DBRS Morningstar Confirms Ratings on Superior Plus LP at BB (high) and BB with Stable Trends Following Announcement of the Sale of Its Specialty Chemicals Business

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Superior Plus LP (Superior Plus or the Company) at BB (high) and the Senior Unsecured Debentures rating at BB based on the unchanged recovery rating of RR5. Both trends are Stable. DBRS Morningstar took these rating actions following the Company’s announcement that it has entered into a definitive agreement to sell its Specialty Chemicals business to Canadian private equity fund Birch Hill Equity Partners for total consideration of $725 million. The sale price includes $600 million in gross cash proceeds and a $125 million unsecured note that bears a rate of 6% and matures in five and a half years. In addition, the purchase price is subject to an EBITDA-based adjustment, which could lead to another unsecured note up to a maximum of $84 million being issued to Superior Plus or an unsecured note up to a maximum of $84 million being issued by Superior Plus to the buyer. The Company also announced that the proceeds from the sale would be primarily used for the repayment of the revolving credit facility, followed by accelerated acquisitions of retail propane distribution businesses while maintaining its financial policy. Superior Plus also mentioned that the sale of the Specialty Chemicals business is expected to reduce the Company’s lease liabilities by $104 million. Furthermore, the Company stated that it has a strong pipeline of acquisitions and anticipates doubling the EBITDA from operations of its U.S. propane distribution business over the next five years.

Firstly, the rating confirmations reflect DBRS Morningstar’s view that the improved customer and geographic diversification, as well as the enhanced margins and scale of the Energy Distribution business achieved through portfolio shifting in recent years, mainly in the U.S., offsets the loss of diversification and scale as a result of the sale of the Specialty Chemicals business, whose economic drivers are generally different than those underlying the Company’s Energy Distribution business. Superior Plus has boosted the margins and scale of its Energy Distribution portfolio in the U.S. by divesting itself of its less-profitable wholesale refined fuels and retail distillate assets and buying higher-margin retail propane distribution businesses. This has also improved weather-related risk diversification, as the Company’s footprint in the U.S. has expanded beyond the northeast and now also spans the warmer regions of the southeast, midwest, and California. The Company’s U.S. activities, which primarily consist of propane distribution to residential customers, to some extent also represent a level of diversification when compared with its Canadian activities, which are mostly for wholesale, commercial, and industrial end-use applications.

Secondly, DBRS Morningstar acknowledges that Superior Plus has been successful in its external growth strategy, mostly in the U.S. retail energy distribution area, by acquiring small and large propane distribution businesses and successfully integrating them, which to a certain degree mitigates the financial and integration risks associated with the future acceleration of acquisitions. Thirdly, the sale of the Specialty Chemicals business, which Superior Plus has been intending to accomplish for some time, not only frees up capital but also allows the Company’s management to continue focusing on its core strategy of growing its Energy Distribution footprint in the U.S. Finally, DBRS Morningstar acknowledges Superior Plus’ commitment to maintain its overall financial policy and leverage, as measured by debt-to-EBITDA of between 3.0 times (x) and 3.5x.

Overall, Superior Plus’ operating performance and business risk profile continue to support the current ratings. DBRS Morningstar 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 (such that debt-to-EBITDA increases above 3.5x or cash flow-to-debt falls below 20% on a sustained basis), DBRS Morningstar could consider a negative rating action. Conversely, DBRS Morningstar would likely consider a positive rating action only if the Company demonstrated a commitment to a materially stronger financial profile over a longer period and significantly improved weather diversification.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Services Industry (January 29, 2021; https://www.dbrsmorningstar.com/research/372947/rating-companies-in-the-services-industry), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020; https://www.dbrsmorningstar.com/research/366063/dbrs-morningstar-criteria-recovery-ratings-for-non-investment-grade-corporate-issuers), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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