DBRS Confirms Spectra Energy Capital, LLC at BBB (high) and R-2 (high), Stable

DBRS has today confirmed the Unsecured Debentures and Commercial Paper ratings of Spectra Energy Capital, LLC (Spectra Capital or the Company) at BBB (high) and R-2 (high), respectively, both with Stable trends. The rating actions incorporate DBRS’s expectation that Spectra Capital’s significant capex program (projected to be $2.4 billion in 2012, including only $0.8 billion spent through June 30, 2012, and likely to be in excess of $1.5 billion of growth capex annually through 2015) will result in negative free cash flows and pressure its credit ratios, as much of the financing will come from increased long-term debt.

While the Company’s capex program is substantial, the spending is allocated to low-risk transmission, gathering and processing and storage projects, which will continue to support its business risk profile. However, the Company’s DCP Midstream, LLC (DCP; 50%-owned) and Empress NGL Marketing (Empress) operations, both of which own natural gas gathering and processing operations, provide a more volatile source of earnings and cash flow as a result of commodity price and fractionation spread risk.

Spectra Capital’s credit metrics have improved from 2009–2010 levels as higher earnings and cash flow from expansion projects and acquisitions offset the impact of rising debt to finance free cash flow deficits. DBRS expects the Company’s credit metrics to remain relatively volatile over the medium term, mainly due to net free cash flow deficits and variable results from DCP. In the absence of significant dividend income from its equity affiliates, especially DCP, Spectra Capital’s credit metrics are relatively weak for the current ratings, although this is partly mitigated by the improved business risk profile expected over time.

The Company has a good business risk profile, generating approximately 80% of its segment EBIT from low-risk, mostly regulated operations in 2009 to 2011. This factor partly offsets relatively weak credit metrics (cash flow-to-total debt ratios in the 15% to 20% range in 2009 to 2011), partly due to the one-third and 40% weighting of the Canadian regulated natural gas transmission and distribution operations with respect to EBIT and long-term debt, respectively (which have higher debt components than U.S. regulated operations). The balance of Spectra Capital’s EBIT generation (20% in 2009 to 2011) comes from DCP and Empress.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.