Premier natural gas company Spectra Energy Corp. (SE) reported better-than-expected first-quarter 2011 results owing to expansion projects that kick-started, higher natural gas liquids (NGLs) prices and a stronger Canadian dollar.

Earnings per share from continuing operations were 54 cents in the reported quarter, fairly ahead of the Zacks Consensus Estimate of 51 cents and higher than the year-earlier profit of 53 cents.

The company reported operating revenues of $1,612 million, surpassing the Zacks Consensus Estimate of $1,611 million and improving from the year-earlier level of $1,480 million.

Operational Analysis

U.S.Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $279 million, compared with $247 million in the year-ago quarter. Business expansion projects, including TEMAX/TIME III and Algonquin East-to-West contributed to the segment’s profit.

Distribution: The segment reported a 14% year over year jump in its EBIT to reach $167 million. The performance was aided by higher customer usage, a stronger Canadian dollar, a hike in the number of residential customers as well as in industrial usage due to encouraging natural gas prices.

Western CanadaTransmission & Processing: The segment witnessed an EBIT of $141 million, up more than 18% from the year-earlier level. The increase over the prior-year quarter was driven by improved results in the base gathering and processing business, coupled with a stronger Canadian dollar.

Field Services: The segment’s EBIT of $81 million decreased from the year-earlier level of $99 million, primarily due to higher operating and maintenance costs.

During the quarter, the company produced NGLs of approximately 358 thousand barrels per day (MBbl/d), up a marginal 1% year over year. Price of NGLs averaged $1.13 per gallon (up 3.7% year over year), while crude oil averaged approximately $94.10 per barrel (up more than 19% year over year).

Balance Sheet

As of March 31, 2011, Spectra Energy had long-term debt of approximately $10,257 million with a debt-to-capitalization ratio of 53.5% (versus 54.5% in the preceding quarter).


With first-quarter results showing an improvement over the prior base year, management remains optimistic about the company’s performance going forward. With a market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain its growth momentum.

However, the heavy debt-to-capitalization ratio serves as a competitive disadvantage for the company. Spectra also faces strong competition from its peer company, El Paso Corp. (EP). Hence, we prefer to remain on the sidelines and maintain our long-term Neutral recommendation. Spectra Energy holds a Zacks #3 Rank, which translates into a short-term Hold rating.

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