Spectra Energy Partners LP’s fourth-quarter results didn’t contain any surprises: The partnership hiked its distribution by 1.95 percent sequentially and 8.4 percent from year-ago levels and generated enough cash flow to cover this higher payout by 120 percent.
During a conference call to discuss the MLP’s 2006-18 financial plan and outlook, management laid out a compelling case for more of the same, fueled by a robust slate of pipeline projects slated to come onstream in 2016 and 2017.
The bulk of these projects involve connecting inexpensive natural gas produced from the prolific Marcellus Shale and Utica Shale to end-users in New England, the Midwest and the Southeast. However, the partnership’s liquids division also plans two expansions to its Express-Platte pipeline system, which runs from Western Canada to the hub in Patoka, Illinois.
About 80 percent of these under-construction projects serve users on the demand side—primarily gas and electric utilities, though refiners have booked 95 percent of the capacity on the liquids pipelines. Given the stable production profile of Canada’s oil sands, favorable differentials and the strength of these contracts, we see little risk to these liquids expansion projects.
Equally important, Spectra Energy Partners’ relatively stable cost of equity and debt capital should enable the partnership to finance these projects at favorable rates that lock in returns of 6 to 8 times cash flow—a superior proposition to the still-elevated valuations in the market for mergers and acquisitions.
Management expects the roughly $700 million in incremental cash flow generated by these projects to enable the MLP to grow its distribution at the familiar rate of $0.0125 per unit each quarter over the next three years. The updated guidance calls for the MLP to cover this payout by a comfortable 1.2 times and its leverage to remain below 4 times cash flow.
Spectra Energy Partners also provided an update on its Access Northeast project, a joint venture with National Grid (NYSE: NGG) and Eversource Energy (NYSE: ES) that will pipe natural gas from the Marcellus Shale and connect with about 60 percent of New England’s gas-fired power plants.
The project recently secured agreements with two utilities in Massachusetts that will cover 40 percent of the capacity, and management indicated that additional contracts are falling into place. During Spectra Energy Partners’ fourth-quarter earnings call, management openly invited Kinder Morgan (NYSE: KMI) to participate in the project instead of moving forward with its competing Northeast Direct project.
Given the regulatory challenges in the Northeast and Spectra Energy Partners’ superior cost of capital and financial condition, consolidating these projects would make a great deal of sense for all parties involved.
Management also highlighted longer-term opportunities delivering natural gas to Mexico and expanding its NEXUS pipeline, which will transport Appalachian natural gas to local distribution companies and electric utilities in Ohio, Michigan and Ontario.
Whereas natural gas accounts for about 12 percent of the generation market in the Midwest today, the planned transition from coal-fired power plants to gas-fired facilities will increase this share to 40 percent. Serving this growing demand represents a huge opportunity for Spectra Energy Partners.
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Elliott and Roger on Aug. 31, 2020
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