Edgar Filing: Spectra Energy Corp.

Document

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 September 30, 2016



¨	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 September 30, 2016: 701,483,324

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SPECTRA ENERGY CORP

FORM 10-Q FOR THE QUARTER ENDED

September 30, 2016

INDEX



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015	4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015	5
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	8
	Condensed Consolidated Statements of Equity for the nine months ended September 30, 2016 and 2015	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.	Controls and Procedures	46

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	48
	Signatures	49

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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.

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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 September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Operating Revenues
Transportation, storage and processing of natural gas	$	792	$	781	$	2,426	$	2,425
Distribution of natural gas	153		160		792		1,005
Sales of natural gas liquids	15		41		68		138
Transportation of crude oil	89		93		262		267
Other	26		28		70		83
Total operating revenues	1,075		1,103		3,618		3,918
Operating Expenses
Natural gas and petroleum products purchased	50		76		401		627
Operating, maintenance and other	425		364		1,158		1,107
Depreciation and amortization	193		188		582		574
Property and other taxes	86		86		291		274
Total operating expenses	754		714		2,432		2,582
Operating Income	321		389		1,186		1,336
Other Income and Expenses
Earnings (loss) from equity investments	51		48		100		(117		)
Other income and expenses, net	52		31		123		73
Total other income and expenses	103		79		223		(44		)
Interest Expense	133		155		437		480
Earnings Before Income Taxes	291		313		972		812
Income Tax Expense	10		70		160		164
Net Income	281		243		812		648
Net Income—Noncontrolling Interests	86		69		234		189
Net Income—Controlling Interests	$	195	$	174	$	578	$	459
Common Stock Data
Weighted-average shares outstanding
Basic	701		671		692		671
Diluted	703		672		693		672
Earnings per share
Basic	$	0.28	$	0.26	$	0.84	$	0.68
Diluted	$	0.28	$	0.26	$	0.83	$	0.68
Dividends per share	$	0.405	$	0.37	$	1.215	$	1.11

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 September 30,						Nine Months Ended September 30,
	2016			2015			2016		2015
Net Income	$	281		$	243		$	812	$	648
Other comprehensive income (loss):
Foreign currency translation adjustments	(78		)	(350		)	273		(755		)
Pension and benefits impact (net of taxes of $2, $3, $6 and $8, respectively)	5			6			14		19
Other	(2		)	1			—		1
Total other comprehensive income (loss)	(75		)	(343		)	287		(735		)
Total Comprehensive Income (Loss), net of tax	206			(100		)	1,099		(87		)
Less: Comprehensive Income—Noncontrolling Interests	84			64			239		178
Comprehensive Income (Loss)—Controlling Interests	$	122		$	(164	)	$	860	$	(265	)

See Notes to Condensed Consolidated Financial Statements.

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SPECTRA ENERGY CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)



	September 30, 2016		December 31, 2015
ASSETS

Current Assets
Cash and cash equivalents	$	464	$	213
Receivables, net	712		806
Inventory	287		307
Fuel tracker	19		41
Other	268		281
Total current assets	1,750		1,648

Investments and Other Assets
Investments in and loans to unconsolidated affiliates	2,742		2,592
Goodwill	4,203		4,154
Other	401		310
Total investments and other assets	7,346		7,056

Property, Plant and Equipment
Cost	32,736		29,843
Less accumulated depreciation and amortization	7,399		6,925
Net property, plant and equipment	25,337		22,918

Regulatory Assets and Deferred Debits	1,504		1,301

Total Assets	$	35,937	$	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)



	September 30, 2016		December 31, 2015
LIABILITIES AND EQUITY

Current Liabilities
Accounts payable	$	736	$	511
Commercial paper	1,637		1,112
Taxes accrued	73		78
Interest accrued	140		179
Current maturities of long-term debt	467		652
Other	634		860
Total current liabilities	3,687		3,392

Long-term Debt	13,094		12,892

Deferred Credits and Other Liabilities
Deferred income taxes	5,758		5,445
Regulatory and other	1,417		1,323
Total deferred credits and other liabilities	7,175		6,768

Commitments and Contingencies

Preferred Stock of Subsidiaries	562		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 September 30, 2016 and December 31, 2015, respectively	1		1
Additional paid-in capital	5,977		5,053
Retained earnings	1,477		1,741
Accumulated other comprehensive income (loss)	13		(269		)
Total controlling interests	7,468		6,526
Noncontrolling interests	3,951		3,006
Total equity	11,419		9,532

