UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

SPECTRA ENERGY PARTNERS, LP

(Exact Name of Registrant as Specified in its Charter)

Delaware		41-2232463
(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 þ No o

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 o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 48,852,175 Common Units, 21,638,730 Subordinated Units and 1,438,291 General Partner Units outstanding as of July 31, 2008.

 

 

SPECTRA ENERGY PARTNERS, LP
FORM 10-Q FOR THE QUARTER ENDED
June 30, 2008

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			4
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007			4
Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007			5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007			7
Condensed Consolidated Statements of Partners’ Capital for the six months ended June 30, 2008 and 2007			8
Notes to Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1A. Risk Factors			28
Item 4. Submission of Matters to a Vote of Security Holders			28
Item 6. Exhibits			29
Signatures			29

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This document includes forward-looking statements that are based on management’s beliefs and assumptions. 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 involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

	•		state and federal 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 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 interest rates;
	•		general economic conditions, including any potential effects arising from terrorist attacks and any consequential hostilities or other hostilities;
	•		changes in environmental, safety and other laws and regulations;
	•		results of financing efforts, including the ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general economic conditions;
	•		increases in the cost of goods and services required to complete capital projects;
	•		growth in opportunities, including the timing and success of efforts to develop domestic pipeline, storage, and other infrastructure projects and the effects of competition;
	•		the performance of natural gas transmission and storage facilities;
	•		the effect of accounting pronouncements issued periodically by accounting standard-setting bodies;
	•		conditions of the capital markets during the periods covered by the 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 Partners, LP has described. Spectra Energy Partners, LP undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SPECTRA ENERGY PARTNERS, LP

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Operating Revenues
Transportation of natural gas		$	25.8			$	24.2			$	53.0			$	49.7
Storage of natural gas and other			3.9				5.2				9.2				12.1
Total operating revenues			29.7				29.4				62.2				61.8
Operating Expenses
Operating, maintenance and other			8.4				2.1				18.4				11.6
Depreciation and amortization			6.5				5.6				13.1				11.2
Property and other taxes			1.8				1.5				2.0				1.7
Total operating expenses			16.7				9.2				33.5				24.5
Operating Income			13.0				20.2				28.7				37.3
Other Income and Expenses
Equity in earnings of unconsolidated affiliates			15.0				11.6				27.6				23.0
Other income and expenses, net			0.3				0.4				0.4				0.4
Total other income and expenses			15.3				12.0				28.0				23.4
Interest Income			0.8				—				2.3				—
Interest Expense			3.8				2.1				8.8				4.3
Earnings Before Income Taxes			25.3				30.1				50.2				56.4
Income Tax Expense (Benefit)			(2.2	)			6.2				(1.4	)			11.4
Net Income		$	27.5			$	23.9			$	51.6			$	45.0
Calculation of Limited Partners’ Interest in Net Income:
Net income		$	27.5			$	23.9			$	51.6			$	45.0
Less:
Net income attributable to predecessor operations			—				23.9				1.6				45.0
General partner’s interest in net income			1.1				—				1.5				—
Limited partners’ interest in net income		$	26.4			$	—			$	48.5			$	—
Basic and diluted net income per limited partner unit		$	0.38			$	—			$	0.71			$	—
Weighted average limited partners units outstanding — basic and diluted			70.4				—				68.3				—

See Notes to Condensed Consolidated Financial Statements

SPECTRA ENERGY PARTNERS, LP

		June 30,				December 31,
		2008				2007
ASSETS
Current Assets
Cash and cash equivalents		$	30.4			$	14.9
Receivables, net			13.2				16.3
Other			6.4				5.1
Total current assets			50.0				36.3
Investments and Other Assets
Investments in unconsolidated affiliates			525.8				495.1
Goodwill			118.3				118.3
Other investments			94.9				154.8
Total investments and other assets			739.0				768.2
Property, Plant and Equipment
Cost			951.2				930.0
Less accumulated depreciation and amortization			146.2				133.7
Net property, plant and equipment			805.0				796.3
Regulatory Assets and Deferred Debits			10.2				10.5
Total Assets		$	1,604.2			$	1,611.3

