DBRS Morningstar Confirms Parkland Corporation Ratings at BB With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes rating of Parkland Corporation (Parkland or the Company) at BB with Stable trends. The Recovery Rating on Senior Unsecured Notes remains RR4. The confirmations reflect Parkland’s solid operating performance during 2021 primarily due to robust fuel volume recovery driven by the economic reopening and incremental contributions from Parkland’s recent acquisitions. The Stable trends reflect DBRS Morningstar’s view that the Company is well positioned to navigate the current macroeconomic environment, including uncertainties surrounding the effects of the ongoing Russia-Ukraine conflict on fuel prices and inflationary pressures coming out of the Coronavirus Disease (COVID-19) pandemic, as well as integration risks associated with the 17 acquisitions the Company completed since Q3 2020, within the context of the current rating category. Parkland's ratings continue to be supported by its strong position as Canada's largest independent marketer and distributor of fuels as well as by its efficient operations, diversified customer and supplier base, and geographic diversification. The ratings also continue to reflect the intense competition, exposure to economic cycles, and volatility in refinery margins as well as risks associated with environmental liability.

Although DBRS Morningstar acknowledges that the currently elevated prices at the pumps could potentially have a modestly negative impact on fuel demand, DBRS Morningstar nonetheless expects Parkland’s total fuel volume to increase to above 25.0 billion litres in 2022 from 23.9 billion litres in 2021 mainly because of (1) full-year contributions from acquisitions completed in 2021 (including Conrad & Bischoff Inc., Urbieta Oil Co., and Pétroles Crevier Inc.) as well as incremental contributions from the acquisition of 156 Husky retail locations expected to close by mid-2022; (2) continued recovery of commuter traffic and; (3) continued recovery in tourism and international travel. DBRS Morningstar believes gross margins on a cents-per-litre (cpl) basis could be volatile in the near term because of the current macroeconomic environment but expects modest improvement over the medium term as Parkland leverages its growing scale and continues to enhance digital and analytical capabilities. DBRS Morningstar forecasts Parkland's EBITDA margins will increase marginally toward 7.0% in 2022 as the Company is expected to continue to focus on improving efficiencies and reducing costs, including achieving synergies as it integrates recent acquisitions and benefits from gains in operating leverage, partially offset by increasing inflationary pressures and higher marketing, general and administrative expenses caused by higher employee-related costs to support the Company's growth programs. As such, DBRS Morningstar expects Parkland's EBITDA to increase toward $1.60 billion in 2022 from $1.44 billion in 2021.

Parkland's financial profile is expected to improve over the near to medium term as the Company's earnings and cash flow reflect the full contribution from recent acquisitions as well as recovering commuter traffic and rebounding tourism and international travel, resulting in improved free cash flow generation. Cash flow from operations should continue to track operating income, increasing to above $1.1 billion in 2022 from $994 million in 2021. Capex spending is expected to increase moderately to approximately $480 million in 2022 mainly consisting of construction and acquisition of new-to-industry sites, remodels, including continued On the Run site conversions, and marketing and data analytics to enhance digital capabilities. DBRS Morningstar does not expect any changes to the Company's dividend policy and expects total cash outlay to be approximately $200 million. DBRS Morningstar expects any free cash flow (after changes in working capital) in the near term will be used to repay debt and/or to complete minor tuck-in acquisitions (excluding the already-announced acquisition of 156 Husky retail locations expected to close by mid-2022, respectively). Although Parkland may use a portion of its free cash flow (after changes in working capital) to moderate debt level, DBRS Morningstar expects improvement in the Company’s key credit metrics to be largely driven by operating income growth. As such, DBRS Morningstar expects Parkland's key credit metrics to improve moderately over the near to medium term, with debt-to-EBITDA expected to improve toward 3.6 times (x) from 3.9x at the end of 2021, mainly because of growth in operating income.

Should Parkland’s lease-adjusted debt-to-EBTIDA improve toward the mid-three-times range on a sustainable basis, primarily driven by growth in operating income, including successful integration of its recent acquisitions, a positive rating action would likely result over the next 12 months. Conversely, although unlikely, should Parkland's credit metrics weaken as a result of weaker-than-expected operating results and/or more aggressive financial management, the ratings could be pressured.

ESG CONSIDERATIONS
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 methodology is Rating Companies in the Merchandising Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382073) and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238), 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).

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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