Fitch Affirms Ratings of Spectra Energy Capital, Spectra Energy Partners, and Texas Eastern
A full list of ratings follows at the end of this release. Roughly \\$2.9 billion of debt at SEC, \\$3.8 billion of debt at SEP, and \\$1.7 billion of TETLP is affected by this action.
The Negative Outlook at SEC reflects the combination of decreased distributions from non-consolidated affiliates and expectations for increased consolidated leverage. It also reflects the structural subordination of SEC's debt, which will increase as a result of the high capital spending program, weakness in the Canadian dollar, and overall commodity price weakness. SEC's consolidated leverage metrics are expected to be elevated over the next several years as SEC's subsidiaries work through a significant capital spending program. Fitch expects debt-to-EBITDA on a consolidated basis at SEC to be above prior targets due in part to the suspension of distributions from 50%-owned joint venture (JV) DCP Midstream, LLC ('BBB-'; Negative Outlook). Fitch had previously expected 2015 leverage to be above 5.0x with year-end 2017 leverage falling below 5.0x. Current expectations are that leverage metrics will remain elevated above that 5.0x threshold through 2017 and beyond assuming balanced funding at SEP and debt funding for other capital spending.
SEP's Outlook remains Stable. Fitch expects SEP's leverage to be between 4.0x to 4.5x for 2015 through 2018, assuming balanced debt and equity funding of the expected growth projects done at SEP. Should leverage be expected to rise above 4.5x on a sustained basis Fitch would likely take a negative rating action.
SEP and TETLP's ratings and Stable Outlook reflect the earnings and cash flow stability driven by the high percentage of fee-based and capacity reservation revenue from the pipeline operations. TETLP's ratings reflect the strength of its credit profile and the low level of business risk associated with its FERC-regulated interstate pipeline operations. As a subsidiary of SEP, the ratings of TETLP remain linked to that of its parent with its structural superiority warranting a one-notch separation.
The affirmation reflects the consistent, stable cashflow profile of all the entities and the general low business-risk nature of the businesses that make up the Spectra Energy family. The ratings are supported by the size, diversity and quality of its natural gas-related infrastructure asset base that is linked to most major producing basins in the U.S. and Canada. SEC and SEP do benefit from the high percentage of fee-based cash flows derived from regulated operations, principally large-scale pipelines, a sizable gas local distribution company (LDC) in Ontario and its storage assets. Roughly 90% of consolidated revenue comes from fee-based businesses with multi-year contracts and limited exposure to commodity prices and volumes, with the majority of these contracts greater than five years.
Credit concerns include the growing structural subordination of SEC's debt to approximately \\$10 billion of subsidiary debt and SEP's structural subordination to roughly \\$2.4 billion in subsidiary debt. Additionally, SEC remains exposed to commodity price risk through its 50% interest in DCP Midstream, which continues to face uncertainty around its ultimate structure, and foreign currency risk from investments and operations in Canada. The ratings recognize SEC retains a roughly 82% interest in SEP including the 2% general partner (GP) interest. As such SEC has operational and financial control of SEP, including the ability to set the distribution level and dictate any capital structure decisions. SEC receives the majority of its cash flows through SEP's limited partner (LP) and GP distributions.
KEY RATING DRIVERS
Stable, Predictable Cash Flows: SEC's ratings reflect the diversity and quality of its asset base and the high percentage of cash flows derived from stable pipeline, storage and gas distribution assets. The ratings reflect the earnings and cash flow stability driven by SEC's high percentage of fee-based and capacity reservation revenue derived from the company's operations, principally its large-scale pipelines, a sizable gas distribution company in Ontario, Western Canadian gathering and processing business, and its storage assets. The ratings recognize SEC's businesses are largely not exposed to commodity prices, with 88% of 2014 EBITDA fee-based. SEC's Western Canadian operations are moderately exposed, particularly at its Empress system, though any 2015 commodity price exposure has been hedged. However, continued commodity price weakness has the potential to negatively impact volumes in the longer term as Western Canadian producers scale back production and pressure pricing on contract renewals and affect SEC's ability to roll over hedges at Empress at beneficial prices.
Large-Scale Capital Spending Program: The ratings consider that SEC and SEP are in the middle of a large-scale capital expenditure program and that credit metrics will remain weak on an interim basis. Fitch believes that some of the inherent risks of the capital program are partially mitigated by the focus on lower-business-risk projects, such as pipeline projects, which are generally backed by firm capacity commitments under long-term contracts. However, capital spending has the potential to flex credit metrics, specifically leverage, above Fitch's trigger depending on how capital spending is ultimately financed. The majority of growth capital will need external financing which is forecast to come from debt and equity issuances at the subsidiary level. All SEP growth capex is expected to be financed on a 50/50 Debt/Equity basis. Spending at the Union Gas LDC is expected to be done with a focus on maintaining Union's approved capital structure and any other spending Fitch has forecasted to be funded with debt. This will push leverage well above 5.0x for 2015- 2018, and further structurally subordinate SEC-level debt.
