TEXT-S&P assigns Inergy Midstream 'BB' ratings

Mon Nov 26, 2012 2:28pm EST

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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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