Fitch Ratings has downgraded DCP Midstream LLC's (DCP) Issuer Default
Rating (IDR) and senior unsecured ratings to 'BB+' from 'BBB-' following
the announcement that its owners will contribute $3 billion in equity.
Additionally, Fitch has assigned a senior secured rating of 'BB+/RR4' to
DCP, assigned an 'RR4' to DCP's senior unsecured rating and downgraded
DCP's short-term IDR and commercial paper rating to 'B' from 'F3' and
also withdrawn the short-term IDR and commercial paper rating. The
Rating Outlook has been revised to Stable from Negative.
DCP Midstream Partners, LP's (DPM) long-term IDR and senior unsecured
rating have been affirmed at 'BBB-' with a Negative Outlook. DPM's
short-term IDR has been affirmed at 'F3'.
Fitch believes that the agreement by Spectra Energy (SE; Fitch rates
operating subsidiary Spectra Energy Capital 'BBB'/Negative Outlook) and
Phillips 66 (PSX) to contribute $3 billion in cash and assets is a
positive development for DCP's credit profile. SE will contribute $1.5
billion in assets and PSX will contribute $1.5 billion of cash. However,
the downgrade reflects expectations that even with strong, tangible
support from its owners and expected deleveraging, DCP's commodity price
exposure, expected profitability and credit metrics will remain weak in
the near to intermediate term due to very low commodity prices and
processing margins. Fitch expects that DCP's debt/EBITDA on a
consolidated basis following the equity injection will be 6.9x for
year-end 2015, 5.5x for year-end 2016, and between 4.5x-5.0x for
year-end 2017 and beyond; which remain high relative to investment grade
midstream issuers with similar size, scale and commodity price exposure.
On a deconsolidated basis, DCP's standalone leverage calculated as DCP
debt/DCP EBITDA plus distributions from DPM, is expected to be high,
more than 8.0x for 2015 but improving to below 4.5x in 2017 assuming
higher commodity prices.
The affirmation and Negative Outlook for DPM reflects Fitch's continued
expectation for commodity price weakness offset in part by DPM's strong
fixed fee and hedged positions for 2015 and 2016. DPM remains
significantly fixed fee and hedged keeping near term commodity price
exposure low with 90% of gross margin either fee-based or hedged for
2015 (approximately 60% fixed fee/approximately 35% hedged) and over 80%
of gross margin fee-based or hedged for 2016 (approximately 65% fixed
fee/approximately 15% hedged). This provides near-term comfort around
the stability of DPM's earnings and cash flows even in this lower
commodity price environment at least through the end of 2016.
Fitch recognizes that DCP is a counterparty to a portion of DPM's fixed
fee contracts, but believes that DCP, and ultimately SE and PSX, will
remain supportive of DPM's operations and capital structure.
Cost-of-capital and the ability and willingness of DPM to fund growth
spending with a balance of debt and equity remain additional concerns
for DPM, particularly given the high equity yields at which it is
currently trading. DPM leverage is expected to range between 4.0x to
4.5x through 2017 with distribution coverage at 1.0x. Fitch would expect
to resolve the Negative Outlook based on DPM's ability to maintain a
fixed-fee or hedged gross margin profile of greater than 70% and
leverage below 4.5x on a sustained basis for 2017 and beyond while
maintaining greater than 1.0x distribution coverage.
KEY RATING DRIVERS
Scale & Scope of Operations: DCP is the largest stand-alone natural gas
processor in the United States, and it has a robust presence in all of
the key production regions within the country. Additionally, the
company's large asset base provides a platform for growth opportunities
across its footprint. DCP has a particular focus on the MidContinent,
the Rockies and the Permian Basin, all areas in need of gathering and
processing infrastructure as production in the core regions of these
plays remains relatively high and continues to increase. DPM benefits
from the strategic location of its midstream assets, which touch several
core U.S. natural gas producing basins and are often integrated with
assets owned by DCP, and the strategic location of DPM's NGL logistics
businesses, as well as DPM's wholesale propane terminals which serve
high-volume retailers in Northeast markets. As such, DPM achieves steady
demand from its core customers as well as good growth opportunities for
organic investments.
Significant Parent Support: The $3 billion equity contribution is
illustrative of the value and support that SE and PSX see in and provide
to DCP, and by extension DPM. Fitch expects DCP's owners to continue to
provide similar support to DCP going forward including continuing to
forego dividends while DCP remains under financial pressures stemming
from low commodity prices. Should SE and PSX no longer express or
possess the willingness and ability to support DCP in times of need
Fitch would likely take a negative ratings action. On a purely
stand-alone basis without parental support, DCP's IDR would likely be
lower rated.
Commodity Price & Volumetric Exposure: DCP does not hedge its commodity
risk directly, though DPM does. It instead tries to balance its contract
mix to help to reduce exposure to commodity price volatility while still
providing upside should commodity prices strengthen. Additionally, DCP
and DPM, like every processor, has volume exposure, however, production
in liquids rich regions continue to be a strong focus for producers and
DCP has seen volume growth even as prices have dramatically declined.
