TEXT-S&P revises Tervita Corp outlook to negative

(The following statement was released by the rating agency)Overview

-- We expect Tervita Corp.'s 2012 debt-to-EBITDA to deteriorate above6.5x through the next 12 months due to soft industry conditions, which willlead to weaker-than-expected EBITDA generation.

-- We are revising our outlook on Tervita to negative from stable.

-- We are affirming our 'B' long-term corporate credit rating.

-- The 'B' issue-level rating on the company's senior secured debt, andits 'CCC+' issue-level ratings on Tervita's unsecured and subordinated debtare unchanged, as are the '3' and '6' recovery ratings on the secured andunsecured debt, respectively.

-- The outlook revision reflects our view that Tervita's EBITDA throughthe second half of 2012 and into 2013 will be significantly lower thanexpected due to lower drilling activity and weather-related issues.

Rating ActionOn Oct. 4, 2012, Standard & Poor's Rating Services revised its outlook onCalgary, Alta.-based Tervita Corp. (formerly CCS Corp.) to negative fromstable. At the same time, Standard & Poor's affirmed its 'B' long-termcorporate credit rating on Tervita, its 'B' issue-level rating on thecompany's senior secured debt, and its 'CCC+' issue-level ratings on Tervita'sunsecured and subordinated debt. The '3' recovery rating on the secured debtand '6' recovery rating on the unsecured and subordinated debt are unchanged,and indicate our expectation of meaningful (50%-70%) and negligible (0%-10%)recovery, respectively, under our default scenario.

Standard & Poor's had expected Tervita to generate significant EBITDA in 2012such that debt-to-EBITDA would improve below 5.7x at year-end 2012. However,lower drilling activity combined with wet weather and delays in facilitiescoming online have reduced our expectations for the company's 2012 and 2013EBITDA. We forecast 2012 EBITDA to be C$370 million-C$400 million, down fromour original expectation of C$420 million-C$450 million; we project Tervita toend 2012 with about 7.0-7.5x debt to EBITDA. We, however, expectdebt-to-EBITDA to improve but remain elevated above 5.5x in 2013.

Rationale

The ratings on Tervita reflect Standard & Poor's view of the company's "fair"business risk profile and "highly leveraged" financial risk profile. Ourratings take into account the company's high debt leverage due to management'saggressive financial policy, participation in the competitive and cyclicaloilfield services market, and lack of long-term contracts. The ratings alsoincorporate our positive assessment of Tervita's relatively stable operatingmargins and integrated strategy that provides cross-selling opportunities. Inour opinion, the company's financial risk profile constrains the ratings.

Tervita is an integrated environmental service company that provides servicesin various fields, including but not limited to energy-related wastemanagement, environmental remediation, and well servicing. Most of itsoperations are in western Canada (85% of gross profit), with some in the U.S.As of June 30, 2012, the company had about C$2.58 billion in adjusted debt(adjusted mostly for operating leases and asset-retirement obligations),compared with C$2.38 billion of balance-sheet debt.

In our view, Tervita's highly leveraged financial risk profile, which reflectsits high debt-to-EBITDA ratio and large cash flow requirements to service itsfixed charges, constrain the ratings. The company finished 2011 with about a6.9x debt-to-EBITDA ratio; given our revised assumptions for Tervita's 2012results, we expect the company to finish 2012 with about a 7.0x-7.5xdebt-to-EBITDA measure. We forecast the company to end 2013 with 5.5x-6.5xdebt-to-EBITDA. We estimate its annual fixed charges (maintenance capex, debtamortization, and interest expense) at C$300 million-C$350 million annuallyfor 2012 and 2013, which is high compared with 2011 EBITDA of C$340 millionand our expected 2012 EBITDA of C$370 million-C$400 million.

We view management's financial policy as aggressive. We believe Tervita'sfinancing of capital expenditure plans through debt for the past few years andmanagement's plan to improve credit measures through EBITDA growth instead ofdebt reduction as risky. Although the company's EBITDA has improvedmarginally, additional debt on the balance sheet to fund capex has hinderedsignificant improvement in its credit measures and constrained return oncapital at less than 3%. Tervita will spend C$650 million-C$700 million incapex in 2012-2013; it will fund 2012 capex partially through additional debtbut plans to keep 2013 capex within cash flow. Given the additional debt, weexpect the company's debt-to-EBITDA to remain above 7.0x through 2012 and 5.5xthrough 2013.

Tervita's EBITDA and revenue generation depend largely on the highly volatileoil and gas industry in the North America market. About 75%-80% of thecompany's revenues are exposed to that industry, and we expect the proportionto stay the same. We believe that Tervita's exposure to North America alsoexposes it to the volatility of its clients' capital budgets and operations,which can be pulled back in times of weak commodity prices. Lower drilling rigcount and E&P companies' reduced capex plans are significant factors inTervita's lower forecast EBITDA in second-half 2012; in addition, wet weatherand delay in bringing some facilities online have also stressed EBITDAgeneration.

Furthermore, as is typical for the services, the work the company's conductsfor customers is not contracted; instead, there are pricing agreements with noguarantees for minimum volumes. We believe that Tervita's cash flows arevulnerable to a sudden loss in revenues should customers scale backoperations, decide to perform the services themselves, or use services from acompeting firm.

