Document
Table of Contents


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

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 1-33007 
 
SPECTRA ENERGY CORP
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
20-5413139
(State or other jurisdiction of incorporation)
 
(IRS Employer Identification No.)
5400 Westheimer Court
Houston, Texas 77056
(Address of principal executive offices, including zip code)
713-627-5400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Number of shares of Common Stock, $0.001 par value, outstanding as of June 30, 2016: 701,100,679
 
 
 
 
 


Table of Contents


SPECTRA ENERGY CORP
FORM 10-Q FOR THE QUARTER ENDED
June 30, 2016
INDEX
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1.
 
     June 30, 2016 and 2015
 
     June 30, 2016 and 2015
 
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015
 
Condensed Consolidated Statements of Equity for the six months ended June 30, 2016 and 2015
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements represent management’s intentions, plans, expectations, assumptions and beliefs about future events. These forward-looking statements are identified by terms and phrases such as: anticipate, believe, intend, estimate, expect, continue, should, could, may, plan, project, predict, will, potential, forecast, and similar expressions. Forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Factors used to develop these forward-looking statements and that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
state, provincial, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an effect on rate structure, and affect the speed at and degree to which competition enters the natural gas and oil industries;
outcomes of litigation and regulatory investigations, proceedings or inquiries;
weather and other natural phenomena, including the economic, operational and other effects of hurricanes and storms;
the timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates;
general economic conditions, including the risk of a prolonged economic slowdown or decline, or the risk of delay in a recovery, which can affect the long-term demand for natural gas and oil and related services;
potential effects arising from terrorist attacks and any consequential or other hostilities;
changes in environmental, safety and other laws and regulations;
the development of alternative energy resources;
results and costs of financing efforts, including the ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general market and economic conditions;
increases in the cost of goods and services required to complete capital projects;
declines in the market prices of equity and debt securities and resulting funding requirements for defined benefit pension plans;
growth in opportunities, including the timing and success of efforts to develop United States and Canadian pipeline, storage, gathering, processing and other related infrastructure projects and the effects of competition;
the performance of natural gas and oil transmission and storage, distribution, and gathering and processing facilities;
the extent of success in connecting natural gas and oil supplies to gathering, processing and transmission systems and in connecting to expanding gas and oil markets;
the effects of accounting pronouncements issued periodically by accounting standard-setting bodies;
conditions of the capital markets during the periods covered by forward-looking statements; and
the ability to successfully complete merger, acquisition or divestiture plans; regulatory or other limitations imposed as a result of a merger, acquisition or divestiture; and the success of the business following a merger, acquisition or divestiture.
In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than Spectra Energy Corp has described. Spectra Energy Corp undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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,
 
2016
 
2015
 
2016
 
2015
Operating Revenues
 
 
 
 
 
 
 
Transportation, storage and processing of natural gas
$
810

 
$
802

 
$
1,634

 
$
1,644

Distribution of natural gas
228

 
238

 
639

 
845

Sales of natural gas liquids
12

 
31

 
53

 
97

Transportation of crude oil
88

 
90

 
173

 
174

Other
21

 
31

 
44

 
55

Total operating revenues
1,159

 
1,192

 
2,543

 
2,815

Operating Expenses
 
 
 
 
 
 
 
Natural gas and petroleum products purchased
101

 
119

 
351

 
551

Operating, maintenance and other
392

 
389

 
733

 
743

Depreciation and amortization
196

 
193

 
389

 
386

Property and other taxes
99

 
85

 
205

 
188

Total operating expenses
788

 
786

 
1,678

 
1,868

Operating Income
371

 
406

 
865

 
947

Other Income and Expenses
 
 
 
 
 
 
 
Earnings (loss) from equity investments
16

 
(189
)
 
49

 
(165
)
Other income and expenses, net
39

 
22

 
71

 
42

Total other income and expenses
55

 
(167
)
 
120

 
(123
)
Interest Expense
153

 
166

 
304

 
325

Earnings Before Income Taxes
273

 
73

 
681

 
499

Income Tax Expense (Benefit)
52

 
(7
)
 
150

 
94

Net Income
221

 
80

 
531

 
405

Net Income—Noncontrolling Interests
72

 
62

 
148

 
120

Net Income—Controlling Interests
$
149

 
$
18

 
$
383

 
$
285

Common Stock Data
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
699

 
671

 
687

 
671

Diluted
701

 
672

 
688

 
672

Earnings per share
 
 
 
 
 
 
 
Basic and diluted
$
0.21

 
$
0.03

 
$
0.56

 
$
0.42

Dividends per share
$
0.405

 
$
0.37

 
$
0.81

 
$
0.74


See Notes to Condensed Consolidated Financial Statements.
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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net Income
$
221

 
$
80

 
$
531

 
$
405

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
50

 
87

 
351

 
(405
)
Pension and benefits impact (net of taxes of $2, $2, $4 and $5, respectively)
4

 
7

 
9

 
13

Other
3

 
(1
)
 
2

 

Total other comprehensive income (loss)
57

 
93

 
362

 
(392
)
Total Comprehensive Income, net of tax
278

 
173

 
893

 
13

Less: Comprehensive Income—Noncontrolling Interests
75

 
64

 
155

 
114

Comprehensive Income (Loss)—Controlling Interests
$
203

 
$
109

 
$
738

 
$
(101
)

See Notes to Condensed Consolidated Financial Statements.
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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
 
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
240

 
$
213

Receivables, net
708

 
806

Inventory
185

 
307

Assets held for sale
225

 

Fuel tracker
33

 
41

Other
246

 
281

Total current assets
1,637

 
1,648

 
 
 
 
Investments and Other Assets
 
 
 
Investments in and loans to unconsolidated affiliates
2,657

 
2,592

Goodwill
4,217

 
4,154

Other
373

 
310

Total investments and other assets
7,247

 
7,056

 
 
 
 
Property, Plant and Equipment
 
 
 
Cost
32,003

 
29,843

Less accumulated depreciation and amortization
7,296

 
6,925

Net property, plant and equipment
24,707

 
22,918

 
 
 
 
Regulatory Assets and Deferred Debits
1,456

 
1,301

 
 
 
 
Total Assets
$
35,047

 
$
32,923


See Notes to Condensed Consolidated Financial Statements.
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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except per-share amounts)
 
 
June 30,
2016
 
December 31,
2015
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
709

 
$
511

Commercial paper
1,113

 
1,112

Taxes accrued
80

 
78

Interest accrued
181

 
179

Current maturities of long-term debt
68

 
652

Liabilities held for sale
56

 

Other
579

 
860

Total current liabilities
2,786

 
3,392

 
 
 
 
Long-term Debt
13,584

 
12,892

 
 
 
 
Deferred Credits and Other Liabilities
 
 
 
Deferred income taxes
5,694

 
5,445

Regulatory and other
1,421

 
1,323

Total deferred credits and other liabilities
7,115

 
6,768

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
Preferred Stock of Subsidiaries
339

 
339

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

 

Common stock, $0.001 par, 1 billion shares authorized, 701 million and 671 million shares outstanding at June 30, 2016 and December 31, 2015, respectively
1

