TEXT-Fitch affirms DCP Midstream Partners at 'BBB-'
May 1 - Fitch Ratings has affirmed its 'BBB-' long-term Issuer Default Rating (IDR) and senior unsecured ratings on DCP Midstream Partners LP's (DPM). The Rating Outlook is Stable. Approximately $850 million in debt is affected by today's rating action. DPM's ratings are reflective of the significant benefits and strong operational and financial linkage which the company has with its sponsor and general partner (GP), DCP Midstream, LLC (DCP Midstream; IDR 'BBB'; Stable Outlook)and indirectly with DCP Midstream's owners, Spectra Energy Corp. (SE, IDR 'BBB'; Stable Outlook) and Phillips 66 (PSX). The ratings also reflect the ongoing improvement in DCP Partners' stand-alone credit profile as credit metrics and business risk continue to move more in line with other investment grade master limited partnerships (MLPs) possessing asset bases with similar operational and business risk profiles. Key Credit Considerations: Sponsor Support: DCP Midstream's ownership of DPM's GP interest gives DCP Midstream significant control over DPM's operations, including most major strategic decisions such as investment plans, distributions, and management of daily operations. There is a significant overlap of management and operations personnel, including centralized treasury functions performed by DCP Midstream. DCP Midstream has also provided significant support for DCP Partners including ongoing credit support, partly in the form of derivative counterparty guarantees. DCP Midstream and its owners are also major counterparties to DPM. In turn, DPM provides DCP Midstream a low cost source of financing and access to equity markets. Fitch expects DCP Midstream, SE, and PSX to continue to support DPM's credit quality including maintaining a capital structure and business risk profile in line with other investment grade MLPs and growing distributions modestly to maintain a solid distribution coverage ratio. Cash Flow Stability: DPM possesses relatively predictable cash flows which are supported by the company's portfolio of fee-based assets and an active hedging program that helps to moderate commodity price exposure. To generate more stable cash flows the growth of DPM has primarily been through the addition of fee-based assets, which currently represents roughly 60% of projected gross margin for 2012. This is expected to grow to roughly 80% by 2015. Liquidity: DPM's liquidity remains strong with roughly $740 in cash and availability under its $1 billion revolver, which was recently extended to 2016. Maturities at DPM are light with only $250 million in notes due 2015 and $350 million due in 2022. Based on Fitch's calculations for Debt/Adjusted EBITDA, which excludes equity in earnings but includes dividends from unconsolidated affiliates, Fitch expects DPM's 2012 Debt/Adj. EBITDA to be between 3.2 and 3.6 times (x). Strategic Location of Assets: 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 Midstream, and the strategic location of 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 growth opportunities for organic investments. Hedging Program: DPM actively manages the majority of its commodity exposure through a hedging program, with shorter tenor direct hedges on Natural Gas Liquids (NGLs), and long-dated swap positions on natural gas and crude oil (as a proxy for NGLs through 2016). Fitch recognizes that direct hedging of NGLs is typically limited to 12 to 18 months due to the lack of liquidity for NGL positions. Per recent guidance, the company has hedged more than 65% of its 2012 forecast gross margin that is exposed to commodity prices. Given the limited market for NGL hedges, DCP Partners uses crude oil swaps as a proxy for hedging its NGL production in the outer years and then perfects those hedges by converting directly to NGL hedges where economically attractive, which helps mitigate some of DPM's sensitivity to the crude to NGL relationship. Fitch notes that the historical correlation between crude oil and NGLs does not always hold, particularly in highly volatile price environments, and a significant change in the correlation can result in a large swing in cash flows. While DPM is expected to pursue fee based growth opportunities, its active hedging strategy would make further non-fee based acquisitions a possibility. Volume Sensitivity: While taking significant steps to mitigate the volatility of prices, DPM has exposure to throughput volumes on its assets. DPM has few take or pay agreements that eliminate volumetric risk. Lower volumes can be driven by many factors including: lower throughput on the company's gathering and processing assets due to reduced upstream activity; lower throughput on the company's NGL pipelines also due to lower upstream activity or unfavorable processing economics (much less frequent in recent years given very low natural gas prices); and lower propane volumes delivered through its terminals due to warm weather, conservation and fuel switching. Catalysts for a negative rating action include: --A negative rating action at DCP Midstream; --A significant change in the support structure from DCP Midstream, without increasing DPM's liquidity or hedging strategy to mitigate price exposure at a reasonable cost; --Significant growth in commodity exposed earnings without an appropriate adjustment in capital structure, specifically a reduction in leverage; --A sustained increase in leverage metrics or decrease in distribution coverage as a result of aggressive growth of capital expenditures and/or distributions. Catalysts for a positive rating action include: --Significant increase in company's asset base while maintaining credit metrics appropriate for credit rating and a primarily fee-based asset base without deteriorating the credit quality of its sponsor, DCP Midstream; --A positive rating action at DCP Midstream. 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. 12, 2011); --'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011); --'2012 Outlook: Midstream Services' (Dec. 7, 2011). Applicable Criteria and Related Research: Corporate Rating Methodology Parent and Subsidiary Rating Linkage 2012 Outlook: Midstream Services
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