TEXT-S&P assigns Inergy Midstream 'BB' ratings
Overview -- U.S. midstream energy partnership Inergy Midstream L.P. plans to issue $400 million in senior unsecured notes due 2020. -- We are assigning our 'BB' corporate credit rating to Inergy Midstream and a 'BB' issue-level rating to the partnership's senior unsecured notes. -- We are withdrawing our 'BB-' corporate credit rating on parent Inergy L.P. and our 'B+' issue ratings on the partnership's debt at the partnership's request. -- The stable outlook reflects our view that Inergy's midstream business will generate stable cash flow and consolidated debt to EBITDA will be in the 3.5x to 3.75x range in 2013. Rating Action On Nov. 26, 2012, Standard & Poor's Ratings Services assigned its 'BB' corporate credit rating to Inergy Midstream L.P. At the same time, we assigned an issue-level rating of 'BB' and a recovery rating of '4' to the partnership's and NRGM Finance Corp.'s $400 million senior unsecured notes due 2020. The '4' recovery rating indicates that lenders can expect average (30% to 50%) recovery if a payment default occurs. The outlook is stable. The partnership intends to use net proceeds to partially fund its acquisition of Rangeland Energy LLC and to repay debt outstanding under its revolving credit facility. We also withdrew our 'BB-' corporate credit rating on parent Inergy L.P. and our issue ratings on the partnership's debt at the partnership's request. Rationale Standard & Poor's rating on Inergy Midstream reflects the consolidated credit profile with parent Inergy L.P. and the partnership's "fair" business risk profile and "significant" financial risk profile under our criteria. Inergy L.P. maintains a significant strategic influence over Inergy Midstream because it owns the general partnership interest in Inergy Midstream as well as about 66% of its limited partnership units (pro forma for the privately-placed common units issued in connection with the Rangeland acquisition). We base the fair business risk profile on the partnership's position as a midstream energy provider focused mainly on natural gas storage operations in the Northeast U.S. and Texas, natural gas transportation, and natural gas liquids (NGL) and crude oil logistics and storage. The partnership's significant financial risk profile reflects our expectation that debt to EBITDA will be about 3.25x for Inergy Midstream only and about 3.5x to 3.75x on a consolidated basis. In our view, the partnership's consolidated business risk profile improved after selling the more volatile retail propane business to Suburban Propane Partners L.P. (BB-/Stable/--). We balance this assessment with the midstream business' relatively small scale and limited diversity, with a significant concentration in natural gas storage assets. We believe Inergy Midstream's acquisition of Rangeland Energy's COLT crude oil rail terminal, storage, and pipeline facilities in the Bakken Shale in North Dakota enhances the partnership's credit profile because the acquisition will expand Inergy's geographic footprint and is underpinned mainly by take-or-pay contracts with an average contract life of about four years, which supports credit, in our view. The COLT system has 720,000 barrels of crude oil storage capacity and can accommodate 120-car-unit trains that can move 120,000 barrels of crude per day. Under our base case forecast, we believe 2013 consolidated EBITDA will likely be between $250 million and $260 million. We expect about 70% of the EBITDA to come from Inergy Midstream, including EBITDA from the COLT crude oil logistics assets, and the balance from parent Inergy L.P. We assume that Inergy L.P.'s EBITDA contribution will come from modest growth at the parent's NGL logistics business segment, partly offset by lower rates at the Tres Palacios natural gas storage facility. We expect capital spending--both growth and maintenance--to be manageable, in the $125 million to $150 million range, with about 75% of total spending at the Inergy Midstream level. As a result, we believe Inergy Midstream could achieve a total debt to EBITDA ratio of about 3.25x to 3.5x and EBITDA interest coverage of about 5.5x by year-end 2013. On a consolidated basis, we expect debt to EBITDA between 3.5x and 3.75x and consolidated EBITDA to interest of about 4.5x. We forecast a distribution coverage ratio of 1.1x to 1.2x, which we view as acceptable given the predominantly fee-based nature of Inergy's business. As part of the propane sale to Suburban, Inergy provides a two-year guarantee of Suburban's 2018 notes up to $600 million under a conditional residual support agreement (CRSA). We do not increase Inergy's adjusted debt for the CRSA in our base case forecast, but do consider an alternative scenario in which Suburban defaults and triggers an obligation. Given our assumption of the