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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Unsecured Debentures rating of Spectra Energy Capital, LLC (Spectra Capital or the Company) at BBB. Concurrently, DBRS has confirmed the Company’s Commercial Paper rating at R-2 (middle). All trends are Stable. The ratings are supported by the Company’s well-diversified portfolio of energy infrastructure assets which generate largely low-risk, fee-based earnings from its operations in natural gas transmission, storage activities in the United States, Western and Eastern Canada including regulated utility operations in the Province of Ontario, all of which contribute nearly 97% of the Company’s EBITDA. However, Spectra’s midstream activities (3% of EBITDA) at DCP Midstream LLC (DCP) and Empress NGL operations (Empress) which entail commodity price and volume risks, as well as the effect of a weaker Canadian dollar at the Company’s Canadian operations, expose the Company to earnings volatility. Spectra’s ratings are also constrained by its relatively high divi¬dend payout and its accelerating growth capital needs.

While earnings volatility at DCP and Empress is expected to continue in the near term due to the weak commodity markets, the impact is expected to be manageable because the earnings contribution from these operations, relative to the overall growing portfolio of mostly stable fee-based operations, is not material. Moreover, the weak commodity and currency impacts are somewhat mitigated as increased revenues from expansion projects placed in service primarily at Texas Eastern and higher crude oil transportation revenues from Express-Platte pipelines have resulted in credit metrics that are reasonable for the current rating category.

The Company’s significant capital expenditures program, projected to be $3.2 billion in 2015 ($388 million spent at Q1 2015), and $3.5 billion annually through 2016 and 2017), and high dividends (payout ratio 96% in 2014 and dividends set to increase by approximately 10% annually on average over the next three years) are expected to generate consistent free cash flow deficits resulting in higher debt levels and weaker credit metrics in the near term. DBRS notes that a majority of capital spending is allocated to commercially secured projects in the low-risk transmission and regulated distribution segments, which are expected to support Spectra Capital’s credit profile. However, a sustained weakness in the commodity markets combined with the Company’s ongoing financing needs in the medium term could weaken its financial profile and result in a negative impact on ratings. Going forward, DBRS expects the Company to fund its free cash flow deficits prudently with a mixture of 50% debt; 50% equity and maintain reasonable credit metrics for the current 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 Companies in the Pipeline and Diversified Energy Industry, and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and Rating Holding Companies and Their Subsidiaries which can be found on our website under Methodologies.

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