DBRS Confirms Ratings of Parkland Fuel Corporation at BB, Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Parkland Fuel Corporation (Parkland or the Company) at BB with Stable trends. The recovery rating on the Senior Unsecured Notes remains at RR4. The confirmation reflects Parkland’s announced acquisition of the majority of CST Brands, Inc.’s Canadian business (the Acquisition; see August 22, 2016, press release) as well as its organic operating performance through Q3 2016, which benefited from the inclusion of Pioneer Energy LP, despite ongoing challenges caused by a weak economic environment in Western Canada.

In the near term, Parkland’s earnings profile is expected to benefit from the Acquisition, which is expected to close in Q1 2017 while organic operating performance is expected to remain challenged by a weak economic environment in Western Canada. Fuel volumes are expected to increase significantly to above the 13.3 billion litre level, driven primarily by the Acquisition. Gross margins on a cents-per-litre basis should remain relatively stable over the longer term while the Company is expected to continue to focus on improving efficiency, reducing costs and achieving synergies (including potential supply synergies). As such, DBRS forecasts that EBITDA should increase toward the $330 million level in the near term after the Acquisition (versus approximately $215 million for the LTM ended Q3 2016).

Parkland’s financial profile is expected to remain acceptable for the current rating subsequent to the Acquisition, despite a significant increase in balance-sheet debt, as the Company’s stated deleveraging plan should return key credit metrics to levels that are considered acceptable for the BB rating level within a reasonable time frame (12 months to 18 months). Cash flow from operations should continue to track operating income while capital expenditures are expected to remain elevated as recent acquisitions are integrated and Parkland continues to invest in organic growth. Gross dividends will continue to increase, driven largely by shares issued to help fund the Acquisition, while cash dividends are expected to continue to benefit from continued meaningful participation in the Dividend Reinvestment Plan (DRIP). The Company is expected to use free cash flow to repay debt in the near term as part of its stated deleveraging intention. Over the longer term, DBRS expects that Parkland will continue to seek growth through acquisitions. Should the Company be challenged to return credit metrics to acceptable levels for the current rating (i.e., lease-adjusted debt-to-EBITDAR below 4.0 times (x)) versus approximately 4.20x pro forma the Acquisition within a reasonable time frame because of weaker-than-expected operating performance or more aggressive-than-expected financial management, the ratings could be pressured. Over the longer term, however, if Parkland’s organic performance stabilizes, it successfully integrates recent acquisitions and reduces its reliance on the DRIP to fund the dividend while displaying sustainably strong credit metrics (i.e., lease-adjusted debt-to-EBITDAR toward 3.5x, improving EBITDA interest coverage and positive free cash flow (after the gross dividend)), 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.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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