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 confirmation reflects the Company’s well-diversified portfolio of energy infrastructure assets, which generate largely low-risk regulated cost-of-service and take-or-pay based earnings derived from investment grade or equivalent counterparties. However, Spectra Capital’s midstream operations, primarily at DCP Midstream LLC (DCP) and Empress NGL operations (Empress), entail commodity price and volume risks, which in addition to the effect of a weaker Canadian dollar at the Company’s Canadian operations, cause some variability in earnings. Spectra Capital’s credit ratings are also constrained by the structural subordination of the Company’s debt to the debt at its subsidiaries, a relatively high dividend payout and a large capital expenditure program.

Spectra Capital’s gas transmission, storage and regulated distribution utility assets service large rich gas basins and high-demand markets in the United States and Canada, contributing a majority of the Company’s earnings with limited volume or commodity risk. While the sale of the Empress operations, expected to close in H2 2016, modestly reduces exposure to commodity prices, DBRS expects the earnings variability at DCP to continue in the near term due to the weak natural gas liquids (NGL) prices. However, the impact is expected to be manageable as the Company has balanced the risks in this business through contract renegotiation, increased fee-based earnings and cost reduction initiatives.

DBRS notes that the Company’s significant capital expenditures (capex) program, projected to be $3.6 billion in 2016 for expansion projects ($1.9 billion and $1.2 billion in 2017 and 2018, respectively) and high dividends are expected to generate free cash flows deficits resulting in higher debt levels. DBRS expects credit metrics to remain relatively weak in the 2016–2018 time frame and gradually improve thereafter, as a majority of capital spending is allocated to commercially secured projects in the low-risk transmission and distribution segments that are expected to generate incremental cash flows as the projects are placed in service. However, in light of the Company’s ongoing financing needs, a sustained weakness in the commodity markets or lower than expected dividends upstreamed from subsidiaries could weaken its financial profile and result in a negative impact on ratings. The Company’s liquidity position remains adequate. DBRS expects that the Company to continue funding its free cash flow deficits prudently with a balance of debt and 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 methodologies are Ratings Companies in the Pipeline and Diversified Energy Industry (December 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Financial Issuers (April 2016) and Ratings Holding Companies and Their Subsidiaries (January 2016), which can be found on our website under methodologies.

This rating was not initiated at the request of the rated entity.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.