 
1

Additional paid-in capital
5,944

 
5,053

Retained earnings
1,567

 
1,741

Accumulated other comprehensive income (loss)
86

 
(269
)
Total controlling interests
7,598

 
6,526

Noncontrolling interests
3,625

 
3,006

Total equity
11,223

 
9,532

 
 
 
 
Total Liabilities and Equity
$
35,047

 
$
32,923


See Notes to Condensed Consolidated Financial Statements.
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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
 
Six Months
Ended June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
531

 
$
405

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
397

 
393

Deferred income tax expense
131

 
25

(Earnings) loss from equity investments
(49
)
 
165

Distributions from equity investments
52

 
93

Other
177

 
375

Net cash provided by operating activities
1,239

 
1,456

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(1,520
)
 
(989
)
Investments in and loans to unconsolidated affiliates
(112
)
 
(34
)
Purchase of intangible, net
(40
)
 

Purchases of held-to-maturity securities
(346
)
 
(329
)
Proceeds from sales and maturities of held-to-maturity securities
364

 
344

Purchases of available-for-sale securities
(329
)
 

Proceeds from sales and maturities of available-for-sale securities
330

 
1

Distributions from equity investments
45

 
35

Distribution to equity investment
(148
)
 

Other changes in restricted funds
11

 
(6
)
Other
1

 
2

Net cash used in investing activities
(1,744
)
 
(976
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from the issuance of long-term debt
382

 
994

Payments for the redemption of long-term debt
(619
)
 
(39
)
Net decrease in commercial paper
(23
)
 
(1,030
)
Distributions to noncontrolling interests
(114
)
 
(93
)
Contributions from noncontrolling interests
278

 
90

Proceeds from the issuances of Spectra Energy common stock
868

 

Proceeds from the issuances of Spectra Energy Partners, LP common units
321

 
180

Dividends paid on common stock
(557
)
 
(499
)
Other
(8
)
 
(9
)
Net cash provided by (used in) financing activities
528

 
(406
)
Effect of exchange rate changes on cash
4

 
(2
)
Net increase in cash and cash equivalents
27

 
72

Cash and cash equivalents at beginning of period
213

 
215

Cash and cash equivalents at end of period
$
240

 
$
287

Supplemental Disclosures
 
 
 
Property, plant and equipment non-cash accruals
$
317

 
$
197


See Notes to Condensed Consolidated Financial Statements.
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SPECTRA ENERGY CORP
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In millions)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive Income
(Loss)
 
 
 
 
Foreign
Currency
Translation
Adjustments
 
Other
 
Noncontrolling
Interests
 
Total
December 31, 2015
$
1

 
$
5,053

 
$
1,741

 
$
79

 
$
(348
)
 
$
3,006

 
$
9,532

Net income

 

 
383

 

 

 
148

 
531

Other comprehensive income

 

 

 
346

 
9

 
7

 
362

Dividends on common stock

 

 
(557
)
 

 

 

 
(557
)
Stock-based compensation

 
10

 

 

 

 

 
10

Distributions to noncontrolling interests

 

 

 

 

 
(116
)
 
(116
)
Contributions from noncontrolling interests

 

 

 

 

 
278

 
278

Spectra Energy common stock issued

 
868

 

 

 

 

 
868

Spectra Energy Partners, LP common units issued

 
15

 

 

 

 
297

 
312

Other, net

 
(2
)
 

 

 

 
5

 
3

June 30, 2016
$
1

 
$
5,944

 
$
1,567

 
$
425

 
$
(339
)
 
$
3,625

 
$
11,223

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
$
1

 
$
4,956

 
$
2,541

 
$
1,016

 
$
(354
)
 
$
2,238

 
$
10,398

Net income

 

 
285

 

 

 
120

 
405

Other comprehensive income (loss)

 

 

 
(399
)
 
13

 
(6
)
 
(392
)
Dividends on common stock

 

 
(498
)
 

 

 

 
(498
)
Stock-based compensation

 
6

 

 

 

 

 
6

Distributions to noncontrolling interests

 

 

 

 

 
(93
)
 
(93
)
Contributions from noncontrolling interests

 

 

 

 

 
90

 
90

Spectra Energy common stock issued

 
1

 

 

 

 

 
1

Spectra Energy Partners, LP common units issued

 
25

 

 

 

 
139

 
164

Other, net

 
2

 
1

 

 

 
(5
)
 
(2
)
June 30, 2015
$
1

 
$
4,990

 
$
2,329

 
$
617

 
$
(341
)
 
$
2,483

 
$
10,079


See Notes to Condensed Consolidated Financial Statements.
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SPECTRA ENERGY CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The terms “we,” “our,” “us” and “Spectra Energy” as used in this report refer collectively to Spectra Energy Corp and its subsidiaries unless the context suggests otherwise. These terms are used for convenience only and are not intended as a precise description of any separate legal entity within Spectra Energy. The term “Spectra Energy Partners” refers to our Spectra Energy Partners operating segment. The term “SEP” refers to Spectra Energy Partners, LP, our master limited partnership.
Nature of Operations. Spectra Energy Corp, through its subsidiaries and equity affiliates, owns and operates a large and diversified portfolio of complementary natural gas-related energy assets, and owns and operates a crude oil pipeline system that connects Canadian and United States (U.S.) producers to refineries in the U.S. Rocky Mountain and Midwest regions. We currently operate in three key areas of the natural gas industry: gathering and processing, transmission and storage, and distribution. We provide transmission and storage of natural gas to customers in various regions of the northeastern and southeastern U.S., the Maritime Provinces in Canada, the Pacific Northwest in the U.S. and Canada, and in the province of Ontario, Canada. We also provide natural gas sales and distribution services to retail customers in Ontario, and natural gas gathering and processing services to customers in western Canada. We also own a 50% interest in DCP Midstream, LLC (DCP Midstream), based in Denver, Colorado, one of the leading natural gas gatherers in the U.S. and one of the largest U.S. producers and marketers of natural gas liquids (NGLs).
Basis of Presentation. The accompanying Condensed Consolidated Financial Statements include our accounts and the accounts of our majority-owned subsidiaries, after eliminating intercompany transactions and balances. These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, and reflect all normal recurring adjustments that are, in our opinion, necessary to fairly present our results of operations and financial position. Amounts reported in the Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods due to the effects of seasonal temperature variations on energy consumption, primarily in our gas distribution operations, as well as changing commodity prices on certain of our processing operations and other factors.
Use of Estimates. To conform with generally accepted accounting principles (GAAP) in the U.S., we make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements. Although these estimates are based on our best available knowledge at the time, actual results could differ.
2. Business Segments
We manage our business in four reportable segments: Spectra Energy Partners, Distribution, Western Canada Transmission & Processing and Field Services. The remainder of our business operations is presented as “Other,” and consists of unallocated corporate costs and employee benefit plan assets and liabilities, 100%-owned captive insurance subsidiaries and other miscellaneous activities.
Our chief operating decision maker (CODM) regularly reviews financial information about each of these segments in deciding how to allocate resources and evaluate performance. There is no aggregation within our reportable business segments.
Spectra Energy’s presentation of its Spectra Energy Partners segment is reflective of the parent-level focus by our CODM, considering the resource allocation and governance provisions associated with SEP’s master limited partnership structure. SEP maintains a capital and cash management structure that is separate from Spectra Energy’s, is self-funding and maintains its own lines of bank credit and cash management accounts. From a Spectra Energy perspective, our CODM evaluates the Spectra Energy Partners segment as a whole, without regard to any of SEP’s individual businesses.
Spectra Energy Partners provides transmission, storage and gathering of natural gas, as well as the transportation of crude oil through interstate pipeline systems for customers in various regions of the midwestern, northeastern and southern U.S. and Canada. The natural gas transmission and storage operations are primarily subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC). The crude oil transportation operations are primarily subject to regulation by the FERC in the U.S. and the National Energy Board (NEB) in Canada. Our Spectra Energy Partners segment is composed of the operations of SEP, less governance costs, which are included in “Other.”

