Master Limited Partnerships are a popular choice for income investors. It is easy to see why, as MLPs commonly sport high dividend yields.

There are many MLPs listed among the 295 stocks with 5%+ dividend yields.

One of them is Spectra Energy Partners (SEP), which offers a 6% dividend yield. Not only that, but the company has also increased its dividend for 38 quarters in a row.

And, thanks to the recent merger of Spectra’s general partner with another huge North American energy company, there should be future dividend increases in store.

Spectra has raised its dividend payout each quarter, going back nearly 10 years. This period includes the Great Recession, as well as the current downturn in oil and gas prices.

By next year, Spectra could become a Dividend Achiever, a group of 264 stocks with 10+ years of consecutive dividend increases.

This article will discuss what separates Spectra from the rest of the MLP pack.

Business Overview

Spectra Energy Partners is a midstream company, meaning it operates oil and gas storage and transportation assets. Its assets include more than 15,000 miles of pipelines, and storage capacity of 170 billion cubic feet of natural gas, along with 5.6 million barrels of crude oil.

On Feb. 27, Spectra Energy Corp (SE) finalized its merger with energy giant Enbridge Inc. (ENB). Spectra Energy Partners’ general partner, SE, became an indirect, wholly-owned subsidiary of Enbridge, but SEP still trades independently.

Each share of SE common stock was converted into 0.984 shares of Enbridge. The merger creates a huge company, with a combined enterprise value of $126 billion.

It brought together Enbridge’s midstream assets from Western Canada and the U.S Midwest, with and Spectra’s gas midstream assets.

(Click on image to enlarge)

Source: Q3 Presentation, page 3

The merged company has $74 billion in secure projects and inventory. By 2019, the company is expected to start up $26 billion worth projects.

Not much changes for SEP investors. The company has continued to perform well, thanks to its strong assets.

Diluted earnings-per-unit declined 7% in 2016, but the company still earned more than enough to cover its dividend.

Spectra operates two core segments:

• U.S. Transmission (88% of 2016 EBITDA)
• Liquids (12% of 2016 EBITDA)

The U.S. Transmission segment performed better than the Liquids business last year, which helps since it constitutes the vast majority of Spectra’s EBITDA.

U.S. Transmission segment EBITDA increased 6.8% for the year. This helped offset a 16% decline in the Liquids segment.

The growth seen last year reflects increased earnings from expansion projects placed into service. Spectra’s future growth will also be the result of new projects.

Growth Prospects

Spectra spends aggressively on capital expenditures. Total capital and investment spending was $1.8 billion last year, and consisted of $1.5 billion of growth expenditures, and approximately $268 million of maintenance spending.

Growth expenditure should pave the way for future cash flow increases, since many of these projects are ramping up.

For example, in 2016 Spectra placed six projects into service, representing nearly $1.5 billion of capital expenditure.

(Click on image to enlarge)

Source: Q3 Presentation, page 12

Going forward, Spectra maintains equally ambitious plans for expansion.

The major projects set to ramp up in 2017 include Sabal Trail, The Access South, Adair Southwest, and Lebanon Extension projects, and the Gulf Markets Expansion project.

In 2018 and 2019, Spectra plans to complete the STEP and Stratton Ridge projects, respectively.

Spectra management maintains that its growth projects have no direct commodity exposure. As fee-based midstream assets, Spectra earns cash based on volumes transported, which is not directly related to the underlying commodity price.

This helps insulate Spectra from a potential downturn in oil prices in 2017, just as it did in 2014-2015.

Dividend Analysis

Spectra has an attractive dividend payout. The company recently raised its dividend to $2.805 on an annualized basis.

Based on its current share price, the stock has a 6.4% current dividend yield. This is roughly triple the average dividend yield of the S&P 500 Index.

As a result, it is easy to see why Spectra Energy is enticing as an income investment. It also offers the added benefit of reliable dividend growth.

The company has raised its dividend for 38 consecutive quarters. Spectra forecasts approximately 7% dividend growth in 2018.

Future dividend increases are likely, as Spectra maintains a comfortable payout ratio.

Spectra generated $1.2 billion of distributable cash flow in 2016, about even with the previous year. Its distributable cash flow covered its distribution during the year by approximately 1.2 times.

If distributable cash flow continues to grow, which seems likely due to new projects, the company could pass along small dividend increases each quarter.

Of course, the company needs to maintain good financial condition to accomplish this. The MLP model is heavily reliant on external capital to finance major growth prospects.

Taking on too much debt is what got many MLPs in trouble when commodity prices fell, which forced so many dividend cuts over the past year.

Spectra Energy raised $800 million last year through debt offerings, and another $579 million in proceeds from equity issuances.

Fortunately, the company is not extremely over-leveraged. It ended 2016 with $7.2 billion in net debt outstanding.

At the same time, Spectra generated $1.8 billion of EBITDA during the year, for a reasonable debt-to-EBITDA ratio of 4.0. This is within a relatively healthy range for an MLP.

It also has investment-grade credit ratings, of ‘BBB’ and ‘Baa2’ from Standard & Poor’s and Moody’s, respectively. This helps keep its cost of capital low, and adds another margin of safety to the dividend.

Final Thoughts

Spectra believes its combination with Enbridge will create an industry powerhouse, capable of realizing massive operational and tax synergies.

Thanks to the merger, Spectra management forecasts 8% dividend growth in 2018, along with 15% 10%-12% annual dividend growth through 2024, due to significant expected growth in distributable cash flow.

Of course, there is no guarantee Spectra will meet these aggressive targets, but it at least helps that it will not need high oil and gas prices to do so.

The company’s growth is more dependent upon its ability to place its projects into service. If it is successful, Spectra could be a very attractive investment for its high yield and dividend growth potential.