Fitch Rates Spectra Energy Capital LLC's Proposed Offering 'BBB'
NEW YORK -- February 25, 2013
Fitch Ratings has assigned a 'BBB' rating to Spectra Energy Capital LLC (SEC)
proposed offering of senior unsecured notes due 2023. The Rating Outlook is
Stable. The notes will be fully and unconditionally guaranteed by SEC's
parent, Spectra Energy Corp. (NYSE: SE), on a senior unsecured basis. Note
proceeds will be used to repay commercial paper used to repay the $495 million
aggregate principal amount of SEC's 6.25% notes that matured on Feb. 15, 2013.
Note proceeds also may be used to fund capital expenditures and for other
corporate purposes, including acquisitions and the repayment of other
commercial paper. Commercial paper outstanding at year end at SEC was
approximately $1.2 billion.
KEY RATING DRIVERS
Stable, Predictable Cash Flows: SEC's ratings reflects 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 interstate pipelines, a sizable gas distribution
company in Ontario, Western Canadian gathering and processing business, and
its storage assets.
Strategically Located, Diverse Asset Base: SEC's asset base represents one of
the largest natural gas infrastructure businesses in North America. The
company's assets are strategically located to capitalize on the significant
investment and growth in natural gas production in recent years from most
major North American producing basins. The company's pipelines are also
situated to capitalize on future growth in new basins, such as the Marcellus
and Eagle Ford Shales.
Large-Scale Capex Program: The ratings consider that SEC is in the middle of a
large-scale capital expenditure program. Given the anticipated investments and
the company's sizable dividends, Fitch's expectations are that SEC will
generate negative free cash flow for several years and credit metrics will
weaken slightly. Fitch believes that the inherent risks of the capital
program, however, are partially mitigated by the focus on pipeline and storage
expansion projects, which are backed by firm capacity commitments generally
under long-term contracts.
Capex Temporarily Weighs on Metrics: Fitch believes SEC's core regulated
assets will provide the stability needed to maintain credit quality, and the
incremental EBITDA provided as growth projects come online will result in
improved metrics, more in line with similarly rated peers. Fitch believes SEC
should be able to fund future capital expenditure levels with a moderate
amount of additional leverage, and that leverage measures will move lower as
projects come on line. Fitch expects consolidated Debt to adjusted EBITDA of
between 4.25x to 4.5x for 2013, moving closer to 4.0x by 2015 as construction
is completed and projects start generating returns. In calculating credit
metrics, Fitch adjusts EBITDA to include cash distributions received from
Liquidity Adequate: Fitch believes SEC's liquidity to be adequate. On a
consolidated basis SEC has $4.1 billion of committed U.S. and Canadian
facilities at year end 2012. Total availability as of December 31, 2012 was
$2.8 billion. While ongoing access to capital markets should be available to
SEC, credit facilities would support a significant portion of capital spending
and debt maturities if needed. Financial covenants are light and the revolver
includes a covenant requiring SE consolidated debt-to-total capitalization
ratio, as defined in the agreement, to not exceed 65%.
Credit concerns include the structural subordination of SEC's debt to
approximately $6.9 billion of subsidiary debt. Additionally, SEC remains
exposed to commodity price risk through its Empress natural gas liquids system
and its 50% interest in DCP Midstream, LLC (DCP; Fitch IDR of 'BBB' with a
The Stable Outlook reflects Fitch's expectation that the benefit to creditors
of SEC's stable pipeline and storage and distribution assets offsets the
volatility in cash flows of SEC's midstream operations and higher leverage due
to its large capital spending program.
Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:
--A material improvement in credit metrics with sustained leverage at 3.5x or
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--A significant decline in distributions from DCP.
--Significant cost overruns on capital projects.
--Increased exposure of earnings and cash flow to changes in commodity prices.
--Sustained debt/adjusted EBITDA above approximately 4.5x.
Fitch rates SEC as follows:
Spectra Energy Capital, LLC
--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012
--'Parent and Subsidiary Ratings Linkage', Aug. 8, 2012
--'The Top Ten Differences Between MLP and Corporate Issuers' Feb. 19, 2013;
--'2013 Outlook: Natural Gas Pipelines and MLPs' Nov. 29, 2012;
--'2013 Outlook: Midstream Services and MLPs' Nov. 29, 2012;
--'2013 Outlook: Crude Oil and Refined Products Pipelines' Nov. 29, 2012;
--Eagle Ford Shale Report - Economics Driving Growth' Oct. 15, 2012;
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and
Opportunities' June 10, 2012.
Applicable Criteria and Related Research
2013 Outlook: Midstream Services and MLPs
2013 Outlook: Crude Oil and Refined Products Pipelines
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
The Top Ten Differences Between MLP and Corporate Issuers
2013 Outlook: Natural Gas Pipelines & MLPs
Eagle Ford Shale Report (Midstream and Pipeline Sector ￢ﾀﾔ Economics Driving
Marcellus Shale Report: Midstream and Pipeline Sector --
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Peter Molica, +1-212-908-0288
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Ralph Pellecchia, +1-212-908-0586
Sean T. Sexton, +1-312-368-3130
Brian Bertsch, New York, +1-212-908-0549
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