DBRS Confirms Superior Plus LP/Superior Plus Income Fund at BBB (low) and STA-3 (low)

DBRS has confirmed the Senior Secured Notes rating of Superior Plus LP (Superior or the Partnership) at BBB (low) with a Stable trend, and the stability rating of Superior Plus Income Fund (the Fund) at STA-3 (low). The confirmations remove the ratings from Under Review with Negative Implications where they were placed on April 24, 2006, following the announcement that the Fund (which wholly owns Superior) would cut its distributions by 30% to $1.56 per unit (from $2.22) on an annualized basis. The Fund also announced that it would initiate a comprehensive strategic review process to enhance shareholder value. These actions followed the March 9, 2006, announcement of a 10% reduction in distributions to $2.22 per unit (from $2.46) on an annualized basis. On July 10, 2006, DBRS maintained the ratings Under Review with Negative Implications following completion of the strategic review and announcement of the plan to implement certain actions in order to strengthen the financial profile of the Fund and Superior.

The confirmations reflect the successful execution of the strategic review goals (see below for details), including significant debt reduction in late 2006 from the sale proceeds ($354.7 million) related to one of its business segments and implementation of more conservative financial policies, including lower debt-to-EBITDA and payout ratio targets. The Fund will continue to operate as a diversified trust while focusing on its existing businesses.

Additionally, expected improvement in the Fund’s key credit metrics going forward as a result of the debt reduction in late 2006 contributed to the confirmation. Finally, DBRS expects that the Fund will not alter its fundamental financial and strategic objectives as a result of the Canadian federal government’s November 1, 2006, proposal that would result in the taxation of existing income trusts, including the Fund, beginning in 2011. The Fund’s ability to continue its distribution at current levels beyond that point could be impacted by the change in tax legislation as modified by Fund-specific tax considerations. However, DBRS would view any such reduction in future distributions as a one-time event, with the subsequent analytical focus on the stability and sustainability of the revised distributions. Superior’s subsidiaries have approximately $400 million of unutilized tax pools that could be used to reduce its taxes payable in future years.

Despite these positive factors, there are near-term challenges. The Fund faces challenges in its key Superior Propane and ERCO Worldwide (ERCO) segments, which accounted for a combined 79% of 2006 operating distributable cash flow (Operating DCF). Superior Propane’s results have been negatively affected by reduced demand as a result of warmer-than-normal winter weather and high propane costs (correlated to the price of crude oil). In addition, ERCO’s results have been hampered by significant pulp mill (72% of ERCO’s 2006 sales) closures over the past 18 months. Additional closures are possible over the medium term, which could further reduce sodium chlorate demand from ERCO’s plants.

The Fund’s cost of equity capital has increased following the cumulative 37% distribution cut during March/April 2006. This has reduced the Fund’s financial flexibility with respect to growth opportunities, at least over the near term. Superior has refinancing risk over the next 18 months due to the maturity of its $125 million two-year committed facility in August 2008 and the balance of its credit facilities in September 2008.

Superior has indicated that it will increase the amount of operating leases that it uses to finance much of its transportation equipment at Superior Propane and Winroc. To the extent that material increases occur, this would offset some of the improvement in credit metrics that resulted from the late 2006 debt reduction. However, DBRS expects that any increase would be relatively modest over the medium term.

Superior has implemented the results of its strategic review, which resulted in a variety of initiatives. In July 2006, the Partnership announced that it would continue to operate as a diversified trust while focussing on its existing businesses. The Partnership also deferred the majority of its planned growth capex in 2006-2007, subject to ongoing review, and reduced its targeted financial ratios (see below for 2006 ratios) as follows: (1) Average senior debt-to-EBITDA ratio of 1.5 to 2.0 times (previously 1.5 to 2.5 times); (2) Average total debt-to-EBITDA ratio of 2.5 to 3.0 times (previously 2.5 to 3.5 times); and (3) Target payout ratio of 85% to 90% (previously 95%). Finally, Superior entered into a new $150 million two-year committed revolving credit facility ($124.9 million outstanding at year-end 2006) maturing in August 2008 and made senior management changes at Superior.

In December 2006, Superior completed the sale of JW Aluminum Holding Company (JWA, a U.S.-based specialty flat rolled aluminum manufacturer acquired by the Partnership in mid-October 2005 for $405.4 million) for $354.7 million and used the proceeds to reduce Superior’s senior debt. As a result, the Partnership’s senior debt-to-EBITDA ratio declined to 2.1 times at December 31, 2006 (compared to 2.8 times at September 30, 2006 and the covenant of 3.0 times), while its total debt-to-EBITDA ratio declined to 3.7 times at December 31, 2006 (compared to 4.0 times at September 30, 2006, and the covenant of 5.0 times). In addition, the Fund’s payout ratio (DBRS adjusted) declined to 93% in 2006 from 109% in 2005.

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