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Distribution provides retail natural gas distribution service in Ontario, Canada, as well as natural gas transmission and storage services to other utilities and energy market participants. These services are provided by Union Gas Limited (Union Gas), and are primarily subject to the rules and regulations of the Ontario Energy Board (OEB).
Western Canada Transmission & Processing provides transmission of natural gas, natural gas gathering and processing services, and NGL extraction, fractionation, transportation, storage and marketing to customers in western Canada, the northern tier of the U.S. and the Maritime Provinces in Canada. This segment conducts business mostly through BC Pipeline, BC Field Services, Empress NGL operations (Empress), Canadian Midstream, and Maritimes & Northeast Pipeline Limited Partnership (M&N Canada). BC Pipeline, BC Field Services and M&N Canada operations are primarily subject to the rules and regulations of the NEB. See Note 8 for additional discussion of Empress.
Field Services gathers, compresses, treats, processes, transports, stores and sells natural gas, produces, fractionates, transports, stores and sells NGLs, recovers and sells condensate, and trades and markets natural gas and NGLs. It conducts operations through DCP Midstream, which is owned 50% by us and 50% by Phillips 66. DCP Midstream gathers raw natural gas through gathering systems connecting to several interstate and intrastate natural gas and NGL pipeline systems, one natural gas storage facility and one NGL storage facility. DCP Midstream operates in a diverse number of regions, including the Permian Basin, Eagle Ford, Niobrara/DJ Basin and the Midcontinent. DCP Midstream Partners, LP (DCP Partners) is a publicly traded master limited partnership, of which DCP Midstream acts as general partner. As of June 30, 2016, DCP Midstream had an approximate 21% ownership interest in DCP Partners, including DCP Midstream’s limited partner and general partner interests.
Our reportable segments offer different products and services and are managed separately as business units. Management evaluates segment performance based on earnings before interest, taxes, and depreciation and amortization (EBITDA). Cash, cash equivalents and short-term investments are managed at the parent-company levels, so the associated gains and losses from foreign currency transactions and interest and dividend income are excluded from the segments’ EBITDA. Our segment EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate EBITDA in the same manner. Transactions between reportable segments are accounted for on the same basis as transactions with unaffiliated third parties.

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Business Segment Data
Condensed Consolidated Statements of Operations
 
Unaffiliated
Revenues
 
Intersegment
Revenues
 
Total
Operating
Revenues
 
Depreciation and Amortization
 
Segment EBITDA/
Consolidated
Earnings before
Income Taxes
 
(in millions)
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Spectra Energy Partners
$
618

 
$

 
$
618

 
$
78

 
$
471

Distribution
284

 

 
284

 
47

 
104

Western Canada Transmission & Processing
254

 
4

 
258

 
59

 
97

Field Services

 

 

 

 
(14
)
Total reportable segments
1,156

 
4

 
1,160

 
184

 
658

Other
3

 
16

 
19

 
12

 
(36
)
Eliminations

 
(20
)
 
(20
)
 

 

Depreciation and amortization

 

 

 

 
196

Interest expense

 

 

 

 
153

Total consolidated
$
1,159

 
$

 
$
1,159

 
$
196

 
$
273

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Spectra Energy Partners
$
603

 
$

 
$
603

 
$
72

 
$
478

Distribution
290

 

 
290

 
45

 
98

Western Canada Transmission & Processing
297

 
7

 
304

 
63

 
104

Field Services

 

 

 

 
(233
)
Total reportable segments
1,190

 
7

 
1,197

 
180

 
447

Other
2

 
15

 
17

 
13

 
(12
)
Eliminations

 
(22
)
 
(22
)
 

 

Depreciation and amortization

 

 

 

 
193

Interest expense

 

 

 

 
166

Interest income and other (a)

 

 

 

 
(3
)
Total consolidated
$
1,192

 
$

 
$
1,192

 
$
193

 
$
73

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Spectra Energy Partners
$
1,242

 
$

 
$
1,242

 
$
155

 
$
944

Distribution
749

 

 
749

 
91

 
274

Western Canada Transmission & Processing
548

 
15

 
563

 
117

 
220

Field Services

 

 

 

 
(11
)
Total reportable segments
2,539

 
15

 
2,554

 
363

 
1,427

Other
4

 
32

 
36

 
26

 
(55
)
Eliminations

 
(47
)
 
(47
)
 

 

Depreciation and amortization

 

 

 

 
389

Interest expense

 

 

 

 
304

Interest income and other (a)

 

 

 

 
2

Total consolidated
$
2,543

 
$

 
$
2,543

 
$
389

 
$
681

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Spectra Energy Partners
$
1,209

 
$

 
$
1,209

 
$
146

 
$
933

Distribution
952

 

 
952

 
90

 
290

Western Canada Transmission & Processing
650

 
24

 
674

 
125

 
265

Field Services

 

 

 

 
(250
)
Total reportable segments
2,811

 
24

 
2,835

 
361

 
1,238

Other
4

 
31

 
35

 
25

 
(27
)
Eliminations

 
(55
)
 
(55
)
 

 

Depreciation and amortization

 

 

 

 
386

Interest expense

 

 

 

 
325

Interest income and other (a)

 

 

 

 
(1
)
Total consolidated
$
2,815

 
$

 
$
2,815

 
$
386

 
$
499

___________________________________
(a)
Includes foreign currency transaction gains and losses related to segment EBITDA.