Total Liabilities and Equity	$	35,937	$	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)



	Nine Months Ended September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	812		$	648
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	599			584
Deferred income tax expense	143			78
(Earnings) loss from equity investments	(100		)	117
Distributions from equity investments	88			145
Other	57			251
Net cash provided by operating activities	1,599			1,823
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(2,407		)	(1,817		)
Investments in and loans to unconsolidated affiliates	(181		)	(91		)
Purchase of intangible, net	(80		)	—
Disposition	204			—
Purchases of held-to-maturity securities	(479		)	(463		)
Proceeds from sales and maturities of held-to-maturity securities	475			457
Purchases of available-for-sale securities	(565		)	—
Proceeds from sales and maturities of available-for-sale securities	559			1
Distributions from equity investments	45			441
Distribution to equity investment	(148		)	—
Other changes in restricted funds	(19		)	(24		)
Other	1			(7		)
Net cash used in investing activities	(2,595		)	(1,503		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt	382			1,332
Payments for the redemption of long-term debt	(619		)	(153		)
Net increase (decrease) in commercial paper	502			(984		)
Distributions to noncontrolling interests	(176		)	(140		)
Contributions from noncontrolling interests	437			164
Proceeds from the issuances of Spectra Energy common stock	878			—
Proceeds from the issuances of Spectra Energy Partners, LP common units	473			351
Proceeds from the issuance of Westcoast Energy Inc. preferred stock	229			—
Dividends paid on common stock	(842		)	(747		)
Other	(20		)	(14		)
Net cash provided by (used in) financing activities	1,244			(191		)
Effect of exchange rate changes on cash	3			(6		)
Net increase in cash and cash equivalents	251			123
Cash and cash equivalents at beginning of period	213			215
Cash and cash equivalents at end of period	$	464		$	338
Supplemental Disclosures
Property, plant and equipment non-cash accruals	$	374		$	276

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)
	Common Stock		Additional Paid-in Capital		Retained Earnings			Foreign Currency Translation Adjustments			Other			Noncontrolling Interests			Total
December 31, 2015	$	1	$	5,053	$	1,741		$	79		$	(348	)	$	3,006		$	9,532
Net income	—		—		578			—			—			234			812
Other comprehensive income	—		—		—			268			14			5			287
Dividends on common stock	—		—		(842		)	—			—			—			(842		)
Stock-based compensation	—		20		—			—			—			—			20
Distributions to noncontrolling interests	—		—		—			—			—			(180		)	(180		)
Contributions from noncontrolling interests	—		—		—			—			—			437			437
Spectra Energy common stock issued	—		878		—			—			—			—			878
Spectra Energy Partners, LP common units issued	—		25		—			—			—			432			457
Other, net	—		1		—			—			—			17			18
September 30, 2016	$	1	$	5,977	$	1,477		$	347		$	(334	)	$	3,951		$	11,419

December 31, 2014	$	1	$	4,956	$	2,541		$	1,016		$	(354	)	$	2,238		$	10,398
Net income	—		—		459			—			—			189			648
Other comprehensive income (loss)	—		—		—			(744		)	20			(11		)	(735		)
Dividends on common stock	—		—		(747		)	—			—			—			(747		)
Stock-based compensation	—		14		—			—			—			—			14
Distributions to noncontrolling interests	—		—		—			—			—			(142		)	(142		)
Contributions from noncontrolling interests	—		—		—			—			—			164			164
Spectra Energy common stock issued	—		2		—			—			—			—			2
Spectra Energy Partners, LP common units issued	—		49		—			—			—			281			330
Other, net	—		3		—			—			—			(4		)	(1		)
September 30, 2015	$	1	$	5,024	$	2,253		$	272		$	(334	)	$	2,715		$	9,931

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.

On September 6, 2016, we announced that we entered into a definitive merger agreement with Enbridge Inc. (Enbridge) under which Enbridge and Spectra Energy will combine in a stock-for-stock merger transaction, which values Spectra Energy’s stock at approximately $28 billion, based on the closing price of Enbridge’s common shares as of September 2, 2016. This transaction was unanimously approved by the boards of directors of both Spectra Energy and Enbridge and is expected to close in the first quarter of 2017, subject to shareholder and certain regulatory approvals and other customary conditions.

