Spectra Energy Corp.'s Aggressive Expansion in Demand-Based Markets Helps Beat Estimates

But a greater-than-expected weakness in the Canadian dollar drags down profits.

Isac Simon
Isac Simon
Nov 4, 2015 at 1:32PM
Energy, Materials, and Utilities

Diversified midstream major Spectra Energy Corp. (NYSE:SE) today reported ongoing, or adjusted, EPS of $0.23 for the third quarter of 2015, modestly beating consensus I/B/E/S estimates of $0.22 per share. As expected, the company's majority-owned master limited partnership, Spectra Energy Partners (NYSE:SEP), powered growth. However, a greater-than-expected weakness in the Canadian dollar wiped out nearly all the gains, thus pulling down overall profits by nearly 10% year over year.

Segment performance
The Houston-based Spectra Energy continued to bring expansion projects into service ahead of schedule in a challenging oil market. Much of its fundamental growth can be attributed to projects that cater to increased demand in the end-user energy markets, which remained strong. As a result, distributable cash flows came in at $223 million, a modest 6% drop from last year's third quarter.

But before we go into the details, let's take a look at how each of the segments performed versus the previous quarter as well as last year's third quarter:


Q3 2015 Adjusted EBITDA (in millions)

Q2 2015 Adjusted EBITDA (in millions)

Q3 2014 Adjusted EBITDA (in millions)

Quarter-over-quarter change

Year-over-year change

Spectra Energy Partners












Western Canada T&P






Field Services


















Source: Spectra Energy earnings releases.

Spectra Energy Partners continued to be the star performer, growing adjusted EBITDA by 15.6% year over year and 2.1% sequentially. Natural gas and liquids transmission volumes grew, thanks to expansions put into service as well higher volumes and tariffs on the Express Pipeline.

The distribution segment, which carries natural gas from local supply stations to residential, commercial, and industrial customers in Canada, saw profits fall by 15% year over year. A weak Canadian dollar continued to wreak havoc despite customer growth. Even more badly hit was the Western Canada Transmission and Processing division, where adjusted EBITDA fell 25%, primarily due to the falling Canadian dollar.

Field services in the form of Spectra's 50% equity interest in DCP Midstream reported negative earnings of $29 million, down from $63 million a year ago. Since DCP Midstream's assets -- through its MLP, DCP Midstream Partners -- are exposed to commodity price swings, a low price environment ensured a loss. 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, of which $2.2 billion is at Spectra Energy Partners. With total available liquidity of $3.4 billion at the end of the third quarter, the company should be able to comfortably fund its projects.

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 $9.6 billion -- with $1.4 billion in the third quarter alone -- into service and is contributing to incremental EBITDA. Moreover, projects worth $8.6 billion are 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.

Foolish takeaway
Spectra Energy's low-risk business should ensure that dividends will remain safe. Its annualized dividend of $1.48 per share is well covered by generated distributable cash flows of $1.60 per share in the first three quarters this year. It's a testimony to the business's underlying strength, thanks to long-term, fee-based contracts in place protecting its biggest segment. In addition, the company benefits from its general alignment to strong demand-based markets and lower exposure to supply-side commodity prices.