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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 June 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 July 30, 2010: 648,019,147

 

 

 


Table of Contents

SPECTRA ENERGY CORP

FORM 10-Q FOR THE QUARTER ENDED

June 30, 2010

INDEX

 

          Page

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (Unaudited)

   4
  

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009

   4
  

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

   5
  

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   7
  

Condensed Consolidated Statements of Equity for the six months ended June 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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Table of Contents

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.

 

3


Table of Contents

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 June 30,
    Six Months
Ended June 30,
         2010            2009             2010            2009    

Operating Revenues

          

Transportation, storage and processing of natural gas

   $ 696    $ 622      $ 1,406    $ 1,230

Distribution of natural gas

     251      215        835      850

Sales of natural gas liquids

     70      64        216      173

Other

     46      36        86      68
                            

Total operating revenues

     1,063      937        2,543      2,321
                            

Operating Expenses

          

Natural gas and petroleum products purchased

     156      153        608      658

Operating, maintenance and other

     334      256        636      520

Depreciation and amortization

     156      144        317      280

Property and other taxes

     75      67        148      131
                            

Total operating expenses

     721      620        1,709      1,589
                            

Gains on Sales of Other Assets and Other, net

     —        —          —        10
                            

Operating Income

     342      317        834      742
                            

Other Income and Expenses

          

Equity in earnings of unconsolidated affiliates

     77      40        199      207

Other income and expenses, net

     6      14        10      23
                            

Total other income and expenses

     83      54        209      230
                            

Interest Expense

     158      146        317      296
                            

Earnings From Continuing Operations Before Income Taxes

     267      225        726      676

Income Tax Expense From Continuing Operations

     76      67        173      206
                            

Income From Continuing Operations

     191      158        553      470

Income (Loss) From Discontinued Operations, net of tax

     —        (1     16      2
                            

Net Income

     191      157        569      472

Net Income—Noncontrolling Interests

     17      17        37      34
                            

Net Income—Controlling Interests

   $ 174    $ 140      $ 532    $ 438
                            

Common Stock Data

          

Weighted-average shares outstanding

          

Basic

     648      645        648      637

Diluted

     650      646        650      638

Earnings per share from continuing operations

          

Basic and Diluted

   $ 0.27    $ 0.22      $ 0.79    $ 0.69

Earnings per share

          

Basic and Diluted

   $ 0.27    $ 0.22      $ 0.82    $ 0.69

Dividends per share

   $ 0.25    $ 0.25      $ 0.50    $ 0.50

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

 

     June 30,
2010
   December  31,
2009

ASSETS

     

Current Assets

     

Cash and cash equivalents

   $ 106    $ 166

Receivables, net

     661      778

Inventory

     296      321

Other

     177      164
             

Total current assets

     1,240      1,429
             

Investments and Other Assets

     

Investments in and loans to unconsolidated affiliates

     1,957      2,001

Goodwill

     3,917      3,948

Other

     438      407
             

Total investments and other assets

     6,312      6,356
             

Property, Plant and Equipment

     

Cost

     20,418      19,960

Less accumulated depreciation and amortization

     4,861      4,613
             

Net property, plant and equipment

     15,557      15,347
             

Regulatory Assets and Deferred Debits

     960      947
             

Total Assets

   $ 24,069    $ 24,079
             

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except per-share amounts)

 

     June 30,
2010
   December  31,
2009

LIABILITIES AND EQUITY

     

Current Liabilities

     

Accounts payable

   $ 420    $ 333

Short-term borrowings and commercial paper

     489      162

Taxes accrued

     58      139

Interest accrued

     160      167

Current maturities of long-term debt

     726      809

Other

     753      885
             

Total current liabilities

     2,606      2,495
             

Long-term Debt

     8,670      8,947
             

Deferred Credits and Other Liabilities

     

Deferred income taxes

     3,173      3,113

Regulatory and other

     1,601      1,634
             

Total deferred credits and other liabilities

     4,774      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 June 30, 2010 and December 31, 2009, respectively

     1      1

Additional paid-in capital

     4,693      4,700

Retained earnings

     1,303      1,096

Accumulated other comprehensive income

     1,212      1,328
             

Total controlling interests

     7,209      7,125

Noncontrolling interests

     552      540
             

Total equity

     7,761      7,665
             

Total Liabilities and Equity

   $ 24,069    $ 24,079
             

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

     Six Months
Ended June 30,
 
         2010             2009      

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 569      $ 472   

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

    

Depreciation and amortization

     324        286   

Deferred income tax expense

     30        124   

Equity in earnings of unconsolidated affiliates

     (199     (207

Distributions received from unconsolidated affiliates

     237        39   

Other

     (130     305   
                

Net cash provided by operating activities

     831        1,019   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Capital expenditures

     (497     (375

Investments in and loans to unconsolidated affiliates

     (3     (51

Acquisition of Ozark

     —          (295

Purchases of held-to-maturity securities

     (530     —     

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

     507        —     

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

     —          32   

Distributions received from unconsolidated affiliates

     12        148   

Other

     (10     (3
                

Net cash used in investing activities

     (521     (544
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from the issuance of long-term debt

