Morningstar DBRS Confirms Parkland Corporation Ratings at BB, Positive Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Notes rating of Parkland Corporation (Parkland or the Company) at BB. The trend on the credit ratings is Positive. The Recovery Rating on the Senior Unsecured Notes is RR4.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations acknowledge Parkland's lower-than-expected operating performance over the last 12 months but continues to reflect Morningstar DBRS' view that Parkland is well positioned to navigate the ongoing volume and margin volatility, particularly in its refining business, within the context of the current rating category. The credit rating confirmations at existing levels, rather than an upgrade, reflects Morningstar DBRS' view that the current macro environment has resulted in a higher uncertainty with respect to the Company's earnings forecast and margin pressures as well as the sustainability of key leverage metrics at levels that commensurate with a higher rating category. Morningstar DBRS could change the trend to Stable if operating performance is weaker than expected and/or key credit metrics continues to be adversely affected.

On March 20, 2024, Morningstar DBRS confirmed Parkland's ratings at BB but changed the trend to Positive from Stable, reflecting a gradual strengthening of Parkland's business risk profile, due to the successful integration of multiple acquisitions in recent years, and material improvement in Parkland's key credit metrics. At that time, Morningstar DBRS stated that ratings could be upgraded if Parkland's operating performance were to track in line with its expectations and key credit metrics were to remain at levels that are commensurate with a higher rating category (i.e., debt-to-EBITDA below 4.0 times (x) on a normalized and sustainable basis and EBITDA-to-interest ratio comfortably above 4.5x).

Parkland has since reported its operating results for full-year 2024 and operating performance has been materially weaker than Morningstar DBRS' expectations. Parkland's 2024 EBITDA at approximately $1.7 billion is 11.7% lower than 2023 EBITDA of $1.9 billion and flat as compared with 2022, driven primarily by lower contribution from refinery operations. Parkland's refinery contribution in 2024 was materially affected due to an unplanned shutdown in Q1 2024 coupled with normalization in refinery margins, particularly in the second half of 2024. For the retail and commercial segment of the business, the overall EBITDA contribution was relatively flat year over year, despite lower fuel volumes across Parkland's core markets as a result of increased competition and reduction in the lower margin wholesales business. Operating cash flows tracked the decline in operating income and reduced to $1.1 billion in 2024 compared with $1.3 billion in 2023 and was primarily utilized towards capital expenditure (capex) levels of approximately $0.5 billion and shareholder returns, including dividends and share repurchases, of approximately $0.4 billion. With EBITDA moderation and relatively flat debt levels, debt-to-EBITDA deteriorated to 3.9x in 2024 from 3.3x in 2023, and 4.1x in 2022.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the ratings over the next two to four quarters if Parkland's operating performance were to track in line with Morningstar DBRS' expectations and key credit metrics were to remain at levels that are commensurate with a higher rating category (i.e., debt-to-EBITDA below 4.0x and EBITDA-to-interest ratio comfortably above 4.5x, on a normalized and sustainable basis). Conversely, Morningstar DBRS may change the trend back to Stable if weaker-than-expected operating performance and/or aggressive financial management were to result in key credit metrics weakening again (i.e., debt-to-EBITDA ratio returns to levels above 4.0x). Although unlikely in the near term, ratings could be downgraded if leverage weakens to levels toward 5.0x as a result of weaker-than-expected operating results and/or more aggressive financial management.

EARNINGS OUTLOOK
Despite the recent earnings moderation, Morningstar DBRS expects Parkland's earnings profile to remain relatively stable during the forecast period, benefitting from an improvement in refinery contribution in the near term and relatively stable contribution from thenon-refinery business segments. Morningstar DBRS expects refinery EBITDA contribution to recover in 2025, primarily as a result of higher full-year utilization rate and modest improvement in crack spreads. For the retail and commercial segment of the business, Morningstar DBRS expects fuel volumes to remain relatively flat in the near term with moderate improvement during the latter half of 2025, as market conditions improve, and fuel gross margins on a cents-per-litre (cpl) basis to remain relatively flat. Morningstar DBRS anticipates the food and convenience business volumes to grow in the low- to mid-single digits but margins to remain pressured due to stagflation and the impact of tariff uncertainty on consumer spending behavior, at least in the near term. As such, Morningstar DBRS forecasts Parkland's EBITDA to increase to approximately $1.8 billion in 2025 from $1.7 billion in 2024, primarily due to earnings recovery in the refinery business, and towards $1.9 billion in 2026.

FINANCIAL OUTLOOK
Parkland's financial profile is expected to remain relatively stable and strong for the current rating category, benefitting from moderate growth in earnings, while debt levels remain relatively stable in the absence of any major leveraged acquisitions. Cash flow from operations should track recovery in operating income, increasing to levels between $1.25 billion and $1.35 billion in 2025 and 2026 from approximately $1.10 billion in 2024. Morningstar DBRS anticipates capex to remain elevated at levels above $500 million annually, and cash outflow on dividends to increase in low-single-digits toward $260 million in 2026. Morningstar DBRS forecasts Parkland to generate free cash flow (before changes in working capital) of above $500 million that will be used primarily toward shareholder returns, principal lease payments, and modest debt reduction. As such, Morningstar DBRS expects Parkland's key credit metrics to improve moderately over the near to medium term, with debt-to-EBITDA around 3.6x in 2025 and below 3.5x in 2026, largely within the Company's publicly stated net leverage target of 2.0x to 3.0x.

CREDIT RATING RATIONALE
Parkland's credit ratings continue to be supported by its strong market position, diversified customer and supplier base, geographic diversification, and the sector's relatively high barriers to entry while taking into account the industry's competitive nature, exposure to economic cycles, and volatility in refinery margins, as well as relatively medium- to long-term risks associated with the electric vehicle transition.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
Morningstar DBRS considered Carbon and Greenhouse Gas Costs as a relevant environmental factor for the Company's refinery operations. This factor is relevant because compliance with ever-increasing environmental regulations and standards limits the growth potential and adds costs for all oil and gas companies, including Parkland.

Social (S) Factors
There were no Social factors that had a significant or relevant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's Intrinsic Assessment can be found at https://www.dbrsmorningstar.com/research/450333.

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

Morningstar DBRS applied the following principal methodologies:

-- Global Methodology for Rating Companies in Services Industries (February 3, 2025)
https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025) https://dbrs.morningstar.com/research/447186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

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

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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