New York, May 28, 2020 -- Moody's Investors Service (Moody's) moved the outlook of DCP
Midstream, LP's (DCP) to stable from positive and affirmed its existing
ratings, including the Ba2 Corporate Family Rating (CFR) and B1
ratings on the preferred units. DCP's SGL-3 Speculative
Grade Liquidity (SGL) rating is unchanged. Additionally,
DCP Midstream Operating, LP's (DCP Midstream Operating) senior
unsecured notes ratings were affirmed at Ba2 and the B1 rating on its
junior subordinated notes was affirmed.
"The affirmation of DCP's current ratings and return to a
stable outlook from positive reflects the challenging US oil and gas industry
environment and our expectation that DCP's earnings will not continue
to grow in 2020 compared to 2019 levels," stated James Wilkins,
Moody's Vice President. "We expect improvement in the company's
credit metrics to be delayed until commodity prices further recover and
volumes improve."
The following summarizes the ratings activity.
Affirmations:
..Issuer: DCP Midstream Operating LP
....Senior Unsecured Notes, Affirmed
Ba2 (LGD3) from (LGD4)
....Senior Unsecured Shelf, Affirmed
(P)Ba2
..Issuer: DCP Midstream, LLC
....Junior Subordinated Notes, Affirmed
B1 (LGD6)
....Senior Unsecured Notes, Affirmed
Ba2 (LGD3) from (LGD4)
..Issuer: DCP Midstream, LP
.... Probability of Default Rating,
Affirmed Ba2-PD
.... Corporate Family Rating, Affirmed
Ba2
....Pref. Stock Preferred Stock,
Affirmed B1 (LGD6)
....Pref. Stock Shelf, Affirmed
(P)B1
Outlook Actions:
..Issuer: DCP Midstream Operating LP
....Outlook, Changed To Stable From
Positive
..Issuer: DCP Midstream, LP
....Outlook, Changed To Stable From
Positive
RATINGS RATIONALE
The change in outlook to stable from positive reflects Moody's expectation
that the decline in volumes processed through certain facilities and low
commodity prices will depress DCP's profits, offsetting the additions
to 2020 of full year earnings from new facilities. Exploration
and production (E&P) companies have dramatically reduced capital spending
in 2020, reduced production volumes and only a portion of DCP's
facilities enjoy contracts with 100% minimum volume commitments.
In 2019, DCP brought online processing capacity in the DJ Basin,
expanded its Southern Hills, Front Range and Texas Express NGL pipelines
and saw the completion of the Gulf Coast Express natural gas pipeline,
in which it has a minority ownership stake. Moody's expects
that actions taken by the company to cut growth and sustaining capital
spending, distributions to unit holders and operating costs will
allow it to maintain credit metrics supportive of the current ratings
and adequate liquidity despite more challenging operating conditions.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The E&P sector has
been significantly affected by the shock given its sensitivity to demand
and oil prices, and that has affected certain midstream energy companies
that move E&P production volumes. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety. Today's outlook action
reflects the impact on DCP's credit quality of the breadth and severity
of the oil demand and supply shocks, and the company's resilience
to a period of low oil prices.
DCP has relatively stable cash flow associated with fee-based businesses,
meaningful scale in the US gathering and processing sector and basin diversification.
Cash flow stability benefits from a combination of fee-based and
hedged revenue that account for about three-quarters of the gross
margin and long-term contractual arrangements with minimum volume
commitments or life of lease or acreage dedications. DCP enjoys
economies of scale as a large processor of natural gas and natural gas
liquids (NGLs) with integrated gathering & processing as well as logistics
assets that transport and process hydrocarbons from the wellhead to markets.
It has a diversified portfolio with critical mass in three key areas --
the DJ Basin, Midcontinent region and Permian Basin --
that offers growth opportunities and also helps offset regulatory risk
in Colorado. The rating and business profile are tempered by inherent
commodity price risk as well as MLP model risks with high payouts and
the reliance on debt and equity markets to fund growth. The elimination
of the incentive distribution rights (IDRs) in 2019 did not materially
change the amount of cash flow distributed, but the company announced
in March 2020 a 50% reduction in distributions. The rating
also considers the support that the parents -- Phillips
66 (A3 stable) and Enbridge Inc. (Baa2 positive) --
have historically provided.
DCP's SGL-3 Speculative Grade Liquidity Rating indicates adequate
liquidity, which is supported by funds from operations and $558
million of availability (net of $14 million of letters of credit
and $828 million of borrowings as of May 1, 2020) under its
$1.4 billion revolving credit facility that matures December
9, 2024. The revolver has a maximum leverage (net debt/EBITDA)
covenant (5.0x, debt/EBITDA is adjusted for partial year
EBITDA for capital projects and acquisitions). We expect DCP will
remain in compliance with its financial covenant through mid-2021,
although the cushion under the covenant will decline with weaker earnings.
The company has $500 million of notes maturing in September 2021,
which we expect the company will be able to repay with free cash flow.
The company also borrows under an accounts receivable securitization facility
that had $590 million of receivables that secured $350 million
of borrowings as of March 31, 2020. Following the actions
taken by the company to cut its distribution by 50% ($325
million), growth and maintenance capital spending by ~$490
million and operating expenses by ~$90 million, Moody's expects
DCP to maintain adequate liquidity through mid-2021 and to have
the ability to repay its $500 million notes that mature in September
2021.
The stable outlook reflects Moody's expectation that DCP's
credit metrics will support the current ratings, despite the decline
in 2020 of commodity prices and US oil and gas production volumes.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if DCP continues to successfully complete
its growth projects, debt to EBITDA is expected to remain below
4.5x and distribution coverage remains above 1.3x.
DCP's Ba2 CFR could be downgraded if leverage exceeded 5.5x or
it cannot maintain a distribution coverage ratio greater than 1x.
The principal methodology used in these ratings was Midstream Energy published
in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
DCP Midstream, LP, headquartered in Denver, Colorado,
is a publicly traded, gathering and processing MLP. The DCP
Midstream, LP common LP units are owned by the public (43.5%)
and the balance of the common units and General Partner interest is owned
by DCP Midstream, LLC, a 50%/50% joint venture
between Phillips 66 and Enbridge Inc.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