The company supports production activities (about 65% of revenues), ratherthan drilling-related activities, which mitigates the volatility in itsprofitability to some extent. We expect operating margins to remain relativelystable in trough industry conditions when compared with that of othercompanies exposed to the oil and gas sector. Tervita's fluids and solidsservices segments generate stable margins (about 65% of the company's totalgross profit), despite some volume fluctuation. In the past five years,including the 2008-2009 downturn, Tervita's EBITDA margin (total EBITDAdivided by total revenues less marketing revenues) ranged from 26%-30%,compared with 14%-35% (trough-peak margins) for other oilfield servicecompanies.

In our view, Tervita's recent strategy of marketing all its business segmentsunder one umbrella, instead of a fragmented method, should enhance itsdiversification. Management's integrated marketing approach and theopportunity to cross-sell different servicing opportunities in the currentlybeneficial industry condition (horizontal drilling and associated pressurepumping) should facilitate the company's revenue and EBITDA growth.

For 2012 and 2013, we have forecast the following:

-- Gross profit and EBITDA growth of 15%-25% in 2012 and 2013.

-- Tervita will spend C$650 million-C$700 million in capex for 2012 and2013.

-- Most of the growth is from the fluids services and Tervita U.S.segments.

Based on our assumptions, the company will end 2012 with a 6.7x-7.2xdebt-to-EBITDA and 2013 with a 5.5x-6.5x debt-to-EBITDA. We believe EBITDAinterest coverage will remain below 2.5x through 2013. Our assumptions do notforecast that Tervita will complete an IPO in this period but we expect creditmeasures to improve significantly provided the company uses any potential IPOproceeds to pay down debt.

Liquidity

We believe Tervita's liquidity is adequate. Sources of liquidity can cover thecompany's near-term needs, even in the event of unforeseen EBITDA declines.Our assessment of Tervita's liquidity profile incorporates the followingexpectations and assumptions:

-- We expect the company's sources of liquidity, including proceeds fromthe new notes offering, FFO, cash, and facility availability, to exceed itsuses by 1.2x in the next 12 months.

-- We expect net sources to remain positive even if EBITDA declines morethan 15%.

-- Compliance with financial covenants will survive a 15% drop in EBITDA,in our view.

-- Due to the refinancing risk associated with Tervita's bank debt, webelieve the company would be unable to absorb low-probability, high-impactshocks.

Tervita's sources of cash include about C$9.8 million of cash on hand as ofJune 30, 2012. It had about US$161.3 million and about C$39 million availableunder its U.S. and Canadian senior secured credit facility, respectively.Although the company has a large capital budget of C$650 million-C$700 millionin 2012 and 2013, we expect it will be able to fund it through cash fromoperations and revolver borrowings. In the case of a downturn, we expectTervita to be able to pare back its capital expenditure plans meaningfully tomanage its liquidity and limit outspending its cash flow.

The credit facility has maximum secured debt-to-EBITDA of 5.75x financialcovenant. As of March 31, 2012, the company's reported of the covenant at4.18x, which provides adequate cushion (about 27% of EBITDA drop) in case of adownturn.

Recovery analysisFor the complete recovery analysis, see "Recovery Report: CCS Corp.'s RecoveryRating Profile," published Jan. 11, 2012, on RatingsDirect on the GlobalCredit Portal.

Outlook

The negative outlook reflects our view that Tervita's credit measures willremain elevated at above 7.0x debt-to-EBITDA as it exits 2012. Despiteimproved EBITDA compared to 2011 levels, due to additional debt on the balancesheet, the company's debt-to-EBITDA will remain elevated throughout ourforecast period. We deem Tervita's leverage metric as high relative to itsoverall business risk profile and we regard management's financial strategy asrisky. At current EBITDA and debt, the company has little flexibility inadding debt without affecting the ratings.

We would downgrade Tervita if the company is unable to generate improved cashflow so that expected debt-to-EBITDA ratios stays within 7.0-7.5x throughfirst-quarter 2013, without any positive trend. This could also occur if 2013gross profit grows less than 15% from 2011 level. Also, debt-financing ofgrowth initiatives, either acquisition or capital expenditures, withoutprospects for rapid deleveraging, could lead us to revisit our ratings andoutlook on Tervita. A deterioration in its liquidity position could alsocompromise the ratings.

An outlook revision to stable for Tervita would depend on an improvingfinancial risk profile, For example, if the company's debt-to-EBITDA improvesto 5.0x-5.5x by reducing debt post-IPO. From an operational perspective, if weexpect Tervita to demonstrate continued EBITDA growth, either through loweroverhead costs or more cross-selling opportunities, such that we expectdebt-to-EBITDA to improve below 5.5x, we could revise the outlook to stable.

Related Criteria And Research

-- Methodology And Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

-- Key Credit Factors For Global Oilfield Services Companies, May 31, 2006

-- Global Oilfield Service Company Characteristics and Keys to Success,Jan. 11, 2005Ratings ListTervita Corp.Outlook Revised To NegativeTo FromCorporate credit rating B/Negative/-- B/Stable/--Ratings UnchangedSenior secured debt BRecovery rating 3Senior unsecured debt CCC+Recovery rating 6Subordinated debt CCC+Recovery rating 6

Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at

. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)

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