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Spectra Blames Weak Commodity Prices for Drop in Profits

Houston-based Spectra Energy's earnings fell 24% in the second quarter from a year ago as each of the company's divisions -- pipelines, field services, distribution and Western Canadian operations -- turned in lower performances. But this will not deter the company from moving forward with its "solid roster" of energy projects, said CEO Greg Ebel.

The company reported net income of $215 million for the quarter (33 cents/share) compared with $284 million (44 cents/share) for the comparable period in 2011.

"We felt the effects of weak commodity prices, which were much lower than our original assumptions," Ebel said during a conference call Thursday. "Our field services segment experienced the most significant impact," reporting earnings before income tax of $66 million for the second quarter compared to $138 million in the same period last year.

"It was definitely a tough quarter for commodity prices. NGL [natural gas liquids] prices dropped almost 40% from 2011. Nymex natural gas averaged almost 50% lower. We have seen an uptick in commodity prices off the low point about six weeks ago, but I think it's fair to say that it would take an extraordinary increase in NGL prices for the rest of 2012 to be at the original level that we projected at the beginning of the year."

Given the current and near-term commodity price environment, Ebel said it was unlikely that the company would meet its earlier projection of $1.90/share for this year.

Despite the slump in quarterly results, Ebel said the company's expansion opportunities remain "strong and growing." Spectra Energy said it placed almost $600 million in expansion projects into service during the quarter.

Ebel estimated that $4 billion in Spectra Energy-financed projects currently are being executed, and $4 billion in DCP Midstream-financed projects are in the works. DCP Midstream is a joint venture of Spectra Energy and Phillips 66.

Ebel said the company expects to invest up to $20 billion to build new energy projects through the end of the decade. The Texas Eastern Appalachia to Market (TEAM 2012) Project, an expansion of Texas Eastern Transmission (Tetco), is due to begin service later this year (see NGI, Jan. 23). The $200 million project is designed to deliver 200 MMcf/d of Marcellus Shale gas to Northeast markets. It is fully subscribed by Range Resources and Chesapeake Utilities, Ebel said.

The second phase (TEAM 2014) would add about 600 MMcf/d of capacity to the Tetco system to deliver gas to markets in the Northeast, Midwest and South. Construction on this part of the expansion will begin in early 2014 and is targeted for operation in the fourth quarter of 2014. Two anchor shippers, Chevron and EQT Corp., have signed agreements for all of the capacity, he said.

And despite the efforts of environmentalists and opponents in New Jersey to block the project, Ebel said that last month Spectra Energy began construction on the $1.2 billion expansion of the Tetco and Algonguin Gas Transmission systems, which would provide an additional 800 MMcf/d of transportation capacity into the New Jersey-New York region (see NGI, July 16). This high-profile, controversial project is expected to be in service in the fourth quarter of 2013 (see NGI, May 28).

The New Jersey-New York expansion is intended to eliminate a bottleneck in the northern New Jersey and Manhattan area that causes prices there to periodically reach four to five times that of the rest of the country.

Ebel said he was "pretty comfortable" that the cost of the project would not significantly increase. "The issue we have to watch [out] for is what happens on directional drills" and the weather. "Right now we're on target as far as construction activities and land acquisitions."

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