See Notes to Condensed Consolidated Financial Statements

		June 30,				December 31,
		2008				2007
LIABILITIES AND PARTNERS’ CAPITAL
Current Liabilities
Accounts payable		$	12.1			$	7.6
Taxes accrued			3.0				3.5
Interest accrued			0.9				1.6
Natural gas imbalance payables			8.7				3.4
Note payable — affiliates			50.0				50.0
Other			4.1				7.5
Total current liabilities			78.8				73.6
Long-term Debt			390.0				400.0
Deferred Credits and Other Liabilities
Deferred income taxes			8.8				10.7
Other			2.3				3.3
Total deferred credits and other liabilities			11.1				14.0
Commitments and Contingencies
Partners’ Capital
Predecessor equity			—				98.4
Common units (48.9 million and 44.6 million units outstanding at June 30, 2008 and December 31, 2007, respectively)			794.4				699.3
Subordinated units (21.6 million units outstanding)			304.7				303.5
General partner units (1.4 million units outstanding)			21.5				19.0
Accumulated other comprehensive income			3.7				3.5
Total partners’ capital			1,124.3				1,123.7
Total Liabilities and Partners’ Capital		$	1,604.2			$	1,611.3

See Notes to Condensed Consolidated Financial Statements

SPECTRA ENERGY PARTNERS, LP

		Six Months
		Ended June 30,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	51.6			$	45.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			13.1				11.2
Deferred income tax expense (benefit)			(2.1	)			6.1
Equity in earnings of unconsolidated affiliates			(27.6	)			(23.0	)
Distributions received from unconsolidated affiliates			35.8				3.7
Other			3.2				(5.1	)
Net cash provided by operating activities			74.0				37.9
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(18.0	)			(13.2	)
Investment expenditures			(39.3	)			(0.8	)
Acquisition of Saltville and P-25 pipeline			(4.7	)			—
Proceeds from sales of assets			—				8.3
Purchases of available-for-sale securities			(700.4	)			—
Proceeds from sales and maturities of available-for-sale securities			760.1				—
Other			—				(0.1	)
Net cash used in investing activities			(2.3	)			(5.8	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt			702.0				—
Payments for the redemption of long-term debt			(712.0	)			—
Distributions to partners			(45.4	)			—
Dividends to parent			—				(12.5	)
Transfers to parent, net			(0.8	)			(19.6	)
Net cash used in financing activities			(56.2	)			(32.1	)
Net increase in cash and cash equivalents			15.5				—
Cash and cash equivalents at beginning of period			14.9				—
Cash and cash equivalents at end of period		$	30.4			$	—

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(Unaudited)
(In millions)

																		Accumulated
						Partners’ Capital												Other
		Predecessor				Limited Partners								General				Comprehensive
		Equity				Common				Subordinated				Partner				Income				Total
December 31, 2007		$	98.4			$	699.3			$	303.5			$	19.0			$	3.5			$	1,123.7
Net income			1.6				33.2				15.3				1.5				—				51.6
Net change in parent advances			(0.8	)			—				—				—				—				(0.8	)
Acquisition of Saltville and P-25 pipeline			(99.2	)			—				—				—				—				(99.2	)
Excess purchase price over net acquired assets			—				(7.6	)			—				(0.2	)			—				(7.8	)
Issuance of units			—				100.2				—				2.1				—				102.3
Attributed deferred tax expense			—				(0.3	)			—				—				—				(0.3	)
Unrealized mark-to-market net gain on hedges			—				—				—				—				0.4				0.4
Reclassification of cash flow hedges into earnings			—				—				—				—				(0.2	)			(0.2	)
Distributions to partners			—				(30.4	)			(14.1	)			(0.9	)			—				(45.4	)
June 30, 2008		$	—			$	794.4			$	304.7			$	21.5			$	3.7			$	1,124.3
December 31, 2006		$	1,093.3			$	—			$	—			$	—			$	3.8			$	1,097.1
Net income attributable to predecessor operations			45.0				—				—				—				—				45.0
Reclassification of cash flow hedges into earnings			—				—				—				—				(0.2	)			(0.2	)
Net change in parent advances			(19.9	)			—				—				—				—				(19.9	)
Dividends to parent			(12.5	)			—				—				—				—				(12.5	)
June 30, 2007		$	1,105.9			$	—			$	—			$	—			$	3.6			$	1,109.5

See Notes to Condensed Consolidated Financial Statements

SPECTRA ENERGY PARTNERS, LP

1. General

     Nature of Operations. Spectra Energy Partners, LP, through its subsidiaries and equity affiliates (collectively, Spectra Energy Partners) is engaged in the transportation of natural gas through interstate pipeline systems that serve the southeastern United States, and the storage of natural gas in underground facilities that are located in southeast Texas, south central Louisiana and southwest Virginia. Spectra Energy Partners, LP is a Delaware master limited partnership formed on March 19, 2007.

