One of the reasons Enbridge (ENB 0.95%) decided to merge with Spectra Energy Partners' (SEP) parent company was the impressive asset portfolio and growth prospects of the subsidiary partnership. If there was anything that could prevent the company from realizing its potential, it was the ownership structure in place that made it harder to grow.
This past quarter, Spectra Energy Partners and Enbridge addressed that problem with a significant change to its ownership structure. So let's look at Spectra Energy Partners' most recent quarterly results, as well as what this change will mean for the company's future.
Spectra Energy Partners' results: The raw numbers
|Metric||Q4 2017||Q3 2017||Q4 2016|
|Operating revenue||($138 million)||$693 million||$663 million|
|EBITDA||($322 million)||$635 million||$474 million|
|Distributable cash flow||$332 million||$363 million||$271 million|
As has been the case with so many other companies this past quarter, Spectra's results were heavily skewed by the changes to the U.S. tax code. In Spectra's case, the company had to write down $854 million in its cost of services for its regulated assets and how it can charge for those assets. It was a non-cash charge, though, so it didn't affect operations or cash flow. If we take out that charge, Spectra's EBITDA for the quarter was $532 million.
Also, because of these special charges, it's harder to determine how this quarter stacks up against the prior quarters. Management noted that segment EBITDA for its U.S. natural gas transmission assets was higher on an ongoing basis compared with the previous year and that its distribution coverage ratio on an ongoing basis was 1.2, but that includes other adjustments on top of the asset writedowns and aren't the same as previously reported numbers.
Gonna be some changes made
In all, it was a rather routine quarter for the company. What wasn't routine, though, was the announcement during the fourth quarter that Spectra and Enbridge had agreed to change their ownership structure. According to the press release, Enbridge will exchange its general partnership shares and the incentive distribution rights that come with it for 172.5 million common units worth about $7.2 billion. With the completion of the deal, Enbridge will own 83% of Spectra's common units.
Enbridge and Spectra aren't the first to do this, as several parent companies have announced similar moves to exchange their general partner stakes for common units. The underlying theme for all of these moves has been to improve the cost of capital for the subsidiary partnerships. When master limited partnerships grow under the general partner/limited partner structure, the general partner gets a larger and larger cut of the quarterly distributable cash flow because of those incentive distribution rights.
So when a company wants to raise capital by issuing shares, the cost of capital includes the distribution to the common unit and the cut for the incentive distribution right. By eliminating those rights, the cost of capital is lower and therefore it becomes easier to raise funds by issuing equity.
What management had to say
Here's Spectra President Bill Yardley's press release statement on the company's most recent quarterly result and the impact of the ownership change between Spectra and Enbridge.
Our 2017 results reinforce the strength and stability of our fee-based business model and exceptional asset footprint, which delivered strong operational performance and achieved top delivery days across our major U.S. pipelines over the recent winter period. We continue to create value for our investors now and into the future, as demonstrated by the recent announcement of our 41st consecutive quarterly distribution increase.
We also are pleased to have successfully completed the elimination of SEP's incentive distribution rights, which enhances SEP's long-term value proposition and better positions SEP for extended growth.
The writing was on the wall for this corporate change for quite some time. Management had previously hinted at the probability of making this kind of move, and it appears that many on Wall Street are rightfully pushing back on companies with this general partner/limited partner structure. With Enbridge now owning the same kind of shares as every other investor -- a lot of them -- it brings management's incentives more in line with its public investors.
Spectra has had an impressive track record of delivering distribution growth while maintaining financial discipline. With this corporate change, it should help the company maintain that track record further into the future.