Spectra Energy Beats Estimates, Has Ambitious Growth Plans to Keep Distributions Strong

Midstream major Spectra Energy (SE) today reported ongoing, or adjusted, EPS of $0.23 for the second quarter of 2015, beating consensus estimates of $0.18 comfortably. More important, the Houston-based company reported adjusted EBITDA of $652 million, a 4% jump from last year's second quarter.

While the increase sounds modest, it must be seen in perspective. Challenging conditions in the oil and gas market seemed to have had minimal impact on Spectra Energy. Here's what CEO Greg Ebel had to say:

Our ongoing earnings not only exceeded our results for the same quarter last year, they exceeded our own expectations. Even in a challenging energy market, Spectra Energy's business mix continues to demonstrate its ability to generate solid earnings and cash flows, allowing us to drive value for our investors through the ongoing growth in our dividend.

Segment performance
Speaking of business mix, the company's master limited partnership, Spectra Energy Partners (SEP), delivered a solid quarter, which helped boost overall results, with the Western Canada division also contributing to growth, albeit modestly. Here's a breakdown of the operating segments with a comparison to last year's performance:

Source: Spectra Energy Q2 2015 earnings presentation.

Spectra Energy Partners grew its earnings by a solid 27% year over year primarily due to expansion projects coming on line. Additionally, higher liquids transmission, as well as higher tariffs on the Express and Sand Hills pipelines, resulted in higher transportation revenues. Here, it's also worth mentioning that 15 more projects are currently under execution and are expected to come into service by the end of 2020, which gives the MLP huge scope for growth. Management estimates that these projects will provide incremental EBITDA to the tune of $800 million -- nearly double the current earnings.

The Distribution segment's earnings fell almost 13% largely due to a lower Canadian dollar in the second quarter. Four projects are currently under execution in this segment.

Western Canada transmission and processing reported a modest 3% increase in EBITDA, thanks to higher earnings at its natural gas liquids processing plant in Empress, Alberta. But a lower Canadian dollar neutralized most of the gains.

Field services, which includes Spectra's 50% joint venture in DCP Midstream and DCP Midstream Partners, reported negative earnings of $27 million, down from $54 million a year ago. This is the only segment with a direct exposure to commodity prices and, therefore, a loss isn't too surprising.

For 2015, total capital expansion spending is pegged at $2.8 billion, which the company should comfortably meet, thanks to total available liquidity of $3.5 billion at the end of the second quarter.

Outlook: Expansion is the name of the game
But more than concentrating on quarter-to-quarter results, management is primarily focused on its ambitious expansion projects. Securing a backlog of projects worth $35 billion and executing them by 2020 is management's biggest priority right now. So far, this approach seems successful. Spectra has already brought projects worth $8.2 billion -- with $600 million in the second quarter alone -- into service and they are contributing to incremental EBITDA. Moreover, projects worth $9.6 billion are currently under execution.

The rest of the projects are still on the drawing board, and investors should get an update as more projects are moved into the execution stage.

Source: Spectra Energy Q2 2015 earnings presentation.

Foolish takeaway
Spectra Energy's distributable cash flow looks safe, with coverage ratio exceeding 1.7 times for the first half of 2015. For the full year, management expects coverage ratio to top 1.2 times. Given Spectra's ambitious expansion plans, incremental EBITDA from projects coming online should comfortably cover Spectra's distributable cash flow.