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

DBRS has today confirmed the ratings of Spectra Energy Capital, LLC (Spectra Capital or the Company), including the Issuer Rating at BBB (high) and the Unsecured Debentures and Commercial Paper (CP) ratings at BBB (high) and R-2 (high), respectively, all with Stable trends.

This rating action follows the announcement that Spectra Energy Corp (Spectra Capital’s 100% owner and guarantor of all series of notes outstanding under the Senior Indenture of Spectra Capital) has agreed to acquire all of the ownership interests in the Express-Platte Pipeline System (Express System) for $1.49 billion, consisting of $1.25 billion cash and assumption of $240 million of debt. The transaction value equates to approximately 11.5 times Express System’s expected EBITDA of approximately $130 million in full-year 2013, which is in line with comparable transactions. Spectra Energy Corp expects the acquisition to be immediately accretive to earnings per share. The confirmation assumes that there are no material changes to the transaction details upon closing.

Express System’s revenues are derived from regulated crude oil pipeline operations, with firm contracts representing 42.5% of committed capacity on the Express Pipeline, with no direct crude oil price exposure (please see the DBRS report on Express Pipeline Limited Partnership & Express Pipeline LLC dated June 13, 2012, for further details). The transaction is subject to customary consents, regulatory approvals and closing conditions and is expected to close in the first half of 2013.

Spectra Capital plans to initially finance the $1.25 billion cash portion of the transaction with approximately $339 million in net equity proceeds ($390 million if the 15% over-allotment option is exercised in full) through a public offering, with the balance funded by debt financing. Spectra Capital had $622 million of available capacity under its credit facility, which matures in October 2016, at September 30, 2012. DBRS expects Spectra Capital to refinance a portion of its outstanding CP balances in order to ensure sufficient liquidity following closing of the acquisition.

DBRS expects a modestly negative impact on Spectra Capital’s key credit metrics as a result of the acquisition funding through debt issuance (plus assumed Express System debt), partly offset by the public common equity offering noted above. DBRS estimates that, pro forma the Express System acquisition and related financing, Spectra Capital’s consolidated total debt-to-capital ratio would rise from 56% to 57% and its consolidated cash flow-to-debt ratio would decline from 17% to 16% on a pro forma basis as at September 30, 2012. On a non-consolidated basis, DBRS expects moderate deterioration of currently relatively weak credit metrics at Spectra Capital as a result of this transaction, resulting in reduced headroom at the current ratings.

As noted previously (see report dated September 19, 2012), DBRS expects that Spectra Capital’s significant capex program (projected to be $2.1 billion in 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. In this context, DBRS views the Express System acquisition as a component that fits well within Spectra Capital’s overall strategy, despite modestly increasing pressure on its credit metrics.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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