     1,440        2,219   

Payments for the redemption of long-term debt

     (1,786     (1,902

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

     334        (936

Distributions to noncontrolling interests

     (36     (136

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

     (325     (314

Other

     5        11   
                

Net cash used in financing activities

     (368     (402
                

Effect of exchange rate changes on cash

     (2     14   
                

Net increase (decrease) in cash and cash equivalents

     (60     87   

Cash and cash equivalents at beginning of period

     166        205   
                

Cash and cash equivalents at end of period

   $ 106      $ 292   
                
    

Supplemental Disclosures

    

Property, plant and equipment accruals

   $ 102      $ 59   

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

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

    —       —          532        —          —          37        569   

Foreign currency translation adjustments

    —       —          —          (111     —          10        (101

Unrealized mark-to-market net loss on hedges

    —       —          —          —          (18     —          (18

Reclassification of cash flow hedges into earnings

    —       —          —          —          1        —          1   

Pension and benefits impact

    —       —          —          —          12        —          12   

Dividends on common stock

    —       —          (325     —          —          —          (325

Stock-based compensation

    —       15        —          —          —          —          15   

Distributions to noncontrolling interests

    —       —          —          —          —          (36     (36

Other, net

    —       (22     —          —          —          1        (21
                                                     

June 30, 2010

  $ 1   $ 4,693      $ 1,303      $ 1,575      $ (363   $ 552      $ 7,761   
                                                     

December 31, 2008

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

Net income

    —       —          438        —          —          34        472   

Foreign currency translation adjustments

    —       —          —          211        —          4        215   

Unrealized mark-to-market net gain on hedges

    —       —          —          —          5        —          5   

Reclassification of cash flow hedges into earnings

    —       —          —          —          (4     —          (4

Pension and benefits impact

    —       —          —          —          22        —          22   

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

    —       —          (325     —          —          —          (325

Stock-based compensation

    —       3        —          —          —          —          3   

Distributions to noncontrolling interests

    —       —          —          —          —          (140     (140

Contributions from noncontrolling interests

    —       —          —          —          —          2        2   

Other, net

    —       25        —          —          —          6        31   
                                                     

June 30, 2009

  $ 1   $ 4,664      $ 1,012      $ 1,092      $ (322   $ 544      $ 6,991   
                                                     

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

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 six months ended June 30, 2009 were also corrected by $9 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. 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.

 

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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.

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 June 30, 2010

       

U.S. Transmission

  $ 440   $ 2      $ 442      $ 223   

Distribution

    331     —          331        73   

Western Canada Transmission & Processing

    289     —          289        69   

Field Services

    —       —          —          58   
                             

Total reportable segments

    1,060     2        1,062        423   

Other

    3     11        14        (16

Eliminations

    —       (13     (13     —     

Interest expense

    —       —          —          158   

Interest income and other (b)

    —       —          —          18   
                             

Total consolidated

  $ 1,063   $ —        $ 1,063      $ 267   
                             

Three Months Ended June 30, 2009

       

U.S. Transmission

  $ 413   $ 1      $ 414      $ 234   

Distribution

    284     —          284        40   

Western Canada Transmission & Processing

    239     —          239        58   

Field Services

    —       —          —          24   
                             

Total reportable segments

    936     1        937        356   

Other

    1     11        12        (12

Eliminations

    —       (12     (12     —     

Interest expense

    —       —          —          146   

Interest income and other (b)

    —       —          —          27   
                             

Total consolidated

  $ 937   $ —        $ 937      $ 225   
                             

Six Months Ended June 30, 2010

       

U.S. Transmission

  $ 896   $ 3      $ 899      $ 470   

Distribution

    999     —          999        219   

Western Canada Transmission & Processing

    644     —          644        188   

Field Services

    —       —          —          157   
                             

Total reportable segments

    2,539     3        2,542        1,034   

Other

    4     23        27        (30

Eliminations

    —       (26     (26     —     

Interest expense

    —       —          —          317   

Interest income and other (b)

    —       —          —          39   
                             

Total consolidated

  $ 2,543   $ —        $ 2,543      $ 726   
                             

Six Months Ended June 30, 2009

       

U.S. Transmission

  $ 816   $ 3      $ 819      $ 451   

Distribution

    992     —          992        192   

Western Canada Transmission & Processing

    510     —          510        139   

Field Services

    —       —          —          174   
                             

Total reportable segments

    2,318     3        2,321        956   

Other

    3     21        24        (36

Eliminations

    —       (24     (24     —     

Interest expense

    —       —          —          296   

Interest income and other (b)

    —       —          —          52   
                             

Total consolidated

  $ 2,321   $ —        $ 2,321      $ 676   
                             

 

(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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3. 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. On March 4, 2010, M&N LLC filed a settlement with FERC that resolves all issues in the case. On March 18, 2010, the settlement was certified by the Presiding Administrative Law Judge and on April 30, 2010 was approved by the FERC. Although the settlement will result 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. 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.

