DBRS Changes Trend on Parkland Fuel Corporation to Positive, Confirms Ratings at BB

DBRS Limited (DBRS) changed the trend on Parkland Fuel Corporation’s (Parkland or the Company) Issuer Rating and Senior Unsecured Notes rating to Positive from Stable and confirmed the ratings at BB. DBRS also confirmed the Recovery Rating on the Company’s Senior Unsecured Notes at RR4. The rating actions reflect the Company’s solid performance since DBRS’s confirmation of the ratings on October 10, 2018, following its 75% acquisition of Sol Investments Limited (the Acquisition; see DBRS’s press release “DBRS Confirms Parkland Fuel Corporation at BB, Stable, Following Announcement to Acquire 75% of Sol Investments Limited,” dated October 10, 2018).

At the time, DBRS stated that a positive rating action could result within six to 12 months following the closing of the Acquisition if Parkland (1) successfully integrates the Acquisition, (2) effectively operates in the new geographic region and (3) maintains credit metrics of lease-adjusted debt-to-EBITDAR below 3.75 times (x) and lease-adjusted EBITDA coverage above 4.5x as well as positive free cash flow after gross dividends.

Since then, Sol Investments Limited’s (SOL) operating performance has exceeded expectations. In the first half of 2019 (H1 2019), SOL generated $117 million of EBITDA (pre-International Financial Reporting Standards (IFRS) 16 and representing Parkland’s 75% share) versus DBRS’s expectation of approximately $215 million for the full year, driven by higher-than-anticipated organic growth as well as supply optimization and cost-saving initiatives implemented by Parkland. Additionally, Parkland benefited from solid operating results from the Company’s supply segment, driven by strong refinery crack spreads due to planned and unplanned refinery outages along the west coast of the United States, resulting in EBITDA for the segment increasing to $346 million in H1 2019 versus $241 million during the same period last year. As such, credit metrics for the last 12 months ended June 30, 2019 (pre-IFRS 16 and fully consolidating SOL for H1 2019), improved to 3.03x lease-adjusted debt-to-EBTDAR and approximately 6.30x lease-adjusted EBITDA interest coverage, well above DBRS’s threshold for the BB (high) rating category. Additionally, DBRS notes that the Company turned free cash flow positive on a gross dividend basis in 2018 and is expected to remain free cash flow positive on a go forward basis. As such, DBRS believes Parkland’s credit risk profile is evolving to a level more commensurate with the BB (high) rating category.

Going forward, subsequent to fully absorbing the Acquisition and absent further acquisitions, DBRS expects Parkland’s earnings profile to remain relatively stable. DBRS expects fuel volumes to grow toward 22 billion litres over the near term from approximately 19 billion liters at the end of H1 2019, driven by the full-year inclusion of SOL, which added approximately 3.6 billion litres (75% share attributable to Parkland) and volume growth across the existing business. As such, with weaker fuel margins in the retail and commercial segments offset by stronger operating results from the Company’s supply and international segments, DBRS expects EBITDA for the full-year 2019 to be in the $1.1 billion to $1.2 billion range (pre-IFRS 16 and fully consolidating SOL). That said, DBRS expects EBITDA to decline to approximately $1.0 billion in 2020 due to a planned turnaround at the Burnaby refinery but normalize thereafter.

In terms of financial profile, DBRS expects cash flow from operations to track operating income and be in the $700 million and $650 million range in 2019 and 2020, respectively. Capex is expected to be approximately $350 million in 2019 and 2020 and gross dividends are expected to be approximately $175 million in 2019 and 2020. As such, DBRS expects free cash flows (before changes in working capital) to be approximately $150 million and $100 million in 2019 and 2020 respectively. DBRS expects the Company to use its free cash flow to repay drawings under the Company’s revolving credit facility and for smaller acquisitions, such as the recent acquisition of Tropic Oil Company, Inc. As such, DBRS expects the Company’s key credit metrics to remain at a level comfortably placed for a BB (high) rating (i.e., lease-adjusted debt-to-EBITDAR below 3.75x and lease-adjusted EBITDA coverage above 4.5x).

If Parkland’s performance tracks in line with expectations while maintaining credit metrics (i.e., lease-adjusted debt-to-EBITDAR below 3.75x and lease-adjusted EBITDA coverage above 4.5x), a further positive rating action would likely result following the next two quarters. Otherwise, although unlikely, the trend could be reverted to Stable.

DBRS notes, that while DBRS expects Parkland to acquire the remaining 25% of SOL in 2022 at the predetermined EBITDA multiple of 8.5x, by that time, DBRS believes that the Company will have repaid sufficient debt, such that credit metrics should remain acceptable for a BB (high) rating.

Parkland’s ratings continue to be supported by its strong position as Canada’s largest independent marketer and distributor of fuel as well as its efficient operations, diversified customer and supplier base, geographic diversification and the sector’s relatively high barriers to entry. The ratings also reflect the industry’s competitive nature, exposure to economic cycles and volatility in refinery margins as well as risks associated with environmental liability and primarily acquisition-driven growth initiatives.

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

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

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 under Related Documents or by contacting us at info@dbrs.com.

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

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

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