12

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3. Regulatory Matters
Union Gas. In December 2015, Union Gas filed an application with the OEB for the disposition of the 2014 demand side management (DSM) deferral and variance account balances. As a result of this application, Union Gas has a receivable from customers of approximately $9 million as of June 30, 2016 and $8 million as of December 31, 2015, which is reflected as Current Assets—Other on the Condensed Consolidated Balance Sheets. In June 2016, the OEB approved Union Gas' application as filed and Union Gas will begin to recover the receivable from ratepayers effective October 1, 2016.
In March 2016, Union Gas filed a Draft Rate Order with the OEB for rates effective January 1, 2016 based on the OEB's February 24, 2016 updated Decision and Order on the 2015-2020 DSM Plan. In May 2016, a decision from the OEB was received approving recovery from ratepayers of approximately $19 million effective January 1, 2016 with an implementation date of July 1, 2016.
In April 2016, Union Gas filed an application with the OEB for the annual disposition of the 2015 deferral account balances. As a result, Union Gas has a net receivable from customers of approximately $18 million as of June 30, 2016 and December 31, 2015, which is primarily reflected as Current Assets—Other on the Condensed Consolidated Balance Sheets. Union Gas filed a Settlement Proposal with the OEB in July 2016 reflecting a full settlement on all issues in the proceeding. Union Gas is proposing to implement the disposition of the balances on October 1, 2016. A decision from the OEB is expected later this year.
4. Income Taxes
Income tax expense was $52 million for the three months ended June 30, 2016, compared to an income tax benefit of $7 million for the same period in 2015. Income tax expense was $150 million for the six months ended June 30, 2016, compared to $94 million for the same period in 2015. The higher tax expense for both periods was primarily due to the $72 million tax impact of the loss on investment due to the partial impairment of goodwill at DCP Midstream in 2015, partially offset by tax rate changes in 2016.
The effective income tax rate was 19% for the three months ended June 30, 2016, compared to negative 10% for the same period in 2015. The effective income tax rate was 22% for the six months ended June 30, 2016, compared to 19% for the same period in 2015. The higher effective income tax rate for both periods was primarily due to the $72 million tax impact of the loss on investment due to the partial impairment of goodwill at DCP Midstream in 2015, partially offset by tax rate changes in 2016.
There was a $7 million increase in unrecognized tax benefits recorded during the six months ended June 30, 2016. Although uncertain, we believe it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $30 million to $40 million prior to June 30, 2017 due to audit settlements and statute of limitations expirations.
5. Earnings per Common Share
Basic earnings per common share (EPS) is computed by dividing net income from controlling interests by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income from controlling interests by the diluted weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, stock-based performance unit awards and phantom stock awards, were exercised, settled or converted into common stock.
The following table presents our basic and diluted EPS calculations:
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions, except per-share amounts)
Net income—controlling interests
$
149

 
$
18

 
$
383

 
$
285

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
699

 
671

 
687

 
671

Diluted
701

 
672

 
688

 
672

Basic and diluted earnings per common share (a)
$
0.21

 
$
0.03

 
$
0.56

 
$
0.42

___________________
(a)    Quarterly earnings per share amounts are stand-alone calculations and may not be additive to full-year amounts due to rounding.

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6. Accumulated Other Comprehensive Income (Loss)
The following table presents the net of tax changes in Accumulated Other Comprehensive Income (AOCI) by component, excluding amounts attributable to noncontrolling interests:
 
Foreign Currency Translation Adjustments
 
Pension
and Post-retirement Benefit Plan Obligations
 
Gas Purchase Contract Hedges
 
Other
 
Total Accumulated Other Comprehensive Income (Loss)
 
(in millions)
March 31, 2016
$
376

 
$
(341
)
 
$

 
$
(3
)
 
$
32

Other AOCI activity
49

 
4

 

 
1

 
54

June 30, 2016
$
425

 
$
(337
)
 
$

 
$
(2
)
 
$
86

 
 
 
 
 
 
 
 
 
 
March 31, 2015
$
532

 
$
(345
)
 
$

 
$
(2
)
 
$
185

Other AOCI activity
85

 
7

 

 
(1
)
 
91

June 30, 2015
$
617

 
$
(338
)
 
$

 
$
(3
)
 
$
276

 
 
 
 
 
 
 
 
 
 
December 31, 2015
$
79

 
$
(346
)
 
$
(3
)
 
$
1

 
$
(269
)
Other AOCI activity
346

 
9

 
3

 
(3
)
 
355

June 30, 2016
$
425

 
$
(337
)
 
$

 
$
(2
)
 
$
86

 
 
 
 
 
 
 
 
 
 
December 31, 2014
$
1,016

 
$
(351
)
 
$
(3
)
 
$

 
$
662

Other AOCI activity
(399
)
 
13

 
3

 
(3
)
 
(386
)
June 30, 2015
$
617

 
$
(338
)
 
$

 
$
(3
)
 
$
276

7. Inventory
Inventory consists of natural gas and NGLs held in storage for transmission and processing, and also includes materials and supplies. In the second quarter of 2016, Westcoast Energy Inc. (Westcoast) entered into a definitive agreement to sell its ownership interest in Empress which resulted in NGLs being reclassified out of Inventory to Assets Held for Sale on the Condensed Consolidated Balance Sheet as of June 30, 2016. See Note 8 for further discussion. Natural gas inventories primarily relate to the Distribution segment in Canada and are valued at costs approved by the OEB. The difference between the approved price and the actual cost of gas purchased is recorded as either a receivable or a current liability, as appropriate, for future disposition with customers, subject to approval by the OEB. The remaining inventory is recorded at the lower of cost or market, primarily using average cost. The components of inventory are as follows:
 
June 30,
2016
 
December 31,
2015
 
(in millions)
Natural gas
$
115

 
$
217

NGLs

 
23

Materials and supplies
70

 
67

Total inventory
$
185

 
$
307


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8. Assets Held for Sale
On April 2, 2016, Westcoast entered into a definitive agreement to sell its ownership interest in Empress for a cash purchase price of approximately 200 million Canadian dollars plus customary closing adjustments. This transaction is expected to close in the second half of 2016. The associated assets and liabilities are included in the Western Canada Transmission & Processing segment and classified as Assets Held for Sale and Liabilities Held for Sale, respectively, on the Condensed Consolidated Balance Sheet as of June 30, 2016.
As these assets are classified as held for sale, we evaluated the book value compared to the lower of the carrying amounts or fair value less costs to sell. As of June 30, 2016, we determined that the fair value less costs to sell exceeded the carrying amount of the assets held for sale, therefore, no adjustment to book value was necessary. The carrying amounts of the assets and liabilities classified as Assets Held for Sale and Liabilities Held for Sale on our Condensed Consolidated Balance Sheet are as follows:
 
June 30,
2016
 
(in millions)
Assets Held for Sale
 
Cash and cash equivalents
$
7

Receivables, net
8

Inventory
28

Current assets—other
7

Investments and other assets—other
11

Net property, plant and equipment
164

Total assets held for sale
$
225

Liabilities Held for Sale
 
Accounts payable
$
9

Taxes accrued
1

Current liabilities—other
6

Deferred credits and other liabilities—deferred income taxes
28

Deferred credits and other liabilities—regulatory and other
12

Total liabilities held for sale
$
56

9. 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,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Operating revenues
$
1,586

 
$
1,869

 
$
3,013

 
$
3,912

Operating expenses
1,592

 
2,332

 
2,957

 
4,323

Operating income (loss)
(6
)
 
(463
)
 
56

 
(411
)
Net income (loss)
(16
)
 
(491
)
 
32

 
(497
)
Net income (loss) attributable to members’ interests
(29
)
 
(466
)
 
(18
)
 
(503
)
DCP Partners issues, from time to time, limited partner units to the public, which are recorded by DCP Midstream directly to its equity. Our proportionate share of gains from those issuances, totaled $2 million during the six months ended June 30, 2015 and is reflected in Earnings (Loss) From Equity Investments in the Condensed Consolidated Statement of Operations.
During the second quarter of 2015 DCP Midstream recognized a $427 million partial goodwill impairment, which reduced our equity earnings from DCP Midstream by $122 million after-tax. DCP Midstream finalized the calculation of their goodwill impairment in the third quarter of 2015.

