DBRS Confirms Ratings of Spectra Energy Capital, LLC at BBB and R-2 (middle) with Stable Trends

DBRS has today confirmed the Issuer Rating and Unsecured Debentures rating of Spectra Energy Capital, LLC (Spectra Capital or the Company) at BBB. The Company’s Commercial Paper is also confirmed at R-2 (middle). All trends are Stable. The ratings reflect Spectra Capital’s sound business risk profile, underpinned by its well-diversified portfolio of assets and cash flows from natural gas transmission, storage and midstream activities in the United States and Eastern and Western Canada, as well as regulated gas distribution operations in Ontario. The Company serves producers in several gas rich basins and diverse end-user markets, and generates a majority of its earnings from low-risk, fee-based services subscribed under multi-year contracts by investment-grade counterparties. However, the Company’s financial risk profile is somewhat constrained by its accelerating capital expenditures (capex) program and dividend policy.

Spectra Capital’s credit metrics have remained reasonable for the current rating category. The Company’s significant capex program (projected to be $2.1 billion in 2014, and $3.0 billion annually through 2016) and high dividends (payout ratio 84%, and dividends set to increase by 9% annually) have resulted in negative free cash flows and weakening of credit metrics, as the deficits are largely debt financed. However, DBRS notes that capital spending is allocated to commercially secure projects in the transmission, gathering, and processing and distribution segments, which are expected to support Spectra Capital’s relatively sound business risk profile. DBRS expects the Company to fund its capex, acquisitions and dividends prudently and maintain credit metrics in line with the current rating category.

In 2013, Spectra Capital dropped down substantially all of its U.S. transmission and liquids assets at a valuation of approximately $12 billion to Spectra Energy Partners (SEP). SEP paid for the purchase with over $7 billion of equity issued to Spectra Capital and $2.3 billion of cash. The transaction resulted in the Company’s maintaining its 2% general partner interest in SEP, and the increase of its limited partner interest to 82% from 59%. DBRS downgraded Spectra Capital’s ratings in August 2013 because of the structural subordination of Spectra Capital’s debt following the drop-down and the Company’s weakening financial profile from its aggressive capex and dividend programs. (See DBRS press release dated August 16, 2013).

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 methodologies are Rating Pipeline and Diversified Energy Companies (January 2014), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), which can be found on our website under Methodologies.

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