DBRS Morningstar Confirms Ratings on Superior Plus LP at BB (high) and BB with Stable Trends

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. The trends on both ratings are Stable. The rating confirmations reflect DBRS Morningstar’s expectation that Superior Plus’ leverage will remain at a level commensurate with the current ratings over the near term, even though the Company has accelerated its acquisition strategy. The rating confirmations also consider the sale of Superior Plus' Specialty Chemicals business to Canadian private equity fund Birch Hill Equity Partners for $725 million, completed on April 9, 2021. This divestiture has transformed Superior Plus into a pure play energy distribution company. Superior Plus has lost some diversification and scale as a result of the sale of the Specialty Chemicals business, whose economic drivers are generally different from those underlying the Company's Energy Distribution business. However, the loss of diversification and scale is offset by the fact that the Energy Distribution segment has gone through a significant portfolio shift in recent years, leading to improved customer and geographic diversification, as well as enhanced margins and scale. Furthermore, in the next two to three years, the Company's accelerated acquisition strategy should allow it to recover from the scale it lost via the sale of the Specialty Chemical business in terms of revenues and EBITDA. The rating confirmations are also driven by the Company’s (1) proven track record of successfully integrating acquisitions and the relative similarity of these acquisitions in terms of business model and geography, (2) leading position in the Canadian propane distribution market, and (3) fast-growing footprint in the U.S.

In 2021, Superior Plus announced six acquisitions totaling $600 million. Notably, on July 7, 2021, Superior Plus closed the acquisition of the South Carolina-based retail propane distribution company Freeman Gas and Electric Co., Inc., for $208 million, and, on July 14, 2021, it announced the acquisition of California-based retail and wholesale propane distribution company Kamps Propane Inc., and related entities (Kamps) for $299 million. Kamps is one of the largest propane retailers in California and operates its wholesale business in 16 states. The Company views Kamps as a significant operating platform, which should enable greater synergies from future tuck-in acquisitions in California. The U.S. Federal Trade Commission (FTC) is currently reviewing the Kamps acquisition. The Company spent more on acquisitions in 2021 than it did in 2020 and 2019 ($285 million and $70 million, respectively). However, the mostly debt-funded acquisition of U.S.-based NGL Energy Partners LP in 2018 for almost $1 billion continues to be the largest acquisition made by the Company to date. During 2021, Superior Plus refinanced its Canadian dollar and U.S. dollar denominated bonds, replacing them with longer dated bonds with relatively lower coupons.

Excluding the divested specialty chemical segment, year-to-date through the first six month of 2021, revenues were 22% higher year-over-year. In the U.S., revenues increased because of higher wholesale prices and additional acquisition-related revenues, partly offset by the strong Canadian dollar, while in Canada revenues grew primarily because of higher wholesale propane prices and volumes. EBITDA grew 8% during the same period. U.S. EBITDA was higher because of higher revenues but also because of acquisition-related synergies and a colder first quarter of 2021. Canadian EBITDA was lower primarily because of the weaker market fundamentals of the supply portfolio management business, partly offset by the Canada Emergency Wage Subsidy (CEWS) benefits. DBRS Morningstar expects 2021 revenues to be higher compared with those of 2020 mainly because of the impact of the acquisitions made in the U.S. during 2021 and 2020, the improvement of commercial and wholesale volumes in Canada, and overall higher propane prices in 2021. Furthermore, EBITDA growth is also expected to come via realization of acquisition-related synergies in the U.S. propane distribution business and the seasonal workforce optimization initiatives undertaken by the Company, partly offset by lower CEWS benefits in Canada, and the almost $10 million higher performance-based stock incentive plan in 2021.

If approved by FTC, the Company expects to fund the Kamps acquisition, mostly with the revolver and DBRS Morningstar expects a slight elevation in the Company's leverage to 4 times (x) or more upon the closing. However, based on incremental EBITDA from the acquisitions made in 2021 and related synergies, in 2022, leverage is expected to come back under 4x and cash flow-to-debt above 20%. DBRS Morningstar anticipates no change in Superior Plus’ strategy to fund acquisitions through revolver drawings, particularly in the propane distribution sector in the U.S.. In addition, DBRS Morningstar continues to expect Superior Plus to manage its credit metrics within levels consistent with the ratings, because acquired assets contribute earnings, and synergies are realized with somewhat of a lag versus the debt funding of these acquisitions. In addition to its proven track record of successfully integrating over 30 acquisitions, the Company has also shown that it can improve leverage in a relatively short time frame following a large debt-funded acquisition.

Overall, Superior Plus’ operating performance and business risk profile continue to support the current ratings. DBRS Morningstar expects the Company to remain acquisitive. The fragmented nature of the propane distribution sector provides sufficient tuck-in acquisition targets for the Company, despite the competition mainly from other sponsor-backed companies. However, DBRS Morningstar could consider a negative rating action under the following conditions: a shift in financial policy, 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 that would cause leverage metrics to deteriorate beyond what is considered commensurate with the ratings for an extended period of time. 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.

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); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424); and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238); and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2021; https://www.dbrsmorningstar.com/research/369165) which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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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