DBRS Downgrades Spectra Energy Capital, LLC; Trends Stable

DBRS has today downgraded the Issuer Rating and Unsecured Debentures rating of Spectra Energy Capital, LLC (Spectra Capital or the Company) to BBB from BBB (high) and the rating on the Company’s Commercial Paper to R-2 (middle) from R-2 (high). The trends on all ratings are now Stable.
This rating action removes the ratings from Under Review with Negative Implications, where they were placed on June 12, 2013, and follows the Company’s announcement on August 6, 2013, that it has entered into a contribution agreement (the Contribution Agreement) with Spectra Energy Partners, LP (SEP), pursuant to which Spectra Capital has agreed to contribute to SEP substantially all of its interests in its subsidiaries that own U.S. transmission and storage and liquids assets and to assign to SEP its interests in certain related contracts (the Contribution). The Contribution will be in exchange for aggregate consideration of approximately $11 billion and consists of 172 million limited partnership units of SEP, approximately 3.5 million general partnership units to retain Spectra Capital’s 2% general partner interest and $2.2 billion in cash. In addition, about $2.5 billion of debt associated with the assets to be dropped down will be assumed by SEP. Following the completion of the transactions contemplated by the Contribution Agreement, which is expected to occur during the fourth quarter of 2013, Spectra Capital is expected to own directly or indirectly approximately 82% of the ownership interests in SEP in the form of common units and a 2% general partner interest.

The rating action is predominantly driven by (1) increasing structural subordination and (2) the weakening financial profile of the Company:

(1) Structural Subordination
The drop down of U.S. transmission and storage assets and the liquids business to SEP increases the structural subordination of Spectra Capital’s debt by further removing these high-quality assets to service debt at SEP. The U.S. transmission assets represented 50% of the Company’s EBIT for the last 12 months (LTM) ended June 30, 2013.

(2) Weakening Financial Profile
Aggressive capex and dividend programs are likely to result in negative free cash flows and pressure the Company’s credit ratios as much of the financing will come from increased long-term debt.

-- Aggressive Capex Plan
The Company has announced an aggressive $25 billion capex program, including approximately $5.3 billion at U.S. transmission and western Canadian operations for projects in execution for 2013-2014. Although a major portion of the capex may relate to projects that are commercially secured, a significant increase in debt financing will pressure Spectra Capital’s credit metrics in the medium term.

-- High Dividend Payout
By completing this drop down, Spectra Capital expects to raise its dividends annually by approximately $80 million from $816 million in 2013.

The Stable trend reflects Spectra Capital’s good business risk profile, generating approximately 90% of its earnings from low-risk, mostly regulated operations. DBRS expects the Company to maintain leverage reasonable for the BBB rating category.

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, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.