Overview -- U.S.-based environmental services company Clean Harbors plans to issue $600 million of senior unsecured eight-year notes to refinance maturing debt. -- We are affirming our ratings, including our 'BB+' corporate credit rating, and are assigning a 'BB+' senior unsecured debt rating and '4' recovery rating to the proposed notes. -- The stable outlook reflects our expectation that Clean Harbors' credit quality will remain consistent with the ratings, incorporating a fair business risk profile and intermediate financial risk profile. Rating Action On July 16, 2012, Standard & Poor's Ratings Services affirmed its ratings, including its 'BB+' corporate credit rating, on Clean Harbors Inc.. The outlook is stable. We also assigned our 'BB+' senior unsecured debt rating to Clean Harbors' proposed offering of $600 million of senior notes due 2020. The recovery rating is '4', indicating average recovery (30% to 50%) in the event of payment default. Clean Harbors plans to use the proceeds of this offering to fund a tender offer for its senior secured notes due Aug. 15, 2016, as well as to provide funding for future acquisitions and general corporate purposes. We will withdraw our ratings on the secured notes following completion of the unsecured notes issuance and tender offer. Rationale The affirmation reflects our view that despite the increase in debt following the proposed notes tender, Clean Harbors' credit measures are not likely to deteriorate significantly and management will remain committed to maintaining prudent financial policies as it executes its growth strategy. The ratings on Norwell, Mass.-based Clean Harbors reflect the company's "intermediate" financial risk profile (including environmental liabilities), an acquisition-oriented growth strategy, and some susceptibility of its operations to economic cycles. The company's leading competitive position in the hazardous waste management industry, good diversity, specialized assets, and "strong" liquidity with a favorable debt maturity schedule partially offset these factors. Standard & Poor's characterizes Clean Harbors' business risk profile as "fair." With roughly $2.2 billion in revenues, Clean Harbors is one of the largest providers of environmental services and the largest operator of nonnuclear hazardous waste treatment facilities in North America. The company's operations include: -- Technical services (38% of sales), which include collection, transport, treatment, and disposal of hazardous and industrial wastes; -- Field services (8%), which include specialty, on-site maintenance services such as tank cleaning, decontamination, remediation, and spill cleanup; -- Industrial services (27%), such as high-pressure and chemical cleaning, catalyst handling, decoking, material processing, and lodging services to energy and industrial companies; and -- Oil and gas field services (27%), including fluid handling, downhole servicing, directional boring services to oil and gas exploration, production, and power generation customers. Clean Harbors' competitive market position contributes to our assessment of its business risk as fair. The company handles more than two-thirds of the commercial hazardous incineration volume and roughly 20% of hazardous landfill volume in North America. The company's core business is performing well, partly because of increased exposure to the oil and gas end market from a series of acquisitions made since 2009. End-market diversity is good, and revenues in many of its sectors have increased. Landfill volumes and incinerator utilization were strong in 2011 and remain so. In the first quarter of 2012, landfill volumes increased 19% year over year and incineration utilization rose 5% to 90%. Still, the company's operations are subject to economic cycles, as recessions give rise to lower waste volumes and overcapacity in some segments. Yet the company maintained solid operating performance through the last recession despite weaker demand from its chemical, manufacturing, and utilities customers, along with a nationwide reduction in landfill volumes and volatile fuel and labor costs during this period. Our performance expectations for 2012 include: -- Sales growth of 12% as a result of the contributions from acquisitions the company made in 2011, increased waste volumes, and modest improvements in pricing; -- EBITDA margins of 18% to 19% because of continued profitability from oil and gas, refinery, and chemicals markets, along with good operating leverage; and -- Free cash flow that approaches $100 million partly because of improved working capital management. The company's trailing-12-month EBITDA margins as of March 31, 2012, were 19%. We believe the company should be able to maintain this level if it contains costs in spite of a weak but gradually improving economy and pricing competition. Clean Harbors' profitability has consistently increased over the past decade, from 13% in 2002 (the year that the company acquired the chemical services division