By now, Spectra Energy Partners' (NYSE:SEP) earnings results are more or less a formality for investors since parent company Enbridge (NYSE:ENB) announced a deal to acquire all outstanding shares. Unfortunately, Spectra Energy Partners didn't end things with a bang as its earnings were hit with higher-than-normal costs for some maintenance work. Here's a brief look at this most recent quarter and what investors should be expecting in the coming months as the two companies integrate.
Spectra Energy Partners results: The raw numbers
|Metric||Q3 2018||Q2 2018||Q3 2017|
|Operating revenue||$737 million||$726 million||$693 million|
|EBITDA||$556 million||$570 million||$635 million|
|Distributable cash flow||$359 million||$398 million||$363 million|
Natural gas transmission and distribution is a seasonal business, so it's not worth looking too much into differences between this quarter and the prior one. The thing that stands out here is that Spectra's results are actually down compared to the prior year even though earnings were up considerably. According to the company's press release, the decline was a result of a one-time accounting gain of $105 million in related to the value of one of its pipelines.
Management also noted that there were some significant cost increases that ate into cash flow. Even though it brought the NEXUS and TEAL pipelines into service this past quarter, higher operating expenses, pipeline integrity costs, and maintenance capital expenses resulted in lower distributable cash flow and its distribution coverage ratio dipped to 1.0 times compared to 1.2 times in the third quarter of last year.
What management had to say
On the joint conference call for Spectra and the rest of the Enbridge umbrella, CFO John Wheelen explained some of the reasons for the higher-than-usual expenses and why it's more temporary than a continuing concern.
The increase in EBITDA, primarily reflected incremental contributions from organic growth projects that were placed into service over the course of 2017. However, that EBITDA growth did not translate into an increase in ongoing DCF [distributable cash flow] relative to 2017.
It was more than offset by higher maintenance capital and higher interest expense quarter-over-quarter also a small portions of SEP's year-over-year EBITDA growth reflects an allowance for equity during construction book for NEXUS and other small regulated projects undertaken over the last year by our Gas Transmission group, which of course gets eliminated in the determination of DCF. NEXUS and some of these other projects have actually come into service since the end of the quarter and have begun delivering cash flow to the bottom line.
All eyes on merger completion
After Enbridge announced that it would be acquiring all of its subsidiary partnerships back in May, management for both it and Spectra have been noticeably quiet about commissioning new growth projects. Investors have to imagine that management has shied away from sanctioning new pipes or other infrastructure assets because it is preoccupied with the integration.
Enbridge's management said that it expects to close the merger with all four of its subsidiaries by Mid-December, and it has its investor day presentation set for Dec. 11. It's highly likely that we will see management announce several new projects at that time since a lot of its decision making will be based on the combined entity.
This path is pretty much set in stone for Spectra Energy Partners investors, so any investment thesis from here on out has to be based on Enbridge's entire plan and not what Spectra is doing specifically.