Fitch Affirms Spectra Energy Capital, Spectra Partners, & Texas Eastern

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of Spectra Energy Capital, LLC (SEC) and Spectra Energy Partners, LP (SEP) at 'BBB' and Texas Eastern Transmission, LP (TETLP) at 'BBB+'. The Rating Outlook on SEC, SEP, and TETLP is Stable. SEC's prior Outlook was Negative. A full list of rating actions follows at the end of this release.

The affirmation reflects the consistent, stable cash flow 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, which is linked to most major producing basins in the U.S. and Canada. SEC and SEP 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. This predictability in revenue and cash flow and the low business risk of SEC's pipeline and LDC assets offset in part what is relatively high leverage versus U.S. peers. Additionally, the size and scale of the Spectra family provides strategic and operational benefits in addition to economies of scale reflective of investment grade midstream energy issuers.

The Outlook revision for SEC reflects Fitch's belief that the company's leverage should moderate back toward and below Fitch's 5.0x (debt/EBITDA) sensitivity sooner than previously anticipated by Fitch. SEC will likely move toward 5.0x consolidated leverage in 2017 and beyond supported by the sale of its Empress business, joint venturing of its Sabal Trail project, and continued balanced funding at SEP. SEC also plans for more balanced funding of its large capital spending backlog, including the issuance of preferred equity at its Canadian subsidiaries and issuance of Spectra Energy level equity through its at-the-market (ATM) program.

Given the capital injection to SEC's 50% JV DCP Midstream, LLC (DCP; 'BB+'/Stable Outlook) last year as well as cost improvements and slight commodity price improvements, operations at DCP seem to have stabilized. While Fitch continues to expect distributions up to SEC from DCP to be limited to SEC's tax obligations related to DCP for the foreseeable future, Fitch also believes that DCP will not need any explicit capital support from its owners.

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 TETLP's ratings remain linked to that of its parent with its structural superiority warranting a one-notch separation.

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 78% 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 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.

Reasonable Internal Cash Generation: Even in a lower commodity priced environment, cash generation is sufficient to cover maintenance capital and dividends as well as a portion of growth capital. Distribution coverage at the SEC level is expected to be in excess of 1.0x throughout the forecast period. However, the majority of growth capital will need external financing which is forecast to come from debt and equity issuances. All SEP growth capex is expected to be financed on a 50/50 debt/equity basis. Spending at the Union Gas and BC Pipeline regulated businesses in Canada is expected to be done with a focus on maintaining approved capital structures of 64% debt/36% equity at Union Gas, and 60% debt/40% equity at BC Pipeline. This approved capital structure is in stark difference to U.S. based gas utilities, which tend to have a much larger equity component of their capital structure, and raises SEC's consolidated leverage.

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 in 2016 and 2017. 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 target in the near term. The majority of growth capital will need external financing, which is forecast to come from debt and equity issuances across Spectra entities. Fitch expects SEC consolidated leverage to be above 5.5x for 2016 and trend lower to below 5.0x as projects are completed and begin to flow cash. Fitch expects debt/EBITDA consolidate leverage metrics below 5.0x by 2018.

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 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). With the sale of the Empress business SEC's direct commodity price exposure has modestly decreased. SEP is largely commodity-price insensitive. Over 90% of its gross margin is derived from pipelines, which operate under medium- to long-term capacity reservation contracts and are expected to continue to exhibit cash flow and earnings stability even if and as commodity prices languish. 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 in the near to intermediate term. To mitigate risks associated with foreign currency fluctuations, investments are naturally hedged through debt denominated or issued in the foreign currency.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--Roughly $9 billion in capital spending on a consolidated basis through 2019. Funding at SEP is assumed to be on a balanced debt/equity basis. Union Gas funding is based on their approved capital structure (65% debt/35% equity).

--Base case commodity prices are consistent with Fitch's price deck. Fitch's price deck assumes modestly rising commodity prices, with WTI of $35/bbl for 2016, $45/bbl for 2017 and $55/bbl for 2018 and a long-term price of $65/bbl. Henry Hub natural gas of $2.25/mcf for 2016, $2.50/mcf for 2017, $2.75/mcf for 2018, and $3.25/mcf long term.

--No distributions from DCP are assumed, and no contributions to DCP assumed either.

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 (debt/ adjusted EBITDA) above 4.5x would likely lead to a negative ratings action.

--For SEC, Fitch expects debt/EBITDA to be above 5.0x in 2016 and 2017 as it works through its construction backlog but improve as projects are completed. Should SEC's consolidated debt/EBITDA fail to show a path toward improvement below 5.0x on sustained basis as growth projects come online Fitch would likely downgrade SEC. FFO adjusted leverage above 5.5x on a sustained basis and FFO interest coverage below 4.0x on a sustained basis could lead to negative ratings pressure at SEC.

--Any negative change in rating or Outlook at SEP would likely lead to negative ratings action at SEC and at TETLP. A negative rating action at SEC would not necessarily prompt a negative rating action at SEP or TETLP.

--Any change in management 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 ratings action at TETLP.

LIQUIDITY

Adequate Liquidity: As of the end of the 1Q 2016, Spectra on a consolidated basis had access to over $3.6 billion in revolving credit facilities, availability under these facilities as of March 31, 2016 was $2.4 billion. SEP has a $2 billion facility, with availability at March 31, 2016 of $1.2 billion. SEC's and SEP's lines of credit are primarily used to back their commercial paper (CP) programs. On April 29, 2016, Union Gas and SEP amended their revolving credit agreements. The Union Gas revolving credit facility was increased to C$700 million and the SEP revolving facility was increased to $2.5 billion. The expiration of both facilities was extended, with both expiring in April 2021. Also amended were the Westcoast and Spectra Capital revolving credit agreements. The expiration of both credit facilities was extended, with both facilities expiring in April 2021. The terms of the SEC credit agreement require SEC's consolidated debt-to-total-capitalization ratio, as defined in the agreement, to be 65% or lower. Per the terms of the agreement, collateralized debt is excluded from the definition of the debt. This ratio was 58.2% at March 31, 2016. SEP's credit agreement requires SEP to maintain a ratio of total consolidated indebtedness-to-consolidated EBITDA, as defined in the agreement, of 5.0x or less. As of March 31, 2016, this ratio was 3.7x. SEC, SEP and TETLP all have manageable maturity schedule over the next two years, with roughly $200 million of remaining consolidated SEC maturities in 2016, $550 million in 2017 and a larger $2.3 billion due on a combined basis in 2018 at various entities across SEC, SEP, Westcoast Energy and Union Gas.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings and revises the Outlook to Stable from Negative:

Spectra Energy Capital, LLC

--Long-term 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

--Long-term IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Texas Eastern Transmission, LP

--Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878264

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008044

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008044

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160627005972/en/