DBRS has today downgraded the rating of EPCOR Power Equity Ltd.’s (Power Equity) Cumulative Redeemable Preferred Shares, Series 1 (Series 1 Preferreds), to Pfd-3 from Pfd-3 (high). The trend remains Negative. This action follows Power Equity’s announcement that it has sold, via a bought deal arrangement, $100 million of Cumulative Rate Reset Preferred Shares, Series 2 (Series 2 Preferreds), to which DBRS has assigned a rating of Pfd-3 with a Negative trend.
Power Equity is a wholly-owned subsidiary of EPCOR Power L.P. (Power LP), with Power LP guaranteeing, on a subordinated basis, certain amounts relating to Power Equity’s Series 1 Preferreds and Series 2 Preferreds (including payment of dividends, as and when declared). As such, the preferred share ratings of Power Equity continue to be based on the credit profile of Power LP. Following the sale of the Series 2 Preferreds, Power LP’s capitalization will include an amount of preferred equity (totalling approximately $220 million) that is large compared with the amount of the Partners’ equity on the balance sheet ($564 million as of June 30, 2009). The rating on the Series 1 Preferreds has been downgraded by one notch to Pfd-3 (with the same rating assigned to the Series 2 Preferreds) to reflect the now-significant amount of preferred equity Power LP carries in relation to its level of Partners’ equity.
Not the same reasons that triggered my speculation! That’s forecasting for you! DBRS continues:
The change in Power Equity’s preferred rating has no impact on the ratings of Power LP, which stand at: Senior Unsecured Debt & Medium-Term Notes of BBB (high) with a Negative trend, and a stability rating of STA-2 (low). See the DBRS press releases dated April 29, 2009, and June 8, 2009, for additional details on recent rating actions and the Negative trends. Since the change in trend from Stable to Negative in April, there have been two developments viewed as positive for Power LP’s credit profile: 1) a reduction in unit distributions, expected to conserve approximately $40 million in cash flow per year; and 2) the proceeds from the sale of the Series 2 Preferreds will be applied to debt reduction. Both of these developments should help Power LP avoid moving closer to its 65% debt-to-capitalization covenant. However, the trends will remain Negative until DBRS views Power LP’s capitalization as stable on a sustainable basis, and expected levels of cash flow are maintained.
Power LP recently stated that it was modestly reducing its financial expectations for 2009, largely as a result of low operating margins at its two North Carolina facilities. DBRS does not view this as a material change, as a reduced level of contributions from these facilities has already been factored into our analysis.