Spectra Energy Partners Might Have Found a Loophole in New Power Rules

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One of the crown jewels of Enbridge's (NYSE: ENB) portfolio of subsidiary master limited partnerships is Spectra Energy Partners (NYSE: SEP). This past quarter, the MLP announced its 40th consecutive quarterly payout increase and delivered financial results that confirm the company can deliver even in the face of some project delays.

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Here's a quick peek at Spectra's most recent results and a unique opportunity popping up thanks to some potential regulations that could have a significant impact on the bottom line. 

By the numbers

Metric Q3 2017 Q2 2017 Q3 2016
Operating revenue $693 million $695 million $628 million
EBITDA $635 million $519 million $431 million
EPS $1.15 $0.75 $0.64
Distributable cash flow $363 million $341 million $313 million

As good as Spectra Energy Partners' recent quarter was, it's a little hard to believe that it achieved a 91% EBITDA margin on its revenue this past quarter. Digging into the numbers, management said it received a $106 million gain from a fair value remeasurement of its Sabal Trail pipeline, which is a one time, non-cash gain that doesn't impact cash flows. Without that gain, EBITDA would have been about $529 million, which puts it much more in line with the prior quarter.

Almost all of the gains for this quarter came from Spectra Energy Partners' natural gas transmission segment. Segment ongoing EBITDA -- that doesn't include the Sabal Trail gain -- was $505 million, a 17% gain from this time last year. Almost all of those gains came from new assets going into service. These gains allowed management to reaffirm its distributable cash flow guidance. Management expects its distribution coverage ratio to end the year in the 1.05x -1.15x range for 2017.

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Now that the Federal Energy Regulatory Commission has enough members on its council to approve projects, Spectra received certificates for its NEXUS and TEAL expansion project and final approval for Nexus in October. However, a long backlog of projects at FERC means that the company has reduced its 2017 capital budgets for these two projects and expect them to be completed slightly later than originally expected. Combined, these two projects represent $1.5 billion in construction backlog for Spectra.

A loophole in new electricity regulations?

The electricity market has been a hot-button political topic as of late as the current administration is looking to preserve existing power generating assets such as coal and nuclear. One way they are doing so is with a proposed rule known as the grid resiliency rule. This regulation would provide cost recovery support for power generating assets that are "able to provide essential energy and ancillary reliability services and have a 90-day fuel supply on site in the event of supply disruptions." As it stands today, only coal and nuclear plants can fit that narrow definition, but some natural gas-fired generators are fighting back, and Spectra could benefit immensely. 

Spectra recently completed an open season for its Texas Eastern Enhanced Electric Reliability project. The goal of the project is to provide enhanced natural gas transportation and storage services for its Texas Eastern pipeline. Since that announcement, the company has received interest from several of the 70 or so plants connected to the pipeline that could benefit from this Department of Energy proposal by adding on-site storage. Spectra's management has yet to put a dollar figure to these upgrades, but it is a project worth watching because it could be a workaround for many natural gas power plants to benefit from this rule that wasn't intended to help natural gas facilities.

What management had to say

While Spectra's most recent financial performance was worth celebrating, Chairman and President Bill Yardley's press release statement suggested that we should expect even better results soon. 

We are on track to place more than $2 billion of projects into service in 2017 which will support our continued stable cash flow generation for investors. Most notably, Sabal Trail was placed into service on-time and on-budget in July and we are bringing three additional projects into service in November -- Access South, Adair Southwest and the initial phase of Atlantic Bridge. We are also pleased to have FERC approval for the NEXUS project, which is now under construction and scheduled to come into service in third quarter 2018.

What a Fool believes

Spectra Energy Partners results have been remarkably consistent, which has to be a relief for Enbridge as it has had to restructure its other subsidiary partnerships and cut distributions. Management at Enbridge has hinted at reevaluating the structure of the business and its various subsidiary partnerships to enhance value. Considering how well Spectra Energy Partners has performed while the others flounder, investors in Spectra have to hope that management doesn't use the strength of Spectra to prop up the performance of its other businesses. 

With several new projects now in service, it should provide enough of a boost to cash flow to allow the company to continue its streak of quarterly distribution increases for a while. That is even more important as it looks like NEXUS, TEAL, and other projects still under FERC evaluation may take longer than initially anticipated. 

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Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool has a disclosure policy.