TEXT-S&P cuts Suburban Propane Partners rating

Thu Aug 2, 2012 4:18pm EDT

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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