Spectra Energy 2010 Annual Report

Letter to Shareholders

To our valued investors and stakeholders:

We are dedicating this annual report to describing our progress toward the goal of leading North America's natural gas infrastructure sector by 2012 in three vital areas: safety and reliability; customer responsiveness; and profitability.

We're looking forward because we believe in delivering energy today – and tomorrow. The signs are good: the economy is improving and the natural gas sector is strengthening at an even greater pace. As such, natural gas is positioned to play an increasingly important role in North America's energy future. These positive trends bode well for Spectra Energy investors.

Tomorrow's energy imperatives are upon us. So are tremendous opportunities to invest, serve growing markets, create lasting value and help usher in a responsible new era in energy. And we know that long-term, sustainable performance rests in our ability not only to deliver in the present, but to anticipate and act on what comes next. As our investors, you can be confident in the road ahead, because we are focusing on both the needs of today and the frontiers of opportunity ahead.

The fuel of choice

The second decade of the 21st century will become known as the era when natural gas was recognized as North America's 'fuel of choice.' In 2010, we witnessed and participated in productive discussion around the issues of energy security, infrastructure and the environmental impacts of energy consumption. While natural gas has long been a key contributor to North America's energy portfolio, it has recently moved to the forefront of public dialogue. Both the U.S. Senate and U.S. House of Representatives have established natural gas caucuses, focused on raising the profile of natural gas and advancing equitable legislative treatment. Similar advocacy efforts are under way in Canada, underlining growing government and private sector support for natural gas.

Natural gas is a fuel whose time has come. We are gratified that it is increasingly viewed as a near-term, viable option to reduce greenhouse gas emissions and deliver affordable and dependable energy to growing markets. Conservative estimates now point to 100-plus years of natural gas supply in North America, and that's good news for you, as an owner in one of the continent's largest, fastest-growing and most reliable natural gas infrastructure companies.

At Spectra Energy, we continue to solidify our position as 'advisor of choice,' providing leadership in numerous business and industry forums to address the energy policy issues and regulation that may affect our industry, our company and our stakeholders. Our employees understand the need to engage and have written thousands of letters to elected officials, citing the virtues of natural gas and urging them to take steps toward energy independence by making natural gas the fuel of choice for North America. Employees also encouraged members of the U.S. Congress to maintain lower taxation on the stock dividends that companies like Spectra Energy pay to investors like you. I want to thank our employees for their willingness to make their voices heard on issues important to our company, industry and future.

Safe and reliable operations

Our license to operate rests with the public's trust in our ability to manage existing assets and construct new facilities to the highest safety standards. Nothing is more fundamental to our success or more compelling to our employees. We'll judge our progress toward the goal of leading our sector by 2012 in safety and reliability on metrics such as achieving top-decile performance in our employee injury frequency rate, and sector-leading performance in compression reliability, line break frequency, and bringing projects into service on time and on budget.

While we're not there yet, I'm pleased with the advances we are making toward our 'zero injury or work-related illness' goal. We achieved a significant overall improvement in our 2010 safety record, with a 30 percent decline in personal injuries among employees. We continue to identify process and performance changes aimed at protecting our employees, the communities in which we operate, and the environment. Although our employee injury numbers improved last year, we still have work to do in terms of reducing the number of vehicle incidents occurring across our business and ensuring that our contractors embrace our safe work practices as their own.

The priority we place on safe, reliable operations is evident in our annual commitment of capital to maintain our existing $17 billion in property, plant and equipment. Since 2007, we've invested more than half a billion dollars annually in maintenance and pipeline integrity. We work hard to ensure our assets are available to meet both the base and peak needs of customers, and in 2010 we achieved more than 99 percent transmission compression reliability across our system.

We pair market responsiveness and resource development with a profound sense of responsibility, and an eye toward long-term sustainability and being a 'partner of choice.' In 2010 we took steps to more closely manage our carbon footprint and reduce the environmental impacts of our operations. For the third consecutive year, Spectra Energy was named to the Dow Jones North America Sustainability Index. We were also named for the first time to the Dow Jones Sustainability World Index and led the energy sector on the 2010 Carbon Disclosure Project's Leadership Index.

Sustainability is also about the way we operate our business and care for the people affected by our operations. From hundreds of stakeholder meetings that help define our projects… to distributing 100,000 free energy saving kits per year to our Union Gas customers… to our annual Helping Hands in Action employee volunteer event – we listen and respond to communities across North America.

