $159 million, or 21%, and $499 million, or 19%, respectively, compared to the same periods in 2008. The decreases were driven primarily by:
• the effects of a weaker Canadian dollar at Western Canada Transmission & Processing and Distribution,
• lower prices of natural gas purchased for the Empress facility at Western Canada Transmission & Processing, and
• lower project development costs at U.S. Transmission.
Gains on Sales of Other Assets and Other, net. Gains on sales of other assets and other, net for the three and nine months ended September 30, 2009 increased $1 million and decreased by $21 million, respectively, compared to the same periods in 2008. The decrease for the nine-month period was primarily due to a 2008 second quarter customer bankruptcy settlement, partially offset by a favorable customer settlement in 2009 resulting from the cancellation of a capital project.
Operating Income. Operating income for the three and nine months ended September 30, 2009 increased by $13 million, or 4%, and decreased $81 million, or 7%, respectively, compared to the same periods in 2008. The decrease for the nine-month period was primarily due to lower NGL product prices associated with the Empress operations at Western Canada Transmission & Processing, a weaker Canadian dollar and a 2008 customer bankruptcy settlement at U.S. Transmission, partially offset by higher earnings from expansion projects placed into service late in 2008 and in 2009 at U.S. Transmission.
Other Income and Expenses. Other income and expenses for the three and nine months ended September 30, 2009 decreased by $210 million, or 74%, and $453 million, or 60%, respectively, compared to the same periods in 2008. The decreases were attributable to lower equity in earnings from Field Services, primarily reflecting lower commodity prices, partially offset by a gain recognized in the first quarter of 2009 associated with partnership units previously issued by DCP Partners.
Income Tax Expense from Continuing Operations. Income tax expense from continuing operations for the three and nine months ended September 30, 2009 decreased by $91 million and $193 million, respectively, compared to the same periods in 2008 as a result of lower earnings from continuing operations in 2009.
For the three months ended September 30, 2009, the effective tax rate was 20.4% compared to 31.6% for the same period in 2008. The lower effective tax rate in 2009 was due to proportionally higher income generated from our Canadian operations, which are subject to lower tax rates as compared to our U.S. operations, and favorable tax settlements in 2009.
The effective tax rate for the nine months ended September 30, 2009 was 27.6% compared to 31.0% in the same period in 2008. The lower effective tax rate in 2009 was primarily due to proportionally higher income generated from our Canadian operations.
For a more detailed discussion of earnings drivers, see the segment discussions that follow.
Segment Results
We evaluate segment performance based on EBIT from continuing operations, after deducting noncontrolling interests related to those profits. On a segment basis, EBIT excludes discontinued operations, represents all profits from continuing operations (both operating and non-operating) before deducting interest and taxes, and is net of noncontrolling interests related to those profits. Cash, cash equivalents and investments are managed centrally, so the gains and losses on foreign currency remeasurement, and interest and dividend income on those balances, are excluded from the segments' EBIT. We consider segment EBIT to be a good indicator of each segment's operating performance from its continuing operations, as it represents the results of our ownership interests in operations without regard to financing methods or capital structures.
Our segment EBIT may not be comparable to similarly titled measures of another company because other entities may not calculate EBIT in the same manner. Segment EBIT is summarized in the following table, and detailed discussions follow.
EBIT by Business Segment
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(in millions)
U.S. Transmission $ 239 $ 213 $ 690 $ 683
Distribution 48 44 240 263
Western Canada Transmission &
Processing 84 113 223 333
Field Services 45 239 219 647
Total reportable segment EBIT 416 609 1,372 1,926
Other (10 ) (9 ) (46 ) (57 )
Total reportable segment and other EBIT 406 600 1,326 1,869
Interest expense 160 163 456 470
Interest income and other (a) 19 22 71 62
Earnings from continuing operations
before income taxes. $ 265 $ 459 $ 941 $ 1,461
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(a) Includes foreign currency transaction gains and losses and the elimination of the noncontrolling interests related to EBIT.
Noncontrolling interests as presented in the following segment-level discussions include only noncontrolling interests related to EBIT of non-wholly owned entities. It does not include noncontrolling interests related to interest and taxes of those operations. The amounts discussed below include intercompany transactions that are eliminated in the Condensed Consolidated Financial Statements.
