Investing.com -- Moody’s Ratings has upgraded the backed senior unsecured ratings on the debt obligations of DCP Midstream Operating, LP (DCP) to Baa2 from Baa3. The backed senior unsecured shelf rating also rose to (P)Baa2 from (P)Baa3. The ratings upgrade also extends to the senior unsecured notes rating of DCP Midstream, LLC, which was lifted to Baa2 from Baa3. The rating outlook for both DCP and DCP Midstream, LLC has transitioned from positive to stable.

James Wilkins, Moody’s Ratings Vice President, stated that the upgrade of DCP Midstream’s ratings to Baa2 mirrors the improvement in credit metrics due to significant debt reduction and conservative financial policies supported by the company’s owners. Moody’s anticipates DCP to further lessen its leverage as its notes reach maturity.

The upgrade of DCP’s ratings to Baa2 is also a reflection of the company’s near-term declines in debt and leverage, conservative financial policies, and the expectation of continuous debt reduction. DCP generated stable earnings in 2023-2024 and positive free cash flow, a trend expected to persist in 2025-2026.

Since Philips 66 acquired the DCP Midstream, LP common units held by the public in 2023, DCP has maintained a stable distribution to its owners and engaged in limited growth capital expenditures. This resulted in residual positive free cash flow that was applied towards debt reduction. The company also utilized the proceeds from the January 2025 sale of its 25 percent stake in Gulf Coast Express Pipeline LLC, amounting to gross cash proceeds of $853 million, to reduce debt.

The company has $525 million of notes due in July 2025, which is expected to be repaid and not refinanced with long-term debt. The company also repaid its three issues of preferred equity in 2022-2023. DCP’s ratings also incorporate the benefits of its majority ownership by Phillips 66 (NYSE: PSX ), its integration with and strategic importance to Phillips 66’s broader midstream business, its financing received from Phillips 66, and support from both owners in its delevering efforts.

DCP’s relatively stable cash flow benefits from fee-based businesses, significant scale in the US gathering and processing sector, and basin diversification. The business profile is tempered by inherent commodity price risk and volume risk.

DCP has excellent liquidity supported by funds from operations and availability under its intercompany revolving credit facility due March 5, 2029. At year-end 2024, the company had $878 million of borrowings under an intercompany revolving credit facility with Phillip 66 Company as the lender, established in March 2024. The company is expected to remain well in compliance with its financial covenant. The next debt maturity is the $525 million of senior notes due in July 2025, which the company is expected to repay from cash flow.

The stable outlook reflects Moody’s expectation that DCP will continue to generate free cash flow that will support ongoing debt reduction.

Further upgrades to DCP’s rating are limited by its stand-alone scale and business profile. However, the rating could be upgraded if DCP’s scale and diversity of assets increased substantially, debt continues to decline and debt to EBITDA is maintained below 2.5x. An upgrade would also require Phillips 66’s rating to be at least Baa1 and its support and integration with DCP to be sustained. The ratings could be downgraded if leverage exceeds 3.0x or DCP does not maintain expected financial policies with respect to debt reduction and distributions.

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