Inergy Going For Radical Shift In Its Business Model

| About: Crestwood Midstream (CMLP)

I had not taken a look at Inergy L.P. (NRGY) in a couple of years and when I started digging into the just released quarterly earnings report, I was in for a big surprise. Inergy - a long time propane distribution company - has put plans in motion to get almost completely out of the propane business.

Inergy had been an interesting investment prospect due to a long history of quarterly dividend increases. Starting around 2001, the company grew by buying up smaller, local propane distributors. Along the way, the dividend increased every quarter from 31.25 cents per share - split-adjusted - at the end of 2001 up to 70.5 cents paid in August 2010. Unfortunately, the company probably paid out too much of income as dividends, piled on a lot of debt and the dividend increase train stopped in 2010. The payout remained at 70.5 cents until the new dividend structure announced last week and will be discussed in a moment.

In 2008, Inergy started to pick up some natural gas midstream assets - primarily storage and processing locations with a small amount of gas pipeline. In 2011, the company quickly filed for and spun-off a portion of the midstream assets as a new MLP - Inergy Midstream L.P. (NRGM). The proceeds from the spin-off were used to pay down about one-third of Inergy's long-term debt. The move did not do much to increase the Inergy prospects in the eyes of the market and post-spin off, the shares continued to decline, from around $24 to below $16 a few weeks ago. At the $2.82 per year dividend rate, the yield ballooned to over 17%.

Of course the dividend was unsustainable and on April 26, 2012, the company declared a quarterly dividend of 37.5 cents - $1.50 per year - a 47% reduction in the distribution. However, this was not the big news. On the same day, the company also announce it was divesting itself of its retail propane business.

The - Soon to Be - New Inergy

Inergy has reached an agreement to sell its retail propane operations to Suburban Propane (NYSE:SPH) for $1.8 billion. The deal involves a bond swap - reducing Inergy's debt by $1.2 billion or three-quarters of the total - and Inergy will receive units in Suburban worth about one-quarter of the company. Assuming regulatory and bondholder approval, the deal is expected to close by September 2012.

The resulting Inergy will be the owner of the Suburban Propane units, 75% of the Inergy Midstream units, the general partnership units and the incentive rights. Inergy will also own some midstream assets which have not yet been dropped down to the new MLP plus some wholesale and service business units. The markets seem to like the deal and the shares have recovered to the present $19 level on the news.

The new dividend rate was set based on the expectations of distributions from the Suburban units after the deal is consummated and the distributions from the Inergy Midstream holdings. The new dividend rate puts the stock yield at 7.9%. For comparison, Inergy Midstream yields 6.8%, but has declared only one quarterly dividend.

For investors who knew or owned the old Inergy will see a completely different company in the fall. It will be interesting to see of the management can do a better job with the midstream assets than it did in propane - it seems to think so. The near 8% yield is enough to take a chance on the company. If the dividend does not start to grow in 2013, look for better opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.