EPP.PR.A: Credit Trend Cut to Negative by DBRS

DBRS has announced that it:

today changed the trend on the BBB (high) Senior Unsecured Debt and Medium-Term Notes rating of EPCOR Power L.P. (Power LP) to Negative from Stable, as well as the trend on the Pfd-3 (high) Cumulative Redeemable Preferred Shares, Series 1 rating of EPCOR Power Equity Ltd. DBRS has also downgraded the Power LP stability rating to STA-2 (middle) from STA-2 (high).

The actions follow the release of Power LP’s first-quarter 2009 earnings, which showed a net loss of $33 million that when combined with distributions, led to a $47 million decline in partners’ equity. The net loss was largely the result of a $50 million unrealized loss on the change in the fair value of natural gas supply and foreign exchange contracts. This followed a net loss of $68 million for year-end 2008, the primary driver of which was unrealized fair value losses. These non-cash fair value losses have resulted in a decrease in partners’ equity, which is largely responsible for the increase in Power LP’s debt-to-total-capital ratio from less than 40% in 2007 to the current 55%. The accounting recognition of these fair value changes is not reflective of the underlying economic circumstances, as the natural gas is largely used to produce electricity, which is sold at contracted rates.

DBRS noted on March 6, 2009, that while Power LP had ample room under its maintenance covenants (primarily that debt-to-total capital not exceed 65%), an increase in Power LP’s debt-to-total capital level closer to the maintenance covenant restriction would result in financial flexibility being reduced, which could lead to negative rating implications. With the current increase in debt-to-total capital to 55%, combined with Power LP’s expectation of an additional US$72 million in debt in 2009 to fund capital expenditures, there is a likely scenario that Power LP’s leverage ratio would approach 60%, and potentially exceed that value if there were additional negative fair value impacts. This scenario will constrain financial flexibility for the current debt and preferred rating levels. DBRS will continue to monitor the situation, with a one-notch downgrade of the current debt and preferred ratings likely if Power LP’s financial flexibility continues to diminish and the prospect of a covenant issue becomes more concrete. Alternatively, if leverage ratio pressure were to be alleviated (e.g., through asset sales, unit issuance, a reversal in fair value changes, etc.), DBRS would consider returning the trends to Stable.

The stability rating has been downgraded to reflect (1) that a decrease in distributions would be one of Power LP’s options to shore up its partners’ equity level in the event of a covenant issue and (2) weakness in distributable cash flow, which has resulted in the payout ratio (DBRS adjusted) continuing to exceed 100% – it increased to approximately 120% on a last 12 months basis ending March 31, 2009, compared with 110% at year-end 2008.

EPP.PR.A is a PerpetualDiscount currently quoted at 15.21-64 to yield 8.11% at the bid. It was last mentioned on PrefBlog in the post EPP.PR.A and WN.PR.E: Coupled? Decoupled?. Those keeping track of such things will note that WN.PR.E now yields 7.24% … way, way, way, WAY through the EPP issue.

The issue continues to be split-rated, with S&P gauging it as P-2(low) on the national scale. It may be noted that the Credit Rating of the company itself is BBB+/Negative Trend by S&P, so everybody’s carefully watching!

EPP.PR.A is tracked by HIMIPref™, but is relegated to the “Scraps” Index on credit concerns.

One Response to “EPP.PR.A: Credit Trend Cut to Negative by DBRS”

  1. […] was last mentioned on PrefBlog when DBRS assigned the negative trend. EPP.PR.A is tracked by HIMIPref™, but is relegated to the “Scraps” index on […]

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