DBRS Confirms Ratings on Superior Plus LP at BB (high) and BB with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating of Superior Plus LP (Superior Plus or the Company) at BB (high) and its Senior Unsecured Debentures rating at BB based on its unchanged recovery rating of RR5. The trend on all ratings remains Stable. The rating confirmations reflect DBRS’s expectation that Superior Plus’s leverage will remain at a level commensurate with the current ratings in the near term while continuing to integrate its 2018 acquisition of NGL Energy Partners LP’s Retail Propane (NGL Retail East) business and pursuing its strategy to make small tuck-in acquisitions. The rating confirmations are also driven by the Company’s proven track record of successfully integrating acquisitions and its relative similarity in terms of business model and geography as well as its leading position in the Canadian propane distribution market.

Following the Company’s acquisition of NGL Retail East for a total consideration of about USD 900 million, leverage temporarily increased with an adjusted debt-to-EBITDA ratio at around 5.0 times (x) and a cash flow-to-debt ratio of around 15%. As of June 2019, Superior Plus has made significant progress toward restoring its credit metrics to levels that are more commensurate with the current rating. In 2019 and 2020, DBRS expects Superior Plus to continue managing these credit metrics within ranges that correspond to the current ratings (i.e., adjusted debt-to-EBITDA ratio below 4.0x and cash flow-to-debt ratio above 20%) as the acquired assets contribute a full year of earnings and synergies continue to be realized. In addition to its proven track record of successfully integrating acquisitions, the Company has also shown that it can improve leverage in a relatively short time frame following a large debt-funded acquisition. Superior Plus is also executing smaller tuck-in acquisitions mostly located in the United States and funded through revolver drawings; these help the Company execute its strategy to grow into the higher-margin retail propane market and reduce its exposure to the lower-margin wholesale refined fuel business.

In June 2019, Superior Plus announced that it is considering selling its specialty chemicals business, which DBRS views as negative for the business risk profile because the Company’s economic drivers are generally different than those underlying its energy distribution business. The impact on the ratings will be assessed if and when a transaction is formerly announced and there is more clarity on the use of proceeds.

The ratings remain well supported by Superior Plus’s excellent brand strength and reputation for outstanding customer service. The importance of the Company’s propane and chemical products to clients and the relatively well-diversified customer base helps to ensure a steady level of demand for Superior Plus’s products. The economic drivers of propane demand are generally different from those underlying demand for the Company’s specialty chemicals products, offering some diversification benefits over the long term. The ratings are also supported by the Company’s position as a leading distributor of propane in Canada and its emergence as a significant player in the northeastern U.S. propane market. Challenges include external factors beyond the Company’s control, such as seasonal and cyclical drivers in its end markets and volatile raw material costs in the specialty chemicals business, which may have a negative impact on earnings and cash flow. The Company also faces structural challenges, such as the fragmented nature of the propane distribution market as well as the financial and integration risks associated with its current acquisition strategy.

Overall, Superior Plus’s operating performance and business risk profile continue to support the current ratings. DBRS expects the Company to remain acquisitive and, given the fragmented nature of the propane distribution sector, there is no shortage of tuck-in acquisition targets available. However, if financial-policy shifts, significant debt-financed acquisitions (especially during a period of notable market weakness), negative free cash flow or difficulties and delays in integrating newly acquired businesses cause leverage metrics to deteriorate beyond what is considered commensurate with the ratings for an extended period of time, DBRS could consider a negative rating action. Conversely, DBRS would likely only consider a positive rating action if the Company demonstrated a commitment to a materially stronger financial profile over a longer period.

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

The principal methodologies are Rating Companies in the Industrial Products Industry, Rating Companies in the Services 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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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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