U.S. Transmission
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
2009 2008 (Decrease) 2009 2008 (Decrease)
(in millions, except where noted)
Operating revenues $ 427 $ 402 $ 25 $ 1,246 $ 1,205 $ 41
Operating expenses
Operating, maintenance and other 126 156 (30 ) 390 433 (43 )
Depreciation and amortization 61 58 3 182 174 8
Gains on sales of other assets and
other, net 1 - 1 11 32 (21 )
Operating income 241 188 53 685 630 55
Other income and expenses 19 39 (20 ) 60 94 (34 )
Noncontrolling interests 21 14 7 55 41 14
EBIT $ 239 $ 213 $ 26 $ 690 $ 683 $ 7
Proportional throughput, TBtu (a) 607 479 128 1,894 1,596 298
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(a) Trillion British thermal units. Revenues are not significantly affected by pipeline throughput fluctuations, since revenues are primarily composed of demand charges.
Three Months Ended September 30, 2009 Compared to Same Period in 2008
Operating Revenues. The $25 million increase was driven primarily by:
• a $41 million increase from expansion projects placed into service late in 2008 and 2009, and
• a $17 million increase in transportation and other revenues primarily from the acquisition of Ozark Gas Transmission, L.L.C. (Ozark Gas Transmission) in May 2009, partially offset by
• a $26 million decrease in processing revenues associated with pipeline operations, caused by lower prices and volumes.
Operating, Maintenance and Other. The $30 million decrease was driven primarily by:
• a $33 million decrease in project development costs, reflecting a net benefit of $21 million in the 2009 third quarter due to the capitalization of project development expenses on northeast expansions compared to expensed project development costs of $12 million in the 2008 period. In accordance with our policy, project development costs are initially expensed until it is determined that recovery of such costs through regulated revenues of the completed project is probable, at which time inception-to-date costs of the project are capitalized and operating expenses are reduced.
• a $5 million decrease in operating and administrative costs, including lower insurance costs and ad valorem taxes as a result of favorable property valuations, partially offset by
• a $4 million increase from expansion projects placed into service late in 2008 and 2009.
Depreciation and Amortization. The $3 million increase was primarily driven by expansion projects placed into service late in 2008 and 2009.
Other Income and Expenses. The $20 million decrease was primarily a result of lower capitalization of interest on construction projects and the discontinuance of rate regulated accounting treatment by SESH, an equity investee. These decreases were partially offset by earnings from expansion projects on Gulfstream and SESH placed into service in late 2008.
Noncontrolling Interests. The $7 million increase was driven by an increase in the noncontrolling interests ownership percentage resulting from the Spectra Energy Partners public sale of additional partner units in the second quarter of 2009 and higher earnings from Spectra Energy Partners and M&N LLC.
EBIT. The $26 million increase was primarily due to higher earnings from expansion projects and lower project development costs. These increases were partially offset by lower processing revenues.
Nine Months Ended September 30, 2009 Compared to Same Period in 2008
Operating Revenues. The $41 million increase was driven primarily by:
• a $106 million increase from expansion projects placed into service late in 2008 and 2009,
• a $26 million increase in transportation and other revenues primarily from Ozark Gas Transmission acquired in May 2009, and
• an $11 million increase primarily in transportation and storage revenues from recoveries of fuel, electric power and other costs passed through to customers, partially offset by
• an $84 million decrease in processing revenues associated with pipeline operations, caused by lower prices and volumes,
• a $14 million decrease resulting from a weaker Canadian dollar at M&N LP, and
• a $6 million decrease in interruptible transportation revenue due to weather and other market conditions.
Operating, Maintenance and Other. The $43 million decrease was driven primarily by:
• a $67 million decrease in project development costs, reflecting a net benefit of $39 million in 2009 primarily due to a reimbursement of project development costs by customers and the capitalization of previously expensed costs on northeast expansions compared to expensed project development costs of $28 million in 2008, and
• a $6 million decrease in operating and administrative costs from lower insurance costs and pipeline integrity costs, partially offset by
• a $14 million increase in operating costs from higher fuel, electric power and other costs passed through to customers,
• a $12 million increase from expansion projects placed in service late in 2008 and in 2009, and
• a $7 million increase from Ozark Gas Transmission.
Depreciation and Amortization. The $8 million increase was primarily driven by expansion projects placed into service late in 2008 and in 2009.
Gains on Sales of Other Assets and Other, net. The $21 million decrease was driven by a customer bankruptcy settlement of $31 million in June 2008, partially offset by a customer settlement of $10 million in 2009 resulting from the cancellation of a capital project.