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Related Party Transactions
During the third quarter of 2015, Gulfstream Natural Gas System, LLC (Gulfstream) issued unsecured debt of $800 million to fund the repayment of its current debt. Gulfstream distributed $396 million, our proportionate share of proceeds, to us of which we contributed $248 million back to Gulfstream in the fourth quarter of 2015 and the remaining $148 million, classified as Cash Flows from Investing Activities—Distribution to Equity Investment, in the second quarter of 2016.
10. Variable Interest Entities
Sabal Trail. On April 1, 2016, NextEra Energy, Inc. (NextEra) purchased a 9.5% interest in Sabal Trail Transmission, LLC (Sabal Trail) from SEP. Consideration for this transaction consisted of approximately $110 million cash, $102 million of which is classified as Cash Flows from Financing Activities—Contributions from Noncontrolling Interests. See Note 11 for additional information related to this transaction. As of June 30, 2016, we have an effective 38.3% ownership interest in Sabal Trail through our ownership of SEP. Sabal Trail is a joint venture that is constructing a natural gas pipeline to transport natural gas to Florida. Sabal Trail is a variable interest entity (VIE) due to insufficient equity at risk to finance its activities. We determined that we are the primary beneficiary because we direct the activities of Sabal Trail that most significantly impact its economic performance and we consolidate Sabal Trail in our financial statements. The current estimate of the total remaining construction cost is approximately $1.8 billion.
The following summarizes assets and liabilities for Sabal Trail as of June 30, 2016 and December 31, 2015:
Condensed Consolidated Balance Sheets Caption
June 30,
2016
 
December 31,
2015
 
(in millions)
Assets
 
 
 
Current assets
$
114

 
$
118

Net property, plant and equipment
1,184

 
773

Regulatory assets and deferred debits
41

 
25

Total Assets
$
1,339

 
$
916

Liabilities and Equity
 
 
 
Current liabilities
$
90

 
$
84

Equity
1,249

 
832

Total Liabilities and Equity
$
1,339

 
$
916

Nexus. We have an effective 38.3% ownership interest in Nexus Gas Transmission, LLC (Nexus) through our ownership of SEP. Nexus is a joint venture that is constructing a natural gas pipeline from Ohio to Michigan and continuing on to Ontario, Canada. Nexus is a VIE due to insufficient equity at risk to finance its activities. We determined that we are not the primary beneficiary because the power to direct the activities of Nexus that most significantly impact its economic performance is shared. Nexus is accounted for under the equity method. Our maximum exposure to loss is $1.0 billion. We have an investment in Nexus of $205 million and $90 million as of June 30, 2016 and December 31, 2015, respectively, classified as Investments in and Loans to Unconsolidated Affiliates on our Condensed Consolidated Balance Sheets.
11. Intangible Asset
During the first quarter of 2016 SEP entered into a project coordination agreement (PCA) with NextEra, Duke Energy Corporation (Duke Energy) and Williams Partners L.P. In accordance with the agreement, payments will be made, based on SEP’s proportional ownership interest in Sabal Trail, as certain milestones of the project are met. During the first quarter of 2016, the first milestone was achieved and paid, consisting of $48 million. On April 1, 2016, NextEra purchased an additional 9.5% interest in Sabal Trail from SEP, reducing SEP’s ownership interest in Sabal Trail to 50%. Upon purchase of the additional ownership interest, NextEra reimbursed SEP $8 million for NextEra’s proportional share of the first milestone payment, which reduced SEP’s total milestone payments to $40 million as of June 30, 2016, both of which are classified as Cash Flows from Investing Activities—Purchase of Intangible, Net. This PCA is an intangible asset and is classified as Investments and Other Assets—Other on our Condensed Consolidated Balance Sheet. The intangible asset will be amortized over a period of 25 years beginning at the time of in-service of Sabal Trail, which is expected to occur during the first half of 2017.

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12. Goodwill
We perform our goodwill impairment test annually and evaluate goodwill when events or changes in circumstances indicate that its carrying value may not be recoverable. We completed our annual goodwill impairment test as of April 1, 2016 and no impairments were identified.
We perform our annual review for goodwill impairment at the reporting unit level, which is identified by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available, whether segment management regularly reviews the operating results of those components and whether the economic and regulatory characteristics are similar. We determined that our reporting units are equivalent to our reportable segments, except for the reporting units of our Western Canada Transmission & Processing and Spectra Energy Partners reportable segments, which are one level below.
As permitted under accounting guidance on testing goodwill for impairment, we perform either a qualitative assessment or a quantitative assessment of each of our reporting units based on management’s judgment. With respect to our qualitative assessments, we consider events and circumstances specific to us, such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, when evaluating whether it is more likely than not that the fair values of our reporting units are less than their respective carrying amounts.
See Note 9 for discussion related to the 2015 partial impairment of goodwill recognized by DCP Midstream.
13. Marketable Securities and Restricted Funds
We routinely invest excess cash and various restricted balances in securities such as commercial paper, bankers acceptances, corporate debt securities, Canadian equity securities, treasury bills and money market funds in the U.S. and Canada. We do not purchase marketable securities for speculative purposes; therefore we do not have any securities classified as trading securities. While we do not routinely sell marketable securities prior to their scheduled maturity dates, some of our investments may be held and restricted for insurance purposes, capital expenditures and NEB regulatory requirements, so these investments are classified as available-for-sale (AFS) marketable securities as they may occasionally be sold prior to their scheduled maturity dates due to the unexpected timing of cash needs. Initial investments in securities are classified as purchases of the respective type of securities (AFS marketable securities or held-to-maturity (HTM) marketable securities). Maturities of securities are classified within proceeds from sales and maturities of securities in the Condensed Consolidated Statements of Cash Flows.
AFS Securities. AFS Securities are as follows:
 
Estimated Fair Value
 
June 30,
2016
 
December 31,
2015
 
(in millions)
Corporate debt securities (a)
$
15

 
$
31

Canadian equity securities (b)
15

 

Total available-for-sale securities
$
30

 
$
31

___________________________________
(a)
Amounts related to certain construction projects.
(b)
Amounts related to restricted funds held and collected from customers of Western Canada Transmission & Processing and Express-Platte for Canadian pipeline abandonment in accordance with the NEB’s regulatory requirements.
Our AFS securities are classified on the Condensed Consolidated Balance Sheets as follows:
 
 
Estimated Fair Value
 
 
June 30,
2016
 
December 31,
2015
 
 
(in millions)
Restricted funds
 
 
 
Investments and other assets—other
$
24

 
$
11

Non-restricted funds
 
 
 
