DBRS Confirms DCP Midstream at BBB and R-2 (middle)

DBRS has today confirmed the Unsecured Notes and Commercial Paper ratings of DCP Midstream, LLC (DCP or the Company) at BBB and R-2 (middle), respectively, both with Stable trends. The confirmations reflect the stand-alone nature and credit quality of DCP, which is owned 50% each by Spectra Energy Corp (owner of Spectra Energy Capital, LLC, rated BBB (high) by DBRS) and ConocoPhillips (rated “A” with a Positive trend by DBRS).

The rating is supported by DCP’s diverse asset base located in the major U.S. natural gas producing regions and its position as one of the largest natural gas liquids (NGL) producers and one of the largest gas gatherers and NGL marketers in North America. DCP benefits from economies of scale, which allows it to be a low-cost provider of gathering and processing and other services, thereby mitigating declines in any particular market.

Despite considerable growth in DCP’s profitability between 2004 and 2008, the Company’s rating has been constrained by the significant volatility of its earnings and cash flow (largely due to energy price exposure), as well as DBRS’s expectation that the Company might manage its consolidated balance sheet leverage to higher levels than previously. Despite continued strong earnings in 2007-2008, some deterioration in credit measures (although remaining at acceptable levels) was evident during the period, as distributions to partners exceeded cash flow despite higher capex and acquisitions. Consequently, total debt-to-capital rose to 65% in 2008 from 48% in 2006 on a consolidated basis before improving slightly to 62% at March 31, 2009. Over the same period, DCP’s total debt-to-EBITDA and EBITDA interest coverage ratios weakened from 1.3 times and 10.6 times, respectively, in 2006, to 1.9 times and 8.7 times, respectively, in 2008, and to 3.9 times and 4.0 times in Q1 2009.

Based on DCP’s forecast parameters (including crude oil, natural gas and NGL prices forecast to average $55 per barrel, $6 per MMBtu and $0.79 per gallon, respectively, and a 60% NGL-to-WTI price relationship), DBRS estimates that while DCP’s consolidated total debt-to-capital ratio remains at 62% at year-end 2009, total debt-to-EBITDA rises to 3.2 times and EBITDA interest coverage ratio falls to 4.3 times in 2009, which would compare unfavourably with 2008 levels (1.9 times and 8.7 times, respectively) and favourably with Q1 2009 levels (3.9 times and 4.0 times, respectively). Based on these assumptions, the Company would have limited scope to add significant debt to its balance sheet during 2009 at the current rating. These credit metrics could deteriorate further based on current energy prices, although the Company could reduce capex to maintenance levels and eliminate distributions to partners (as in Q1 2009) to mitigate the consequences of this scenario. Continued volatility in key credit measures is expected given the relatively low proportion of fee-based contracts (which account for 15% of forecast gross margin in 2009, compared with 8% in each of 2006 to 2008) and the lack of a significant hedging program.

At March 31, 2009, DCP held a 30.1% interest in DCP Midstream Partners, LP (DCP MLP) through 1.3% general partner (GP) and 28.8% limited partner (LP) interests. Despite its minority ownership position, DCP is required to consolidate its interest in DCP MLP due to its GP interest, although the impact on consolidated cash flow is relatively small (5% in 2008). Despite the foregoing, DCP MLP’s $645 million of debt, although non-recourse to DCP, represented 18% of the latter’s $3.7 billion of consolidated total debt at March 31, 2009. Consequently, DCP’s consolidated credit metrics are distorted by the accounting methodology, and DBRS believes that non-consolidated credit metrics (i.e., treating DCP MLP on an equity accounting basis) are a more meaningful basis upon which to evaluate the Company’s financial profile.

On a non-consolidated basis, the reduction in credit ratios during 2007-2008 was more modest. Total debt-to-capital rose to 64% in 2008 from 45% in 2006 before improving slightly to 60% at March 31, 2009. Over the same period, DCP’s non-consolidated total debt-to-EBITDA and EBITDA interest coverage ratios weakened from 1.2 times and 11.1 times, respectively, in 2006, to 1.7 times and 9.6 times, respectively, in 2008. DBRS estimates that these ratios deteriorated to 3.9 times and 3.8 times, respectively, in Q1 2009, largely due to sharply lower energy prices.

However, DBRS expects DCP’s credit metrics to remain within the parameters of the current ratings over the medium term in the absence of substantial debt-financed acquisition activity. DBRS believes that the level of growth capex and distributions to the partners would be adjusted over time to reflect the level of free cash flow generated by the business in order to maintain reasonable credit measures.

DCP faces a large direct maturity ($800 million) in August 2010, representing approximately 26% of its $3.0 billion of direct debt. While this amount is material, DCP should be able to re-finance this obligation based on the significant amount of cash flow generated before growth capex and distributions to its owners. In February 2009, DCP issued $450 million of 9.75% senior notes due March 2019, with part of the proceeds used to repay outstanding amounts under its credit facilities. DCP currently has sufficient liquidity to meet its obligations.

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

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.

This is a Corporate rating.