Upon completion of the proposed merger, Spectra Energy shareholders will receive 0.984 Enbridge common shares for each share of Spectra Energy stock they own. The consideration to be received by Spectra Energy shareholders is valued at $40.33 per Spectra Energy share, based on the closing price of Enbridge common shares as of September 2, 2016, representing an approximate 11.5% premium to the closing price of Spectra Energy stock as of September 2, 2016. Upon completion of the merger, Enbridge shareholders are expected to own approximately 57% of the combined company and Spectra Energy shareholders are expected to own approximately 43%.

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. Disposition

On August 4, 2016, Westcoast Energy Inc. (Westcoast) completed the sale of its ownership interests in the Empress NGL operations (Empress) to Plains Midstream Canada ULC. Consideration received by Westcoast in this transaction was approximately $204 million in cash, including approximately $51 million for inventory and working capital. The total consideration is subject to final working capital adjustments, which are expected to be completed in the fourth quarter of 2016. The sale resulted in a pre-tax loss of less than $1 million and a tax benefit of $27 million, which are reflected in Operating, Maintenance and Other and Income Tax Expense, respectively, on our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016.

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3. 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.”

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 and natural gas gathering and processing services 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, 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 2 for discussion related to the sale of Empress on August 4, 2016.

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 September 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 September 30, 2016
Spectra Energy Partners	$	628	$	—		$	628		$	79	$	464
Distribution	209		—			209			47		77
Western Canada Transmission & Processing	236		—			236			56		93
Field Services	—		—			—			—		12
Total reportable segments	1,073		—			1,073			182		646
Other	2		16			18			11		(30		)
Eliminations	—		(16		)	(16		)	—		—
Depreciation and amortization	—		—			—			—		193
Interest expense	—		—			—			—		133
Interest income and other (a)	—		—			—			—		1
Total consolidated	$	1,075	$	—		$	1,075		$	193	$	291

Three Months Ended September 30, 2015
Spectra Energy Partners	$	612	$	—		$	612		$	74	$	488
Distribution	209		—			209			43		70
Western Canada Transmission & Processing	279		9			288			59		117
Field Services	—		—			—			—		(3		)
Total reportable segments	1,100		9			1,109			176		672
Other	3		16			19			12		(12		)
Eliminations	—		(25		)	(25		)	—		—
Depreciation and amortization	—		—			—			—		188
Interest expense	—		—			—			—		155
Interest income and other (a)	—		—			—			—		(4		)
Total consolidated	$	1,103	$	—		$	1,103		$	188	$	313

Nine Months Ended September 30, 2016
Spectra Energy Partners	$	1,870	$	—		$	1,870		$	234	$	1,408
Distribution	958		—			958			138		351
Western Canada Transmission & Processing	784		15			799			173		313
Field Services	—		—			—			—		1
Total reportable segments	3,612		15			3,627			545		2,073
Other	6		48			54			37		(85		)
Eliminations	—		(63		)	(63		)	—		—
Depreciation and amortization	—		—			—			—		582
Interest expense	—		—			—			—		437
Interest income and other (a)	—		—			—			—		3
Total consolidated	$	3,618	$	—		$	3,618		$	582	$	972

Nine Months Ended September 30, 2015
Spectra Energy Partners	$	1,821	$	—		$	1,821		$	220	$	1,421
Distribution	1,161		—			1,161			133		360
Western Canada Transmission & Processing	929		33			962			184		382
Field Services	—		—			—			—		(253		)
Total reportable segments	3,911		33			3,944			537		1,910
Other	7		47			54			37		(39		)
Eliminations	—		(80		)	(80		)	—		—
Depreciation and amortization	—		—			—			—		574
Interest expense	—		—			—			—		480
Interest income and other (a)	—		—			—			—		(5		)
Total consolidated	$	3,918	$	—		$	3,918		$	574	$	812

___________________________________


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

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4. 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 September 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 has begun 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 September 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. In August 2016, the OEB approved the Settlement Proposal as filed. Union Gas has begun to implement the disposition of the balances effective October 1, 2016.

5. Income Taxes

Income tax expense was $10 million for the three months ended September 30, 2016, compared to $70 million for the same period in 2015. Income tax expense was $160 million for the nine months ended September 30, 2016, compared to $164 million for the same period in 2015. The lower tax expense for the three-month period was primarily due to the sale of Empress on August 4, 2016 and the release of tax reserves. The nine-month periods include the $74 million tax impact of the loss on investment due to the impairment of goodwill at DCP Midstream in 2015, partially offset by tax rate changes in 2016.

