Fitch Downgrades DCP Midstream's (DPM) IDR Rating to 'BBB'; Outlook Revised to Stable From Negative
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Fitch Ratings has downgraded DCP Midstream LLC's (DCPM) (NYSE: DPM) senior unsecured debt and Issuer Default Rating (IDR) to 'BBB' from 'BBB+'. The Rating Outlook has been revised to Stable from Negative. Additionally, Fitch affirms DCPM's short-term IDR at 'F2', which applies to its commercial paper program. The rating action affects approximately $3.0 billion of debt at DCPM.
In April 2009, Fitch revised the Outlook for DCPM to Negative from Stable reflecting concerns regarding the impact of low commodity prices on the company's cash flows. As a gas processor, DCPM's cash flows are highly sensitive to crude oil, natural gas liquids (NGLs) and natural gas prices. DCPM does not hedge its commodity price exposure and the recent decline in prices is expected to result in 2009 EBITDA of less than half fiscal 2008 levels.
Following further review, Fitch believes a 'BBB' rating is more consistent with DCPM's projected performance which is expected to result in leverage ratios between 2.5 times (x) and 3.5x on a consolidated basis. The analysis leading to DCPM's upgrade to 'BBB+' in September 2008 assumed leverage of 1.5x to 2.5x based on higher base case and stress case commodity price forecasts. For fiscal 2009, Fitch expects debt to EBITDA of 3.5x and EBITDA interest coverage of 4.5x.
Fitch's decision to revise the Outlook to Stable from Negative takes into account numerous factors including the scale and diversity of DCPM's 'must-run' assets and a footprint that extends operations into several key gas producing regions, including high growth shale plays.
The credit is further supported by a defensive financing strategy which has emphasized liquidity and regular market access despite difficult conditions. Additionally, DCPM's capital expenditure and dividend policies are highly discretionary and allow management to conserve cash during difficult operating environments.
DCPM is a tax pass-through entity. Under the terms of its LLC agreement, DCPM is required to make quarterly tax distributions to its sponsors, ConocoPhillips (NYSE: COP) ([COP] IDR 'A'; Outlook Stable by Fitch) and Spectra Energy Capital, LLC ([SE] IDR 'BBB'; Outlook Stable by Fitch), using a formula based on allocated taxable income. These distributions are intended to cover taxes on DCPM's income. In addition, DCPM makes discretionary dividend payments to its sponsors. DCPM paid record dividends to its sponsors in 2008 and leverage was negatively affected by the payment of a special distribution in 2008. However, beginning in the fourth quarter of 2008, no dividends have been paid to the sponsors. Even under stressed conditions, the discretionary nature of the dividends further enhances the company's ability to live within the means of its cash flows. Fitch does not expect dividend payments to resume until commodity markets have returned to more supportive levels. [SM]
In April 2009, Fitch revised the Outlook for DCPM to Negative from Stable reflecting concerns regarding the impact of low commodity prices on the company's cash flows. As a gas processor, DCPM's cash flows are highly sensitive to crude oil, natural gas liquids (NGLs) and natural gas prices. DCPM does not hedge its commodity price exposure and the recent decline in prices is expected to result in 2009 EBITDA of less than half fiscal 2008 levels.
Following further review, Fitch believes a 'BBB' rating is more consistent with DCPM's projected performance which is expected to result in leverage ratios between 2.5 times (x) and 3.5x on a consolidated basis. The analysis leading to DCPM's upgrade to 'BBB+' in September 2008 assumed leverage of 1.5x to 2.5x based on higher base case and stress case commodity price forecasts. For fiscal 2009, Fitch expects debt to EBITDA of 3.5x and EBITDA interest coverage of 4.5x.
Fitch's decision to revise the Outlook to Stable from Negative takes into account numerous factors including the scale and diversity of DCPM's 'must-run' assets and a footprint that extends operations into several key gas producing regions, including high growth shale plays.
The credit is further supported by a defensive financing strategy which has emphasized liquidity and regular market access despite difficult conditions. Additionally, DCPM's capital expenditure and dividend policies are highly discretionary and allow management to conserve cash during difficult operating environments.
DCPM is a tax pass-through entity. Under the terms of its LLC agreement, DCPM is required to make quarterly tax distributions to its sponsors, ConocoPhillips (NYSE: COP) ([COP] IDR 'A'; Outlook Stable by Fitch) and Spectra Energy Capital, LLC ([SE] IDR 'BBB'; Outlook Stable by Fitch), using a formula based on allocated taxable income. These distributions are intended to cover taxes on DCPM's income. In addition, DCPM makes discretionary dividend payments to its sponsors. DCPM paid record dividends to its sponsors in 2008 and leverage was negatively affected by the payment of a special distribution in 2008. However, beginning in the fourth quarter of 2008, no dividends have been paid to the sponsors. Even under stressed conditions, the discretionary nature of the dividends further enhances the company's ability to live within the means of its cash flows. Fitch does not expect dividend payments to resume until commodity markets have returned to more supportive levels. [SM]
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