DBRS Morningstar Confirms Ratings on Superior Plus LP at BB (high) and BB With Stable Trends Following Announcement of the Acquisition of Certarus Limited

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 (recovery rating of RR5), with Stable trends. The rating confirmations are underpinned by the Company’s leading position and strong brand in the energy-distribution market and moderately high medium-term financial risk profile. The rating confirmations also reflect DBRS Morningstar’s expectation that Superior Plus’ credit metrics would remain within the BB (high) range after the completion of the potential acquisition of Certarus Limited (Certarus) for $1.05 billion (the Acquisition). Superior Plus will finance the Acquisition with a drawdown from revolving credit facilities of approximately $600 million and the rest by an equity issuance to the shareholders of Certarus. The Acquisition is subject to regulatory approval and satisfaction of customary conditions, which are expected to be finalised in the first quarter of 2023.

Certarus is a fast growing North American private energy distributer, headquartered in Alberta, Canada. It provides transportable infrastructure for distribution of compressed natural gas and other gases (e.g., hydrogen, biogas) to industrial and commercial customers. It has developed a network of more than 600 mobile storage units to supply approximately300 customers in energy (utilities), mining, and other sectors. The Acquisition is aligned with Superior Plus strategic expansion in a fragmented energy distribution market. The Acquisition would improve supply, customer, and geographical diversification, with an expectation of modest dilution of weather-linked seasonality, which is more pronounced with a high share of residential end-use. In addition, the Acquisition will strengthen Superior Plus’ footprint in the U.S. market, and will enable the Company to offer a lower carbon alternative to propane. Certarus’ earnings and cash flow contribution (excluding cost synergies) are expected to materialize immediately and therefore not create a lag versus the debt funding raised for the Acquisition. In 2022 to date, Superior Plus completed eight acquisitions totalling $522.8 million, notably the California-based retail and wholesale businesses, Kamps Propane, Inc. and Kiva Energy, Inc., for $302 million. The Certarus acquisition is, however, the largest transaction by value since the NGL Energy Partners LP acquisition in 2018.

Superior Plus funded the 2022 acquisitions mostly with the revolving credit facilities, and this caused a notable elevation in the Company's net leverage above its long-term target of 4 times (x). The Company made a modest reduction in indebtedness from the proceeds of $287.5 million equity issuance in April 2022. However, the softer operational performance in the second and third quarter resulted in stretched credit metrics. Year-to-date through to September 2022, EBITDA grew 4% year-on-year because of higher contribution from the U.S. propane distribution and the Wholesale segment, but was negatively affected by higher corporate costs, inflation, and expenses relating to the integration of tuck-in acquisitions. Canadian EBITDA was lower primarily because of a reduction in Canada Emergency Wage Subsidy benefits, compared with the prior period. DBRS Morningstar expects full-year 2022 EBITDA to be within the management guided range, reflecting realization of acquisition-related synergies in the U.S. propane distribution business and the seasonal workforce optimization initiatives undertaken by the Company. Looking ahead into 2023, DBRS Morningstar forecast EBITDA is expected to be flat vis-à-vis 2022, or 25% to 30% higher with the Acquisition.

Pro forma medium-term gross leverage is expected to remain elevated above 4.5x and cash flow-to-debt below 20%, post the Acquisition. DBRS Morningstar anticipates a slowdown in acquisition activity beyond 2023 (after the Certarus transaction), in a path to deleverage. The Company has in the past demonstrated an ability to reduce debt within two years following large acquisitions.

Overall, Superior Plus’ strong business risk profile continues to support the current ratings. However, DBRS Morningstar could consider a negative rating action under the following conditions: (1) a prolonged weak performance or (2) difficulties in integrating newly acquired businesses that would cause leverage metrics to deteriorate beyond what is considered acceptable within the current rating range for an extended period of time, particularly gross debt to EBITDA at or above 4.5x and cash flow to debt at or below 13%. 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.

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 at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodologies are Rating Companies in the Services Industry (January 28, 2022; https://www.dbrsmorningstar.com/research/391428); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683); DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (September 1, 2022; https://www.dbrsmorningstar.com/research/402218); and DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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 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.

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 info@dbrsmorningstar.com.

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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