likely loss if there is a default of the bonds, we calculate the present value of the potential obligation to be about $360 million, roughly 60% of the bonds' face value. In this scenario, Inergy's consolidated debt to EBITDA ratio would increase by about 1.5x. Inergy Midstream's assets are almost entirely fee-based under firm, long-term contracts, and include natural gas and NGL storage in the Northeast U.S., natural gas transportation assets including the Marc-I Hub pipeline, the U.S. Salt business, and the COLT crude oil logistics assets. Inergy's transportation and storage assets have a weighted-average contract life of about 5.5 years with mostly investment-grade counterparties. U.S. Salt is also strategically situated near Inergy's Stagecoach, Steuben, Thomas Corners, and NGL storage facilities and can provide incremental natural gas and liquid petroleum gas storage capacity. Inergy's assets consist of Tres Palacios gas storage facility, a West coast NGL processing and fractionation facility, an NGL logistics business, and its ownership interest in Inergy Midstream. Inergy is seeing some softness in contract rates at its Tres Palacios natural gas storage facility due to weak basis differentials (the difference between the Henry Hub spot price and the natural gas cash spot price at a different location). Tres Palacios has about 59% of its current 38.4 billion cubic feet of capacity under firm agreements through 2013 with gas distribution companies and marketers that have weighted average rating of about 'BB+'. However, much of the remaining capacity is "parked" for terms under one year. Although we believe rates could remain weak for several years, we think that they will not deteriorate much more, given that natural gas prices seem to have stabilized. Liquidity We consider Inergy's consolidated liquidity to be "adequate" under our criteria, with estimated liquidity sources divided by uses of 1.5x during the next 12 months. Although this ratio maps to a "strong" assessment under our criteria, qualitative factors--such as having a demonstrated ability to raise capital in challenging markets--keeps our view in the adequate category. Sources reflect our assumptions of funds from operations of about $260 million and credit facility availability of $610 million. Key uses include assumed capital spending (for maintenance and growth) of between $125 and $150 million, and distributions of about $180 million. The partnership has no significant near-term debt maturities (both credit facilities mature in 2016). Maintenance capital spending is only about $10 million annually, which allows the partnership to scale down spending if necessary. The credit facilities contain minimum interest coverage ratios and maximum total leverage covenants (total debt to EBITDA) whereby Inergy must maintain a ratio of less than 4.75x and Inergy Midstream less than 5x. Both partnerships have a comfortable cushion in these ratios (Inergy's cushion is more than 50% and Inergy Midstream's is about 40% pro forma for the notes) as of Sept. 30, 2012, and we expect there to be ample covenant headroom in 2013. Recovery analysis The recovery rating on Inergy Midstream's senior unsecured notes is '4' and the issue rating is 'BB', indicating that lenders can expect average (30% to 50%) recovery if a payment default occurs. For the complete recovery analysis, see the recovery report to be published following this article on RatingsDirect. Outlook The stable outlook on Inergy Midstream reflects our expectations that consolidated financial leverage will be about 3.5x in 2013, and that the partnership will successfully integrate the Rangeland acquisition and execute on its organic growth initiatives. Higher ratings are unlikely over the next 12 to 18 months, due to the midstream businesses' limited scale and asset diversity, as well as our belief that natural gas storage cash flows could face recontracting risk during this period. We could raise the rating over time if the partnership continues to expand and diversify its midstream business while consistently maintaining consolidated total adjusted debt to EBITDA below 4x. We could lower the rating if the natural gas storage business underperforms or the midstream expansion projects endure meaningful cost overruns or delays such that total adjusted debt to EBITDA approaches 5x. Related Criteria And Research Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 Ratings List New Ratings Inergy Midstream L.P. Corp. credit rating BB/Stable/-- $400 mil senior unsecured notes BB Recovery rating 4 Ratings Withdrawn To From Inergy L.P. Corp. credit rating NR BB-/Stable/-- Inergy L.P. Inergy Finance Corp. Senior unsecured NR B+/Watch Dev Recovery rating NR 5 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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