     Initial Public Offering. On July 2, 2007, immediately prior to the closing of Spectra Energy Partners’ initial public offering (IPO), Spectra Energy Corp (Spectra Energy) contributed to Spectra Energy Partners, LP 100% of the ownership of East Tennessee Natural Gas LLC (East Tennessee) less certain working capital balances retained as per the partnership agreements, 50% of the ownership of Market Hub Partners Holding (Market Hub) and a 24.5% interest in Gulfstream Natural Gas System, L.L.C. (Gulfstream).

     On July 2, 2007, Spectra Energy Partners completed its IPO. Spectra Energy Partners issued 11.5 million common units to the public, representing 17% of its outstanding equity. Spectra Energy retained an 83% equity interest in Spectra Energy Partners, including common units, subordinated units and a 2% general partner interest. Spectra Energy also holds incentive distribution rights.

     Acquisitions. On April 4, 2008, Spectra Energy Partners completed the acquisition of the equity interests of Saltville Gas Storage Company L.L.C. (Saltville) and the P-25 pipeline from Spectra Energy (collectively, hereafter referred to as the “Saltville acquisition”) at a purchase price of $107.0 million, which included the issuance of 4,207,641 common units and 85,870 general partner units, and a cash payment of $4.7 million to Spectra Energy.

     The Saltville acquisition represented a transfer of entities under common control. Accordingly, the condensed consolidated financial statements and related information presented herein have been recast to include the historical results of Saltville and the P-25 pipeline for all periods presented. See Note 2 for further discussion.

     Basis of Presentation. For periods prior to the closing of the IPO, the combined financial statements were prepared from the separate records maintained by Spectra Energy for the entities that were originally contributed to Spectra Energy Partners and for the operations included in the Saltville acquisition, and are based on Spectra Energy’s historical ownership percentages of those operations. The combined financial results of these entities are treated as the historical results of Spectra Energy Partners for financial statement reporting purposes. Both the combined financial statements of East Tennessee, Saltville, Market Hub and Gulfstream, as well as the consolidated financial statements of Spectra Energy Partners for the periods post-IPO, are hereafter referred to as the Condensed Consolidated Financial Statements. The historical data for periods prior to the closing of the IPO and for periods prior to the Saltville acquisition may not necessarily be indicative of the actual results of operations had those entities been operated separately during those periods. Because a direct ownership relationship did not exist among the entities comprising Spectra Energy Partners prior to July 2, 2007 and prior to the Saltville acquisition on April 4, 2008, the net investment in Spectra Energy Partners is shown as Predecessor Equity in the applicable Condensed Consolidated Financial Statements.

     Spectra Energy Partners generally accounts for investments in 20% to 50%-owned affiliates, and investments in less than 20%-owned affiliates where it has the ability to exercise significant influence, under the equity method. Accordingly, the consolidated historical financial statements for Spectra Energy Partners reflect the consolidation of East Tennessee, operations associated with the Saltville acquisition, and the investments in Market Hub and Gulfstream using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

     These interim financial statements should be read in conjunction with the consolidated financial statements included in Spectra Energy Partners’ Annual Report on Form 10-K for the year ended December 31, 2007 and reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present Spectra Energy Partners’ 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.

     Use of Estimates. To conform with generally accepted accounting principles (GAAP) in the United States, management makes 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 management’s best available knowledge at the time, actual results could differ.

