Premier natural gas company Spectra Energy Corp. (SE) reported a minor disappointment in fiscal third-quarter 2010 results owing to higher operating expenses. Earnings per share (excluding special items) were 31 cents in the reported quarter, just missing the Zacks Consensus Estimate by a penny, and slightly ahead of the year-earlier profit of 30 cents per share.
The year-over-year result benefited from Spectra’s fee-based businesses, improved commodity prices at its Field Services business, and a stronger Canadian dollar.
The company reported operating revenues of $1,019 million, falling short of the Zacks Consensus Estimate of $1,081 million. However, on a year-over-year basis, revenues increased 9.2% from $933 million.
Operational Analysis
U.S. Transmission: The segment posted quarterly earnings before interest and taxes (EBIT) of $231 million, compared with $229 million in the year-ago quarter. Business expansion projects contributed to the segment profit, partially offset by higher operating costs.
Distribution: The segment reported an EBIT of $63 million, a substantial increase of approximately 31% year over year due to more industrial customers and residential customers served, lower operating fuel costs and a stronger Canadian dollar.
Western Canada Transmission & Processing: The segment witnessed an EBIT of $90 million, up nearly 7.1% from the year-earlier level. The sharp increase over the prior year was driven by the improved results in the base gathering and processing business, partially offset by declines in conventional supply areas.
Field Services: The segment’s EBIT of $70 million significantly increased from the year-earlier level of $45 driven primarily due to higher commodity prices and a pre-tax gain related to ongoing unit issuances by DCP Midstream’s master limited partnership.
During the quarter, the company produced natural gas liquids (NGLs) of approximately 378 thousand barrels per day (MBbl/d), up 1.8% year over year. Price of NGLs averaged 87 cents per gallon (up 26.1% year over year), while crude oil averaged approximately $76 per barrel (up nearly 11.6% year over year).
Balance Sheet
As of September 30, 2010, Spectra Energy had long-term debt of approximately $9,277 million with a debt-to-capitalization ratio of 53.6%.
Outlook
With third-quarter results showing a marked improvement over the prior base year, management remains optimistic about the company’s performance in the concluding three months of 2010. Spectra Energy expects to exceed its 20% earnings growth forecast to reach $1.42 per share in the year.
With a market leading position 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, compelling us to maintain our long-term Neutral recommendation.
Spectra Energy currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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