Fitch Rates DCP Midstream Partners, L.P. Proposed $500MM Offering 'BBB-'; Outlook 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 until 2015.
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-'.
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. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'Impact of Lower NGL Prices on Midstream Processors,' Aug. 27, 2012;
--'Eagle Ford Shale Report (Midstream and Pipeline Sector - Economics Driving Growth),' Oct. 15, 2012;
--'Pipelines, Midstream, and MLP Stats Quarterly -2Q 2012, Sept. 27, 2012;
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors', May 21, 2012;
--'DCP Midstream Partners - Full Rating Report,' Oct. 14, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Impact of Lower NGL Prices on Midstream Processors
Eagle Ford Shale Report (Midstream and Pipeline Sector I Economics Driving Growth)
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2012 (Second-Quarter Review)
Top Ten Questions Asked by Pipeline, Midstream and MLP Investors
DCP Midstream Partners, L.P.
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|Date:||Nov 19, 2012|
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