Fitch rates Spectra Energy Partners, LP's (SEP) $800 million
senior unsecured note offering 'BBB.' The notes are expected to be
a mix of new 10 year notes and a reopening of SEP's existing notes
maturing in 2045. Proceeds are to be used to repay a portion of
outstanding commercial paper, to fund capital expenditures and for
general partnership purposes. The Rating Outlook is Stable.
SEP'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 its pipeline operations. The
ratings consider that SEP is in the midst of a large scale capital
spending program, with roughly $3 billion in growth capital
spending expected at SEP through 2017. Fitch recognizes that SEP's
capital spending has the potential to flex credit metrics,
specifically leverage, above Fitch's target in the near term.
However, Fitch generally views SEP's project slate to be beneficial
to SEP's credit profile as the projects are largely focused on
lower business risk pipeline assets backed by long-term contracts
with creditworthy counterparties which should generate stable
earnings and cash flows once completed. Credit concerns include
SEP's structural subordination to roughly $2.4 billion in
subsidiary debt.
Fitch recently placed SEP's parent company Spectra Energy
Capital (SEC; Long-Term Issuer Default Rating [IDR] 'BBB') ratings
on Rating Watch Positive following the announcement that Enbridge
Inc. (ENB; not rated) will acquire Spectra Energy Corp (SE) in a
stock-for-stock transaction that will create the largest energy
infrastructure company in North America. SEP expects to remain a
publicly traded limited partnership headquartered in Houston, TX
upon completion of the merger. Fitch does not expect the ENB
acquisition of SEC to have any immediate impact to the ratings,
financing plans, or capital structure at SEP.
KEY RATING DRIVERS
Stable Earnings and Cash Flow: 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.
Large-Scale Capital Spending Program: The ratings consider that
SEP and its parent SEC are in the middle of a large-scale capital
expenditure program and that credit metrics, specifically leverage
(debt/adjusted EBITDA), will remain elevated 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 SEP's pipeline projects, which are generally
backed by firm capacity commitments under long-term contracts.
However, capital spending has the potential to flex SEP's credit
metrics 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, with SEP expected to finance
growth spending on a 50/50 debt/equity basis. Fitch expects
debt/adjusted EBITDA (with adjusted EBITDA excluding equity in
earnings of unconsolidated affiliates but including distributions
from those affiliates) at SEP of roughly 4.0x to 4.2x in 2016 and
2017 improving closer to roughly 3.5x in 2018 as projects get
completed with distribution coverage of above 1.0x for the next
several years. If leverage were expected to rise above 4.5x and or
distribution coverage expected to be below 1.0x on a sustained
basis, Fitch would likely take a negative ratings action.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer
include:
--Roughly $4 billion in capital spending at SEP through 2017.
SEP funding on a balanced debt/equity basis.
--Base case commodity prices are consistent with Fitch's price
deck. Fitch's price deck assumes modestly rising commodity prices,
with WTI pf $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.
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.
--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.
LIQUIDITY
Adequate Liquidity: SEP has a $2.5 billion revolving credit
facility, with availability at June 30, 2016 of $1.8 billion. SEP's
facility is primarily used to back its commercial paper (CP)
programs. On April 29, 2016, SEP amended its revolving credit
agreement, expanding the facility to $2.5 billion and extending the
maturity to April 2021. 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 June
30, 2016, this ratio was 3.5x. SEP has a modest but manageable
maturity schedule over the next two years, with a $400 million
senior unsecured note maturing at consolidated subsidiary Texas
Eastern Transmission, LP ('BBB+'/Stable Outlook) in September 2017
and a $500 million senior unsecured note and a $400 million term
loan maturing at SEP in 2018.
FULL LIST OF RATING ACTIONS
Fitch currently rates SEP as follows:
Spectra Energy Partners, LP
--Long-term IDR 'BBB';
--Senior unsecured debt 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: June 24, 2016
Summary of Financial Statement Adjustments - Fitch typically
adjusts EBITDA for Master Limited Partnerships (MLP) like SEP to
exclude equity in earnings of unconsolidated affiliates but include
cash distributions from unconsolidated affiliates.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27
September 2016 (pub. 17 Aug
2015)https://www.fitchratings.com/site/re/869362
Treatment and Notching of Hybrids in Non-Financial Corporate and
REIT Credit Analysis (pub. 29 Feb
2016)https://www.fitchratings.com/site/re/878264
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Fitch RatingsPrimary Analyst:Peter Molica, +1-212-908-0288Senior
DirectorFitch Ratings, Inc.33 Whitehall StreetNew York, NY
10004orSecondary Analyst:Kathleen Connelly,
+1-212-908-0290DirectororCommittee Chairperson:Shalini Mahajan,
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