DBRS Confirms Superior Plus LP at BBB (low) and BB (high), Changes Trends to Negative

DBRS has today confirmed the Senior Secured Notes and Senior Unsecured Debentures ratings of Superior Plus LP (Superior) at BBB (low) and BB (high), respectively, with both trends changed to Negative from Stable. Superior is a 99.9% owned subsidiary of Superior Plus Corporation (the Corporation), which converted from an income fund at year-end 2008.

The Negative trend reflects DBRS’s review of the Corporation’s Q2 2010 financial results and its updated 2010 and 2011 public financial outlooks in the context of ongoing economic weakness in its key North American markets. Based on its review and year-to-date results, DBRS expects that further potential deterioration in credit metrics could occur during 2010, as well as a longer transition period to more conservative financial metrics, than previously anticipated.

Superior’s recent acquisitions (detailed below), as well as the conversion of its Port Edwards chloralkali facility to membrane technology over a two-year period ending in Q4 2009 and other growth capital expenditures, were financed with a combination of debt and equity, distorting its credit metrics. The Corporation raised significant financing, roughly one-third each of common equity, senior debt and convertible subordinated debentures, between year-end 2007 and June 30, 2010. Consequently, DBRS has calculated pro forma credit metrics that include the estimated impact of the recent transactions as if these occurred at the beginning of the period.

On a pro forma basis, the Corporation’s total debt-to-EBITDA ratio increased to 5.3 times for the 12 months ending June 30, 2010 (LTM June 2010) from 4.2 times in 2009 and 3.4 times in 2008. Concurrently, its senior debt-to-EBITDA ratio (which includes the senior secured notes, the bank facility, amounts due under the off-balance sheet accounts receivable securitization program and the senior unsecured debentures) rose to 3.1 times from 2.3 times and 2.4 times over the same period, although remaining well below the 5.0 times covenant. The most critical ratio is the Corporation’s senior secured debt-to-EBITDA ratio (which excludes the senior unsecured debentures), which returned to 2.4 times from 1.9 times and 2.4 times. Superior is required, under its credit facility, to restrict its senior secured debt-to-EBITDA ratio to not more than 3.0 times and not more than 3.5 times as a result of acquisitions. (Note that the convertible subordinated debentures, upon which the Corporation may elect to pay principal upon maturity or redemption by issuing shares to the debenture holders, are treated as 100% debt for “total debt” ratios and are excluded from “senior debt” ratios and financial covenant calculations.) The latest ratios (which all include the impact of the off-balance sheet accounts receivable securitization program) are outside the acceptable range for Superior’s current ratings.

The deterioration in the Corporation’s key credit metrics has been due to: (1) weaker earnings and cash flow as a result of ongoing economic weakness and the negative impact of warmer-than-expected weather in the 2009-2010 winter; and (2) higher debt levels resulting from partial debt financing for various acquisitions and growth capital expenditures.

The above factors have also negatively affected the Corporation’s dividend payout ratio, which rose to 101% on a pro forma basis in LTM June 2010 from 70% in 2009 and 74% in 2008, and its total EBITDA interest coverage ratio, which declined to 4.1 times from 4.4 times and 6.3 times over the same period. Superior restarted its dividend re-investment program (DRIP) during Q2 2010, commencing with the payment of its May 2010 dividend, resulting in proceeds of $1.5 million. The Corporation has maintained its dividend/distribution at $0.135 per share/unit, or $1.62 per share/unit annualized, since February 2008 (prior to conversion).

The rating confirmations reflect DBRS’s expectation of a gradual recovery of the Corporation’s credit metrics to relatively strong 2008 levels by the end of 2011 in order to maintain the current ratings. This is supported by expected contributions from the various acquisitions (totaling $468.4 million) completed between late Q3 2009 and early Q1 2010 and the ramp-up of activity at the Port Edwards chloralkali facility, which was converted to membrane technology over a two-year period ending in Q4 2009, for a total cost of $157.7 million. Achievement of credit metric improvement over the above-noted time frame is based on the expectation that Energy Services (46% of 2009 segment EBITDA) will benefit from a return to normal winter weather and improved economic conditions, and that Specialty Chemicals (43%) is not affected by further downside from conditions in the pulp and paper industry or economic weakness on its chloralkali operations.

Superior faces some near-term challenges, as its operations are affected to various degrees by the current weak economic conditions. Its key Energy Services and Specialty Chemicals segments accounted for a combined 89% of 2009 segment EBITDA. Earnings and cash flow from Energy Services’ key Superior Propane and U.S. Refined Fuels businesses are very seasonal, and are negatively affected by reduced demand as a result of warmer-than-normal winter weather, reduced economic activity and high wholesale propane and refined fuel costs (correlated to the price of crude oil) resulting in energy conservation. Operating results from Specialty Chemicals can be hampered by reduced sodium chlorate demand due to pulp mill curtailments and shutdowns as a result of the ongoing global economic weakness. Construction Products Distribution’s results (11% of 2009 segment EBITDA) have been negatively affected by the impact of the economic recession on new home residential housing starts and commercial building activity.

Despite the above-noted trends, the Corporation’s interest coverage ratios have remained reasonable, reflecting good underlying profitability and relatively low interest rates on its credit facility. Superior’s liquidity remains adequate, with no major maturities until year-end 2012, when the Corporation has $175 million of 5.75% convertible subordinated debentures maturing, although it may elect to pay principal upon maturity or redemption by issuing shares to the debenture holders. At June 30, 2010, Superior had credit lines totalling $450 million ($259.1 million of borrowings and $20.7 million of letters of credit outstanding), expandable to $750 million, maturing on June 28, 2013.

Superior’s recent acquisitions increased its exposure to seasonal variation in EBITDA as a result of changes in winter weather, as the last three comprise the operations of the new U.S. Refined Fuels division within its Energy Services segment.

(1) On September 24, 2009, Superior acquired Specialty Products & Insulation Co. (SPI), a leading national distributor of insulation and architectural products in the United States, for $142.1 million. SPI is part of the Corporation’s Construction Products Distribution segment.

(2) On September 30, 2009, Superior acquired certain assets that comprise a retail heating oil and propane distribution business in Pennsylvania and New York (Sunoco Retail Heat (SRH)), for $96.5 million. SRH is part of the Corporation’s new U.S. Refined Fuels division within its Energy Services segment.

(3) On December 11, 2009, Superior acquired certain assets that comprise a retail heating oil, propane and motor fuels distribution business in Connecticut, Pennsylvania and Rhode Island from Griffith Energy Services, Inc. (GES), for $82.5 million. The acquired GES assets are part of the Corporation’s U.S. Refined Fuels division within its Energy Services segment.

(4) On January 20, 2010, Superior acquired Griffith Energy Holdings, Inc. (GHI), a retail and wholesale distributor of retail propane, heating oil and motor fuels in upstate New York, for $147.3 million. GHI is part of the Corporation’s U.S. Refined Fuels division within its Energy Services segment.

In order to fund the above-noted acquisitions, as well as the above-noted Port Edwards conversion project and other growth capex, the Corporation raised significant financing, roughly one-third each of common equity, senior debt and convertible subordinated debentures, between year-end 2007 and June 30, 2010.

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.