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
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 non-consolidated
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
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 Stable Outlook).
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 below.
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
--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 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
Marcellus Shale Report: Midstream and Pipeline Sector --
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.
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