Other Income and Expenses. The $34 million decrease was primarily a result of lower capitalization of interest on construction projects and from the discontinuance of rate regulated accounting treatment by SESH. These decreases were partially offset by earnings from expansion projects on Gulfstream and SESH placed into service in late 2008.
Noncontrolling Interests. The $14 million increase was driven by an increase in the noncontrolling interests ownership percentage resulting from the Spectra Energy Partners public sale of additional partner units in the second quarter of 2009 and higher earnings from Spectra Energy Partners and M&N LLC.
EBIT. The $7 million increase was primarily due to higher earnings from expansion projects and lower project development costs. These increases were partially offset by lower processing revenues and a customer bankruptcy settlement in 2008.
Distribution
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
2009 2008 (Decrease) 2009 2008 (Decrease)
(in millions, except where noted)
Operating revenues $ 244 $ 280 $ (36 ) $ 1,236 $ 1,433 $ (197 )
Operating expenses
Natural gas purchased 62 97 (35 ) 617 747 (130 )
Operating, maintenance and other 89 93 (4 ) 252 284 (32 )
Depreciation and amortization 44 45 (1 ) 126 138 (12 )
Operating income 49 45 4 241 264 (23 )
Other income and expenses (1 ) (1 ) - (1 ) (1 ) -
EBIT $ 48 $ 44 $ 4 $ 240 $ 263 $ (23 )
Number of customers, thousands 1,315 1,300 15
Heating degree days, Fahrenheit 348 264 84 4,964 4,815 149
Pipeline throughput, TBtu 133 153 (20 ) 589 631 (42 )
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Three Months Ended September 30, 2009 Compared to Same Period in 2008
Operating Revenues. The $36 million decrease was driven primarily by:
• a $40 million decrease from lower natural gas prices passed through to customers without a mark-up,
• a $13 million decrease resulting from a weaker Canadian dollar, and
• a $6 million decrease in customer usage of natural gas due to conservation efforts and the impacts of the economic recession, partially offset by
• a $10 million increase in storage and transportation revenues attributable to growth of the storage system and an increase in short-term transportation services provided to customers, and
• an $8 million increase due to growth in the number of customers.
Natural Gas Purchased. The $35 million decrease was driven primarily by:
• a $40 million decrease from lower natural gas prices passed through to customers without a mark-up, and
• a $5 million decrease in customer usage of natural gas due to conservation efforts and the impacts of the economic recession, partially offset by
• a $6 million increase due to growth in the number of customers, and
• a $3 million increase related to fuel used in operations.
Operating, Maintenance and Other. The $4 million decrease was driven primarily by a weaker Canadian dollar.
EBIT. The $4 million increase was primarily a result of higher storage and transportation revenues, partially offset by the effect of a weaker Canadian dollar.
Nine Months Ended September 30, 2009 Compared to Same Period in 2008
Operating Revenues. The $197 million decrease was driven primarily by:
• a $227 million decrease resulting from a weaker Canadian dollar,
• a $34 million decrease in customer usage of natural gas due to conservation efforts and the impacts of the economic recession,
• a $13 million decrease from lower natural gas prices passed through to customers without a mark-up, and
• an $11 million decrease due to a 2009 settlement on 2008 earnings to be shared with customers, partially offset by
• a $39 million increase due to growth in the number of customers,
• a $38 million increase in storage and transportation revenues attributable to growth of the storage system and an increase in short-term transportation services provided to customers, and
• a $15 million increase resulting from a charge in 2008 due to an unfavorable decision from the OEB related to unregulated storage revenues.
Natural Gas Purchased. The $130 million decrease was driven primarily by:
• a $126 million decrease resulting from a weaker Canadian dollar,
• a $31 million decrease in customer usage of natural gas due to conservation efforts and the impacts of the economic recession, and
• a $33 million increase due to growth in the number of customers, and
• a $5 million increase in fuel used in operations.
Operating, Maintenance and Other. The $32 million decrease was driven primarily by a weaker Canadian dollar.
Depreciation and Amortization. The $12 million decrease was driven primarily by a weaker Canadian dollar.
EBIT. The $23 million decrease was primarily a result of a weaker Canadian dollar and the 2008 earnings sharing settlement reached in June 2009. These decreases were partially offset by higher storage and transportation revenues.
Western Canada Transmission & Processing . . . |
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