Current assets—other
6

 
20

Total available-for-sale securities
$
30

 
$
31


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At June 30, 2016, the weighted-average contractual maturity of outstanding AFS securities was less than one year.
There were no material gross unrealized holding gains or losses associated with investments in AFS securities at June 30, 2016 or December 31, 2015.
HTM Securities. HTM securities are as follows:
 
 
Estimated Fair Value
Description
Condensed Consolidated Balance Sheets Caption
June 30,
2016
 
December 31,
2015
 
 
(in millions)
Bankers acceptances
Current assets—other
$
28

 
$
30

Canadian government securities
Current assets—other
25

 
24

Money market funds
Current assets—other
3

 
3

Canadian government securities
Investments and other assets—other
54

 
50

Bankers acceptances
Investments and other assets—other

 
12

Total held-to-maturity securities
$
110

 
$
119

All of our HTM securities are restricted funds pursuant to certain M&N Canada and Express-Platte (our crude oil pipeline system) debt agreements. The funds restricted for M&N Canada, plus future cash from operations that would otherwise be available for distribution to the partners of M&N Canada, are required to be placed in escrow until the balance in escrow is sufficient to fund all future debt service on the M&N Canada 6.90% senior secured notes. There are sufficient funds held in escrow to fund all future debt service on these M&N Canada notes as of June 30, 2016.
At June 30, 2016, the weighted-average contractual maturity of outstanding HTM securities was less than one year.
There were no material gross unrecognized holding gains or losses associated with investments in HTM securities at June 30, 2016 or December 31, 2015.
Other Restricted Funds. In addition to the portions of the AFS and HTM securities that were restricted as described above, we had other restricted funds totaling $12 million at June 30, 2016 and $11 million at December 31, 2015 classified as Current Assets—Other on the Condensed Consolidated Balance Sheets. These restricted funds are related to additional amounts for insurance. We also had other restricted funds totaling $26 million at June 30, 2016 and $38 million at December 31, 2015 classified as Investments and Other Assets—Other on the Condensed Consolidated Balance Sheets. Included in these restricted funds are $16 million and $24 million at June 30, 2016 and December 31, 2015, respectively, related to funds held and collected from customers of Western Canada Transmission & Processing and Express-Platte for Canadian pipeline abandonment in accordance with the NEB’s regulatory requirements and $10 million and $14 million, respectively, related to certain construction projects.
Changes in restricted balances are presented within Cash Flows from Investing Activities on our Condensed Consolidated Statements of Cash Flows.

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14. Debt and Credit Facilities
Available Credit Facilities and Restrictive Debt Covenants
 
Expiration
Date
 
Total
Credit
Facilities
Capacity
 
Commercial Paper Outstanding at June 30, 2016
 
Available
Credit
Facilities
Capacity
 
 
 
(in millions)
Spectra Energy Capital, LLC (a)
2021
 
$
1,000

 
$
363

 
$
637

SEP (b)
2021
 
2,500

 
693

 
1,807

Westcoast (c)
2021
 
310

 
57

 
253

Union Gas (d)
2021
 
542

 

 
542

Total
 
 
$
4,352

 
$
1,113

 
$
3,239

_________
(a)
Revolving credit facility contains a covenant requiring the Spectra Energy consolidated debt-to-total capitalization ratio, as defined in the agreement, to not exceed 65%. Per the terms of the agreement, collateralized debt is excluded from the calculation of the ratio. This ratio was 56% at June 30, 2016.
(b)
Revolving credit facility contains a covenant that requires SEP to maintain a ratio of total Consolidated Indebtedness-to-Consolidated EBITDA, as defined in the agreement, of 5.0 to 1 or less. As of June 30, 2016, this ratio was 3.5 to 1.
(c)
U.S. dollar equivalent at June 30, 2016. The revolving credit facility is 400 million Canadian dollars and contains a covenant that requires the Westcoast non-consolidated debt-to-total capitalization ratio to not exceed 75%. The ratio was 34% at June 30, 2016.
(d)
U.S. dollar equivalent at June 30, 2016. The revolving credit facility is 700 million Canadian dollars and contains a covenant that requires the Union Gas debt-to-total capitalization ratio to not exceed 75% and a provision which requires Union Gas to repay all borrowings under the facility for a period of two days during the second quarter of each year. The ratio was 66% at June 30, 2016.
On April 29, 2016, we amended the Union Gas and SEP revolving credit agreements. The Union Gas revolving credit facility was increased to 700 million Canadian dollars and the SEP revolving facility was increased to $2.5 billion. The expiration of both facilities was extended, with both facilities expiring in 2021.
On April 29, 2016, we amended the Westcoast and Spectra Energy Capital, LLC (Spectra Capital) revolving credit agreements. The expiration of both credit facilities was extended, with both facilities expiring in 2021.
The issuances of commercial paper, letters of credit and revolving borrowings reduce the amount available under the credit facilities. As of June 30, 2016, there were no letters of credit issued or revolving borrowings outstanding under the credit facilities.
Our credit agreements contain various covenants, including the maintenance of certain financial ratios. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. As of June 30, 2016, we were in compliance with those covenants. In addition, our credit agreements allow for acceleration of payments or termination of the agreements due to nonpayment, or in some cases, due to the acceleration of other significant indebtedness of the borrower or some of its subsidiaries. Our debt and credit agreements do not contain provisions that trigger an acceleration of indebtedness based solely on the occurrence of a material adverse change in our financial condition or results of operations.
Debt Issuances. On May 31, 2016, Union Gas issued 250 million Canadian dollars (approximately $191 million as of the issuance date) of 2.81% unsecured notes due 2026 and 250 million Canadian dollars (approximately $191 million as of the issuance date) of 3.80% unsecured notes due 2046. Net proceeds from the offerings were used for repayment of short term debt and debt maturities, capital expenditures and general corporate purposes.

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Table of Contents


15. Fair Value Measurements
The following presents, for each of the fair value hierarchy levels, assets and liabilities that are measured and recorded at fair value on a recurring basis:


Description


Condensed Consolidated Balance Sheet Caption
June 30, 2016
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Corporate debt securities
Cash and cash equivalents
$
161

 
$

 
$
161

 
$

Corporate debt securities
Current assets—other
6

 

 
6

 

Corporate debt securities
Investments and other assets—other
9

 

 
9

 

Interest rate swaps
Investments and other assets—other
76

 

 
76

 

Canadian equity securities
Investments and other assets—other
15

 
15

 

 

Total Assets
$
267

 
$
15

 
$
252

 
$

Commodity derivatives
Liabilities held for sale
$
2

 
$

 
$

 
$
2

Total Liabilities
$
2

 
$

 
$

 
$
2



Description


Condensed Consolidated Balance Sheet Caption
December 31, 2015
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Corporate debt securities
Cash and cash equivalents
$
137

 
$

 
$
137

 
$

Corporate debt securities
Current assets—other
20

 

 
20

 

Commodity derivatives
Current assets—other
36

 

 

 
36

Commodity derivatives
Investments and other assets—other
5

 

 

