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August 24, 2011

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NRGY's Latest Bold Move: Midstream MLP IPO

Will Inergy Midstream IPO Turn NRGY Around?
This morning, Inergy L.P. ($NRGY) filed its initial IPO registration form S-1 for its midstream subsidiary, Inergy Midstream, L.P. (will trade with ticker NRGM).  The filing is for up to $300mm in gross proceeds.  Morgan Stanley and Barclays Capital are joint bookrunners and the only banks listed so far on the registration statement (see S-1 here).
NRGM owns 4 natural gas storage facilities with a combined working gas storage capacity of 41 bcf, 1 NGL storage facility with 1.5 million barrels of capacity, and natural gas pipelines that will have 875 MMcf/d of transportation capacity upon completion of two pipeline projects.

Map of Inergy, L.P.’s Operations

NRGM projects that 66% of revenues will come from firm storage services, 26% will come from transportation services, and the rest from hub services.  NRGM expects to have $127.9 million in EBITDA in the next 12 months and $123.5 million in distributable cash flow.   NRGM projects to spend $118 million on planned and contracted expansion projects to achieve its projections.  NRGM will have a clear balance sheet to start with, only $80 million of debt, or 0.6x debt to EBITDA, compared with 4.9x debt to EBITDA at NRGY currently.
NRGY’s EBITDA for the last 12 months was $366mm, and as of today’s close, NRGY had an enterprise value of $5.1 billion, which means NRGY trades at 13.9x EBITDA.  If NRGM trades at the same valuation, NRGM would have a value of approximately $1.8 billion.  We’ll see in the next few rounds of revised S-1’s what the bankers think NRGM is worth.
The comparable situation is to PAA, which took its natural gas storage business public as PNG in 2010.  PNG now carries a 24x LTM enterprise value to EBITDA multiple (18.6x consensus 2011E EBITDA multiple) as it ramps up growth over the next few years, very similar to NRGY’s storage expansion projects.  If NRGM gets that kind of multiple as a standalone business, this IPO would be a home run for NRGY.
This IPO is an effort to inject some life into the company, which has struggled of late with both its propane and its midstream businesses.  The IPO will help NRGY de-lever its business without losing control of the storage assets and associated upside.  NRGY will retain the general partner and incentive distribution rights at NRGM, which will pay NRGY an increasing distribution when NRGM increases its distribution per unit.
NRGY has now gone 4 straight quarters without growing its distribution, after 35 straight quarters of growing its distribution (every single quarter since its 2001 IPO).  NRGY raised its distribution at an annual rate of 10.3% until the second quarter of 2010, and since then 0%.  Declining propane fundamentals and the challenge of digesting its merger with NRGP (its public GP) led to the growth stall. The market has not been kind to NRGY as a result.  As shown below, NRGY has lost 1/3rd of its market value since the end of 2010, well below its propane peers like SPH and APU.  NRGY now sports a yield of 10.7%.

Will this IPO be the catalyst that turns things around?  I’m not sure, but I like the drastic move and the effort management is putting into changing the way the market perceives the company.  It may be too little too late, though, as they’ve dug a pretty big whole with several big moves that haven’t worked out in the past few years.
Related: Propane Tank’s Empty
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. No Positions.

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