of Safety-Kleen Systems Inc.). We characterize Clean Harbors' financial risk profile as intermediate, mainly because of its prudent financial policies, favorable credit measures, and strong liquidity. Acquisitions are a key part of the company's growth strategy, but we don't believe that potential acquisitions will impede credit quality or forestall potential further financial improvement. Clean Harbors has operated with significant excess cash balances since 2008 and has demonstrated a willingness to use equity and cash on hand in addition to debt borrowings as sources of financing for large acquisitions. We believe the company will continue to strike a prudent balance between its growth objectives and financial policy decisions. Environmental liabilities remain significant but manageable. Clean Harbors has $169 million of closure, postclosure, and remediation obligations, with another $3 million classified as reasonably possible. Substantially all of these liabilities resulted from the company's 2002 purchase of the assets of Safety-Kleen's chemical services division and other assets. Annual estimates for the costs of managing these environmental liabilities are roughly $10 million to $15 million. As of March 31, 2012, Clean Harbors' funds from operations (FFO) to debt ratio was 43% and debt to EBITDA was 1.9x. Pro forma for the notes refinancing, we expect these measures to deteriorate slightly, to 35% and 2.1x. We adjust its debt figure to include the capitalization of operating lease commitments, tax-adjusted asset retirement and environmental obligations, accrued interest, and tax-adjusted self-insurance liabilities. We believe the company will be able to maintain FFO to debt of more than 30%--a level we consider appropriate for the ratings. Clean Harbors has continued to exceed this mark, as a combination of improving waste volumes, large-scale project work, and continued investment in oil and gas production have increased demand for the company's services. Liquidity We expect liquidity to remain strong (as defined in our criteria) given the company's good internally generated cash flow and healthy availability under its revolving credit facility. As of March 31, 2012, Clean Harbors had about $247 million of cash and marketable securities and $165 million of availability under a $250 million revolving credit facility due May 31, 2016. Pro forma for the $30 million partial redemption of the secured notes, the issuance of unsecured notes, and the tender offer for the remaining secured notes, we expect Clean Harbors' cash balance to rise to roughly $300 million after accounting for call premiums and transaction fees. The company's liquidity should remain sufficient to fund acquisitions and internal investments. There are no significant debt maturities until the revolving facility maturity in 2016. We expect Clean Harbors to generate substantial discretionary cash flow in 2012. Key uses of cash are likely to include: -- Capital spending of roughly $180 million; and -- Acquisition spending, which may exceed $100 million. The company was in compliance with its fixed charge ratio financial covenant as of March 31, 2012, and we expect the company to retain adequate headroom under the covenant during the near-to-intermediate term. Recovery analysis For the detailed recovery analysis, see our recovery report on Clean Harbors, to be published following this report on RatingsDirect. Outlook The outlook is stable. We believe that Clean Harbors will continue to maintain strong liquidity and manage its growth initiatives prudently. In our view, despite the additional debt, the company's credit measures will likely remain above the minimum consistent with the ratings as cash flow generation improves. The company has adequate cushion for the ratings to execute its growth strategy. The stable outlook also reflects our view that its liquidity and cash flow generation should continue to support the company's acquisitions. Although unlikely, we could lower the ratings if cash flow declines substantially because of a weak economy, which would lead to lower waste volumes and capacity utilization rates than we expect, or if the company undertakes other sizable debt-financed acquisitions that weaken its financial risk profile. Under our projections, we estimate that if revenues underperform our expectations by more than 6% and EBITDA margins fall precipitously to less than 12%, then FFO to debt could deteriorate to about 20%, which could prompt a modest downgrade. We could also lower the ratings if unexpected cash outlays or financial policy decisions reduce liquidity or stretch the financial profile beyond what would be appropriate for the rating. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Ratings List Ratings Affirmed Clean Harbors Inc. Corporate Credit Rating BB+/Stable/-- Senior Secured BB+ Recovery Rating 4 New Rating Clean Harbors Inc. $600 mil sr unsecd nts due 2020 BB+ Recovery Rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.