4. Income Taxes

Income tax expense from continuing operations for the three months ended June 30, 2010 was $76 million, compared to $67 million for the same period in 2009, increasing primarily as a result of higher earnings from continuing operations. Income tax expense from continuing operations for the six months ended June 30, 2010 was $173 million, compared to $206 million reported for the same period in 2009, decreasing primarily as a result of favorable tax audit settlements and a higher proportion of earnings from Canadian subsidiaries that are taxed at lower rates, 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 and six-month periods ended June 30, 2010 was 28.5% and 23.8%, respectively, compared to 29.8% and 30.5% reported for the same period in 2009. The lower effective tax rates were primarily due to favorable tax audit settlements and a higher proportion of earnings from Canadian subsidiaries that are taxed at lower rates.

The favorable tax audit settlements were mainly due to 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. We did not have any uncertain tax benefits associated with these settlements.

We recognized a $3 million increase in unrecognized tax benefits during the six months ended June 30, 2010. Although uncertain, we believe it is reasonably possible that prior to June 30, 2011 the total amount of unrecognized tax benefits could decrease by approximately $10 million, related to the expiration of statutes of limitation.

5. Discontinued Operations

Discontinued operations includes the net effects of a settlement arrangement related to prior liquefied natural gas transportation 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 (Loss) From Discontinued Operations, Net of Tax, in the Condensed Consolidated Statements of Operations.

 

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

Three Months Ended June 30, 2010

         

Other

   $ 16    $ (1   $ (1   $ —     
                               

Total consolidated

   $ 16    $ (1   $ (1   $ —     
                               

Three Months Ended June 30, 2009

         

Other

   $ 23    $ (1   $ —        $ (1
                               

Total consolidated

   $ 23    $ (1   $ —        $ (1
                               

Six Months Ended June 30, 2010

         

Other

   $ 107    $ 4      $ (12   $ 16   
                               

Total consolidated

   $ 107    $ 4      $ (12   $ 16   
                               

Six Months Ended June 30, 2009

         

Other

   $ 66    $ 3      $ 1      $ 2   
                               

Total consolidated

   $ 66    $ 3      $ 1      $ 2   
                               

6. Comprehensive Income

Components of comprehensive income are as follows:

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2010     2009     2010     2009  
     (in millions)  

Net income

   $ 191      $ 157      $ 569      $ 472   

Other comprehensive income (loss)

        

Foreign currency translation adjustments

     (314     420        (101     215   

Unrealized mark-to-market net gain (loss) on hedges

     (4     11        (18     5   

Reclassification of cash flow hedges into earnings

     1        (4     1        (4

Pension and benefits impact

     6        18        12        22   
                                

Total comprehensive income (loss), net of tax

     (120     602        463        710   

Less: comprehensive income—noncontrolling interests

     13        23        47        38   
                                

Comprehensive income (loss)—controlling interests

   $ (133   $ 579      $ 416      $ 672   
                                

7. 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 June 30,
    Six Months
Ended June 30,
     2010    2009     2010    2009
     (in millions, except per-share
amounts)

Income from continuing operations, net of tax—controlling interests

   $ 174    $ 141      $ 516    $ 436

Income (loss) from discontinued operations, net of tax—controlling interests

     —        (1     16      2
                            

Net income—controlling interests

   $ 174    $ 140      $ 532    $ 438
                            

Weighted-average common shares, outstanding

          

Basic

     648      645        648      637

Diluted

     650      646        650      638

Basic and diluted earnings per common share (a)

          

Continuing operations

   $ 0.27    $ 0.22      $ 0.79    $ 0.69

Discontinued operations, net of tax

     —        —          0.03      —  
                            

Total basic earnings per common share

   $ 0.27    $ 0.22      $ 0.82    $ 0.69
                            

 

(a) Quarterly earnings-per-share amounts are stand-alone calculations and may not be additive to full-year 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 June 30, 2010 and 2009, respectively, and 10 million and 12 million shares for the six months ended June 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.

8. Marketable Securities and Restricted Funds

Held-to-Maturity (HTM) Marketable SecuritiesHTM marketable securities, totaling $146 million at June 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 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 June 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 Consolidated Statements of Cash Flows.

 

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Additional information regarding HTM investments follows:

 

     June 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

   $ —      $ —      $ 146    $ —      $ —      $ 113

Money market instruments

     —        —        —        —        —        8
                                         

Total held-to-maturity investments

   $ —      $ —      $ 146    $ —      $ —      $ 121
                                         

Other Restricted Funds. In addition to the HTM securities held in escrow described above, we had funds totaling $42 million at June 30, 2010 that were also considered restricted funds, primarily related to the M&N LP debt service and insurance requirements.

9. 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:

 

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

Natural gas

   $ 187    $ 219

NGLs

     40      21

Materials and supplies

     69      81
             

Total inventory

   $ 296    $ 321
             

10. 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 June 30,
   Six Months
Ended June 30,
     2010    2009    2010    2009
     (in millions)

Operating revenues

   $ 2,479    $ 1,806    $ 5,594    $ 3,733

Operating expenses

     2,286      1,718      5,128      3,541

Operating income

     193      88      466      192

Net income

     131      22      327      65

Net income attributable to members’ interests

     114      50      295      80

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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11. 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.

