NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Spectra Energy Partners, LP's (SEP) proposed offering of senior unsecured notes. Proceeds from the notes will be used to pay a portion of the $2.2 billion in cash consideration associated with SEP's acquisition of all of the U.S. transmission storage and liquids from its ultimate parent company Spectra Energy Corp (Spectra). The Ratings Outlook is Stable.
The transaction transforms SEP into a larger, more diversified MLP with a significant backlog of growth opportunities. SEP is expected to maintain a low volatility cash flow profile that is supportive of its current rating. On a pro-forma basis SEP's EBITDA, as calculated by Fitch, will be roughly 5x higher in 2014 than prior to the transaction. Following the dropdown, SEP will own and operate a 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. The operations should generate a significant amount of growing, consistent cash flows for SEP, providing good support for SEP's ability to meet obligations and provide distribution growth to its shareholders.
KEY RATINGS DRIVERS
Stable, Predictable Cash Flows: SEP's ratings reflect the earnings and cash flow stability driven by SEP's high percentage of fee-based and capacity reservation revenue derived from the company's operations.
Large-Scale Capex Program: The ratings consider that SEP is in the middle of a large-scale capital expenditure program and credit metrics will remain weak on an interim basis. Fitch believes that the inherent risks of the capital program, however, are partially mitigated by the focus on pipeline projects, which are generally backed by firm capacity commitments under long-term contracts.
Capex Weighs on Metrics: Fitch believes SEP's new core 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 peers. Fitch expects debt-to-EBITDA for SEP to be between 4.0x to 4.5x for 2014 and 2015, inclusive of the transaction debt and balanced debt and equity funding of the expected growth projects. Should leverage rise above 4.5x on a sustained basis Fitch would likely take a negative rating action.
Adequate Liquidity Position and Financial Flexibility: On a consolidated basis Spectra has $2.2 billion of committed U.S. facilities and $700 million of Canadian facilities. Availability under its combined credit facilities as of June 30, 2013 was $1.2 billion. SEP has a $700 million revolving credit facility. Availability under SEP's credit facility was $376 million as of June 30, 2013. SEP's credit facility contains a covenant that requires SEP to maintain a ratio of total debt-to-adjusted EBITDA, as defined in the credit agreement, of 5.0x or less. This ratio was 3.1x as of June 30, 2013.
RATINGS SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--For SEP, a positive rating action is not currently anticipated.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--A sustained worsening of credit ratios due to increased leverage or poor operating performance. Distribution coverage below 1.0x and sustained leverage above 4.5x would likely lead to a negative rating action.
--Significant speculative building or large scale third-party acquisitions.
--Any change in management's stated plan to fund growth with balance of debt and equity.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (April, 2, 2013);
--'Funding U.S. LNG Export Facilities Credit Issues for MLP and Corporate Sponsors' (Aug. 20, 2013);
--'Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors' (Aug. 5, 2013);
--'Tax Event Risk and MLPs: Assessing a Change in Tax Law Status for MLPs' (April 18, 2013);
--'Top 10 Comparisons of REITS and MLPs' (April 16, 2013);
--'The Top Ten Differences Between MLP and Corporate Issuers' (Feb. 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415
Funding U.S. LNG Export Facilities (Credit Issues for MLP and Corporate Sponsors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716427
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715517
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705496
Top 10 Comparisons of REITs and MLPs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705475
The Top Ten Differences Between MLP and Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701812
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802161
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