2. Acquisitions

     On April 4, 2008, Spectra Energy Partners completed the Saltville acquisition from Spectra Energy at a purchase price of $107.0 million, which included the issuance of 4,207,641 common units and 85,870 general partner units, and a cash payment of $4.7 million to Spectra Energy. Saltville assets include three separate natural gas storage facilities adjacent to the East Tennessee system in southwest Virginia with approximately 5.5 billion cubic feet of working capacity. The P-25 pipeline, now part of the operations of East Tennessee, is a 72-mile, eight-inch natural gas pipeline with a capacity of 40 million cubic feet per day that runs parallel to the East Tennessee system in Virginia. The Saltville storage assets and the P-25 pipeline are strategically integrated with Spectra Energy Partners’ East Tennessee system. The completion of the Saltville acquisition allows for a streamlined regulatory structure under Federal Energy Regulatory Commission (FERC) jurisdiction, an enhanced operational flexibility that will benefit both East Tennessee and Saltville customers and a broader array of organic expansion opportunities for Spectra Energy Partners’ pipeline and storage assets.

     Spectra Energy’s ownership of Spectra Energy Partners increased from 83% to 84% as a result of receipt of the new common and general partner units. The $7.8 million excess purchase price over the book value of net assets acquired was recorded as a reduction to Partners’ Capital, and the $102.3 million of common and general partner units issued were recorded as increases to Partners’ Capital.

     As discussed in Note 1, the Saltville acquisition represented a transfer of entities under common control, which requires that the assets and liabilities acquired be recorded at historical book value and that Spectra Energy Partners’ financial statements be presented on a basis similar to the pooling method of accounting, whereby all historical periods are retroactively adjusted to furnish comparative financial information as if the transaction had occurred immediately prior to the earliest period presented.

     Condensed Consolidated Statements of Operations.  The historical Condensed Consolidated Statements of Operations for the three and six-month periods ended June 30, 2007 have been recast to retroactively reflect the Saltville acquisition, as presented below.

		Three Months Ended																Six Months Ended
		June 30, 2007																June 30, 2007
		Previously												As				Previously												As
		Reported				Saltville				Eliminations				Recast				Reported				Saltville				Eliminations				Recast
		(in millions)
Operating Revenues
Transportation of natural gas		$	23.7			$	0.5			$	—			$	24.2			$	48.6			$	1.4			$	(0.3	)		$	49.7
Storage of natural gas and other			—				6.0				(0.8	)			5.2				1.5				11.7				(1.1	)			12.1
Total operating revenues			23.7				6.5				(0.8	)			29.4				50.1				13.1				(1.4	)			61.8
Operating Expenses
Operating, maintenance and other			(0.1	)			3.0				(0.8	)			2.1				6.8				6.2				(1.4	)			11.6
Depreciation and amortization			5.1				0.5				—				5.6				10.0				1.2				—				11.2
Property and other taxes			1.0				0.5				—				1.5				0.9				0.8				—				1.7
Total operating expenses			6.0				4.0				(0.8	)			9.2				17.7				8.2				(1.4	)			24.5
Operating Income			17.7				2.5				—				20.2				32.4				4.9				—				37.3
Other Income and Expenses
Equity in earnings of unconsolidated affiliates			11.6				—				—				11.6				23.0				—				—				23.0
Other income and expenses, net			0.3				0.1				—				0.4				0.3				0.1				—				0.4
Total other income and expenses			11.9				0.1				—				12.0				23.3				0.1				—				23.4
Interest Expense			2.1				—				—				2.1				4.3				—				—				4.3
Earnings Before Income Taxes			27.5				2.6				—				30.1				51.4				5.0				—				56.4
Income Tax Expense			5.9				0.3				—				6.2				10.6				0.8				—				11.4
Net Income		$	21.6			$	2.3			$	—			$	23.9			$	40.8			$	4.2			$	—			$	45.0

     Condensed Consolidated Balance Sheet.  The historical Condensed Consolidated Balance Sheet as of December 31, 2007 has been recast to retroactively reflect the Saltville acquisition, as presented below.

