DBRS Confirms Duke Energy Field Services, LLC at BBB & R-2 (middle)

Dominion Bond Rating Service (DBRS) has today confirmed the Unsecured Notes and Commercial Paper ratings of Duke Energy Field Services, LLC (DEFS or the Company) at BBB and R-2 (middle), respectively. The trends remain Stable.

The confirmation reflects the standalone nature of DEFS, and incorporates the pending change in its ultimate ownership as outlined below. Currently, DEFS is owned 50% each by Duke Energy Corporation (DUK) and Conoco Phillips (COP). In June 2006, DUK announced that it would pursue a plan to create two separate publicly traded companies by spinning off, on a tax-free basis, its natural gas businesses (including a 50% interest in DEFS) to DUK shareholders. Following the spinoff, Duke Capital LLC (a DUK subsidiary that holds the DEFS interest) would become a direct, wholly owned subsidiary of a newly formed natural gas company named Spectra Energy Corp. (Spectra) effective January 2, 2007. Subsequently, DEFS (which will be renamed DCP Midstream, LLC), will be owned 50% each by Spectra and COP.

In December 2005, DEFS closed an initial public offering (IPO) of common units of DCP Midstream Partners, LP (DCP MLP), a master limited partnership formed by DEFS. In conjunction with the IPO, DEFS sold certain of its midstream assets to, and retained an initial 42% interest in, DCP MLP through 2% general partner (GP) and 40% limited partner (LP) interests. Net proceeds of $206 million were generated by the IPO, for assets that generated about $50 million of EBITDA in 2005 (3% of DEFS’s total). Despite its minority ownership position, DEFS is required to consolidate its interest in DCP MLP, although the impact on earnings, cash flow and balance-sheet leverage is very small. (Total debt-to-capital ratio at September 30, 2006, was 40.3% on a deconsolidated basis compared to 42.6% on a consolidated basis.) DEFS will receive ongoing cash distributions from its GP and LP interests (total cash distributions to public unitholders during the first nine months of 2006 was approximately $14 million). DCP MLP intends to provide stable cash flow from fee-based operations, with any commodity price exposure largely hedged. Anticipated growth at DCP MLP, largely through acquisitions (including from DEFS) would provide ongoing cash distributions to DEFS with an opportunity to earn incentive distributions in the future.

DEFS’s credit measures have improved considerably since year-end 2002, largely due to debt reduction and improved profitability. The Company’s debt-to-capital ratio has been managed in the low-to-mid-40% range since year-end 2003, while return on equity rose to 45% from -1% over the same period. DBRS expects the debt-to-capital ratio to remain in the low-to-mid-40% range, which is reasonable for the current credit ratings, although moderately aggressive for operations with significant commodity price exposure. DEFS has some operational flexibility to manage gas price spikes, despite 80% to 90% of its gross margin being exposed to volatile energy prices at current high levels.

Given its large balance of cash and short-term investments ($874 million at September 30, 2006), DEFS has ample liquidity to meet its obligations. Despite its underlying volatility, cash flow has consistently been more than sufficient to fund capex, equity investments and working capital changes. DBRS believes that the level of distributions to the partners is likely to be adjusted over time to reflect the level of free cash flow generated by the business. DEFS maintains a degree of financial flexibility through its ability to temporarily reduce capital expenditures without impairing operational performance. In addition, EBITDA interest coverage, which reached a trough of 3.2 times in 2002, remains reasonable over the cycle, rising to high levels under strong industry conditions. DBRS expects that DEFS will be able to refinance the $800 million of direct debt (almost 50% of consolidated debt) due in 2010 without difficulty.

Note:
All figures are in U.S. dollars unless otherwise noted.