DCP's fixed fee profile has been improving and should improve further as
it adds the 1/3 interest in the Southern Hills and Sand Hills pipelines,
which are fee based assets. Additionally, DCP has been marginally
successful in increasing fees charged to producers who use its services
and in converting existing price exposed percent of proceeds (POP)
contracts to fixed fee. A continued increase in fixed fee type gross
margin could lead to a positive ratings action at DCP and if at DPM the
resolution of the Negative Outlook to Stable.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for DCP and DPM include:
--Equity/asset contribution totalling $3 billion from SE and PSX are
consistent with management guidance. Proceeds are to be used to repay
revolver borrowings. DCP's October 2015 $200 million maturity is
expected to retired. DPM's $250 million maturity is expected to be
refinanced.
--Growth capital at DPM of roughly $500 million annually. Growth
spending funded roughly 50% debt 50% equity.
--Crude Oil trending up from $50/Bbl in 2015 to $60/Bbl for 2016 and
beyond; natural gas prices moving from $2.75MMbtu in 2015 $3.00MMBtu in
2016 and $3.25MMbtu in 2017 and NGL prices of $0.43/gallon in 2015;
$0.45 gallon in 2016; $0.50/gallon in 2017 and beyond.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
For DPM
--Leverage above 4.5x on a sustained basis and/or distribution coverage
consistently below 1.0x.
--A significant decline in fixed fee or hedged commodity exposed
earnings to less than 70% fixed/hedged without an appropriate,
significant adjustment in capital structure, specifically a reduction in
leverage.
--Acceleration of dropdowns that results in significantly increased
leverage or commodity price exposure at DPM could lead to a negative
ratings action at DPM.
--A significant change in the ownership support structure from SE and
PSX to DCP Midstream, and from all three to DPM, particularly with
regard to commodity price exposure, distribution policies at DCP and
DPM, and capital structure.
--Significant volume declines leading to margin and earnings pressure.
--If DCP's ratings were to move lower Fitch would consider a negative
ratings action at DPM, however, given the equity contribution Fitch does
not currently expect a negative ratings action on DCP in the normal
course of business.
For DCP
--If DPM's ratings were to move lower Fitch would consider a negative
ratings action at DCP given DCP's near term reliance on DPM
distributions to support operations and service debt. Given the $3
billion equity contribution Fitch does not currently expect a negative
ratings action on DCP.
--A significant change in the ownership support structure from SE and
PSX to DCP Midstream, particularly with regard to distribution policies
at DCP and DPM, increased commodity price exposure, and capital
structure.
Positive:
--For DPM the exhibited ability to increase the percentage of fixed fee
or hedged gross margin for 2017 and beyond to above 70% while
maintaining leverage below 4.5x on a sustained basis could lead to an
Outlook revision.
--For DCP the improvement of standalone DCP LLC leverage to between 4.0x
to 4.5x on a sustained basis.
LIQUIDITY
Adequate Liquidity: With the planned equity injection both DCP and DPM
are expected to have adequate liquidity. DPM as of June 30, 2015 had
available capacity of $1.149 billion under its $1.25 billion revolver.
Maturities are manageable DPM has a $250 million note maturing in
October 2015 and no additional maturities until 2017. DPM's revolver has
a leverage covenant of a maximum of 5.0x, with a maximum of 5.5x
following an acquisition for up to three quarters. The revolver allows
for the pro forma inclusion of EBITDA from acquisitions or ongoing
growth projects. DPM is currently in compliance with this covenant with
covenant leverage at June 30, 2015 of 3.1x, DPM's revolver matures in
May 2019.
Pro forma for the equity contribution and recent asset sales, DCP is
expected to have near full availability under its $1.8 billion secured
credit facility. DCP's revolver is secured by 100% of the equity
interests in DPM. All of net cash proceeds from any equity infusion,
asset sales, or debt issuances are required as mandatory pre-payments on
the revolver. DCP's revolver has a secured leverage ratio covenant of
3.25x. Additionally, DCP's revolver has a consolidated leverage ratio of
5.0x starting in fourth quarter 2015. Pro forma for the equity
contribution, DCP is expected to be in compliance with this consolidated
leverage ratio. As of June 30, 2015, DCP had $1.4 billion in borrowings
outstanding under its revolver, the revolver matures in March 2017. DCP
has a $200 million note maturing October 2015, but otherwise DCP's
maturities are very manageable with no maturities of debt (excepting the
revolver) until 2019.
FULL LIST OF RATING ACTIONS
Fitch's rating actions for DCP Midstream, LLC are as follows:
--Long-term IDR downgraded to 'BB+' from 'BBB-';
--Senior unsecured downgraded to 'BB+/RR4' from 'BBB-';
--Jr. subordinated downgraded to 'BB-' and assigned a 'RR6' recovery
rating from 'BB'.
--Short-term IDR downgraded to 'B' from 'F3' and withdrawn;
--Commercial paper downgraded to 'B' from 'F3' and withdrawn.
Fitch has assigned DCP's $1.8 billion secured credit facility as follows:
--Senior secured rating 'BB+/RR4.'
DCP's Rating Outlook is Stable. The 'RR4' ratings reflect expectations
for average recoveries in a default scenario. The 'RR6' rating reflects
the expectations for lower recoveries in a default scenario for the
junior subordinated notes.
Fitch affirms DCP Midstream Partners, LP as follows:
--Long-term IDR at 'BBB-';
--Senior unsecured rating at 'BBB-';
--Short-term IDR and commercial paper rating at 'F3'.
DPM's Rating Outlook is Negative.
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
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 12 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867275
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug
2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869259
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis (pub. 25 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990553
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990553
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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