DBRS Morningstar Confirms Parkland Corporation Ratings 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 with Stable trends. The Recovery Rating on Senior Unsecured Notes remains RR4. The confirmations reflect Parkland’s strong operating performance during 2022, fueled by continued and broad-based growth in fuel volumes, relatively higher fuel margins as well as growth in the Company’s food and convenience retail segment. The Stable trends reflect DBRS Morningstar’s expectations that the Company is well positioned to navigate ongoing inflationary pressures, normalizing refinery margins, as well as integration risks associated with the Company’s numerous acquisitions, within the context of the current rating category. Parkland's ratings continue to be supported by its strong market position, diversified customer and supplier base, and geographic diversification, while taking into account the intense competition, exposure to economic cycles, and volatility in refinery margins.

Parkland’s earnings profile is expected to remain relatively stable at a level considered strong for the current BB rating category, despite the expectation of fuel margin normalization and ongoing inflationary headwinds, benefitting from integration synergies and volume growth. In the fuel segment, volumes are expected to increase in the high-single-digits from 27.0 million litres in 2022, benefitting from the full-year contribution from five acquisitions completed in 2022 as well as modest organic growth, while fuel gross margins on a cents-per-litre (cpl) basis are likely to normalize from elevated levels, due to weaker economic activity and relatively higher inventories. Additionally, a planned turnaround at the Burnaby refinery in Q1 2023 will negatively affect results. The food and convenience segment is expected to grow in the low-to-mid-single digits, benefitting from the M&M integration as well as ongoing expansion of the On the Run convenience store network. As such, DBRS Morningstar forecasts Parkland's EBITDA to increase to $1.75 billion in 2023 and increase toward $1.85 billion in 2024 from approximately $1.69 billion in 2022.

Parkland's financial profile is expected to improve over the near to medium term, benefitting from growth in earnings, while debt levels should remain relatively stable. Cash flow from operations should continue to track operating income, increasing to above $1.25 billion in 2023 and $1.35 billion in 2024, from approximately $1.17 billion in 2022. Capital expenditure spending is forecast to remain relatively stable at $500 million annually, while dividends cash outflow should increase toward $250 million, in part due to the suspension of the Dividend Reinvestment Plan (DRIP) program. DBRS Morningstar expects that any free cash flow (after changes in working capital) will be used to complete tuck-in acquisitions and/or to reduce debt modestly. As such, DBRS Morningstar expects Parkland's key credit metrics to improve moderately over the near to medium term, with debt-to-EBITDA leverage improving to below 4.00 times (x) in 2023 and below 3.75x in 2024, from 4.13x at the end of 2022.

A positive rating action could occur if Parkland’s debt-to-EBTIDA levels improve in line with DBRS Morningstar’s expectations to below 4.00x on a normalized and sustainable basis, primarily driven by growth in operating income, including the successful integration of recent acquisitions. Conversely, although unlikely, a negative rating action could occur if Parkland's leverage weakens to levels toward 5.0x as a result of weaker-than-expected operating results and/or more aggressive financial management.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations

Environmental (E) Factors
DBRS Morningstar considered Carbon and Greenhouse gas costs as a relevant environmental factor. 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 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 methodology applicable to the rating is Global Methodology for Rating Companies in the Merchandising Industry (https://www.dbrsmorningstar.com/research/402334; September 2, 2022). Other methodologies and criteria include Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (https://www.dbrsmorningstar.com/research/402196; August 31, 2022) and DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (https://www.dbrsmorningstar.com/research/402218; September 1, 2022).

In assessing the business risk of Parkland, DBRS Morningstar accounts for the merchandising methodology and Oil and Gas (O&G) methodology based on EBITDA contribution from the retail and refinery segment, respectively. DBRS Morningstar uses the merchandising methodology to cover the retail business of the Company, including gas stations and convenience stores, and the O&G methodology to review the risks related to Parkland’s refinery operations. DBRS Morningstar also considers the income derived from each of these areas, the interrelationship between them, and any diversification benefits.

The 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 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.

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 ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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