DBRS Morningstar Confirms Parkland Corporation 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 and the Recovery Rating on the Senior Unsecured Notes at RR4. All trends are Stable. The confirmations reflect Parkland’s F2020 operating results, which were stronger than DBRS Morningstar’s revised forecast at the onset of the Coronavirus Disease (COVID-19) pandemic (see the press release titled “DBRS Morningstar Changes Trends on Parkland Corporation to Stable from Positive, Confirms Ratings at BB,” published April 13, 2020). The Stable trends reflect DBRS Morningstar’s view that, while there are still uncertainties related to the pace of global distribution of coronavirus vaccines, the relaxation of virus containment measures, and the macroeconomic aftereffects, the Company is now well placed to navigate the current environment and improve within the current rating category without the need for materially stringent capital preserving measures. 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 the risks associated with environmental liability.

During F2020, Parkland’s total fuel volume decreased to 21.4 billion litres from 22.3 billion litres in F2019. The decrease was primarily because of lower fuel demand as a result of coronavirus containment measures, particularly the restrictions on non-essential businesses and travel. DBRS Morningstar notes, however, that the Company benefitted from increased fuel volume attributed to its acquisition-driven growth initiatives primarily in the U.S. market. Furthermore, Parkland’s operating earnings benefitted from improved fuel margins, strong convenience store sales growth, and proactive cost reduction initiatives. As such, the Company’s EBITDA decreased to approximately $1.0 billion in F2020 from $1.3 billion in F2019 largely because of the economic impact of the coronavirus pandemic and the F2020 Burnaby refinery turnaround.

DBRS Morningstar expects fuel volume recovery to continue tracking the pace of economic reopening in Parkland’s key markets. DBRS Morningstar further expects fuel volume growth to accelerate over the near term as a result of investments in new-to-industry sites and strategic acquisitions, primarily in the U.S. market. As such, DBRS Morningstar forecasts Parkland’s fuel volume to increase to approximately 23 billion litres in F2021 and to above 25 billion litres in F2022. In terms of margins, DBRS Morningstar expects the Company to continue to benefit from efficiency-improving initiatives implemented at the onset of the coronavirus pandemic and also from operating leverage as fuel volume increases. DBRS Morningstar expects Parkland’s EBITDA to reach approximately $1.2 billion in F2021, up from $1.0 billion in F2020. Thereafter, DBRS Morningstar expects EBITDA to grow above $1.4 billion with the increase in operating earnings primarily driven by enhancements in the Company’s past transactions as well as future acquisitions.

In terms of Parkland’s financial profile, DBRS Morningstar expects cash flow from operations to continue to track operating income. Capital expenditure is expected to increase to above $500 million in F2021 from $345 million in F2020 largely because of maintenance work that was delayed last year in response to the pandemic. DBRS Morningstar expects Parkland’s dividend policy to remain stable, resulting in free cash flow (FCF; after dividends but before changes in working capital) to be approximately $110 million in F2021. DBRS Morningstar expects Parkland will use its FCF and incremental debt for further acquisitions, predominantly in the U.S. market. DBRS Morningstar also expects the Company to acquire the 25% interest in SOL that it does not currently own with debt financing as the option becomes available in F2022. DBRS Morningstar forecasts Parkland’s lease-adjusted debt-to-EBITDAR will return to below 3.50 times (x) during the course of F2022, from 3.90x in F2020 and 2.93x in F2019, as the rate of growth in operating income should outpace the proportion of any incremental debt incurred for acquisitions. As such, should Parkland’s lease-adjusted debt-to-EBITDAR improve towards the mid-three-times range on a sustainable basis, based on operating earnings growth and supportive financial management, a positive rating action may occur by the end of F2021.

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 methodologies are Rating Companies in the Merchandising Industry (July 30, 2020, https://www.dbrsmorningstar.com/research/364692), DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020, https://www.dbrsmorningstar.com/research/366063), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020, https://www.dbrsmorningstar.com/research/369167), 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).

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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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