Spectra Energy Partners L.P. #BBB+# Ratings Affirmed On Proposed Buy-In By Outlook Remains Negative

Stocks and Financial Services Press Releases Wednesday May 30, 2018 09:22
TORONTO--30 May--S&P Global Ratings

TORONTO (S&P Global Ratings) May 29, 2018--S&P Global Ratings today affirmed its 'BBB+' long-term corporate credit rating on Spectra Energy Partners L.P. (SEP), its 'BBB+' issue-level rating on the partnership's senior unsecured notes, and its 'A-2' short-term rating on SEP's commercial paper program. The outlook is negative.

Enbridge Inc. recently announced its proposal to acquire all of SEP's equity outstanding. The affirmation reflects our view that the transaction will increase the level of parental support from Enbridge, so we will likely revise our group assessment to core from highly strategic. Enbridge owns about 83% of SEP and after completion of the roll-up/buy-in, the partnership will become a wholly owned subsidiary of Enbridge. SEP is the gas platform in the Enbridge group and the primary growth vehicle for the gas business and is fully integrated and important to the group's strategy. With this transaction, Enbridge will have full control and influence. The parent expects to close the transaction by the end of the year; following the transaction's close, we will equalize the ratings on SEP with those on the parent.

The negative outlook reflects limited cushion in SEP's credit metrics following the FERC decision and U.S. federal tax reform, which we believe create a challenging operating environment for the partnership. In our base-case forecast, we expect SEP to maintain debt-to-EBITDA in the 4.0x-4.5x range during our two-year outlook period.

We could lower the rating if debt-to-EBITDA increases and stays above 4.5x, either through weaker financial performance, increased leverage, multiyear growth capital spending financed mostly with debt, or project delays that affect financial metrics. A negative rating action on ultimate parent Enbridge would result in a similar action on SEP. A downgrade to Enbridge could occur if FFO-to-debt stays below 13% or debt-to-EBITDA remains above 5.5x. This could follow weaker financial performance due to mainline volumes falling below expectations, or more aggressive funding of the large combined capital program throughout our outlook period.

We could revise the outlook to stable if financial metrics improve such that debt-to-EBITDA stays below 4.0x, which we believe would provide sufficient cushion below our 4.5x downgrade trigger. This could follow improved financial performance from incremental cash flows from newly commissioned projects or equity injection from the parent used to pay down debt. In addition, we will likely revise the outlook at SEP to stable to mirror that on parent Enbridge at the announced transaction's close.

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