		December 31, 2007
		Previously												As
		Reported				Saltville				Eliminations				Recast
		(in millions)
ASSETS
Current Assets
Cash and cash equivalents		$	14.9			$	—			$	—			$	14.9
Receivables, net			16.5				3.2				(3.4	)			16.3
Other			5.0				0.1				—				5.1
Total current assets			36.4				3.3				(3.4	)			36.3
Investments and Other Assets
Investments in unconsolidated affiliates			495.1				—				—				495.1
Goodwill			118.3				—				—				118.3
Other investments			154.8				—				—				154.8
Total investments and other assets			768.2				—				—				768.2
Property, Plant and Equipment
Cost			821.4				108.6				—				930.0
Less accumulated depreciation and amortization			128.8				4.9				—				133.7
Net property, plant and equipment			692.6				103.7				—				796.3
Regulatory Assets and Deferred Debits			10.4				0.1				—				10.5
Total Assets		$	1,507.6			$	107.1			$	(3.4	)		$	1,611.3
LIABILITIES AND PARTNERS’ CAPITAL
Current Liabilities
Accounts payable		$	7.0			$	0.6			$	—			$	7.6
Taxes accrued			2.9				0.6				—				3.5
Interest accrued			1.6				—				—				1.6
Natural gas imbalance payables			4.0				2.8				(3.4	)			3.4
Note payable — affiliates			50.0				—				—				50.0
Other			5.8				1.7				—				7.5
Total current liabilities			71.3				5.7				(3.4	)			73.6
Long-term Debt			400.0				—				—				400.0
Deferred Credit and Other Liabilities
Deferred income taxes			8.4				2.3				—				10.7
Other			2.6				0.7				—				3.3
Total deferred credits and other liabilities			11.0				3.0				—				14.0
Partners’ Capital
Predecessor equity			—				98.4				—				98.4
Common units			699.3				—				—				699.3
Subordinated units			303.5				—				—				303.5
General partner units			19.0				—				—				19.0
Accumulated other comprehensive income			3.5				—				—				3.5
Total partners’ capital			1,025.3				98.4				—				1,123.7
Total Liabilities and Partners’ Capital		$	1,507.6			$	107.1			$	(3.4	)		$	1,611.3

     Condensed Consolidated Statement of Cash Flows.  The historical Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2007 has been recast to retroactively reflect the Saltville acquisition, as presented below.

		Six Months Ended
		June 30, 2007
		Previously								As
		Reported				Saltville				Recast
		(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	40.8			$	4.2			$	45.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			10.0				1.2				11.2
Deferred income tax expense			5.7				0.4				6.1
Equity in earnings of unconsolidated affiliates			(23.0	)			—				(23.0	)
Distributions received from unconsolidated affiliates			3.7				—				3.7
Other			(3.0	)			(2.1	)			(5.1	)
Net cash provided by operating activities			34.2				3.7				37.9
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(13.1	)			(0.1	)			(13.2	)
Investment expenditures			(0.8	)			—				(0.8	)
Proceeds from sales of assets			—				8.3				8.3
Other			—				(0.1	)			(0.1	)
Net cash provided by (used in) investing activities			(13.9	)			8.1				(5.8	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to parent			(12.5	)			—				(12.5	)
Transfers to parent, net			(7.8	)			(11.8	)			(19.6	)
Net cash used in financing activities			(20.3	)			(11.8	)			(32.1	)
Net change in cash and cash equivalents			—				—				—
Cash and cash equivalents at beginning of period			—				—				—
Cash and cash equivalents at end of period		$	—			$	—			$	—

     Condensed Consolidated Statement of Partners’ Capital.  The historical Condensed Consolidated Statement of Partners’ Capital for the six months ended June 30, 2007 has been recast to retroactively reflect the Saltville acquisition, as presented below.

		Previously								As
		Reported				Saltville				Recast
		(in millions)
December 31, 2006		$	989.1			$	108.0			$	1,097.1
Net income attributable to predecessor operations			40.8				4.2				45.0
Reclassification of cash flow hedges into earnings			(0.2	)			—				(0.2	)
Net change in parent advances			(8.1	)			(11.8	)			(19.9	)
Dividends to parent			(12.5	)			—				(12.5	)
June 30, 2007		$	1,009.1			$	100.4			$	1,109.5

3. Income Taxes

     Income taxes with respect to Spectra Energy Partners’ East Tennessee and Saltville operations were calculated by Spectra Energy Partners in 2007 on the basis of their separate company income and deductions related to East Tennessee and Saltville, respectively, in accordance with established practices of Spectra Energy. Effective July 2, 2007, as a result of Spectra Energy Partners’ master limited partnership (MLP) structure, Spectra Energy Partners is no longer subject to federal income taxes, but is still subject to Tennessee state income tax.

