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

DBRS Limited (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. The recovery ratings on the above-noted securities are RR2 and RR6, respectively. SP-LP is a 99.9%-owned subsidiary of publicly listed Superior Plus Corporation (SP Corp), which has no other operating business and relies solely on SP-LP’s business cash flow to support all consolidated debt. As such, DBRS evaluates SP-Corp’s consolidated financial metrics and liquidity in its assessment of SP-LP’s financial risk.

The rating confirmation reflects SP-LP’s continued focus on improving operating efficiency while the Company maintains its leading market positions in propane distribution in Canada and Northeast United States under its Energy Services (ES) division and in Specialty Chemicals (SC) production. The ratings are also supported by management’s sustained effort since 2010 to improve its financial metrics through deleveraging. Partly offsetting these strengths are challenges due to (1) matured markets and slow demand growth potential in its core businesses, (2) exposure to exogenous factors beyond the Company’s control (such as winter temperatures and natural gas prices in ES and input costs in SC) and (3) exposure of its sodium chlorate business to cyclical pulp mill production.

Financial performances in 2014 and Q1 2015 were mixed, as the benefits from lower propane and natural gas prices to ES’s profit margin, expanded chloralkali capacity and recovery in the U.S. housing markets to the Construction Products Distribution (CPD) segment were partly offset by SC’s high electricity cost and weak product prices and poor earnings in fixed-price energy services. Despite the challenges, SP Corp has remained diligent in reducing its debt, resulting in further improvement in financial metrics. Adjusted cash flow-to-debt for the 12-month ended (LTM) March 31, 2015, improved to 19% from 16% in 2013 and adjusted debt-to-EBITDA to 3.9 times (x) from 4.5x during the same period.

The Stable trend reflects DBRS’s view that the SP-Corp’s financial metrics are now consistent with its ratings, while industry fundamentals, SP-LP’s business mix and risk profile should remain broadly unchanged following its decision of retaining CPD. DBRS understands that SP-Corp is currently formulating its business plan and financial targets for the next three years. While currently not anticipated, a material increase in management’s appetite toward increased debt-financed growth, particularly into unfamiliar businesses, could pressure the ratings. Given management’s demonstrated prudent management of cost and leverage, DBRS believes that the likelihood of such change in appetite is low. Conversely, DBRS could consider rating upgrades if SP-Corp adopts a more conservative financial policy with financial metric targets consistent with an investment-grade financial risk assessment and takes active steps to attain and sustain them.

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 methodologies are Rating Companies in the Industrial Products Industry, Rating Companies in the Merchandising Industry, DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments Non-Financial Companies and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under.

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