 
5

Corporate debt securities
Investments and other assets—other
11

 

 
11

 

Interest rate swaps
Investments and other assets—other
37

 

 
37

 

Total Assets
$
246

 
$

 
$
205

 
$
41

The following presents changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs:
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Derivative assets (liabilities)
 
 
 
 
 
 
 
Fair value, beginning of period
$
10

 
$
49

 
$
41

 
$
78

Total gains (losses):
 
 
 
 
 
 
 
Included in earnings
(11
)
 
3

 
(15
)
 
9

Included in other comprehensive income

 
1

 
1

 
(5
)
Purchases

 
2

 
(1
)
 
3

Settlements
(1
)
 
(5
)
 
(28
)
 
(35
)
Fair value, end of period
$
(2
)
 
$
50

 
$
(2
)
 
$
50

Unrealized losses relating to instruments held at the end of the period
$
(8
)
 
$

 
$
(31
)
 
$
(16
)
Level 1
Level 1 valuations represent quoted unadjusted prices for identical instruments in active markets.
Level 2 Valuation Techniques
Fair values of our financial instruments that are actively traded in the secondary market, including our long-term debt, are determined based on market-based prices. These valuations may include inputs such as quoted market prices of the exact or similar instruments, broker or dealer quotations, or alternative pricing sources that may include models or matrix pricing tools, with reasonable levels of price transparency.
For interest rate swaps, we utilize data obtained from a third-party source for the determination of fair value. Both the future cash flows for the fixed-leg and floating-leg of our swaps are discounted to present value. In addition, credit default swap

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rates are used to develop the adjustment for credit risk embedded in our positions. We believe that since some of the inputs and assumptions for the calculations of fair value are derived from observable market data, a Level 2 classification is appropriate.
Level 3 Valuation Techniques
Level 3 valuation techniques include the use of pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
The derivative financial instruments reported in Level 3 at June 30, 2016 consist of NGL revenue swap contracts related to the Empress assets in Western Canada Transmission & Processing. As of June 30, 2016, we reported certain of our NGL basis swaps at fair value using Level 3 inputs due to such derivatives not having observable market prices for substantially the full term of the derivative asset or liability. For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations whose contract length extends into unobservable periods.
The fair value of these NGL basis swaps is determined using a discounted cash flow valuation technique based on a forward commodity basis curve. For these derivatives, the primary input to the valuation model is the forward commodity basis curve, which is based on observable or public data sources and extrapolated when observable prices are not available.
The significant unobservable inputs used in the fair value measurements of our Level 3 derivatives are the forward NGL basis curves, for which a significant portion of the derivative’s term is beyond available forward pricing. At June 30, 2016, a 10¢ per gallon movement in underlying forward NGL prices, primarily propane prices, would affect the estimated fair value of our NGL derivatives by $1 million. This calculated amount does not take into account any other changes to the fair value measurement calculation.
Financial Instruments
The fair values of financial instruments that are recorded and carried at book value are summarized in the following table. Judgment is required in interpreting market data to develop the estimates of fair value. These estimates are not necessarily indicative of the amounts we could have realized in current markets.
 
June 30, 2016
 
December 31, 2015
 
Book
Value
 
Approximate
Fair Value
 
Book
Value
 
Approximate
Fair Value
 
(in millions)
Note receivable, noncurrent (a)
$
71

 
$
71

 
$
71

 
$
71

Long-term debt, including current maturities (b)
13,638

 
14,994

 
13,567

 
13,891

__________
(a)
Included within Investments in and Loans to Unconsolidated Affiliates.
(b)
Excludes commercial paper, capital leases, unamortized items and fair value hedge carrying value adjustments.
The fair value of our long-term debt is determined based on market-based prices as described in the Level 2 valuation technique described above and is classified as Level 2.
The fair values of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, notes receivable—noncurrent, accounts payable and commercial paper are not materially different from their carrying amounts because of the short-term nature of these instruments or because the stated rates approximate market rates.
During the six months ended June 30, 2016 and 2015, there were no material adjustments to assets and liabilities measured at fair value on a nonrecurring basis.
16. Risk Management and Hedging Activities
We are exposed to the impact of market fluctuations in the prices of NGLs and natural gas purchased as a result of our investment in DCP Midstream, the ownership of the NGL marketing operations in western Canada and processing operations associated with our U.S. pipeline assets. Exposure to interest rate risk exists as a result of the issuance of variable and fixed-rate debt and commercial paper. We are exposed to foreign currency risk from our Canadian operations. We employ established policies and procedures to manage our risks associated with these market fluctuations, which may include the use of derivatives, mostly around interest rate and commodity exposures. As of April 2016, we are no longer entering into new contracts under our risk management program at Empress.

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DCP Midstream manages their direct exposure to market prices separate from Spectra Energy, and utilizes various risk management strategies, including the use of commodity derivatives.
Other than the interest rate swaps and commodity derivatives as described below, we did not have significant derivatives outstanding during the six months ended June 30, 2016.
Interest Rate Swaps
At June 30, 2016, we had “pay floating—receive fixed” interest rate swaps outstanding with a total notional amount of $2 billion to hedge against changes in the fair value of our fixed-rate debt that arise as a result of changes in market interest rates. These swaps also allow us to transform a portion of the underlying interest payments related to our long-term fixed-rate debt securities into variable-rate interest payments in order to achieve our desired mix of fixed and variable-rate debt.
Information about our interest rate swaps that had netting or rights of offset arrangements are as follows:
 
June 30, 2016
 
December 31, 2015
 
Gross Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
 
Amounts Not
Offset in the
Condensed
Consolidated
Balance Sheet
 
Net
Amount
 
Gross Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
 
Amounts Not
Offset in the
Condensed
Consolidated
Balance Sheet
 
Net
Amount
Description
(in millions)
Assets
$
76

 
$

 
$
76

 
$
37

 
$

 
$
37

Commodity Derivatives
At June 30, 2016, we had commodity mark-to-market derivatives outstanding with a total notional amount of 110 million gallons at Empress. The longest dated commodity derivative contract we currently have expires in 2018.
Information about our commodity derivatives that had netting or rights of offset arrangements are as follows:
 
June 30, 2016
 
December 31, 2015


Gross 
Amounts

Gross
Amounts
Offset

Net Amount Presented in the Condensed Consolidated Balance Sheet
 

Gross 
Amounts
 
Gross
Amounts
Offset
 
Net Amount Presented in the Condensed Consolidated Balance Sheet
Description
(in millions)
Assets
$
61


$
61


$

 
$
104

 
$
63

 
$
41

Liabilities
63


61


2

 
63

 
63

 

Substantially all of our commodity derivative agreements outstanding at June 30, 2016 and December 31, 2015 have provisions that require collateral to be posted in the amount of the net liability position if one of our credit ratings falls below investment grade.
Information regarding the impacts of commodity derivatives on our Condensed Consolidated Statements of Operations are as follows:
 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
Derivatives
Condensed Consolidated Statements of Operations Caption
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Commodity derivatives
Sales of natural gas liquids
$
(11
)
 
$
5

 
$
(16
)
 