     On April 4, 2008, Spectra Energy Partners completed the Saltville acquisition, which was treated as a transfer of entities under common control as discussed in Note 1. Accordingly, the income tax effects associated with Saltville’s operations prior to the acquisition are reflected in the Condensed Consolidated Statements of Operations. In addition, in the second quarter of 2008, in connection with the acquisition and the resulting change in tax status of Saltville, $2.5 million of accumulated deferred income tax liabilities were eliminated and recorded as a benefit to Income Tax Expense (Benefit) on the Condensed Consolidated Statements of Operations.

     Market Hub and Gulfstream are not subject to federal income tax, but rather the taxable income or loss of these entities is reported on the income tax returns of the respective members. Market Hub is subject to Texas income (margin) taxes under a tax sharing agreement with Spectra Energy.

4. Business Segments

     Prior to the Saltville acquisition, East Tennessee was considered the sole reportable segment for Spectra Energy Partners. Effective upon completion of the acquisition, Spectra Energy Partners created a new business segment, Gas Transportation and Storage, that aligns the operations of Spectra Energy Partners with the chief operating decision maker’s view of the business. All prior periods presented have been recast to conform the business segment disclosures to the new segment structure. Spectra Energy Partners’ business segment is considered the sole reportable segment under the guidance of Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

     Gas Transportation and Storage includes East Tennessee and Saltville. This segment provides interstate transportation and storage of natural gas and the storage and redelivery of liquefied natural gas (LNG) for customers in the southeastern United States. These operations are primarily subject to the FERC and the Department of Transportation’s (DOT) rules and regulations.

     The remainder of Spectra Energy Partners’ operations is presented as “Other.” While it is not considered a business segment, Other primarily includes Spectra Energy Partners’ equity investments in Gulfstream and Market Hub, other investments and certain unallocated corporate costs.

     Gulfstream provides interstate natural gas pipeline transportation for customers in central and southern Florida. Gulfstream’s operations are subject to the rules and regulations of FERC and DOT.

     Market Hub owns and operates two natural gas storage facilities, Moss Bluff and Egan, which are located in Southeast Texas and South Central Louisiana, respectively. Market Hub’s operations are subject to the rules and regulations of DOT. Moss Bluff is also subject to the rules and regulations of the Texas Railroad Commission. Egan is also subject to the rules and regulations of FERC.

     Management evaluates segment performance based on earnings before interest and taxes from continuing operations (EBIT). On a segment basis, EBIT represents all profits from continuing operations (both operating and non-operating) before deducting interest and taxes.

Business Segment Data

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(in millions)
Operating revenues
Gas Transportation and Storage		$	29.7			$	29.4			$	62.2			$	61.8
Other			—				—				—				—
Total operating revenues		$	29.7			$	29.4			$	62.2			$	61.8
Segment EBIT
Gas Transportation and Storage		$	15.2			$	20.5			$	32.8			$	37.6
Other			13.1				11.7				23.9				23.1
Total EBIT			28.3				32.2				56.7				60.7
Interest income			0.8				—				2.3				—
Interest expense			3.8				2.1				8.8				4.3
Earnings before income taxes		$	25.3			$	30.1			$	50.2			$	56.4

		June 30,				December 31,
		2008				2007
		(in millions)
Segment Assets
Gas Transportation and Storage		$	975.9			$	968.1
Other			628.3				643.2
Total assets		$	1,604.2			$	1,611.3

5. Regulatory Matters

     Saltville. In April 2008, Saltville initiated a rate proceeding to satisfy a certificate condition relating to a cost and revenue study, and to reflect certain changes in costs and revenues from assumptions underlying current rates. The proposed rates were accepted by the FERC in April 2008, subject to a five-month suspension, to become effective September 1, 2008, subject to refund pending conclusion of the rate proceeding.  A hearing is scheduled for January 27, 2009.

