Fitch Places Spectra Energy Capital on Rating Watch Positive
SE shareholders will receive 0.984 shares of the combined company for each share of SE common stock they own. The consideration to be received by SE shareholders is valued at $40.33 per SE share, based on the closing price of ENB common shares on Sept. 2, 2016. Upon completion of the merger, ENB shareholders are expected to own approximately 57% of the combined company and SE shareholders are expected to own approximately 43%. The combined company will be called Enbridge Inc. The transaction is expected to close in the first quarter of 2017, subject to shareholder and certain regulatory approvals, and other customary conditions.
KEY RATING DRIVERS
Fitch views the acquisition as favourable for ENB and SEC. The combination of companies creates the largest energy infrastructure company in North America in a business where size and scale are significant credit factors. The combined companies will have increased geographic and business line diversity, as well as, a strong backlog of growth spending opportunities which should provide significant earnings and cash flow growth.
While ENB is not rated by Fitch, we acknowledge that ENB has strong asset and geographic diversity as well as a favourable cash flow consistency profile. On a combined basis, ENB and SE will have roughly $20 billion of secured growth capital projects in execution and roughly $37 billion of additional projects in development. Cost-of-service, take-or-pay, or fee-based contracts will underpin 96% of pro forma cash flow, and 93% of counterparties will be investment grade or investment grade equivalent, limiting volumetric, commodity price, and counterparty risks. The acquisition itself will be a deleveraging transaction for ENB (given the all-equity funding) which should provide some mild credit benefits.
Ultimately, SEC's ratings will reflect the credit quality of the combined entities which Fitch expects in the 'BBB' to 'BBB+' range given expectations for the assumption of the SEC debt at the new combined entities. Fitch would seek to resolve its rating watch following at or near deal close following a more thorough analysis of the transaction and of the credit profile combined entities.
Fitch does not expect the transaction to have any immediate impact to the ratings of Spectra Energy Partners, LP (SEP) and Texas Eastern Transmission, LP (TETLP). Fitch does not expect any change to financing plans or capital structure at either SEP or TETLP as a result of this transaction.
Fitch's key assumptions within the rating case for SEC include:
--Roughly $9 billion in capital spending on a consolidated basis at SEC through 2019. Funding at SEP continues to be assumed to be on a balanced debt/equity basis. Union Gas funding is based on their approved capital structure (64% debt/36% equity).
--Base case commodity prices are consistent with Fitch's price deck. Fitch's price deck assumes modestly rising commodity prices, with WTI of $42/bbl for 2016, $45/bbl for 2017 and $55/bbl for 2018 and a long-term price of $65/bbl. Henry Hub natural gas of $2.25/mcf for 2016, $2.50/mcf for 2017, $2.75/mcf for 2018, and $3.25/mcf long term.
--SEP continues to operate as a standalone MLP.
Negative: Future developments that may lead to negative rating actions include:
--Sustained worsening of credit ratios due to increased leverage or poor operating performance.
--Increase in volumetric or commodity exposed portions of revenue without commensurate offsetting adjustments to leverage targets.
--Heavy debt funding of capital program leading to higher levels of sustained leverage. Leverage (debt/EBITDA) on a sustained basis above 5.2x in 2018 and beyond could lead to a negative ratings action.
Positive: Future developments that may lead to positive rating actions include:
--With expected minimal volumetric and commodity price exposure at the combined entities, Fitch believes the combined companies could tolerate slightly higher leverage. Fitch previously expected SEC's debt/EBITDA to be above 5.0x in 2016 and 2017 as it worked through its construction backlog but improve to below 5.0x as projects are completed. Should the combined entities leverage be expected to be below 5.0x on sustained basis Fitch would likely take a positive ratings action.
Adequate Liquidity: As of the end of the second quarter of 2016 (2Q16), Spectra on a consolidated basis had access to over $4.3 billion in revolving credit facilities, availability under these facilities as of June 30, 2016 was $3.5 billion. SEC's and SEP's lines of credit are primarily used to back their commercial paper (CP) programs. The terms of the SEC credit agreement require SEC's consolidated debt-to-total-capitalization ratio, as defined in the agreement, to be 65% or lower. Per the terms of the agreement, collateralized debt is excluded from the definition of the debt. This ratio was 56% at June 30, 2016. SEP's credit agreement requires SEP to maintain a ratio of total consolidated indebtedness-to-consolidated EBITDA, as defined in the agreement, of 5.0x or less. As of June 30, 2016, this ratio was 3.5x. SEC, SEP and TETLP all have manageable maturity schedule over the next two years, with roughly $33 million of remaining consolidated SEC maturities in 2016, $550 million in 2017 and a larger $2.3 billion due on a combined basis in 2018 at various entities across SEC, SEP, Westcoast Energy and Union Gas.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Rating Watch Positive:
Spectra Energy Capital, LLC
--Long-Term IDR 'BBB';
--Senior unsecured debt 'BBB';
--Short-Term IDR 'F2';
--Commercial paper 'F2'.