12. Debt and Credit Facilities

Available Credit Facilities and Restrictive Debt Covenants

 

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

Spectra Energy Capital, LLC (a)

                 

Multi-year syndicated

   2012    $ 1,500    $ 190    $ —      $ 12    $ 202

Westcoast Energy Inc. (b)

                 

Multi-year syndicated

   2011      188      81      —        —        81

364-day bilateral

   2010      19      —        —        1      1

Union Gas (c)

                 

Multi-year syndicated

   2012      470      218      —        —        218

364-day bilateral

   2010      14      —        —        1      1

Spectra Energy Partners, LP

                 

Multi-year syndicated

   2012      500      —        240      —        240
                                     

Total

      $ 2,691    $ 489    $ 240    $ 14    $ 743
                                     

 

(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 June 30, 2010. Two credit facilities, totaling 220 million Canadian dollars, each contain 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 June 30, 2010. Two credit facilities, totaling 515 million Canadian dollars, each contain a covenant that requires the Union Gas debt-to-total capitalization ratio to not exceed 75%. The multi-year syndicated facility contains 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 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 June 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.

 

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Table of Contents

13. 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

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

Corporate debt securities

  

Cash and cash equivalents

   $ 65    $ —      $ 65    $ —  

Corporate debt securities

  

Investments and other assets—other

     12      12      —        —  

Derivative assets—natural gas purchase contract

  

Investments and other assets—other

     1      —        —        1

Derivative assets—interest rate swaps

  

Investments and other assets—other

     42      —        42      —  

Money market funds

  

Investments and other assets—other

     19      19      —        —  
                              

Total Assets

   $ 139    $ 31    $ 107    $ 1
                              

Derivative liabilities—interest rate swaps

   Deferred credits and other liabilities— regulatory and other    $ 26    $ —      $ 26    $ —  
                              

Total Liabilities

   $ 26    $ —      $ 26    $ —  
                              

 

          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 contract

  

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:

 

     Short-Term
Derivative
Assets
   Short-Term
Derivative
Liabilities
   Long-Term
Derivative
Assets
    Long-Term
Derivative
Liabilities
     (in millions)

Three Months Ended June 30, 2010

  

Fair value at March 31, 2010

   $ —      $ —      $ —        $ —  

Total gains or losses (realized/unrealized):

          

Included in earnings

     —        —        (3     —  

Included in other comprehensive income

     —        —        4        —  
                            

Fair value at June 30, 2010

   $ —      $ —      $ 1      $ —  
                            

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 held at June 30, 2010

   $ —      $ —      $ (2   $ —  
                            

Three Months Ended June 30, 2009

  

Fair value at March 31, 2009

   $ —      $ —      $ 26      $ —  

Total gains or losses (realized/unrealized):

          

Included in earnings

     —        —        (3     —  

Included in Investments and Other Assets—Other

     —        —        3        —  

Included in other comprehensive income

     —        —        (2     —  
                            

Fair value at June 30, 2009

   $ —      $ —      $ 24      $ —  
                            

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 held at June 30, 2009

   $ —      $ —      $ (3   $ —  
                            

Six Months Ended June 30, 2010

  

Fair value at December 31, 2009

   $ —      $ —      $ 15      $ —  

Total gains or losses (realized/unrealized):

          

Included in earnings

     —        —        (3     —  

Included in other comprehensive income

     —        —        (11     —  
                            

Fair value at June 30, 2010

   $ —      $ —      $ 1      $ —  
                            

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 held at June 30, 2010

   $ —      $ —      $ (2   $ —  
                            

Six Months Ended June 30, 2009

  

Fair value at December 31, 2008

   $ —      $ —      $ 36      $ —  

Total gains or losses (realized/unrealized):

          

Included in earnings

     —        —        (4     —  

Included in Investments and Other Assets—Other

     —        —        1        —  

Included in other comprehensive income

     —        —        (9     —  
                            

Fair value at June 30, 2009

   $ —      $ —      $ 24      $ —  
                            

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 held at June 30, 2009

   $ —      $ —      $ (4   $ —  
                            

 

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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, 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.

 

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

Long-term receivables

   $ 116    $ 118    $ 116    $ 118

Long-term debt, including current maturities

     9,396      10,589      9,756      10,690

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.

14. 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.

 

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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 June 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 arise out of the conversion of the Duke Power Company Employees’ Retirement Plan into the Duke Power Company Retirement Cash Balance Plan. The plaintiffs seek to represent present and former participants in the Duke Energy Retirement Cash Balance Plan. This group is estimated to include approximately 36,000 persons. Duke Energy filed its answer in March 2006, and various motions were thereafter filed by the parties, including plaintiffs’ motion to certify a class, Duke Energy’s motion to dismiss, and cross motions for summary judgment filed by both the plaintiffs and Duke Energy. The Court issued a series of rulings in June 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 June 2008 asserting and re-pleading the claims which the Court is allowing to proceed. Duke Energy filed a motion to dismiss in July 2008 requesting the dismissal of plaintiffs’ breach of fiduciary claims. Plaintiffs filed a new motion to certify a class action in August 2008 and Duke Energy filed a response to this motion. The Court issued an Order on March 31, 2009 denying Duke Energy’s motion to dismiss plaintiffs’ breach of fiduciary claims. A hearing on the issue of class certification of plaintiffs’ remaining claims was held on April 29, 2009. On September 4, 2009, the Court issued an Order granting class certification for plaintiffs’ remaining claims and denying certification of the plaintiffs’ breach of fiduciary claims. Both parties filed motions for summary judgment on April 1, 2010 with respect to the two claims that remain in the case and which were certified as class actions last year. Duke Energy also filed a motion for summary judgment on the plaintiffs’ breach of fiduciary claims which remain in the case but were denied class action status. Future activity in this case, including additional discovery activity, will be determined and scheduled after the Court considers and issues rulings on these new motions.

