DBRS Confirms Superior Plus LP at BBB (low)

DBRS has today confirmed the Senior Secured Notes rating of Superior Plus LP (Superior or the Partnership) at BBB (low) with a Stable trend. The confirmation follows the successful conversion of Superior Plus Income Fund (the Fund) to Superior Plus Corporation (the Corporation) on December 31, 2008, and reflects the implementation of more conservative financial policies since 2006, including lower targeted debt-to-EBITDA (senior debt: 1.5 times (x) to 2.0x and total debt: 2.5x to 3.0x, compared with 1.5x to 2.5x and 2.5x to 3.5x, previously) and payout ratio (below 90%, compared with 100% previously).

On October 30, 2008, the Fund announced its intention to convert to a corporation through a Plan of Arrangement (POA) involving Ballard Power Systems Inc. (Ballard) (see related press release). At that time, DBRS confirmed the rating based on its expectation that the Partnership’s operations would not be affected by the POA and that modest deterioration of its credit metrics (based on financing of the POA costs under its credit facility) would be offset by the benefits of the POA, partly due to future income tax benefits, to be reflected over the medium term. On December 31, 2008, the POA closed at a total cost of $51.3 million ($46.3 million paid to Ballard), and increased the Corporation’s tax basis to over $1.3 billion. The Corporation has maintained the Fund’s operating strategies and financial targets, including payment of a monthly per share dividend equal to the Fund’s monthly distribution of $0.135 per unit while continuing the Fund’s relatively conservative payout ratio (74% of cash flow in 2008).

Superior has taken initiatives to maintain and grow its earnings over time. Its subsidiary, ERCO Worldwide (ERCO, specialty chemicals operations), is progressing with its US$130 million project to convert its Port Edwards chloralkali facility from a mercury-based process to membrane technology. Approximately US$66 million ($77.8 million) was spent through Q1 2009, with start-up expected on schedule and on budget in Q3 2009. The project is expected to provide US$20 million to US$30 million of incremental annual EBITDA at full capacity, equivalent to approximately 8% to 12% of the Corporation’s 2008 EBITDA. It is designed to significantly improve process and energy efficiency, including a plant capacity increase of approximately 30%, electricity usage decline of 25%, and extension of the plant’s useful life by 20 to 25 years. In addition, the Partnership continues to implement cost savings and productivity improvement measures at its Superior Propane (propane distribution) and Winroc Corporation (Winroc, construction products distribution) operations.

Despite these positive factors, Superior faces some near-term challenges, as its operations are affected to various degrees by the current economic downturn. Its key Superior Propane and ERCO segments accounted for a combined 83% of its segment EBITDA in 2008. Superior Propane’s results can be negatively affected by reduced demand as a result of warmer-than-normal winter weather, reduced economic activity and high wholesale propane costs (correlated to the price of crude oil) resulting in energy conservation. In addition, ERCO’s results can be hampered by reduced sodium chlorate demand due to pulp mill curtailments and shutdowns as a result of the ongoing global economic downturn. Results have, however, benefited from higher chemical prices for sodium chlorate and chloralkali products more than offsetting lower volumes. Winroc’s results continue to deteriorate as a result of very weak demand in core construction and renovations-related markets.

Superior’s key leverage metrics have weakened somewhat over the past year, although this is largely attributable to the higher debt balance as a result of the previously noted ongoing Port Edwards expansion and the Ballard transaction. The Corporation’s total debt-to-EBITDA ratio increased to 3.15x and senior debt-to-EBITDA to 2.19x for the 12 months ending March 31, 2009 (LTM March 2009) from 2.98x and 1.93x, respectively, in 2007. These ratios (which include the impact of the off-balance sheet receivable sales program amounts) remain outside Superior’s long-term target ranges noted above.

Inclusion of operating leases used to finance much of Superior’s transportation equipment (replacing currently owned assets) at Superior Propane and Winroc, results in adjusted total-debt-to-EBITDA and senior debt-to-EBITDA ratios of 4.05x and 3.08x in LTM March 2009, similar to 2007 levels. Note that the Corporation’s convertible subordinated debentures and the Partnership’s operating lease obligations are not included in the calculation of Superior’s financial covenants.

Despite the above-noted trends, the Corporation’s interest coverage ratios have remained relatively strong, reflecting good profitability and low interest rates on its credit facilities, although the latter factor is likely to be less favourable following the recent term extension (see below). Similarly, its cash flow-to-debt ratio was relatively stable at 25.3% in LTM March 2009, compared with 25.8% in 2007. Finally, its distribution payout ratio (cash distributions-to-cash flow) improved to 72% in LTM March 2009 from 77% in 2007.

Superior’s liquidity remains strong, with no major maturities until its recently extended $570 million credit facility ($339.2 million undrawn at March 31, 2009) comes due in June 2011. DBRS expects the Corporation to meet its May 2009 guidance through the remainder of the year, with EBITDA in the range of $224 million to $254 million and adjusted operating cash flow (AOCF) of $2.00 to $2.15 per share.

Furthermore, DBRS expects that the significant degree of diversification within the Corporation and its segments (including additional EBITDA from the Port Edwards expansion from Q3 2009) will continue to support its ability to generate stable cash flows and move its credit metrics into the targeted ranges, which are appropriate for a business with its level of volatility, over time.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is General Rating Methodology for Non-Financial Companies, which can be found on our website under Methodologies.

This is a Corporate rating.