DBRS Confirms Ratings of Superior Plus LP at BB (high) and BB (low), Stable

DBRS has today confirmed the Issuer Rating of Superior Plus LP (SP-LP or the Company) at BB (high) and the Company’s Senior Secured Notes and Senior Unsecured Debentures ratings at BB (high) and BB (low), respectively. Trends on all the ratings are Stable. Pursuant to the methodology titled “DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers,” the recovery ratings of RR3 and RR6 on the above-noted securities are confirmed. SP-LP is a 99.9%-owned subsidiary of publicly listed Superior Plus Corporation (SP-Corp). SP-Corp has no other operating business and relies solely on SP-LP’s business cash flow to support all consolidated debt. As such, DBRS has assessed SP-Corp’s consolidated financial metrics and liquidity in determining SP-LP’s financial risk profile.

SP-LP’s ratings reflect its leading market positions and steady cash flows from its Canadian propane distribution business in its Energy Services (ES) division and in its Specialty Chemicals (SC) production. The ratings also take into account SP-Corp’s ongoing deleveraging effort and the resulting improvement in financial metrics in the past three years and DBRS’s expectation that the improvement will continue until the Company’s internal leverage targets are reached. These strengths were somewhat offset by a number of business challenges. They include (1) matured markets and limited near-term demand growth potential in both ES and Construction Product (CPD) divisions, (2) exposure to exogenous factors beyond the Company’s control (such as winter temperatures and natural gas prices in ES and electricity costs in SC production) and (3) exposure of its sodium chlorate business to cyclical pulp mill production.

SP-LP’s overall business risk profile remains supported by its leading market position in Canadian propane distribution and sodium chlorate production and by the diversity provided by other businesses, which reduces its dependence on the North American markets and to specific customer segments. Although prices of the distributed products could fluctuate, the Company typically earns a fixed-dollar margin over product and transportation costs in ES’s propane and refined fuel distribution business, while a material proportion of SC’s sodium chlorate sales are covered by contractual arrangements. Business volumes in the ES and SC divisions have been steady, albeit slow growing, in the long term, although short-term volume decline could occur for ES in the event of warm winter temperatures and periods of low production in the pulp industry that would affect sodium chlorate demand. Electricity costs, which account for 70% to 85% of sodium chlorate variable production costs could also directly affect SC’s profit margin. DBRS considers the business risk profile of the Company’s much smaller CPD business to be materially weaker than those of the other segments as the CPD market is fragmented with intense competition and demand is exposed to the volatility of the U.S. housing markets.

SP-LP’s businesses were previously challenged by a combination of debt-funded acquisitions (in commercial and industrial installation business in CPD and U.S. Refined Fuel businesses in ES); the general recession in 2009, which hit U.S. housing markets; and a decline in production in the pulp and paper industry, which affected SC’s revenue. These headwinds resulted in SP-Corp’s consolidated financial metrics being materially weaker than those expected for the Company’s ratings at the end of 2010.

Since then, SP-Corp has been on the path of business rationalization and financial deleveraging. Its “Destination 2015” business plan that was initiated in 2012, aimed at improving cost efficiencies and logistics, increasing customer focus and debt reduction, has been made progress in the past two years. DBRS understands that the Company remains on track in meeting expected operating targets regarding profit margin improvements, improved supply chain and working capital management and leverage reduction. SP-Corp has consistently applied free cash flows and used the proceeds from equity issuance to repay approximately $347 million of its debt since the end of 2011, largely through repayments of unsecured debt and senior secured notes and redemption of convertible debentures. As a result, SP-Corp’s financial metrics improved meaningfully to levels now consistent with those expected for its ratings, with adjusted cash flow-to-debt of 16% for the last 12 months (LTM) ended March 31, 2014, compared with 13% in 2011 and adjusted debt-to-EBITDA of 4.4 times (x) from 5.3x in 2011. Management has publicly stated its intention to continue deleveraging until SP-Corp reaches its target of lowering its unadjusted total debt-to-EBITDA to the low end of the 3.0x to 3.5x range (4.1x at March 31, 2014) and maintains that ratio in the medium term.

Business conditions for SP-LP were mixed in 2013 and Q1 2014. During the period, the improved volume and margin in the ES’s Canadian propane and CPD were partly offset by depressed prices of chloralkali products and high electricity costs in SC and increased transportation and operating costs for ES as a result of severe 2013-2014 winter conditions. Together with higher business restructuring costs, the Company’s EBITDA in 2013 and LTM 2014 were moderately lower than its 2012 level, while operating cash flow was essentially unchanged. With high working capital requirements related to increased propane prices and volume and capital spending related to business restructuring, IT system improvement, tuck-in acquisitions, and capacity expansion at SC, SP-Corp’s debt reduction and improvement in financial metrics since the end of 2012 were slower than DBRS’s expectation. DBRS expects improvement to regain its momentum in the next two years because (1) the efficiency benefits of SP-Corp’s restructuring efforts are expected to begin in the second half of 2014, (2) increased volume of chloralkali from the Port Edwards, Wisconsin, and Saskatoon, Saskatchewan, facility expansions to be completed by end of 2014 and (3) working capital requirement for ES should ease in Q2 2014 after the winter months.

As part of its business plan, SP-LP has conducted a strategic review of its businesses and intended to focus on those that have a good strategic fit and where it can achieve sustained growth and performance. The review has resulted in the Company’s exit from its small HVAC (heating, ventilation and air-condition) service business, disposal of its U.S. fixed-price energy business, continued review of the strategic fit of the remaining fixed-price energy business in Canada and board approval to solicit interests for disposal of CPD segment. DBRS expects that these actions could help SP-LP better focus on its remaining businesses that are either less cyclical or where SP-LP has stronger and defendable market positions. The disposal of CPD business, if materialized, could reduce the Company’s exposure to its relatively more volatile building material markets in the United States and, through sale proceeds, could provide SP-Corp with additional financial resources to invest in its core businesses and/or accelerate its debt reduction effort.

SP-Corp’s liquidity is acceptable for the ratings, supported by an improved cash balance of $15 million as at March 31, 2014, available balance of $146 million in credit facility and annual operating cash flow of $180 million to $200 million. These cash sources are more than adequate to cover DBRS’s estimations of SP-Corp’s cash uses of approximately $250 million (including scheduled debt repayment of $98 million and DBRS’s capex estimations of $70 million to $75 million and dividends of $75 million to $80 million for the coming year). DBRS expects SP-Corp to use the excess cash resources to continue its debt reduction efforts for the remainder of 2013.

The Stable trend on the ratings reflects DBRS’s view that, while the SP-Corp’s financial metrics have already improved to levels consistent with the rating, it will take a sustained management effort and more time before they return to levels supportive of a low-investment-grade financial risk profile. On the other hand, given management’s concrete deleveraging effort to date and its stated target, DBRS believes that the likelihood of deterioration in financial metrics and business risk profile that warrant a rating downgrade is now materially reduced. DBRS also expects industry fundamentals, SP-LP’s business mixes in ES and SC, to remain largely unchanged in the medium term. DBRS has not factored in the potential CPD sale to SP-LP’s ratings and could consider the materiality of the benefits of a CPD sale to SP-LP’s ratings as and when more specific details on the timing of sale, expected receipt amount and intended usage of sale proceeds emerge.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Industrial Products Industry, which can be found on our website under.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.