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Global Credit Research - 24 Aug 2010
Approximately $1.1 billion of debt securities affected
New York, August 24, 2010 -- Moody's Investors Service upgraded Inergy, L.P.'s
(NRGY) Corporate Family Rating (CFR) to Ba2 from Ba3, its Probability
of Default Rating to Ba2 from Ba3, and raised its senior unsecured
notes rating to Ba3 from B1. Moody's also affirmed the SGL-3
Speculative Grade Liquidity Rating. The rating outlook is stable.
"The upgrade reflects substantial improvements in NRGY's operating
and financial performance leading to expectations for enhanced business
and seasonal diversification from growing natural gas storage operations
in the U.S. northeast, and increased fee-based
income from the midstream segment helping reduce cash flow volatility,"
said Ken Austin, Moody's Vice President. "The
upgrade also considers the announced merger of Inergy Holdings L.P.
(NRGP) -- the general partner (GP) - into NRGY, which
will eliminate NRGY's incentive distribution rights (IDRs) owned
by NRGP, create a simplified corporate structure, and support
its credit profile."
The company has been able to grow sales volume and maintain margins at
healthy levels through small-scale acquisitions and cost cutting
initiatives despite a general trend towards conservation in the industry
and lower propane prices. NRGY has also shown the willingness and
ability to issue equity to support liquidity and fund growth and acquisition
capex as evidenced by approximately $401 million of equity issuances
since the beginning of 2009.
The growth of the midstream sector has also enhanced Inergy's overall
profile. The gross margin contribution from this business (approximately
40% as of June 30, 2010), provides the company with
a steady cash flows stream primarily through its natural gas storage segment.
The collapsing of the general partnership into NRGY through an equity
exchange transaction is a credit positive as it does not erode liquidity
or require funding from the debt or equity markets, decreases NRGY's
cost of capital by eliminating the IDRs and the GP's economic interest,
and simplifies reporting, governance and improves transparency through
a streamlined corporate structure. The merger is expected to close
in the fourth quarter of 2010, subject to GP voter approval and
While Moody's recognizes these positive developments, NRGY's
leverage (debt/EBITDA of 4.14x at June 30, 2010) remains
elevated for the rating category and is still on the high end for the
rating. Although this leverage is partially tempered by Inergy's
stable midstream business and is in-line with the other "pure-play"
midstream MLP peers, the upgrade assumes that leverage will not
increase from current levels and decline below 4.0x on a sustainable
NRGY's liquidity is expected to be adequate in 2010 and 2011 which
is captured in our SGL-3 rating. Internally generated cash
flow should cover maintenance capital expenditures, interest payments,
working capital requirements, and cash distributions to unit holders
over the next 12 to 15 months.
The outlook and ratings would be pressured in leverage rises from current
levels and remains above 4.0x for an extended period. Conversely,
a positive outlook or upgrade would be considered if the company continues
to improve its business profile and brings leverage to well under 3.5x
on a sustainable basis.
The last rating action on NRGY was on January 28, 2009 when we affirmed
the company's Ba3 CFR and changed the outlook to stable from positive.
The principal methodologies used in rating Inergy, L.P.
were Midstream Energy Companies & Partnerships published in September
2007, and Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
Inergy, headquartered in Kansas City, MO, is a publicly
traded master limited partnership (MLP) that owns and operates one of
the largest geographically diverse retail and wholesale propane supply,
marketing, and distribution businesses in the United States.
NRGY also owns and operates a natural gas storage facility located approximately
150 miles northwest of New York City and a natural gas liquids business
located near Bakersfield, California.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information,
and confidential proprietary Moody's Analytics' information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit or validate
information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades Inergy to Ba2, outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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