DBRS Confirms DCP Midstream, LLC 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 (Spectra, owner of Spectra Energy Capital, LLC, rated BBB (high) by DBRS) and ConocoPhillips (COP, rated “A” by DBRS).

The ratings are supported by DCP’s diverse asset base located in nine 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, partly mitigating declines in any particular market.

Despite considerable growth in DCP’s profitability between 2004 and 2008, the Company’s ratings were 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 employed. These concerns were realized with the significant deterioration in DCP’s credit metrics, reflecting the sharp decline in energy prices that commenced during Q3 2008. Total debt-to-capital rose from 48% at year-end 2006 to 65% at year-end 2008 before improving to 61% at year-end 2009. DCP’s consolidated cash flow-to-debt, total debt-to-EBITDA and EBITDA interest coverage ratios (23%, 3.8 times and 3.6 times, respectively) were much weaker in 2009, well below the levels implied by DCP’s February 2009 earnings guidance (25%, 3.2 times and 4.3 times, respectively).

Based on DCP’s forecast parameters (including crude oil, natural gas and NGL prices forecast to average $80 per barrel, $5.50 per MMBtu and $0.95 per gallon, respectively, and a 50% NGL-to-WTI price relationship), DBRS estimates DCP’s consolidated total debt-to-capital ratio at 60% at year-end 2010, cash flow-to-debt of 32%, total debt-to-EBITDA of 2.6 times and EBITDA interest coverage ratio of 5.5 times in 2010, which would compare favourably with 2009 levels (61%, 23%, 3.8 times and 3.6 times, respectively) and Q4 2009 levels (61%, 29%, 2.7 times and 4.6 times, respectively). These credit metrics could be weaker than forecast 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 metrics is expected given the relatively low proportion of fee-based contracts (which entail volume risk and account for 14% of forecast gross margin in 2010, compared with 13% in 2009) and the lack of a significant hedging program.

At year-end 2009, DCP held a 35% interest in DCP Midstream Partners, LP (DCP MLP) through 1% general partner (GP) and 34% 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 increased significantly (17% in 2009 from 5% in 2008) as DCP MLP’s cash flow was protected by hedges unlike DCP’s non-consolidated cash flow. DCP MLP’s $613 million of debt, although non-recourse to DCP, represented 17% of the latter’s $3.6 billion of consolidated total debt at year-end 2009. 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 deterioration in credit ratios during 2006-2009 was similarly significant. Total debt-to-capital rose from 45% in 2006 to 64% in 2008 before improving slightly to 62% at year-end 2009. Over the same period, DCP’s non-consolidated cash flow-to-debt, total debt-to-EBITDA and EBITDA interest coverage ratios weakened from 75%, 1.3 times and 10.6 times, respectively, in 2006, to 23%, 3.7 times and 3.4 times, respectively, in 2009. DBRS estimates that these ratios improved to 28%, 2.7 times and 4.3 times, respectively, in Q4 2009, as energy prices improved.

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.

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

The applicable methodology is General Rating Methodology for Non-Financial Companies, which can be found on our website under Methodologies.

This is a Corporate rating.