TEXT-S&P cuts Suburban Propane Partners rating
Overview -- U.S. retail propane distributor Suburban Propane Partners L.P. completed its acquisition of Inergy L.P.'s retail propane business for $1.8 billion. -- Suburban also completed the offer to exchange Inergy's outstanding 7% senior notes due 2018 and 6.875% senior notes due 2021 for $1 billion in new debt of the same tenors and $200 million in cash. -- We are lowering our corporate credit ratings on Suburban to 'BB-' from 'BB' and removing them from CreditWatch with negative implications. -- We are assigning a 'BB-' issue rating and '4' recovery rating to the exchanged senior notes. -- The stable outlook reflects our view that the partnership will maintain debt to EBITDA of about 4x in 2013. Rating Action On Aug. 2, 2012, Standard & Poor's Ratings Services lowered its corporate credit and senior unsecured ratings on Suburban Propane Partners L.P. to 'BB-' from 'BB' and removed the ratings from CreditWatch, where they were placed with negative implications on April 26, 2012. The outlook is stable. At the same, we assigned a 'BB-' issue rating and '4' recovery rating to Suburban's 7.50% notes due 2018 and 7.375% notes due 2021. The '4' recovery rating indicates our expectation for average (30% to 50%) recovery in the event a payment default occurs. Rationale The rating action on Suburban reflects our view that its acquisition of Inergy's retail propane business will result in higher financial leverage, which more than offsets the increased scale the propane business brings. Suburban's credit measures are aggressive, based on the increase in debt from the exchange and an unseasonably warm winter that significantly affected financial results over the trailing-12-month period. We expect total debt to EBITDA to be slightly more than 5x as of year-end 2012, compared with 2.4x as of Sept. 30, 2011. We are revising the financial risk profile to "significant" from "intermediate" under our criteria because we anticipate credit measures will likely remain weaker than our prior expectations. However, we expect the company's ratios to improve in 2013. Specifically, we estimate that total debt to EBITDA will decrease to about 3.8x in 2013, assuming propane volumes recover to more normal levels and retail margins remain somewhat stable. Suburban's business risk profile remains weak primarily due to what we consider to be industry risks. These risks include the potential for mild winter weather, little product differentiation, customer conservation, and some commodity price exposure. Still, we recognize that the acquisition better positions Suburban due to the partnership's increased scale, better geographic diversity, and potential cost synergies. The Inergy purchase about doubles the partnership's size (in terms of retail gallons sold) and expands its geographic territory beyond its existing East Coast and West Coast markets and into the Midwest and Southeast. Under our base-case forecast, pro forma for the acquisition, we assume that retail propane gallons sold will decrease about 12% to about 550,000 gallons for year-end 2012 and that blended gross margins will be about $1.25 per gallon. We estimate 2012 EBITDA will be between $250 million and $270 million. Our assumptions for 2013 include a retail propane gross margin of about $1.28 per gallon and retail gallons sold of 630,000, which is 14% above 2012 but comparable to 2011 levels. We also assume a 3% increase in operating expenses and arrive at EBITDA between $340 million and $360 million for fiscal 2013. As a result, we expect financial ratios to weaken, with total debt to EBITDA of about 5x in 2012 and 3.8x in 2013. We also expect the distribution coverage ratio to be weak, with coverage falling to about 0.7x in 2012 from 1.2x in 2011. However, we believe the partnership will maintain cash of $75 million to $100 million that will more than offset the coverage shortfall. We assume that distribution coverage will improve to about 1.1x in 2013. Suburban's ability to achieve lower financial leverage not only depends on colder winter weather and less customer conservation, but also on the partnership's capacity to realize some operating synergies. Based on management's track record of effectively managing operating costs through the cycle, we conservatively forecast annual cost savings of $10 million to $30 million over the next 12 month forecast period. Liquidity We consider Suburban's liquidity position to be "strong" under our criteria, with estimated liquidity sources divided by uses of 1.6x during the next 12 months and more than 1x thereafter. Pro forma for the acquisition, we expect the partnership to have about $200 million of funds from operations (FFO) and $300 million of revolving credit capacity. Key uses include assumed capital spending (both maintenance and growth-oriented) of about $40 million, peak working capital needs of $100 million, and distributions of about $170 million. The partnership's historical track record of funding its working capital requirements solely through cash flow, even when commodity prices have been high, lends further credence to the liquidity assessment. The partnership has not borrowed under its credit facility for working capital purposes since April 2006. Suburban does not have any near-term debt maturities. Its revolving credit facility is due in 2017 and the earliest tranche of unsecured notes matures in 2018. Suburban's revolving credit agreement has financial covenants, which have been amended for the Inergy acquisition. The financial covenants require the partnership to maintain a consolidated leverage ratio (total debt to EBITDA) of less than 7x in December 2012 and 5.75x through December 2013; a minimum EBITDA interest coverage ratio of 2x in December 2012 and 2.25x through December 2013; and the operating partnership to maintain a senior secured leverage ratio less than 3x. We expect the partnership to remain in compliance with these covenants. Recovery analysis The rating on Suburban's senior unsecured debt is 'BB-' (the same as the corporate credit rating), and the recovery rating is '4', indicating our expectation that lenders would receive average (30% to 50%) recovery if a payment default occurs. (For the complete recovery analysis, see the recovery report on Suburban Propane to be published following this article on RatingsDirect.) Outlook The stable outlook reflects our view that the partnership will maintain total debt to EBITDA of about 4x in 2013. We could lower the ratings if cash flows drop below our expectations due to increased customer conservation, mild winter weather, or reduced margins, resulting in a debt to EBITDA ratio of 5x or higher outside of the working capital borrowings peak. Although we don't consider an upgrade likely at this time, we could raise the ratings if Suburban can increase the amount of retail gallons it sells and maintain strong margins such that financial leverage is sustained below 3x. Related Criteria And Research -- , April 18, 2012 -- , Sept. 28, 2011 -- , May 27, 2009 -- , April 15, 2008 Ratings List Downgraded; CreditWatch/Outlook Action; Recovery Ratings Unchanged To From Suburban Propane Partners L.P. Corporate Credit Rating BB-/Stable/-- BB/Watch Neg/-- Senior Unsecured BB- BB/Watch Neg Recovery Rating 4 4 Suburban Energy Finance Corp. Senior Unsecured BB- BB/Watch Neg Recovery Rating 4 4 New Rating Suburban Propane Partners L.P. Suburban Energy Finance Corp. Senior Unsecured US$ mil 7.375% sr unsecd nts due BB- 2021 Recovery Rating 4 US$ mil 7.50% sr unsecd nts due 2018 BB- Recovery Rating 4
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