Spectra Energy (SE) Ratings Affirmed by Moody's Amid Merger Agreement

September 6, 2016 2:08 PM EDT

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Moody's Investors Service ("Moody's") affirmed the long- and short-term ratings of Spectra Energy Capital, LLC (SE Capital) and Spectra Energy Partners, LP (SEP), including their Baa2 senior unsecured and Prime-2 short term commercial paper ratings. Moody's also affirmed the Baa1 senior unsecured rating of Texas Eastern Transmission, LP. The rating outlooks remain stable for all of these companies.

SE Capital is an intermediate holding company of Spectra Energy Corp (Spectra, not rated) which guarantees its debt. SE Capital is the holding company for SEP, a master limited partnership that owns Spectra's largest US pipeline segment (Texas Eastern being its principal pipeline subsidiary); Westcoast Energy, a Canadian gas midstream subsidiary; and DCP Midstream, LLC (Ba2 stable), a gas gathering and processing joint venture.

Moody's rating actions follow the announcement that Enbridge Inc. (Enbridge) has agreed to acquire Spectra for an estimated enterprise value of $43 billion. The companies expect to close the transaction in the first quarter of 2017.


"The merger will make Spectra the largest subsidiary of an energy company of a global scale that owns critical energy infrastructure assets across North America," said Moody's Senior Vice President Mihoko Manabe.

The combination of Spectra with Enbridge will enhance the market positions for both companies and creates the largest midstream company in North America. The companies are complementary with a number of parallels. Both have extensive pipelines (mostly natural gas for Spectra, mostly liquids for Enbridge) in Canada and the US. Enbridge owns the largest gas distribution utility in Canada, while Spectra owns the second-largest. Both companies have comparable low business risk profiles, with assets that are mostly contracted or regulated and have little exposure to commodity prices or sales volumes.

"As a combined entity, the wider opportunity set among oil and gas projects could be a competitive advantage as the growth rate for pipeline infrastructure slows," added Manabe.

The deal's full valuation indicates Enbridge's outlook for growing gas transportation on Spectra's pipelines. The $43 billion enterprise value is over 15 times Spectra's annualized year-to-date EBITDA of almost $3 billion. In this all stock deal, approximately two-thirds of the enterprise value is attributed to the stock-for-stock exchange and the remainder to the assumed Spectra debt and preferred stock.

Spectra is smaller than Enbridge and will account for roughly 40% of the combined company's EBITDA and debt, adjusted to proportionately consolidate their equity investments. Spectra will also become part of a more leveraged company. As of June 2016, Spectra's ratio of proportionately consolidated debt-to-annualized EBITDA was 5.8 times, compared to Enbridge's 7.3 times, and the pro forma combined company's 6.7 times.

Moody's expects Spectra's elevated leverage will peak this year with the company's largest-ever capital budget. The stable outlook anticipates earnings from completed projects will bring down its leverage towards 5.0 times over the next 12 to 18 months.

After the merger, SE Capital will become an intermediate holding company within Enbridge's complex capital structure that includes multiple yield vehicles. Enbridge's credit quality has been strained by its own major capital program. Moody's believes Spectra's rising cash flow from its more front-ended projects will mitigate the new burden of debt at Enbridge (about $14 billion at the holding company level). In addition, SE Capital's debt is expected to decrease over time as maturities are refinanced elsewhere in the Enbridge organization. For the foreseeable future under Enbridge's ownership, Spectra will continue to guarantee SE Capital's debt.

SE Capital's stable rating outlook incorporates a view that, over the next 12 to 18 months, debt-to-EBITDA will stay comfortably below 6 times. SE Capital's ratings could be downgraded if debt-to-EBITDA stays in the high 5 times range. An upgrade is unlikely before a track record is established under Enbridge's ownership, but longer term, SE Capital's ratings could be upgraded with financial policies that keep debt-to-EBITDA in the low 4 times range.

SEP's credit quality is closely linked to Spectra's as the latter's largest holding and principal earnings growth driver. Given the importance of Spectra as its sponsor, SEP's rating could move up or down in the direction of a change in SE Capital's ratings. SEP is moderately levered (its proportionately consolidated debt-to-annualized EBITDA was 4 times), and its credit metrics would strengthen as it completes its capital projects. Its ratings incorporate debt-to-EBITDA sustained between 4 to 5 times.

The primary rating driver for Texas Eastern is the credit quality of SEP. Texas Eastern is the foundational asset for Partners and the platform for the numerous expansions that drive the growth and value of Spectra overall. Texas Eastern's standalone credit profile is strong, but its credit quality is constrained by the debt burden at SEP. Consequently, the driver for rating change, either up or down, for Texas Eastern is the rating of SEP.

Outlook Actions:

..Issuer: Spectra Energy Capital, LLC

....Outlook, Remains Stable

..Issuer: Spectra Energy Partners, LP

....Outlook, Remains Stable

..Issuer: Texas Eastern Transmission L.P.

....Outlook, Remains Stable


..Issuer: Spectra Energy Capital, LLC

....Senior Unsecured Commercial Paper, Affirmed P-2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Spectra Energy Partners, LP

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Texas Eastern Transmission L.P.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

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