The effective income tax rate was 3% for the three months ended September 30, 2016, compared to 22% for the same period in 2015. The effective income tax rate was 16% for the nine months ended September 30, 2016, compared to 20% for the same period in 2015. The lower effective income tax rate for the three-month period was primarily due to the sale of Empress on August 4, 2016 and the release of tax reserves. The nine-month periods include the $74 million tax impact of the loss on investment due to the impairment of goodwill at DCP Midstream in 2015, partially offset by tax rate changes in 2016.

There was an $8 million decrease in unrecognized tax benefits recorded during the nine months ended September 30, 2016. Although uncertain, we believe it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $20 million to $25 million prior to September 30, 2017 due to audit settlements and statute of limitations expirations.

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6. 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 September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in millions, except per-share amounts)
Net income—controlling interests	$	195	$	174	$	578	$	459
Weighted-average common shares outstanding
Basic	701		671		692		671
Diluted	703		672		693		672
Basic earnings per common share (a)	$	0.28	$	0.26	$	0.84	$	0.68
Diluted earnings per common share (a)	$	0.28	$	0.26	$	0.83	$	0.68

___________________

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

7. 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)
June 30, 2016	$	425		$	(337	)	$	—		$	(2	)	$	86
Other AOCI activity	(78		)	5			—			—			(73		)
September 30, 2016	$	347		$	(332	)	$	—		$	(2	)	$	13

June 30, 2015	$	617		$	(338	)	$	—		$	(3	)	$	276
Other AOCI activity	(345		)	6			—			1			(338		)
September 30, 2015	$	272		$	(332	)	$	—		$	(2	)	$	(62	)

December 31, 2015	$	79		$	(346	)	$	(3	)	$	1		$	(269	)
Other AOCI activity	268			14			3			(3		)	282
September 30, 2016	$	347		$	(332	)	$	—		$	(2	)	$	13

December 31, 2014	$	1,016		$	(351	)	$	(3	)	$	—		$	662
Other AOCI activity	(744		)	19			3			(2		)	(724		)
September 30, 2015	$	272		$	(332	)	$	—		$	(2	)	$	(62	)

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8. Inventory

Inventory consists of natural gas held in storage for transmission and processing, and also includes materials and supplies. The NGLs previously included in inventory were disposed of as part of the Empress sale on August 4, 2016. See Note 2 for further discussion related to the sale of Empress. 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:



	September 30, 2016		December 31, 2015
	(in millions)
Natural gas	$	214	$	217
NGLs	—		23
Materials and supplies	73		67
Total inventory	$	287	$	307

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 September 30,					Nine Months Ended September 30,
	2016		2015			2016		2015
	(in millions)
Operating revenues	$	1,961	$	1,851		$	4,974	$	5,763
Operating expenses	1,866		1,794			4,823		6,117
Operating income (loss)	95		57			151		(354		)
Net income (loss)	94		25			126		(472		)
Net income (loss) attributable to members’ interests	26		(6		)	8		(509		)

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 nine months ended September 30, 2015 and is reflected in Earnings (Loss) From Equity Investments in the Condensed Consolidated Statement of Operations.

During the third quarter of 2015, DCP Midstream finalized their goodwill impairment test. This resulted in the recognition of a $460 million goodwill impairment, which reduced our equity earnings from DCP Midstream by $123 million after-tax.

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 September 30, 2016, we have an effective 37.9% 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

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economic performance and we consolidate Sabal Trail in our financial statements. The current estimate of the total remaining construction cost is approximately $1.5 billion.

The following table summarizes the assets and liabilities for Sabal Trail:



Condensed Consolidated Balance Sheets Caption	September 30, 2016		December 31, 2015
	(in millions)
Assets
Current assets	$	303	$	118
Net property, plant and equipment	1,363		773
Regulatory assets and deferred debits	58		25
Total Assets	$	1,724	$	916
Liabilities and Equity
Current liabilities	$	128	$	84
Equity	1,596		832
Total Liabilities and Equity	$	1,724	$	916

Nexus. We have an effective 37.9% 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 of accounting. Our maximum exposure to loss is $1.0 billion. We have an investment in Nexus of $281 million and $90 million as of September 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.

