Spectra Energy Corp. last week turned in a weaker third quarter performance compared with a year ago due largely to lower commodity prices. However, management pointed to expansion projects that are generating returns near the top of expectations. Further, the U.S. Southeast and Western Canada both offer opportunities, executives said.

The Houston-based company reported third quarter net income of $191 million (30 cents/share), compared with $296 million (48 cents) in the prior-year quarter. Ongoing net income was $190 million (30 cents/share) versus $302 million (49 cents) during the same period last year.

"We saw good performance from our fee-based businesses, which helped to offset the effects of much lower commodity prices, and [we] continued executing extremely well on our capital expansion plan. Our 2009 expansion projects are being completed on time and on budget, and we are realizing returns on these projects that exceed the high end of our expectations," said CEO Greg Ebel. "We are on track to meet the financial goals we have set for the year, including our 2009 [earnings per share] target of $1.15..."

The company's U.S. Transmission segment reported third quarter earnings before interest and taxes (EBIT) of $239 million, compared with $213 million in third quarter 2008. The segment benefited from expansion projects and capitalization of previously expensed project development costs, Spectra said. These earnings were partially offset by lower gas processing revenues as a result of lower prices and volumes.

Asked during a conference call with financial analysts last Thursday why Spectra's pipelines have been successful at getting shippers to sign up/renew for capacity at maximum rates on Texas Eastern Transmission and Algonquin, Ebel pointed to the character of the pipeline customers and the market served by the facilities.

"First of all, our customers are both producers and LDCs [local distribution companies], right? So the LDCs can do a lot of things but not run out of gas in the middle of the winter, so it's critical, and as we hit 10 out of 25 peak days last winter that they've got the capacity, they're also thinking long term as well. They need to have that gas available to them, and short-term fluctuations in the price of natural gas aren't going to change their long-term view about that.

"I think that it's also the critical position that Texas Eastern has to feed that Northeast market, that last mile, that critical position is very difficult to replicate, and so people want to make sure that they maintain capacity on lines into those large markets. I mean, look throughout the Northeast, even with the economic challenges, you continue to see more gas-fired generation."

Spectra's Distribution segment reported third quarter EBIT of $48 million, compared with $44 million in third quarter 2008. The segment continued to benefit from higher storage and transportation revenues.

The Western Canada Transmission & Processing segment reported third quarter EBIT of $84 million, compared with $113 million during third quarter 2008.

Improved revenues in the fee-based gathering and processing business, due primarily to stronger activity in the Fort Nelson and Grizzly Valley regions, were more than offset by lower Empress earnings, primarily as a result of lower fractionation spreads. Fractionation spreads at Empress averaged $6.75 for the quarter, compared with $10.86 in third quarter 2008.

The Field Services segment reported third quarter EBIT of $45 million, compared with $239 million in third quarter 2008. The decrease was primarily driven by lower commodity prices. During the most recent third quarter crude oil averaged approximately $68/bbl, compared with approximately $118/bbl in the prior-year quarter, and the natural gas liquids-to-crude relationship averaged 42% versus 51% in third quarter 2008. Additionally, natural gas averaged $3.39/MMBtu on the New York Mercantile Exchange, compared with $10.24/MMBtu during the same period in 2008.

During the conference call Ebel outlined areas of opportunity for Spectra going forward.

"First, we continue to see real need for further capacity expansion in the Northeast," he said. "Second, opportunities are presenting themselves in the Marcellus Shale Basin. This shale play is coming on incrementally, and Texas Eastern is well positioned for incremental expansions to accommodate customers' needs as these emerging supplies develop.

"Third, we know that the Florida market will need additional capacity due to the state's growing conversion to natural gas-fired power generation. Fourth, in western Canada, you'll recall that we'll spend about $1 billion on our series of Fort Nelson projects. We've signed 10 producers for 790 million [cubic feet] a day in that region, and we will be seeing some incremental EBIT from the Fort Nelson expansion in 2010, which will increase through 2012 and beyond as facilities are brought into service and the contract volumes ramp up.

"We're seeing significant drilling activity in this area, and about 100 million a day is now flowing out of the Horn River Basin into our system, so we're seeing real results. And if the reserve levels in the Horn River and Montney turn out to be as prolific as projected, we would expect another round of fee-based gathering and processing facilities to be required in the 2012-2015 time frame."

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