Fee-based Master Limited Partnership (MLP): SEP's ratings reflect earnings and cash flow stability driven by its high percentage of fee-based and capacity reservation revenue derived from the company's operations. SEP owns and operates a large diverse portfolio of gas, natural gas liquids (NGL), and oil transportation and storage assets with revenue assured by a high percentage of capacity reservation contracts which are largely volume and commodity price insensitive. Over 90% of SEP's revenue and cash flow will come from volume and price insensitive take-or-pay or fee-based contracts with a weighted average contract life of nine years. This provides a fair amount of certainty as to SEP's ability to meet obligations and provide distribution growth to unitholders. SEP's assets access both emerging supply areas and higher growth demand areas, are hard to replicate, and should provide solid upside for SEP from an organic growth perspective.
Commodity Price/Foreign Currency Sensitivity: SEC is primarily exposed to market price fluctuations of NGL prices in the Field Services segment (DCP Midstream) and very modestly in the Empress operations in Canada. With low commodity prices DCP is not expected to provide any cash distributions up to SEC above its tax obligations limiting cash up to SEC previously assumed to be able to help fund capex or support SEC's obligations. SEP is largely commodity-price insensitive, as over 90% of gross margin is derived from its pipelines which operated under medium- to long-term capacity reservation contracts. Union Gas and SEC's Western Canadian operations are sensitive to changes in the Canadian dollar exchange rate, with current weakness in the Canadian dollar expected to have a negative impact on consolidated net income for 2015. To mitigate risks associated with foreign currency fluctuations, investments are naturally hedged through debt denominated or issued in the foreign currency.
TETLP Solid: The ratings of TETLP have historically been linked to those of its parent, SEP, which is dependent on upstream distributions from TETLP and other subsidiaries. TETLP's credit metrics are strong, with the FERC-regulated pipeline company exhibiting modest leverage and strong cash flow and interest coverage measures. Additionally, TETLP is geographically advantaged given its access to both high supply and demand areas and its position in the Spectra Family pipeline system, which provides deliverability into major metropolitan areas. Expectations are for continued strength as TETLP expands its system with a focus on accessing and delivering growing Marcellus volumes. TETLP and SEP's other U.S. operating companies are expected to remain reliant on SEP's credit facility for any short-term liquidity needs.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--Consolidated maintenance and growth spending of \\$3.1 billion, \\$3.5 billion, \\$3.5 billion, and \\$3.3 billion 2015-2018, respectively
--Balanced debt and equity funding at SEP for capital spending.
--Moderate revenue growth on existing SEP assets.
--Foreign currency sensitivity consistent with management public guidance.
--WTI oil price that trends up from \\$50/barrel in 2015 to \\$60/barrel in 2016 and a long-term price of \\$70/barrel; and Henry Hub gas that trends up from \\$3/mcf in 2015 to a long-term price of \\$3.75/mcf consistent with Fitch's published June 2015 Base Case commodity price deck.
RATING SENSITIVITIES
Negative: Future developments that may lead to negative rating actions include:
--Sustained worsening of credit ratios due to increased leverage or poor operating performance. Distribution coverage at SEP below 1.0x and sustained leverage above 4.5x would likely lead to a negative ratings action. For TETCO any negative rating action at SEP would likely lead to a negative ratings action at TETCO.
--For SEC, on an adjusted EBITDA basis (inclusive of distributions from non-consolidated affiliates) Fitch currently expects DEBT/adjusted EBITDA to be roughly 5.5x in 2015 and remain above 5.0x in outer years (2016-2018) assuming continued commodity price and Canadian dollar weakness, no distributions from DCP, and heavy debt funding of growth spending done at Canadian subsidiaries. Should SEC's consolidated debt/EBITDA fail to show a path toward improvement below 5.0x on sustained basis beyond 2017, Fitch would likely downgrade SEC one notch.
--Significant speculative building or large-scale leveraging from third-party acquisitions.
--Any change in management's stated plan to fund growth with balance of debt and equity at SEP's U.S. projects with SEP issuing more debt than equity to fund growth spending could lead to negative ratings actions.
Positive: Future developments that may lead to positive rating actions include:
--Improvement of leverage metrics. At SEP sustained leverage approaching 3.5x or below would likely lead to a one-notch upgrade. For TETLP any positive ratings action at SEP would likely lead to a positive rating action at TETLP. Fitch would likely revise the Negative Outlook on SEC if consolidated leverage were expected to improve to below 5.0x through the use of funding other than debt for growth projects outside of SEP, where Fitch expects balanced funding.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: On a consolidated basis SEC has \\$3 billion of committed U.S. facilities and C\\$900 million of Canadian facilities. Total credit facility availability as of March 31, 2015 was \\$3.1 billion. SEC's and SEP's \\$1 billion and \\$2 billion respective lines of credit are primarily used to back their commercial paper (CP) programs. While access to capital markets is readily available to SEC and its subsidiaries, the combined credit facilities could support capital spending and a large part of its debt maturities if needed. SEC's credit facility requires Spectra Energy Corp consolidated debt-to-total capitalization ratio, as defined in the agreement, to not exceed 65%; this ratio was 58% at March 31, 2015. SEP's credit facility contains a covenant that requires SEP to maintain a ratio of total debt-to-adjusted EBITDA of 5.0x or less; this ratio was 3.8x as of March 31, 2015.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings and revises the Outlook to Negative from Stable:
Spectra Energy Capital, LLC
--IDR at 'BBB';
--Senior unsecured debt at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Fitch affirms the following ratings with a Stable Outlook:
Spectra Energy Partners, LP
--IDR at 'BBB';
--Senior unsecured debt at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Texas Eastern Transmission, LP
--IDR at 'BBB+';
--Senior unsecured debt at 'BBB+'.
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