Nov 19 - Fitch Ratings has assigned a 'BBB-' rating to DCP Midstream
Partners, L.P.'s (DPM) proposed $500 million senior unsecured note
offering due Dec. 1, 2017. Proceeds from the offering will be used in part to
repay the two-year $343.5 million term loan used to fund the dropdown of a 33%
interest in Eagle Ford gathering and processing (G&P) operations from DPM's
sponsor general partner (GP) DCP Midstream LLC (DCP; IDR 'BBB'; Stable Outlook).
Remaining proceeds will be used to repay a $140 million term loan entered into
in July 2012 to fund a portion of the acquisition of interest in two Mont
Belvieu fractionators. The Ratings Outlook is Stable.
DPM's ratings reflect the significant benefits and strong operational and
financial linkage DPM has with its sponsor and general partner, DCP and
indirectly with DCP's owners, Spectra Energy Corp. (SE; IDR 'BBB'; Stable
Outlook) and Phillips 66 (PSX). DPM's ratings are also reflective of DPM's
stand-alone credit profile which continues to move more in-line with its
investment grade master limited partnership peers, in terms of size, scale,
diversity and business risk profile of its asset base.
On Nov. 6, 2012, DPM announced it had formed a joint venture (JV) with DCP and
completed a drop down of a one-third interest in DCP's Eagle Ford system for
$438.3 million. The transaction was financed with a $343.5 million term loan,
which the proceeds from these notes will be used to repay. The acquisition helps
expand DPM's position in the growing Eagle Ford shale and should provide a
steady source of earnings and cash flow as DCP has agreed to provide three year
direct product commodity price hedges for DPM's one-third interest in the JV.
These hedges should limit DPM's exposure to commodity price fluctuations at the
Eagle Ford processing operations. DPM will still be exposed to volumetric risks
at the Eagle Ford operations, but volumes are expected to show growth given the
relative economics of production in the Eagle Ford shale. Fitch believes the
transaction provides DPM good opportunities for organic growth going forward,
further growth through dropdowns, and helps to further diversify DPM's asset
base both geographically and by business line.
Key Credit Considerations:
Sponsor Support: DCP's ownership of DPM's GP interest gives DCP significant
control over DPM's operations, including major strategic decisions such as
investment plans, distributions, and management of operations, including
centralized treasury functions. DCP Midstream has also provided significant
support for DPM including a demonstrated willingness to take back units as
equity contributions for dropdown transactions and in the form of three year
direct-product hedges for DPM's portion of the Eagle Ford JV's output. DCP and
PSX are also major counterparties to DPM. Meanwhile, DPM provides DCP a low cost
source of financing and access to equity markets. Fitch expects DCP, 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 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 -60% of projected gross margin for
2012, this is expected to grow to -80% by 2015. DPM's liquidity remains strong
with roughly $507 million in cash and availability under its $1 billion revolver
at year-end 2011. Maturities are also manageable with no significant maturities
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 good 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. 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 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. Fitch notes that a
significant change in the correlation can result in a large swing in cash flows.
Volume Sensitivity: While taking significant steps to mitigate the volatility of
prices, DPM has exposure to throughput volumes on its assets. DPM has very 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 production from upstream producers, lower
throughput due to lower upstream production or due to bypassing NGL processing
facilities when natural gas prices are very high (much less frequent in recent
years and expected to remain so) and lower propane volumes delivered through its
terminals due to warm weather, conservation and fuel switching.
Adequate Liquidity: DPM has a $1 billion revolver with roughly $699 million in
availability as of Sept. 30, 2012. Maturities at DPM are light with only $250
million in notes due 2015 and $350 million due in 2022.
WHAT COULD TRIGGER A RATING ACTION
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Fitch expects that with the Eagle Ford dropdown, debt/EBITDA for 2012 will be
slightly above 4.0x, but expects 2013 leverage between 3.5x and 4.0x. Should
leverage remain at or above 4.0x on a sustained basis Fitch would consider a
negative ratings action.
--Similarly, as of Sept. 30, 2012 DPM's distribution coverage ratio was below
1.0x. Fitch expects distribution coverage will be above 1.0x for 2013,
consistent with past practices and management's stated distribution coverage
target of 1.1x to 1.2x. Should distribution coverage remain below 1.0x Fitch
would consider a negative ratings action.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Significant decrease in leverage.
--Positive ratings action at DCP.
Fitch currently rates DPM as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured rating 'BBB-'.