6. Comprehensive Income

     Comprehensive income includes net income and all other non-owner changes in equity. Components of comprehensive income are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(in millions)
Net income		$	27.5			$	23.9			$	51.6			$	45.0
Unrealized mark-to-market net gain on hedges			0.4				—				0.4				—
Reclassification of cash flow hedges into earnings			(0.1	)			(0.1	)			(0.2	)			(0.2	)
Total comprehensive income		$	27.8			$	23.8			$	51.8			$	44.8

7. Net Income Per Limited Partner Unit and Cash Distributions

     Spectra Energy Partners calculates net income per limited partner unit in accordance with Emerging Issues Task Force (EITF) Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128.” Undistributed earnings for a period are allocated to a participating security based on the contractual participation rights of the security to share in those earnings as if all of the earnings for the period had been distributed.

     Net income per limited partner unit is computed by dividing the limited partners’ interest in net income by the weighted average number of limited partner units outstanding. The limited partners’ interest in net income is determined by first allocating net income to the general partner based upon the general partner’s 2% ownership interest and incentive distribution rights held. Although Spectra Energy Partners has not reached the Available Cash levels that would require incentive distributions to the general partner, in accordance with EITF Issue No. 03-6, net income levels above the incentive distribution level must be allocated to the general partner for purposes of calculating net income per limited partner unit. Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or other agreements to issue common units, such as phantom unit awards, were exercised, settled or converted into common units.

     The following table presents Spectra Energy Partners’ net income per limited partner unit calculations.

		Three Months				Six Months
		Ended				Ended
		June 30, 2008				June 30, 2008
		(in millions, except per-unit amounts)
Net income		$	27.5			$	51.6
Less:
Net income attributable to predecessor operations			—				1.6
General partner’s interest in net income – 2%			0.6				1.0
General partner’s interest in net income attributable to incentive distribution rights			0.5				0.5
Limited partners’ interest in net income		$	26.4			$	48.5
Net income allocable to common units		$	18.3			$	33.2
Net income allocable to subordinated units			8.1				15.3
Limited partners’ interest in net income		$	26.4			$	48.5
Weighted average limited partner units outstanding — basic and diluted
Common units			48.8				46.7
Subordinated units			21.6				21.6
Total			70.4				68.3
Net income per limited partner unit — basic and diluted
Common units		$	0.38			$	0.71
Subordinated units		$	0.38			$	0.71

     Weighted average limited partner units outstanding, and basic and diluted net income per limited partner unit for the three and six months ended June 30, 2007 are not presented since Spectra Energy Partners was not formed until July 2, 2007.

     The partnership agreement requires that, within 45 days after the end of each quarter, Spectra Energy Partners distribute all of its Available Cash, as defined, to unitholders of record on the applicable record date.

     Available Cash. Available Cash, for any quarter, consists of all cash on hand at the end of that quarter:

•

less the amount of cash reserves established by the general partner to:

	•		provide for the proper conduct of business,
	•		comply with applicable law, any debt instrument or other agreement, or
	•		provide funds for distributions to the unitholders and to the general partner for any one or more of the next four quarters,

•

plus, if the general partner so determines, all or a portion of cash on hand on the date of determination of Available Cash for the quarter.

     Subordinated Units. All of the subordinated units are held by a wholly owned subsidiary of Spectra Energy. The partnership agreement provides that, during the subordination period, the common units have the right to receive distributions of Available Cash each quarter in an amount equal to $0.30 per common unit (the Minimum Quarterly Distribution), plus any arrearages in the payment of the Minimum Quarterly Distribution on the common units from prior quarters, before any distributions of Available Cash may be made on the subordinated units. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be Available Cash to be distributed on the common units. The subordination period will end, and the subordinated units will convert to common units, on a one-for-one basis, when certain distribution requirements, as defined in the partnership agreement, have been met. It is currently estimated that the subordination period will not end during 2008.

     Incentive Distribution Rights. The general partner holds incentive distribution rights in accordance with the partnership agreement as follows:

		Total Quarterly				Marginal Percentage
		Distribution				Interest in Distributions
						Common and
						Subordinated
		Target Amount				Unitholders				General Partner
Minimum Quarterly Distribution		$	0.30				98	%			2	%
First Target Distribution		up to $0.345					98	%			2	%
Second Target Distribution		above $0.345 up to $0.375					85	%			15	%
Third Target Distribution		above $0.375 up to $0.45					75	%			25	%
Thereafter		above $0.45					50	%			50	%

     To the extent these incentive distributions are made to the general partner, there will be more Available Cash proportionately allocated to the general partner than to holders of common and subordinated units.

