July 30, 2012 / 7:14 PM / 5 years ago

TEXT-S&P affirms Praxair ratings

Overview

     -- U.S. industrial gas producer Praxair Inc. is issuing $500 million
in notes due 2022; the company is drawing the notes from an existing shelf 
registration. Praxair will use proceeds for general corporate purposes.
     -- We are affirming all of our ratings, including the 'A' long-term and 
'A-1' short-term corporate credit ratings, on Praxair. We are also assigning 
our 'A' senior unsecured debt rating to the company's notes.
     -- The stable outlook incorporates our view that Praxair's strong project 
backlog will likely support higher earnings in the next few years.

Rating Action

On July 30, 2012, Standard & Poor's Ratings Services affirmed its 'A' 
long-term and 'A-1' short-term corporate credit ratings on Danbury, 
Conn.-based Praxair Inc. At the same time, we assigned our 'A' senior 
unsecured debt rating to the company's $500 million notes due 2022. The 
company is drawing the notes from an existing shelf registration. The outlook 
is stable.

Rationale

The ratings on Praxair, a leading industrial gas producer, reflect its 
excellent business profile, the impressive resilience of its cash flows and 
operating margins, and credit metrics that are consistent with our 
expectations. These strengths, along with the substantial percentage of its 
revenues that are under long-term contracts, allow Praxair to pursue 
moderate-size acquisitions and repurchase shares while maintaining credit 
quality. However, we believe the capital intensity of the business, numerous 
investment opportunities, and the cyclicality of some key industrial end 
markets remain tempering factors.

Long-term fundamentals for the industrial gases market remain attractive 
worldwide, with industrial production growth rates of 1.5% to 2.0%, stable 
cash flows, high barriers to entry, and a wide variety of industries served. 
Praxair's business position also benefits from significant sales diversity, 
including a dominant market share in South America, and an expanding business 
in China and India. Praxair expects its sales to emerging countries, currently 
36% of total sales, to increase to 45% of sales by 2015.

Over the next several years, we expect Praxair's sales and return on capital 
(currently 18%) to continue to benefit from management's focus on a variety of 
projects, including:

     -- Building hydrogen plants to support new business with refiners along 
the company's U.S. Gulf Coast pipeline and in emerging markets around the 
world;
     -- Capital investments in China, Korea, and India for onsite capacity to 
supply electronics, petrochemicals, steel facilities, and other industries;
     -- Supplying nitrogen and carbon dioxide to help drillers fracture rock 
formations and for enhanced oil recovery; and
     -- Providing technology to enable customers to burn fuel (primarily 
natural gas) more efficiently, capture and sequester carbon dioxide more 
effectively, and reduce the amount of sludge in wastewater.

Praxair's project backlog was $2.5 billion as of June 30, 2012, and most of 
the new projects are energy related and in emerging markets. EBITDA margins 
remain robust in the low-30% area and in the top tier of chemical companies. 
The key ratio of funds from operations (FFO) to total adjusted debt (taking 
into consideration capitalized operating leases and underfunded pension and 
postretirement benefits obligations) was 35% as of June 30, 2012, and is in 
the 35% to 40% range that we consider appropriate for the ratings. Praxair 
invested about $51 million in acquisitions in the first six months of 2012, 
and we expect acquisition-related outlays to remain manageable.

Liquidity

We view Praxair's liquidity as "strong" under our criteria. Our 'A-1' 
short-term rating on Praxair incorporates the ample availability under its 
revolving credit facilities and its solid cash flow generation. The credit 
facilities include a $1.75 billion credit facility expiring in 2016 and a $400 
million multicurrency facility in Europe expiring in November 2012.

Other relevant aspects of our assessment of the company's liquidity profile 
include:

     -- Sources of liquidity over the next year will exceed uses by 1.5x or 
more;
     -- Net sources should be positive, and we expect the company to  remain 
in compliance with covenants, even with a 30% drop in EBITDA or a 25% increase 
in debt; and
     -- Praxair could likely absorb low-probability shocks due to its positive 
cash flow from operations and available liquidity.

As of June 30, 2012, Praxair had cash and cash equivalents of $104 million. 
The company will likely continue to direct its free cash flow to potential 
acquisitions, common share repurchases, and dividends. It completed $313 
million of share repurchases in the first six months of 2012.

Praxair expects its capital expenditures to be approximately $2.1 billion to 
$2.4 billion in 2012, which is substantial and above the long-term capital 
reinvestment rate of 10% to 15% of sales. A major portion of capital outlays 
will be for new production plants, mostly for onsite air-separation facilities 
backed by 15-year take-or-pay contracts with customers. The remainder is for 
cost-reduction and maintenance programs.

In September 2010, the Brazilian Administrative Council for Economic Defense 
alleged anticompetitive activity among industrial gas companies in Brazil and 
imposed a civil fine of $1 billion on the Brazil-based subsidiary of Praxair. 
In response, the company filed an annulment petition with the federal court in 
Brasilia seeking to have the fine overturned. Appeals in Brazil have 
historically taken many years to resolve, so the timing of the appeal decision 
is uncertain.

Outlook

The outlook is stable. Praxair's strong project backlog supports prospects 
that net income will continue to grow. These earnings enhance Praxair's 
ability to address heavy capital investments, periodic acquisitions, and 
common stock repurchases, while sustaining appropriate financial ratios 
throughout the business cycle. In our view, a significant departure from the 
expected financial and operating strategies, including a 
larger-than-anticipated acquisition, could challenge the key underpinnings of 
the ratings. Although we do not currently expect to do so, we could lower the 
ratings if sizable acquisitions and share repurchases result in FFO to total 
adjusted debt deteriorating to less than 30% without clear prospects for 
recovery. On the other hand, we could raise the ratings if Praxair's financial 
profile improved such that FFO to total adjusted debt is sustained in the 40% 
to 45% range.

Related Criteria And Research

     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- Industrials: Key Credit Factors: Business And Financial Risks In The 
Commodity And Specialty Chemical Industry, Nov. 20, 2008

Ratings List

Ratings Affirmed

Praxair Inc.
                                        Rating
 Corporate credit rating                A/Stable/A-1       
 Senior unsecured                       A               
 Commercial paper                       A-1                

New Rating

Praxair Inc. 
                                        Rating
 Senior unsecured
$500M sr unsecd notes due 2022          A

Our Standards:The Thomson Reuters Trust Principles.
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