Weak Commodity Prices Dampen Spectra's Earnings in 2012, but $25 Billion in Expansions Planned

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Researched by Industrial Info Resources (Sugar Land, Texas)--Natural gas production, transmission and storage company Spectra Energy Corporation (NYSE:SE) (Houston, Texas) saw its earnings depleted by lower commodity prices in fourth-quarter and full-year 2012, despite a strong performance from fee-based businesses. Executives announced that the company is targeting $25 billion in capital expansion investments through the end of the decade. Net income was reported to be $213 million for the quarter, a 26.3% decrease from fourth-quarter 2011, and $940 million for the year, a 20.61% decrease from 2011.

Total operating revenues stood at $1.35 billion for the quarter, a 5.67% decrease from the same period in 2011, and $5.08 billion for the year, a 5.16% decrease from 2011. Although the U.S. transmission segment benefited from expansions in the pipeline business and lower operating costs, it still felt the bite of lower processing and storage revenues. Lower propane prices dragged down earnings for the Empress System natural gas liquids (NGL) business in the Western Canada Transmission & Processing segment, which also saw lower revenues in conventional areas, while lower NGL prices decreased earnings in the Field Services segment, also known as DCP Midstream Partners LP (NYSE:DPM), a 50:50 joint venture with Phillips 66 (NYSE:PSX) (Houston, Texas).

In November 2012, the Ontario Energy Board announced a decision that certain revenues realized from Spectra subsidiary Union Gas' upstream transportation contracts must be reclassified as gas supply costs, with 90% of these revenues refunded to customers. The decision resulted in a charge of $30 million to earnings in Spectra's Distribution segment. Spectra has appealed the decision.

Total capital expenditures for 2012 were reported to be $2.03 billion, an increase from $1.92 billion in 2011. About 46% of expenditures were in the U.S. Transmission segment, up from about 40% in the previous year.

Industrial Info is tracking $9.16 billion in active projects involving Spectra, including the $300 million construction of a natural gas processing plant in Fort Nelson, British Columbia. The plant, which is to be situated north of an existing 2 billion-cubic-foot-per-day plant, will have an inlet capacity of 250 million standard cubic feet per day to process natural gas from the Montney Shale formation in the South Peace region.

"Low natural gas prices in Western Canada are driving reductions in Spectra Energy Transmission West (SET West) conventional gathering and processing (G&P) business," said Pat Reddy, the chief financial officer of Spectra Energy, of the Western Canada segment in a conference call. "The current low gas price environment, including a few days in 2012 below $2, have led producers to scale back. Once AECO prices strengthen, we expect producers to renew their G&P contracts with us or use more interruptible services, and we will see a rebound in revenues. We experienced a $49 million loss at Empress in 2012; as we said, we expect Empress to break even in 2013."

The U.S. Transmission segment was the only one to see an increase in earnings before interest and taxes (EBIT) for the quarter or the year:

• The U.S. Transmission segment reported operating revenues of $478 million for the quarter, a 2.25% decrease from fourth-quarter 2011, and EBIT of $249 million, a 10.18% increase. For the year, the segment saw operating revenues of $1.9 billion, basically unchanged from 2011, and EBIT of $995 million, a 1.22% increase.
• The Distribution segment reported operating revenues of $478 million for the quarter, a 1.24% decrease from fourth-quarter 2011, and EBIT of $93 million, a 22.5% decrease. For the year, the segment saw operating revenues of $1.67 billion, a 9.01% decrease from 2011, and EBIT of $374 million, a 12% decrease.
• The Western Canada Transmission & Processing segment reported operating revenues of $403 million for the quarter, a 14.26% decrease from fourth-quarter 2011, and EBIT of $72 million, a 47.45% decrease. For the year, the segment saw operating revenues of $1.55 billion, a 7.54% decrease from 2011, and EBIT of $387 million, a 24.12% decrease.
• The Field Services segment reported EBIT of $58 million for the quarter, a 39.58% decrease from the same period in 2011. For the year, the segment saw EBIT of $279 million, a 37.86% decrease from 2011.

Spectra executives expect to see net income of $984 million in 2013, with the company's expansion program being the strongest driver of earnings growth, bringing in about $30 million for DCP Midstream alone. Executives anticipate more than $10 billion of investment in the U.S. Transmission segment, with the Marcellus and Utica supply moving to high-growth markets, including Spectra's expansion in New Jersey and New York, while the U.S. Southeast is expected to see strong growth in incremental gas-fired generation over the next few years. The Western Canadian segment has $7 billion of expansion growth on the horizon, as the growing gas supply environment in the region is attracting a large amount of international investment.

"DCP Midstream enjoys premier positions in substantially all of the major U.S. basins being actively developed," said Greg Ebel, the president and chief executive officer of Spectra Energy, in the conference call. "DCP Midstream will place more than $3 billion of projects into service over the next 12 months alone. And given the magnitude of these opportunities, DCP has raised its growth capital investment outlook to $6 billion through 2015, allowing it to grow volumes and earnings nicely."

For more information, visit Industrial Info's North American Oil and Gas Production Project Database, North American Oil and Gas Transmission Project Database and North American Terminal Project Database.

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