During the third quarter of 2016, the second milestone was achieved and paid, consisting of $40 million. The milestone payments are classified as Cash Flows from Investing Activities—Purchase of Intangible, Net. This PCA, in the amount of $80 million as of September 30, 2016, 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.

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

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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 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 securities 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
	September 30, 2016		December 31, 2015
	(in millions)
Corporate debt securities (a)	$	20	$	31
Canadian equity securities (b)	17		—
Total available-for-sale securities	$	37	$	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
	September 30, 2016		December 31, 2015
	(in millions)
Restricted funds
Investments and other assets—other	$	31	$	11
Non-restricted funds
Current assets—other	6		20
Total available-for-sale securities	$	37	$	31

At September 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 September 30, 2016 or December 31, 2015.

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HTM Securities. HTM securities are as follows:



		Estimated Fair Value
Description	Condensed Consolidated Balance Sheets Caption	September 30, 2016		December 31, 2015
		(in millions)
Bankers acceptances	Current assets—other	$	44	$	30
Canadian government securities	Current assets—other	25		24
Money market securities	Current assets—other	8		3
Canadian government securities	Investments and other assets—other	52		50
Bankers acceptances	Investments and other assets—other	—		12
Total held-to-maturity securities		$	129	$	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 September 30, 2016.

At September 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 September 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 $25 million at September 30, 2016 and $11 million at December 31, 2015 classified as Current Assets—Other on the Condensed Consolidated Balance Sheets. Included in these restricted funds are $13 million at September 30, 2016 of funds received from the province of Ontario related to the Green Investment Fund that is to be distributed to eligible homeowners, based on specific energy conservation initiatives at Union Gas and $12 million and $11 million at September 30, 2016 and December 31, 2015, respectively, related to additional amounts for insurance.

We also had other restricted funds totaling $43 million at September 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 $17 million and $24 million at September 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, $7 million and $14 million, respectively, related to certain construction projects and $19 million at September 30, 2016 of funds received from the province of Ontario related to the Green Investment Fund.

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 September 30, 2016		Available Credit Facilities Capacity
		(in millions)
Spectra Energy Capital, LLC
Multi-year syndicated (a)	2021	$	1,000	$	460	$	540
364-day syndicated (a)	2017	2,000		—		2,000
SEP (b)	2021	2,500		1,177		1,323
Westcoast (c)	2021	305		—		305
Union Gas (d)	2021	533		—		533
Total		$	6,338	$	1,637	$	4,701

_________


(a)	Revolving credit facilities contain a covenant requiring the Spectra Energy consolidated debt-to-total capitalization ratio, as defined in the agreements, to not exceed 65%. Per the terms of the agreements, collateralized debt is excluded from the calculation of the ratio. This ratio was 55.8% at September 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 September 30, 2016, this ratio was 3.7 to 1.


(c)	U.S. dollar equivalent at September 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 31.1% at September 30, 2016.

(d)

U.S. dollar equivalent at September 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 68.1% at September 30, 2016.

On September 29, 2016, we entered into a new one-year, $2 billion credit facility at Spectra Energy Capital, LLC (Spectra Capital), which expires in 2017. Proceeds from borrowings under the credit facility will be used for general corporate purposes. Amounts borrowed under the credit facility must be repaid following any change in control, including any that results from the proposed merger with Enbridge.

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 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 September 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 September 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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15. Preferred Stock of Subsidiaries

On August 30, 2016, Westcoast issued 12 million Cumulative 5-Year Minimum Rate Reset Redeemable First Preferred Shares, Series 12 for an aggregate principal amount of 300 million Canadian dollars (approximately $229 million as of the issuance date). Net proceeds from the issuance were used to fund capital expenditures and for general corporate purposes.

16. 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	September 30, 2016
Description	Condensed Consolidated Balance Sheet Caption	Total		Level 1		Level 2		Level 3
		(in millions)
Corporate debt securities	Cash and cash equivalents	$	346	$	—	$	346	$	—
Corporate debt securities	Current assets—other	6		—		6		—
Interest rate swaps	Current assets—other	1		—		1		—
Corporate debt securities	Investments and other assets—other	14		—		14		—
Interest rate swaps	Investments and other assets—other	55		—		55		—
Canadian equity securities	Investments and other assets—other	17		17		—		—
Total Assets		$	439	$	17	$	422	$	—



Description	Condensed Consolidated Balance Sheet Caption	December 31, 2015
Description	Condensed Consolidated Balance Sheet Caption	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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in millions)
Derivative assets (liabilities)
Fair value, beginning of period	$	(2	)	$	50		$	41		$	78
Total gains (losses):
Included in earnings	8			18			(7		)	27
Included in other comprehensive income	—			(4		)	1			(9		)
Purchases	—			(5		)	(1		)	(2		)
Settlements	(6		)	(6		)	(34		)	(41		)
Fair value, end of period	$	—		$	53		$	—		$	53
Unrealized gains (losses) relating to instruments held at the end of the period	$	—		$	5		$	—		$	(11	)

Level 1

Level 1 valuations represent quoted unadjusted prices for identical instruments in active markets.