In connection with the spin-off from Duke Energy in January 2007, we agreed to share with Duke Energy any liabilities or damages associated with this matter that relate to our employees that may be members of a plaintiff class if one is certified. At mediation, plaintiffs quantified their claims as being in excess of $150 million. It is not possible to predict with certainty the damages, if any, that we might incur in connection with this matter. However, based upon our current estimate of individuals that could be included in any plaintiff class, 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.

 

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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 June 30, 2010 or December 31, 2009 related to litigation.

Other Commitments and Contingencies

See Note 15 for a discussion of guarantees and indemnifications.

15. 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 honor our contingencies 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 June 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.

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 non-wholly owned entities and third-party entities as of June 30, 2010 was $61 million. Of these guarantees, $4 million expire in 2015 and the remaining have no contractual expiration.

 

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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 June 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.

16. 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 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 June 30, 2010, we had interest rate hedges outstanding for various purposes. These hedges consisted of “pay floating—receive fixed” swaps with a total notional principal amount of $1,361 million, forward-starting “pay fixed—receive floating” swaps with a total notional principal amount of $150 million, and at Spectra Energy Partners, LP, third-party “pay fixed—receive floating” swaps with a total notional principal amount of $40 million.

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 six months ended June 30, 2010.

17. 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 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 $5 million to our U.S. retirement plans in the six-month period ended June 30, 2010 and made no contributions for the same period in 2009. We anticipate making approximately $30 million of total discretionary contributions to the U.S. plans during 2010. We made total contributions to the Canadian DC and qualified DB plans of $34 million and $17 million during the six-month periods ended June 30, 2010 and 2009, respectively. We anticipate that we will make total contributions of approximately $70 million to the Canadian plans in 2010.

 

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Qualified Pension Plans—Components of Net Periodic Pension Cost

 

     Three Months
Ended June  30,
    Six Months
Ended June  30,
 
         2010             2009             2010             2009      
     (in millions)  

U.S.

        

Service cost benefit earned

   $ 3      $ 3      $ 6      $ 5   

Interest cost on projected benefit obligation

     7        6        13        13   

Expected return on plan assets

     (8     (8     (16     (16

Amortization of loss

     2        1        4        2   
                                

Net periodic pension cost

   $ 4      $ 2      $ 7      $ 4   
                                

Canada

        

Service cost benefit earned

   $ 4      $ 3      $ 8      $ 6   

Interest cost on projected benefit obligation

     12        9        23        18   

Expected return on plan assets

     (12     (10     (23     (20

Amortization of loss

     4        —          8        1   

Amortization of prior service costs

     —          1       1        1   
                                

Net periodic pension cost

   $ 8      $ 3      $ 17      $ 6   
                                

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

 

  

     Three Months
Ended June  30,
    Six Months
Ended June  30,
 
     2010     2009     2010     2009  
     (in millions)  

U.S.

        

Interest cost on projected benefit obligation

   $ 1      $ 1      $ 1      $ 1   
                                

Net periodic pension cost

   $ 1      $ 1      $ 1      $ 1   
                                

Canada

        

Service cost benefit earned

   $ 1      $ 1      $ 1      $ 1   

Interest cost on projected benefit obligation

     1        1        3        2   
                                

Net periodic pension cost

   $ 2      $ 2      $ 4      $ 3   
                                

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.

 

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

 

     Three Months
Ended June  30,
    Six Months
Ended June  30,
 
         2010             2009             2010             2009      
     (in millions)  

U.S.

        

Interest cost on accumulated post-retirement benefit obligation

   $ 3      $ 3      $ 6      $ 7   

Expected return on plan assets

     (2     (2     (3     (3

Amortization of net transition liability

     1        2        2        3   

Amortization of loss

     1        1        1        1   
                                

Net periodic other post-retirement benefit cost

   $ 3      $ 4      $ 6      $ 8   
                                

Canada

        

Service cost benefit earned

   $ 1      $ —        $ 2      $ 1   

Interest cost on accumulated post-retirement benefit obligation

     2        1        3        2   
                                

Net periodic other post-retirement benefit cost

   $ 3      $ 1      $ 5      $ 3   
                                

18. 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 June 30, 2010

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
   Eliminations     Consolidated

Total operating revenues

   $ —        $ —        $ 1,063    $ —        $ 1,063

Total operating expenses

     2        1        718      —          721
                                     

Operating income (loss)

     (2     (1     345      —          342

Equity in earnings of unconsolidated affiliates

     —          —          77      —          77

Equity in earnings of subsidiaries

     175        281        —        (456     —  

Other income and expenses, net

     —          —          6      —          6

Interest expense

     —          52        106      —          158
                                     

Earnings before income taxes

     173        228        322      (456     267

Income tax expense (benefit)

