I have owned SEP for several years, making my first purchase in mid-2012 with share prices at $31 and a quarterly dividend of $0.48 ($1.92 annually). Shares now trade at $46 and the quarterly dividend is $0.64 ($2.56 annually). This represents an increase in income of 35% and capital appreciation of 48% over the past 4 years.
Spectra Energy Partners is one of the largest pipeline MLPs with assets including more than 15,000 miles of transmission and gathering pipelines, approximately 170 billion cubic feet of natural gas storage, and approximately 4.8 million barrels of crude oil storage. SEP is a MLP spin-off of Spectra Energy (SE), a natural gas utility. SE is the General Partner and the parent with about $6 billion in projects under construction that will eventually drop down to SEP, fueling SEP’s continued growth. SE has identified an additional $20 billion in projects that could move forward by the end of the decade. With a market cap of $13 billion, SEP is the 9th largest US pipeline company, and has strong exposure to the growing footprint in the Marcellus shale, the US’s most prolific gas play.
SEP’s network of interconnecting gas pipelines connects several major gas fields with substantial user markets. The core of SEP's gas pipeline system is Texas Eastern Transmission, a massive pipeline that can move 10% of U.S. gas consumption and which runs from the Gulf Coast to New York, directly through the heart of the Marcellus. SEP also owns Algonquin Gas and the Maritimes and Northeast Pipeline, providing gas to New England along with 50% of Gulfstream, one of the major gas pipes into Florida. The key and unique feature to this pipeline system is that all of Spectra's gas pipelines are interconnected. Utilization on the pipes is high and all pipelines generate fixed-fee cash flow from long-term contracts, making SEP one of the most stable cash generators in the MLP sector.
SEP is one of the few MLPs that acts as a pure tollbooth operator--it has no commodity price exposure, and about 95% of its income stems from long-term capacity contracts. The average term of its contracts remaining is between 9 and 10 years. In the current low gas price environment, many MLPs are struggling with their commodity exposure.
Over the past 5 years, SEP has greatly outperformed its peers as calculated by the total return of the Alerian MLP Index. A $100 invested in SEP on Jan 1 2011 would have been worth $188 as of last Dec vs $107 for the Alerian MLP Index and $180 for the S&P 500.
However, as with most MLPs, SEP pays a pretty penny to SE for General Partner services. Typically compensated by Incentive Distribution Rights, or IDRs, SEP pays its general partner fees based on cash available for distribution, with incentive thresholds along the way. SEP currently pays a fee equal to a maximum of 50% of distributable income over $0.45 per share per quarter. This will total about $300 million in 2016 and is expected to rise to $475 million in 2018, and represents General Partner payments increasing from $1.00 per SEP share in 2016 to $1.58 in two years.
While typical in the industry, it is important for investors to appreciate the payments going to the General Partner. Owning both the MLP and the General Partner is an approach I utilize to take advantage of lucrative IDRs.
Income investors seeking a reasonable 5.5% yield with the tax advantages of a MLP should review SEP if it is not already in the portfolio. The quality of its assets, the growth platform as laid out by management, and the lack of commodity exposure should make Spectra Energy Partners a quality, long-term investment selection.
This article first appeared in the July issue of Guiding Mast Investments. Thanks you for reading. George Fisher