DBRS Places Spectra Energy Capital, LLC Under Review with Negative Implications

DBRS has today placed the Issuer Rating of BBB (high) and the Unsecured Debentures and Commercial Paper ratings of BBB (high) and R-2 (high), respectively, of Spectra Energy Capital, LLC (Spectra Capital or the Company) Under Review with Negative Implications. The rating action is largely driven by DBRS’s concern over the potential financial profile implications of the Company’s recent announcement, which is detailed below.

This rating action follows the announcement that Spectra Energy Corp (Spectra Energy, Spectra Capital’s 100% owner and guarantor of all series of notes outstanding under the Senior Indenture of Spectra Capital) intends to drop down all of its remaining U.S. Transmission and Storage Assets to Spectra Energy Partners (SEP, a master limited partnership controlled by Spectra Energy) by the end of this year, subject to market conditions. By completing this drop-down, Spectra Energy expects to provide its investors with higher dividend growth of approximately 12 cents per year compared with the current rate of eight cents per year. Management expects to provide more details concerning this transaction in its Q2 earnings call scheduled for August 6, 2013.

As noted previously (see press release dated December 12, 2012), DBRS expects that Spectra Capital’s $1.49 billion acquisition of the Express-Platte Pipeline System (Express System, closed in March 2013), combined with the Company’s significant capex program (projected to be $2.2 billion in 2013 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 DBRS views the Company’s planned capex growth and the Express System acquisition as a component that fits well within Spectra Capital’s overall strategy, despite modestly increasing pressure on its credit metrics, DBRS views the proposed drop-down as potentially negative from a financial risk perspective.

DBRS expects to evaluate the potential impact of the proposed drop-down as details become available. DBRS is concerned that its shareholder-friendly components could have a negative impact on Spectra Capital’s key credit metrics on both a consolidated and non-consolidated basis.

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.