     (1     53        24      —          76
                                     

Net income

     174        175        298      (456     191

Net income—noncontrolling interests

     —          —          17      —          17
                                     

Net income—controlling interests

   $ 174      $ 175      $ 281    $ (456   $ 174
                                     

 

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Table of Contents

Spectra Energy Corp

Condensed Consolidating Statement of Operations

Three Months Ended June 30, 2009

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
   Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total operating revenues

   $ —        $ —      $ 937      $ —        $ 937   

Total operating expenses

     (7     —        627        —          620   
                                       

Operating income

     7        —        310        —          317   

Equity in earnings of unconsolidated affiliates

     —          —        40        —          40   

Equity in earnings of subsidiaries

     135        215      —          (350     —     

Other income and expenses, net

     —          16      (2     —          14   

Interest expense

     —          52      94        —          146   
                                       

Earnings from continuing operations before income taxes

     142        179      254        (350     225   

Income tax expense from continuing operations

     2        44      21        —          67   
                                       

Income from continuing operations

     140        135      233        (350     158   

Loss from discontinued operations, net of tax

     —          —        (1     —          (1
                                       

Net income

     140        135      232        (350     157   

Net income—noncontrolling interests

     —          —        17        —          17   
                                       

Net income—controlling interests

   $ 140      $ 135    $ 215      $ (350   $ 140   
                                       

 

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Spectra Energy Corp

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2010

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
   Eliminations     Consolidated

Total operating revenues

   $ —        $ —        $ 2,543    $ —        $ 2,543

Total operating expenses

     5        1        1,703      —          1,709
                                     

Operating income (loss)

     (5     (1     840      —          834

Equity in earnings of unconsolidated affiliates

     —          —          199      —          199

Equity in earnings of subsidiaries

     535        782        —        (1,317     —  

Other income and expenses, net

     —          2        8      —          10

Interest expense

     —          102        215      —          317
                                     

Earnings from continuing operations before income taxes

     530        681        832      (1,317     726

Income tax expense (benefit) from continuing operations

     (2     146        29      —          173
                                     

Income from continuing operations

     532        535        803      (1,317     553

Income from discontinued operations, net of tax

     —          —          16      —          16
                                     

Net income

     532        535        819      (1,317     569

Net income—noncontrolling interests

     —          —          37      —          37
                                     

Net income—controlling interests

   $ 532      $ 535      $ 782    $ (1,317   $ 532
                                     

 

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Spectra Energy Corp

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2009

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
   Eliminations     Consolidated

Total operating revenues

   $ —        $ —        $ 2,321    $ —        $ 2,321

Total operating expenses

     5        1        1,583      —          1,589

Gains on sales of other assets and other, net

     —          —          10      —          10
                                     

Operating income (loss)

     (5     (1     748      —          742

Equity in earnings of unconsolidated affiliates

     —          —          207      —          207

Equity in earnings of subsidiaries

     441        681        —        (1,122     —  

Other income and expenses, net

     —          23        —        —          23

Interest expense

     —          109        187      —          296
                                     

Earnings from continuing operations before income taxes

     436        594        768      (1,122     676

Income tax expense (benefit) from continuing operations

     (2     153        55      —          206
                                     

Income from continuing operations

     438        441        713      (1,122     470

Income from discontinued operations, net of tax

     —          —          2      —          2
                                     

Net income

     438        441        715      (1,122     472

Net income—noncontrolling interests

     —          —          34      —          34
                                     

Net income—controlling interests

   $ 438      $ 441      $ 681    $ (1,122   $ 438
                                     

 

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Spectra Energy Corp

Condensed Consolidating Balance Sheet

June 30, 2010

(In millions)

 

     Spectra
Energy
Corp
    Spectra
Capital
   Non-Guarantor
Subsidiaries
    Eliminations     Consolidated

Cash and cash equivalents

   $ —        $ 7    $ 99      $ —        $ 106

Receivables (payables)—consolidated subsidiaries

     (25     213      (183     (5     —  

Receivables (payables)—other

     (4     2      663        —          661

Other current assets

     3        31      439        —          473
                                     

Total current assets

     (26     253      1,018        (5     1,240

Investments in and loans to unconsolidated affiliates

     —          74      1,883        —          1,957

Investments in consolidated subsidiaries

     9,770        13,025      —          (22,795     —  

Advances receivable (payable)—consolidated subsidiaries

     (2,510     2,717      137        (344     —  

Goodwill

     —          —        3,917        —          3,917

Other assets

     39        42      357        —          438

Property, plant and equipment, net

     —          —        15,557        —          15,557

Regulatory assets and deferred debits

     1        14      945        —          960
                                     

Total Assets

   $ 7,274      $ 16,125    $ 23,814      $ (23,144   $ 24,069
                                     

Accounts payable (receivable)—consolidated subsidiaries

   $ —        $ 41    $ (36   $ (5   $ —  

Accounts payable—other

     5        102      313        —          420

Short-term borrowings and commercial paper

     —          534      299        (344     489

Accrued taxes payable (receivable)

