DBRS Morningstar Confirms Superior Plus LP’s Issuer Rating at BB (high) and Senior Unsecured Debentures Rating at BB, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Superior Plus LP (Superior Plus or the Company) at BB (high) and the Company’s Senior Unsecured Debentures rating at BB, with a recovery rating of RR5. All trends are Stable. The Issuer Rating confirmation is underpinned by the Company’s leading market share position, strong brand strength, and a growing footprint in the energy distribution market, both in the United States and Canada. The Company has a weaker financial risk profile, driven in part by an aggressive leverage policy and increase in debt used to finance acquisitions, to an extent where lease-adjusted debt-to-EBITDA exceeded 4 times (x). The minus one-notch and RR5 recovery rating on the Senior Unsecured Debentures rating considers the large amount of senior secured debt that ranks in priority to the Senior Unsecured Debentures. The Stable trends are based on DBRS Morningstar’s expectation that Superior Plus will deliver solid growth in earnings and operating cash flows, and the credit metrics will gradually strengthen over the forecast horizon to a level more commensurate with the current Issuer Rating.

In May 2023, Superior Plus completed the acquisition of Certarus, a private energy distributor specializing in compressed and renewable natural gas, headquartered in Alberta, Canada, for a consideration of $840.5 million and financed with $353.2 million of debt and $487.3 million of equity. In addition to the consideration paid, Superior Plus assumed approximately $214.2 million in interest-bearing debt giving the acquisition an enterprise value of approximately $1,054.7 million. In the nine months ending September 2023, EBITDA (as determined by DBRS Morningstar) grew by 28.4% year over year (YoY) to $341 million, reflecting a strong wholesale propane market and growth in unit margins, but offset by weaker Canadian propane performance due to warmer weather in the first quarter, cost inflation, and increased corporate expenses primarily due to higher incentive plan costs due to fluctuations in Superior’s share price compared to the prior comparable period, a higher insurance provision, costs related to onboarding the new CEO, and the impact of inflation on costs. Excluding the Certarus contribution, year-to-date (YTD) EBITDA grew by 10.3% YoY. YTD EBITDA margins improved from 12% to 14%, supported by the higher-margin Certarus integration and the Company’s ability to pass some of the costs to its customers. YTD cash flow from operations before changes in working capital grew by 26.5% to $200 million, reflecting a strong earnings conversion, partially offset by higher interest expenses due to additional debt used to fund the acquisitions and higher average borrowing costs. Free cash flow (FCF) before working capital improved from a use of $36 million in the prior comparable period to a use of $13 million in the current period, due to stronger operational cash flows and a 10.6% decrease in shareholder dividends, offset by a 43% increase in capex to $104 million for strategic projects and the procurement of mobile storage units (MSUs) at Certarus. Overall, the Company’s YTD financial performance supports the DBRS Morningstar EBITDA estimate of ~$580 million, with the seven months including the Certarus contribution.

Looking ahead into 2024, DBRS Morningstar’s forecast EBITDA for Superior Plus is expected to be approximately $650 million, reflecting full consolidation of the acquisitions made in 2023 and moderate growth in total revenue to levels above $4 billion, offset by cost inflation and an expectation that the Canadian propane segment will be moderately affected by divestitures in Ontario. EBITDA margins are expected to improve to 15% to 16% with the full integration of Certarus, which benefits from a lean business model and efficiency gains from its growing MSU base. Interest expenses are expected to remain elevated above $120 million (compared to $85 million in 2022) due to expectations that Superior Plus will not make a meaningful debt reduction in the near term. Cash flow from operations is expected to improve in line with earnings. Free cash flow before working capital is expected to be insignificant due to higher planned capex and a moderate growth in dividends. Changes in operational working capital are not expected to be a material source of cash flows for the Company in the forecast period. DBRS Morningstar anticipates a slowdown in acquisition activity in the medium term, save for small tuck-in acquisitions that are not expected to materially affect the financial profile.

The gross lease-adjusted debt-to-EBITDA is expected to remain elevated at or near 4x in 2023 and 2024 and then gradually improve thereafter, albeit at a slow pace as the Company prioritizes strategic projects in order to maximize earnings. Lease-adjusted cash flow-to-debt is also expected to improve from 12% in 2022 to mid-to-upper teens in 2023 and 2024, reflecting a strong cash contribution from recent acquisitions and lower transaction-related costs.

Overall, Superior Plus’ strong business risk profile continues to support the current credit ratings. However, DBRS Morningstar could consider a negative rating action under the following conditions: (1) a weaker-than-expected performance or an increase in the level of indebtedness that would cause leverage metrics to deteriorate below what is considered acceptable within the current credit rating range for an extended period of time, particularly forecasted gross debt-to-EBITDA at or above 4.5x; and/or (2) a negative permanent shift in the business risk profile, such as loss of market position. Conversely, DBRS Morningstar would likely consider a positive rating action if the Company demonstrated a commitment to a materially stronger financial profile over a longer period, while maintaining a strong business risk profile.

DBRS Morningstar notes that in this review the applicable rating methodology for Superior Plus LP is the “DBRS Morningstar Global Methodology for Rating Companies in the Merchandising Industry” rather than the “DBRS Morningstar Global Methodology for Rating Companies in the Services Industry,” which was used in the prior annual review. There was no change in the credit ratings.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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 (https://www.dbrsmorningstar.com/research/416784; July 4, 2023).

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Merchandising Industry (July 21, 2023; https://www.dbrsmorningstar.com/research/417461);
-- DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (https://www.dbrsmorningstar.com/research/420063; August 30, 2023);
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 19, 2023; https://www.dbrsmorningstar.com/research/422134).

The credit rating methodologies used in the analysis of this transaction can be found at:: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

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.

This is a solicited credit rating.

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

DBRS Morningstar will publish a full report that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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