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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 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 require significant management judgment or estimation.

As of September 30, 2016, there are no financial instruments classified as Level 3. Those reported in Level 3 at December 31, 2015 consisted of NGL revenue swap contracts related to the Empress assets in Western Canada Transmission & Processing, which were disposed of on August 4, 2016. See Note 2 for further discussion related to the sale of Empress. As of December 31, 2015, 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 included both observable and unobservable inputs, if the unobservable input was determined to be significant to the overall inputs, the entire valuation was categorized in Level 3. This included derivatives valued using indicative price quotations whose contract length extended into unobservable periods.

The fair value of these NGL basis swaps was determined using a discounted cash flow valuation technique based on a forward commodity basis curve. For those derivatives, the primary input to the valuation model was the forward commodity basis curve, which was based on observable or public data sources and extrapolated when observable prices were not available.

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.



	September 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)	13,563		15,031		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 nine months ended September 30, 2016 and 2015, there were no material adjustments to assets and liabilities measured at fair value on a nonrecurring basis.

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17. 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 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 ceased entering into new contracts under our Empress risk management program. See Note 2 for further discussion related to the sale of Empress.

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 nine months ended September 30, 2016.

Interest Rate Swaps

At September 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 is as follows:



	September 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	$	56	$	—	$	56	$	37	$	—	$	37

Commodity Derivatives

At September 30, 2016, we had no commodity mark-to-market derivatives outstanding. At December 31, 2015, we had commodity mark-to-market derivatives outstanding that had netting or rights of offset arrangements as follows:



	December 31, 2015
	Gross Amounts		Gross Amounts Offset		Net Amount Presented in the Condensed Consolidated Balance Sheet
Description	(in millions)
Assets	$	104	$	63	$	41
Liabilities	63		63		—

Information regarding the impacts of commodity derivatives on our Condensed Consolidated Statements of Operations is as follows:



		Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives	Condensed Consolidated Statements of Operations Caption	2016		2015		2016			2015
		(in millions)
Commodity derivatives	Sales of natural gas liquids	$	8	$	13	$	(8	)	$	25

18. 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.

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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 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 September 30, 2016 or December 31, 2015 related to litigation.

Other Commitments and Contingencies

See Note 19 for a discussion of guarantees and indemnifications.

19. 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 September 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

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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.

As of September 30, 2016, the amounts recorded for the guarantees and indemnifications described above are not material, both individually and in the aggregate.

20. 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 September 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 used the proceeds from our unit purchase for general corporate purposes, including the funding of its current expansion capital plan.

21. Issuances of SEP Units

During the nine months ended September 30, 2016, SEP issued 10.4 million common units to the public under its at-the-market program and approximately 212,000 general partner units to Spectra Energy. Total net proceeds to SEP were $483 million (net proceeds to Spectra Energy were $473 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 20 for further discussion.

In connection with the issuances of the units, a $40 million gain ($25 million net of tax) to Additional Paid-in Capital and a $432 million increase in Equity—Noncontrolling Interests were recorded during the nine months ended September 30, 2016. The issuances decreased Spectra Energy’s ownership in SEP from 78% to 76% at September 30, 2016.

The following table presents the effects of the issuances of SEP units:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in millions)
Net income—controlling interests	$	195	$	174	$	578	$	459
Increase in additional paid-in capital resulting from issuances of SEP units	10		24		25		49
Total net income—controlling interests and changes in equity—controlling interests	$	205	$	198	$	603	$	508

22. 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 $16 million to our U.S. retirement plans in both of the nine months ended September 30, 2016 and 2015. We made total contributions to the Canadian DC and DB plans of $20 million in the nine months ended September 30, 2016 and $23 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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Qualified and Non-Qualified Pension Plans—Components of Net Periodic Pension Cost



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
	(in millions)
U.S.