DBRS Confirms Parkland Following Acquisition of Pioneer

DBRS has today confirmed the Issuer Rating and Senior Unsecured Notes ratings of Parkland Fuel Corporation (Parkland or the Company) at BB; the trends are Stable. The recovery rating on Parkland’s Senior Unsecured Notes remains RR4. This action follows the Company’s announcement that it has entered a definitive agreement to acquire the assets of Pioneer Energy (Pioneer) for $378 million, including $259 million in cash, $119 million in Parkland common shares and the assumption of standard operating liabilities (the Transaction). Parkland indicated that its existing credit facility can be utilized to fund the cash consideration of the Transaction.

Pioneer is the largest independent marketer of fuel in Ontario, the largest retail gasoline market in Canada. The Company owns a network of gas stations throughout Ontario and Manitoba, operating primarily under the Pioneer (well-established low-cost market position) and Esso brands. Pioneer distributes more than 2 billion litres of fuel annually through 393 gas stations and a recently acquired commercial operation in Ontario, New Brunswick and Nova Scotia.

The acquisition of Pioneer’s assets will benefit Parkland’s scale, adding over 2 billion litres of fuel annually, increasing the Company’s annual total volume toward the 10 billion litre level. The Transaction will also benefit Parkland’s geographic diversification, adding 319 gas stations in Ontario, a market currently under-penetrated by Parkland, a number of which are considered to be in prime urban areas. Pioneer’s last 12 months EBITDA was approximately $55 million, reflecting a reasonable 6.9 times (x) multiple on the total Transaction cost. Parkland has indicated that the acquired EBITDA, along with expected synergies, should help the Company reach its targeted EBITDA of $250 million by the end of 2015. Overall, DBRS views the impact of the acquisition on the Company’s business risk profile to be moderately positive.

In terms of Parkland’s financial profile, Parkland indicated that the total cash portion of the acquisition price could be funded using its existing credit facilities, which would add nearly $260 million of incremental balance sheet debt. Total balance sheet debt (including approximately $126 million of convertible debentures) would therefore increase to approximately $695 million, versus approximately $435 million at the end of Q2 2014. Pro forma the Transaction, DBRS estimates key credit metrics (i.e., pro forma lease-adjusted debt-to-EBITDAR of approximately 3.30x and lease-adjusted EBITDA coverage of 5.05x) will remain well within the range considered acceptable for the current rating (i.e., lease-adjusted debt-to-EBITDAR of less than 4.0x and lease-adjusted EBITDA coverage greater than 4.0x) and should improve with the expected conversion of approximately $82 million of in-the-money convertibles that mature on November 30, 2014.

Should Parkland be challenged to maintain credit metrics in a range acceptable for the current BB rating due to weaker-than-expected operating performance or more aggressive-than-expected financial management (i.e., significant debt-financed acquisitions and/or higher-than-expected cash dividends from rising dividends or declining participation in the Company’s dividend reinvestment plan), the current ratings could be pressured. Alternatively, should Parkland reach normalized EBITDA of greater than $250 million while maintaining current leverage targets (i.e., net debt-to-EBITDA of 2.0x to 3.0x) and sustainable lease-adjusted debt-to-EBITDAR below 3.5x, a positive rating action could result.

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.

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

The applicable methodologies are Rating Companies in the Merchandising Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.