     (150     147      61        —          58

Current maturities of long-term debt

     —          9      717        —          726

Other current liabilities

     46        66      801        —          913
                                     

Total current liabilities

     (99     899      2,155        (349     2,606

Long-term debt

     —          3,303      5,367        —          8,670

Deferred credits and other liabilities

     164        2,153      2,457        —          4,774

Preferred stock of subsidiaries

     —          —        258        —          258

Equity

           

Controlling interests

     7,209        9,770      13,025        (22,795     7,209

Noncontrolling interests

     —          —        552        —          552
                                     

Total equity

     7,209        9,770      13,577        (22,795     7,761
                                     

Total Liabilities and Equity

   $ 7,274      $ 16,125    $ 23,814      $ (23,144   $ 24,069
                                     

 

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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

Six Months Ended June 30, 2010

(In millions)

 

    Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES

         

Net income

  $ 532      $ 535      $ 819      $ (1,317   $ 569   

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

         

Depreciation and amortization

    —          —          324        —          324   

Equity in earnings of unconsolidated affiliates

    —          —          (199     —          (199

Equity in earnings of subsidiaries

    (535     (782     —          1,317        —     

Distributions received from unconsolidated affiliates

    —          —          237        —          237   

Other

    (159     159        (100     —          (100
                                       

Net cash provided by (used in) operating activities

    (162     (88     1,081        —          831   
                                       

CASH FLOWS FROM INVESTING ACTIVITIES

         

Capital expenditures

    —          —          (497     —          (497

Investments in and loans to unconsolidated affiliates

    —          —          (3     —          (3

Purchases of held-to-maturity securities

    —          —          (530     —          (530

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

    —          —          507        —          507   

Distributions received from unconsolidated affiliates

    —          —          12        —          12   

Other

    —          —          (10     —          (10
                                       

Net cash used in investing activities

    —          —          (521     —          (521
                                       

CASH FLOWS FROM FINANCING ACTIVITIES

         

Proceeds from the issuance of long-term debt

    —          —          1,440        —          1,440   

Payments for the redemption of long-term debt

    —          —          (1,786     —          (1,786

Net increase in short-term borrowings and commercial paper

    —          149        185        —          334   

Distributions to noncontrolling interests

    —          —          (36     —          (36

Dividends paid on common stock

    (325     (3     —          3        (325

Distributions and advances from (to) affiliates

    486        (51     (432     (3     —     

Other

    1        —          4        —          5   
                                       

Net cash provided by (used in) financing activities

    162        95        (625     —          (368
                                       

Effect of exchange rate changes on cash

    —          —          (2     —          (2
                                       

Net increase (decrease) in cash and cash equivalents

    —          7        (67     —          (60

Cash and cash equivalents at beginning of period

    —          —          166        —          166   
                                       

Cash and cash equivalents at end of period

  $ —        $ 7      $ 99      $ —        $ 106   
                                       

 

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Spectra Energy Corp

Condensed Consolidating Statements of Cash Flows

Six Months Ended June 30, 2009

(In millions)

 

    Spectra
Energy
Corp
    Spectra
Capital
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES

         

Net income

  $ 438      $ 441      $ 715      $ (1,122   $ 472   

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

         

Depreciation and amortization

    —          —          286        —          286   

Equity in earnings of unconsolidated affiliates

    —          —          (207     —          (207

Equity in earnings of subsidiaries

    (441     (681     —          1,122        —     

Distributions received from unconsolidated affiliates

    —          —          39        —          39   

Other

    53        200        176        —          429   
                                       

Net cash provided by (used in) operating activities

    50        (40     1,009        —          1,019   
                                       

CASH FLOWS FROM INVESTING ACTIVITIES

         

Capital expenditures

    —          —          (375     —          (375

Investments in and loans to unconsolidated affiliates

    —          (23     (28     —          (51

Acquisition of Ozark

    —          —          (295     —          (295

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

    —          —          32        —          32   

Distributions received from unconsolidated affiliates

    —          —          148        —          148   

Other

    —          —          (3     —          (3
                                       

Net cash used in investing activities

    —          (23     (521     —          (544
                                       

CASH FLOWS FROM FINANCING ACTIVITIES

         

Proceeds from the issuance of long-term debt

    —          —          2,219        —          2,219   

Payments for the redemption of long-term debt

    —          (163     (1,739     —          (1,902

Net decrease in short-term borrowings and commercial paper

    —          (768     (168     —          (936

Distributions to noncontrolling interests

    —          —          (136     —          (136

Proceeds from the issuance of Spectra Energy common stock

    448        —          —          —          448   

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

    —          —          208        —          208   

Dividends paid on common stock

    (314     (8     —          8        (314

Distributions and advances from (to) affiliates

    (196     945        (741     (8     —     

Other

    12        —          (1     —          11   
                                       

Net cash provided by (used in) financing activities

    (50     6        (358     —          (402
                                       

Effect of exchange rate changes on cash

    —          —          14        —          14   
                                       

Net increase (decrease) in cash and cash equivalents

    —          (57     144        —          87   

Cash and cash equivalents at beginning of period

    —          60        145        —          205   
                                       

Cash and cash equivalents at end of period

  $ —        $ 3      $ 289      $ —        $ 292   
                                       

 

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19. New Accounting Pronouncements

The following new accounting pronouncement was adopted during the six months ended June 30, 2010:

In June 2009, the Financial Accounting Standards Board issued an accounting standard which is intended to address (1) the effects on certain consolidation provisions as a result of the elimination of the concept of qualifying special-purpose entities and (2) constituent concerns about the application of certain consolidation provisions including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. The adoption of the provisions of this standard on January 1, 2010 did not have any impact on our consolidated results of operations, financial position or cash flows.