Our forward-looking philosophy applies to our employee team, and we commit significant focus to training, development and recruitment efforts to ensure we maintain our human capital advantage. We're working hard to ensure we are the 'employer of choice' for the men and women of Spectra Energy, and in 2010 we achieved a number of significant milestones: Spectra Energy was recognized as one of Houston's Top Workplaces; and Union Gas, our distribution business, was named one of Canada's Top 100 Employers. We were recently named one of Alberta's Top 50 Employers for 2011, and were proud to have our diversity efforts recognized with a 100 percent score on the Human Rights Campaign's 2011 Corporate Equality Index.

Customer responsiveness

We are proud to serve customers and communities across North America, and we measure our customer responsiveness success in terms of contract renewal rates across all our businesses, and connecting new and existing natural gas supply sources to growing markets.

We are connected to both conventional gas supply basins and prolific unconventional gas reserves like the Appalachian Basin's Marcellus, the Horn River and Montney in Western Canada, the Eagle Ford in South Texas and many others. Our businesses in the U.S. and Canada are ideally situated to serve the fastest-growing demand markets in North America, enabling us to move quickly on emerging opportunities.

That focus on being the 'supplier of choice' was evident in 2010, when we placed half a dozen pipeline, storage and processing growth projects into service on time and on budget, for a total investment of more than $900 million. Those facilities, ranging from Northeast British Columbia to Florida, Pennsylvania and Ontario, Canada, will provide returns well above expectations by adding some $200 million a year in new earnings before interest and taxes.

We also solidified our leading natural gas storage position in the Gulf Coast region by acquiring a new storage development that we will build out progressively through 2015. Upon completion, the Bobcat Storage project will provide customers with numerous options to reliably manage their needs in the Southeast U.S. And we reached a significant milestone on our New Jersey – New York project, with the filing of our certificate application late last year with the Federal Energy Regulatory Commission. We continue to make good progress on that important project, which will deliver new, affordable, clean-burning natural gas supplies to consumers in New Jersey and New York.

We see abundant opportunities ahead. Over the next five years we expect to invest at least $1 billion a year to be the 'supplier of choice' for both existing and new customers. Whether it's new infrastructure to serve the growing fleet of natural gas-fired generation in North America or new pipelines to bring domestic natural gas to factories and homes across the continent, Spectra Energy will be there.

Profitability

We know that as Spectra Energy investors, you're keenly interested in our ongoing profitability. We remain dedicated to growing our business and delivering a steady stream of value. I'm pleased by our record in this important area, and by our progress toward being the 'investment opportunity of choice' by leading our sector in profitability

Our profitability metrics are straightforward: deliver a return on capital employed between 10 and 12 percent and rank within our sector's top quintile in total shareholder return. And, we are delivering. As investors, you realized a 2010 total shareholder return of 28 percent, compared with a 15 percent return from the S&P 500 and a 14 percent return from the Dow Jones Industrial Average. Between 2007 and 2010, we've invested $4 billion in capital expansion for an average annual return on capital employed of 14.5 percent. You would be hard pressed to find any of our peers who can match those results. And notably, we offer investors an attractive dividend, and true to our pledge to grow the dividend as we increase earnings, Spectra Energy's board of directors increased our quarterly dividend 4 percent, to 26 cents per share, effective in the first quarter of 2011.

We are exceptionally well positioned financially, with an investment-grade balance sheet, strong ongoing cash flow, ample liquidity and excellent access to capital. Spectra Energy offers investors a number of benefits – benefits detailed in the following pages. But perhaps our greatest appeal is the fact that we profitably deliver an essential product that stands ready to address important societal needs: the need for a reliable, secure, domestic energy source; the need for economic growth; and the need for a cleaner, sustainable environment. We believe today's investors increasingly recognize the long-term value of natural gas and share our commitment to delivering on its tremendous promise. We'll deliver on that promise – and on the goals we've set for 2012 and beyond.

We are grateful to you, our long-term investors, for your ongoing trust and support. We also appreciate the engagement of our chairman and board of directors, who champion your interests every day and inspire our management team to provide the best possible results for you, our investors.

Respectfully,

 

Gregory L. Ebel, president and chief executive officer