DBRS Confirms Parkland Fuel Corporation at BB, Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Parkland Fuel Corporation (Parkland or the Company) at BB, with Stable trends. The Recovery Rating on the Senior Unsecured Notes remains at RR4. The confirmations primarily reflect the Company’s adequate operating performance in a challenging environment and the closing of the previously announced acquisition of Pioneer Energy (in line with DBRS expectations as outlined in the September 18, 2014, press release), despite declines in organic fuel volumes, which are at least partially attributable to the energy-related economic slowdown in Western Canada and North Dakota.

Going forward, Parkland’s earnings profile should remain stable over the medium term as the Company integrates the assets of Pioneer Energy, while continuing to seek growth through acquisitions. Organic growth of fuel volumes is likely to remain challenged in the near term as the economy in Western Canada feels the impact of the decline in oil prices. Gross margins on a cents-per-litre basis are expected to remain relatively steady over the longer term, while Parkland is expected to continue to focus on improving efficiency and achieving synergies. As such, DBRS forecasts that EBITDA should grow toward the $250 million level in the near term (with a full-year contribution from Pioneer) and in the low- to mid-single-digit range per year over the medium term.

DBRS expects Parkland’s financial profile and leverage levels to remain within the range considered acceptable for the current rating over the near to medium term. Cash flow from operations should continue to track operating income, while capital expenditures (capex) should rise toward the $70 million level partially due to higher maintenance capex with the growth of the Company. Gross dividends are expected to remain high, but the cash outlay related to dividends should remain reasonable based on steady participation in the Company’s dividend reinvestment program (DRIP). Parkland is expected to use any free cash flow, incremental debt and possibly equity to finance acquisitions, while the number of attractive acquisition opportunities for Parkland should increase if the economic environment in Western Canada remains challenging. Should Parkland be challenged to maintain credit metrics in a range considered acceptable for the current BB rating (i.e., lease-adjusted debt-to-
EBITDAR below 4.0 times (x) and lease-adjusted EBITDA-to-interest over 4.0x) due to weaker-than-expected operating performance and/or more aggressive-than-expected financial management (debt-financed acquisitions and/or higher-than-expected cash dividends from rising dividends or declining participation in the Company’s DRIP), the Company’s current rating could be pressured. However, should the Company stabilize its operating performance and reach normalized EBITDA of greater than $250 million (resulting in a declining payout ratio) while maintaining sustainable credit metrics at levels considered strong for the current rating (i.e., lease-adjusted debt-to-EBITDAR below 3.5x), a positive rating action could result.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Merchandising Industry (August 2015) and DBRS Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.