20. Subsequent Events

On July 2, 2010, Westcoast issued 250 million Canadian dollars (approximately $235 million) aggregate principal amount of its 4.57% Medium Term Notes due 2020. Net proceeds from this offering will be used for general corporate purposes, including refinancing of current maturities of debt and funding of expansion projects.

On July 23, 2010 Union Gas issued 250 million Canadian dollars (approximately $241 million) of 5.20% notes due 2040. Net proceeds from the offering will be used for general corporate purposes, including refinancing of current maturities of debt.

On July 15, 2010, we entered into a definitive agreement to purchase the Bobcat Gas Storage assets and development project from Haddington Energy Partners III LP and GE Energy Financial Services for $540 million in cash. In addition to the purchase price, we expect to invest an additional $400 to $450 million to fully develop the facility by the end of 2015. Once fully operational, the high-deliverability salt dome storage caverns in southeastern Louisiana will have a total working gas storage capacity of 46 billion cubic feet. This acquisition will complement our existing pipeline and storage assets in that region and with Bobcat’s interconnection with major interstate pipelines, including our Texas Eastern Transmission, LP pipeline, will provide our customers with added flexibility to access all major markets in the United States. Completion of the transaction is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. The transaction is expected to close before year-end 2010.

 

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

INTRODUCTION

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

Executive Overview

During the first half of 2010, our fee-based businesses at U.S. Transmission and Western Canada Transmission & Processing performed well by meeting the needs of our customers and generating increased earnings and cash flows from successful expansion projects placed in service. In addition, commodity prices have improved significantly compared to the same period in 2009 and have positively affected our earnings in the first six months of 2010.

For the three months ended June 30, 2010 and 2009, we reported net income from controlling interests of $174 million and $140 million, respectively. For the six months ended June 30, 2010 and 2009, we reported net income from controlling interests of $532 million and $438 million, respectively. The increases for the three and six-month periods primarily reflect the positive impact of NGL prices on earnings from Field Services, a stronger Canadian dollar, expansion projects placed in service in 2009 at U.S. Transmission and Western Canada Transmission & Processing and lower income tax rates. NGL prices are correlated to higher crude oil prices, which averaged $78 per barrel for the six months ended June 30, 2010 versus $51 per barrel during the same period in 2009. These increases

 

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in earnings were 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.

The highlights for the three months and six months ended June 30, 2010 include:

 

   

U.S. Transmission’s earnings benefited from expansion projects placed in service in 2009 and higher processing revenues, partially offset by a reimbursement of project development costs in 2009,

 

   

Distribution’s earnings increased primarily as a result of an earnings sharing settlement related to 2008 earnings in the second quarter of 2009, a stronger Canadian dollar and a decrease in operating fuel costs, partially offset by lower customer usage of natural gas due to warmer weather and higher employee benefit costs,

 

   

Western Canada Transmission & Processing earnings increased primarily as a result of higher gathering and processing revenues from expansions and a stronger Canadian dollar, partially offset by higher facilities maintenance costs, and

 

   

Field Services earnings benefited from higher commodity prices, but decreased overall as a result of a gain recognized in 2009 associated with partnership units issued by DCP Partners.

In the first six months of 2010, we had $500 million of capital and investment expenditures. Excluding the acquisition of the Bobcat Gas Storage assets and development project discussed below, we continue to project approximately $1.6 billion of capital and investment expenditures for the full year, including expansion capital of approximately $1.0 billion. All expansion projects remain on track for scheduled in-service dates.

As of June 30, 2010, we have access to approximately $1.9 billion available under our credit facilities and expect to continue to utilize commercial paper and revolving lines of credit, as needed, to fund liquidity needs throughout 2010. Other financing activities in the second half of 2010 include debt issuances of 500 million Canadian dollars (approximately $476 million) in July 2010 and the refinancing of debt maturities of approximately $450 million. We may also access the capital markets for other long-term financing, as needed.

On July 15, 2010, we entered into a definitive agreement to purchase the Bobcat Gas Storage assets and development project from Haddington Energy Partners III LP and GE Energy Financial Services for $540 million in cash. In addition to the purchase price, we expect to invest an additional $400 to $450 million to fully develop the facility by the end of 2015. The transaction is expected to close before year-end 2010. See Note 20 of Notes to Condensed Consolidated Financial Statements for further discussion.

RESULTS OF OPERATIONS

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
     2010    2009     2010    2009
     (in millions)

Operating revenues

   $ 1,063    $ 937      $ 2,543    $ 2,321

Operating expenses

     721      620        1,709      1,589

Gains on sales of other assets and other, net

     —        —          —        10
                            

Operating income

     342      317        834      742

Other income and expenses

     83      54        209      230

Interest expense

     158      146        317      296
                            

Earnings from continuing operations before income taxes

     267      225        726      676

Income tax expense from continuing operations

     76      67        173      206