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Fitch Downgrades DCP Midstream on Price Exposure

Commodity price exposure dinged the rating on DCP Midstream LLC (DCPM) debt as Fitch Ratings downgraded the company's senior unsecured debt and Issuer Default Rating (IDR) to "BBB" from "BBB+." However, the ratings outlook was revised to "stable" from "negative."

Fitch affirmed DCPM's short-term IDR at "F2," which applies to its commercial paper program. The rating action affects approximately $3 billion of debt.

In April Fitch revised the outlook to "negative" from "stable" (see NGI, April 20), reflecting concerns over the impact of low commodity prices on cash flow.

"As a gas processor, DCPM's cash flows are highly sensitive to crude oil, natural gas liquids (NGL) and natural gas prices," Fitch said. "DCPM does not hedge its commodity price exposure and the recent decline in prices is expected to result in 2009 EBITDA [earnings before interest, taxes, depreciation and amortization] of less than half fiscal 2008 levels."

The ratings agency said it 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," Fitch said. "It is also important to recognize that future long-term cash flow performance is not predicated on the current commodity market. Since DCPM is unhedged there is no lag in profitability when and if commodity markets rebound. While it is obvious that cash flows are highly sensitive to declines in commodity prices, the reverse is also true and cash flows could rebound to a large degree should improving economic conditions cause commodity prices to stabilize and/or improve."

The credit is further supported by a defensive financing strategy that has emphasized liquidity and regular market access despite difficult conditions, Fitch said.

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