Fitch Rates Spectra Energy Partners, LP's Senior Unsecured Offering 'BBB'

NEW YORK--()--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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Contacts

Fitch Ratings
Primary Analyst:
Peter Molica, +1-212-908-0288
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Kathleen Connelly, +1-212-908-0290
Director
or
Committee Chairperson:
Shalini Mahajan, +1-212-908-0351
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com