$
12

17. 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, climate change, hazardous and solid waste disposal and other environmental matters. These laws and regulations can change from time to time, imposing new obligations on us.
Like others in the energy industry, we and our affiliates are responsible for environmental remediation at various contaminated sites. These include some properties that are part of our ongoing operations, sites formerly owned or used by us, and sites owned by third parties. Remediation typically involves management of contaminated soils and may involve

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groundwater remediation. Managed in conjunction with relevant federal, state/provincial and local agencies, activities vary with site conditions and locations, remedial requirements, complexity and sharing of responsibility. If remediation activities involve statutory joint and several liability provisions, strict liability, or cost recovery or contribution actions, we or our affiliates could potentially be held responsible for contamination caused by other parties. In some instances, we may share liability associated with contamination with other potentially responsible parties, and may also benefit from contractual indemnities that cover some or all cleanup costs. All of these sites generally are managed in the normal course of business or affiliated operations.
Litigation
Litigation and Legal Proceedings. We are involved in legal, tax and regulatory proceedings in various forums arising in the ordinary course of business, including matters regarding contract and payment claims, some of which involve substantial monetary amounts. We have insurance coverage for certain of these losses should they be incurred. We believe that the final disposition of these proceedings will not have a material effect on our consolidated results of operations, financial position or cash flows.
Legal costs related to the defense of loss contingencies are expensed as incurred. We had no material reserves for legal matters recorded as of June 30, 2016 or December 31, 2015 related to litigation.
Other Commitments and Contingencies
See Note 18 for a discussion of guarantees and indemnifications.
18. Guarantees and Indemnifications
We have various financial guarantees and indemnifications which are issued in the normal course of business. As discussed below, these contracts include financial guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. We enter into these arrangements to facilitate a commercial transaction with a third party by enhancing the value of the transaction to the third party. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on our Condensed Consolidated Balance Sheets. The possibility of having to perform under these guarantees and indemnifications is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events.
We have issued performance guarantees to customers and other third parties that guarantee the payment and performance of other parties, including certain non-100%-owned entities. In connection with our spin-off from Duke Energy in 2007, certain guarantees that were previously issued by us were assigned to, or replaced by, Duke Energy as guarantor in 2006. For any remaining guarantees of other Duke Energy obligations, Duke Energy has indemnified us against any losses incurred under these guarantee arrangements. The maximum potential amount of future payments we could have been required to make under these performance guarantees as of June 30, 2016 was approximately $406 million, which has been indemnified by Duke Energy as discussed above. One of these outstanding performance guarantees, which has a maximum potential amount of future payment of $201 million, expires in 2028. The remaining guarantees have no contractual expirations.
We have also issued joint and several guarantees to some of the Duke/Fluor Daniel (D/FD) project owners, guaranteeing the performance of D/FD under its engineering, procurement and construction contracts and other contractual commitments in place at the time of our spin-off from Duke Energy. D/FD is one of the entities transferred to Duke Energy in connection with our spin-off. Substantially all of these guarantees have no contractual expiration and no stated maximum amount of future payments that we could be required to make. Fluor Enterprises Inc., as 50% owner in D/FD, issued similar joint and several guarantees to the same D/FD project owners.
Westcoast, a 100%-owned subsidiary, has issued performance guarantees to third parties guaranteeing the performance of unconsolidated entities, such as equity method investments, and of entities previously sold by Westcoast to third parties. Those guarantees require Westcoast to make payment to the guaranteed third party upon the failure of such unconsolidated or sold entity to make payment under some of its contractual obligations, such as debt agreements, purchase contracts and leases.
We have entered into various indemnification agreements related to purchase and sale agreements and other types of contractual agreements with vendors and other third parties. These agreements typically cover environmental, litigation and other matters, as well as breaches of representations, warranties and covenants. Typically, claims may be made by third parties for various periods of time, depending on the nature of the claim. Our potential exposure under these indemnification agreements can range from a specified amount, such as the purchase price, to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. We are unable to estimate the total potential amount of future payments under these indemnification agreements due to several factors, such as the unlimited exposure under certain guarantees.

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As of June 30, 2016, the amounts recorded for the guarantees and indemnifications described above are not material, both individually and in the aggregate.
19. Issuances of Common Stock
On March 1, 2016, we entered into an equity distribution agreement under which we may sell and issue common stock up to an aggregate offering price of $500 million. The equity distribution agreement allows us to offer and sell common stock at prices deemed appropriate through sales agents. Sales of common stock under the equity distribution agreement will be made by means of ordinary brokers’ transactions through the facilities of the New York Stock Exchange (NYSE), in block transactions, or as otherwise agreed upon by one or more of the sales agents and us. We intend to use the net proceeds from sales under this at-the-market program for general corporate purposes, including investments in subsidiaries to fund capital expenditures. We issued approximately 12.9 million of common shares to the public under this program, for total net proceeds of $383 million through June 30, 2016.
In April 2016, we issued 16.1 million common shares to the public for net proceeds of approximately $479 million. Net proceeds from the offering were used to purchase approximately 10.4 million common units in SEP. SEP intends to use the proceeds from our unit purchase for general corporate purposes, including the funding of its current expansion capital plan.
20. Issuances of SEP Units
During the six months ended June 30, 2016, SEP issued 7.0 million common units to the public under its at-the-market program and approximately 143,000 general partner units to Spectra Energy. Total net proceeds to SEP were $327 million (net proceeds to Spectra Energy were $321 million).
In April 2016, SEP issued 10.4 million common units and 0.2 million general partner units to Spectra Energy in a private placement transaction. See Note 19 for further discussion.
In connection with the issuances of the units, a $23 million gain ($15 million net of tax) to Additional Paid-in Capital and a $297 million increase in Equity—Noncontrolling Interests were recorded during the six months ended June 30, 2016. The issuances decreased Spectra Energy’s ownership in SEP from 78% to 77% at June 30, 2016.
The following table presents the effects of the issuances of SEP units:
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Net income—controlling interests
$
149

 
$
18

 
$
383

 
$
285

Increase in additional paid-in capital resulting from issuances of SEP units
7

 
19

 
15

 
25

Total net income—controlling interests and changes in
equity—controlling interests
$
156

 
$
37

 
$
398

 
$
310

21. Employee Benefit Plans
Retirement Plans. We have a qualified non-contributory defined benefit (DB) retirement plan for U.S. employees and non-qualified, non-contributory, unfunded defined benefit plans which cover certain current and former U.S. executives. Our Westcoast subsidiary maintains qualified and non-qualified, contributory and non-contributory, DB and defined contribution (DC) retirement plans covering substantially all employees of our Canadian operations.
Our policy is to fund our retirement plans, where applicable, on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan participants or as required by legislation or plan terms. We made contributions of $11 million to our U.S. retirement plans in both of the six months ended June 30, 2016 and 2015. We made total contributions to the Canadian DC and DB plans of $13 million in the six months ended June 30, 2016 and $16 million in the same period in 2015. We anticipate that we will make total contributions of approximately $22 million to the U.S. plans and approximately $26 million to the Canadian plans in 2016.

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