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
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
--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