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Spectra Energy’s Capital Projects Should Fuel Its Dividend Growth

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Spectra Energy’s distributable cash flows

Spectra Energy’s (SE) distributable cash flow for 3Q15 was $223 million, compared with $236 million in 3Q14. The year-over-year fall in distributable cash flow is primarily attributed to low commodity prices and the weak Canadian dollar. Nearly 60% of Spectra Energy’s 2014 revenues came from its Canadian operations.

Distributable cash flow is broadly calculated by subtracting interest, tax, and maintenance capital expenditures from EBITDA (earnings before interest, tax, depreciation, and amortization).

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The above graph shows Spectra Energy’s distributable cash flows, total capital expenditures, and dividends over the last two years. The right axis shows SE’s per-share dividends. As seen in the graph, Spectra Energy’s distributable cash flows are seasonally low in the second and third quarters, as is generally the case with companies involved in the natural gas business.

Spectra Energy forms ~1.2% of the Vanguard Energy ETF (VDE) and ~1.1% of the iShares North American Natural Resources ETF (IGE).

SE’s capital expenditures

Spectra Energy’s capital expenditures for the nine months ending September 30, 2015, were $1.9 billion compared to $1.7 billion for the same period last year.

Greg Ebel, chief executive officer of Spectra Energy, said in the company’s 3Q15 earnings release, “We continue to demonstrate our execution advantage, placing expansion projects into service early or on schedule. In fact, the expansion projects we are putting into service in 2015 are set to contribute $135 million in annual EBITDA for the company.” Spectra Energy’s expected EBITDA growth should drive its dividend growth in the future.

Spectra Energy’s dividends

Spectra Energy has not raised its per-share dividends in four quarters. As the above graph shows, Spectra Energy’s total dividends were higher compared to its distributable cash-flows in 3Q15 for the first time over the last two years. This resulted in a coverage ratio of less than one for the quarter.

A company’s dividend coverage is the ratio of its distributable cash flow to total dividends. A ratio below one indicates that the company is distributing more cash than it is generating, which can’t continue for long.

The company’s seasonally low performance resulted in a ratio of below 1 for 3Q15. SE’s estimated coverage ratio for the whole of 2015 is 1.2x, and its results are in-line with this target.

Kinder Morgan (KMI), Williams Companies (WMB), and Enterprise Products Partners (EPD) have raised their 3Q15 dividends by 4.1%, 8.5%, and 1.3%, respectively, compared to the previous quarter.

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