8. Investments in Unconsolidated Affiliates

     Spectra Energy Partners’ investments in unconsolidated affiliates consist of a 24.5% interest in Gulfstream and a 50% interest in Market Hub. Spectra Energy Partners received distributions from Gulfstream of $14.3 million in the six months ended June 30, 2008 and $3.7 million during the same period in 2007. Spectra Energy Partners received distributions from Market Hub of $21.5 million in the six months ended June 30, 2008 and none during the same period in 2007.

Investments in Unconsolidated Affiliates

		June 30,				December 31,
		2008				2007
		(in millions)
Gulfstream		$	230.9			$	211.3
Market Hub			294.9				283.8
Total		$	525.8			$	495.1

Equity in Earnings of Unconsolidated Affiliates

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(in millions)
Gulfstream		$	7.0			$	4.3			$	11.8			$	8.5
Market Hub			8.0				7.3				15.8				14.5
Total		$	15.0			$	11.6			$	27.6			$	23.0

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(in millions)
Gulfstream
Operating revenues		$	51.6			$	46.2			$	92.4			$	84.2
Operating expenses			15.8				17.3				29.7				26.6
Operating income			35.8				28.9				62.7				57.6
Net income			27.3				17.5				46.2				34.6
Market Hub
Operating revenues		$	25.2			$	23.5			$	47.1			$	44.3
Operating expenses			8.8				7.7				15.6				13.3
Operating income			16.4				15.8				31.5				31.0
Net income			16.8				14.7				32.5				29.1

										Outstanding as of June 30, 2008
						Credit
		Expiration				Facility								Revolving
Credit Facility Summary		Date				Capacity				Term Loan				Loan				Total
		(in millions)
Spectra Energy Partners, LP			2012			$	500.0			$	94.0			$	146.0			$	240.0

     Spectra Energy Partners’ obligations under the revolving portion of its credit facility are unsecured and the term borrowings are secured by qualifying investment-grade securities in an amount equal to or greater than the outstanding principal amount of the loan. The terms of the credit facility allow for liquidation of collateral to fund capital expenditures or certain acquisitions provided that an equal amount of term loan is converted to a revolving loan. Investments in marketable securities totaling $94.9 million at June 30, 2008 and $154.6 million at December 31, 2007 were pledged as collateral against the term loan. These investments are classified as Investments and Other Assets — Other Investments on the Condensed Consolidated Balance Sheets. The credit facility prohibits Spectra Energy Partners from making distributions of Available Cash to unitholders if any default or event of default, as defined, exists. In addition, the credit facility contains covenants, among others, limiting Spectra Energy Partners’ ability to make other restricted distributions or dividends on account of the purchase, redemption, retirement, acquisition, cancellation or termination of partnership interests, and is also subject to certain financial covenants. As of June 30, 2008, Spectra Energy Partners was in compliance with those covenants. The credit facility does not contain material adverse change clauses.

     Long-term debt includes East Tennessee’s 5.71% unsecured notes payable totaling $150.0 million as of June 30, 2008 and December 31, 2007. East Tennessee’s debt agreement contains financial covenants which limit the amount of debt that can be outstanding as a percentage of total capital. Failure to maintain the covenants could require East Tennessee to immediately pay down the outstanding balance. As of June 30, 2008, East Tennessee was in compliance with those covenants. In addition, the debt agreement allows for acceleration of payments or termination of the agreements due to nonpayment, or to the acceleration of other significant indebtedness of the borrower or some of its subsidiaries, if any. The debt agreement does not contain material adverse change clauses.

10. Fair Value Measurements

     Effective January 1, 2008, Spectra Energy Partners adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 requires entities to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

     SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

     SFAS No. 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Spectra Energy Partners’ market assumptions. In accordance with SFAS No. 157, these two types of inputs have created the following fair value hierarchy:

	•		Level 1 — Quoted unadjusted prices for identical instruments in active markets.
	•		Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
	•		Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.