Morningstar DBRS Confirms Superior Plus LP's Issuer Rating at BB (high) and Senior Unsecured Debentures Rating at BB, Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Superior Plus LP (Superior Plus or the Company) at BB (high) and the Company's Senior Unsecured Debentures rating at BB, with a recovery rating of RR5. All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
Superior Plus's financial performance in the nine months to September 2024 was pressured by relatively warmer average winter temperatures, which affects volumes and pricing in the propane distribution. As a result, Morningstar DBRS expects the full year 2024 financial risk assessment to remain moderately weak, despite full consolidation of Certarus. The credit ratings are largely supported by Superior Plus's business risk assessment as an established mobile energy distributor with a solid market position in the U.S. and Canada and its ability to hold out through cyclical headwinds including weather variability. The credit ratings are constrained by the Company's high leverage from a recent history of debt-funded acquisitions, where lease-adjusted debt-to-EBITDA exceeded 4.5 times (x). The RR5 recovery rating on the Senior Unsecured Debentures considers the large amount of senior secured debt that ranks in priority to the rated instruments.

The Stable trends reflect Morningstar DBRS expectation that Superior Plus will achieve steady growth in earnings and operating cash flows and that the credit metrics will gradually strengthen over the medium term to a level more commensurate with the current Issuer Rating. The Company has come off its accelerated acquisition phase, and this should allow for some strengthening in the credit metrics in the next two to three years, with adjusted debt-to-EBITDA progressing toward 4x in the medium term. (Please note that Morningstar DBRS EBITDA calculations are adjusted for realized gains and losses on commodity risk management, and gross debt include a quarter portion of the $260 million preferred share capital).

CREDIT RATING DRIVERS
Morningstar DBRS may consider a negative rating action if some or all of the following conditions occur: (1) a weaker-than-expected performance, (2) an increase in the level of indebtedness that caused credit metrics to deteriorate below what is considered acceptable within the current credit rating range on a normalized, sustained basis, particularly the forecast gross debt-to-EBITDA at or higher than 4.5x; and/or (3) a permanent negative shift in the business risk profile, such as loss of market position.

Conversely, although not likely in the medium term, a positive credit rating action may be considered if the Company demonstrated a commitment to a materially stronger financial risk assessment over a longer period while maintaining its current business risk assessment.

EARNINGS OUTLOOK
Morningstar DBRS expects that Superior Plus's 2025 adjusted EBITDA growth to remain relatively flat relative to 2024, benefitting from normalization of operating and corporate costs and an expectation of volumes recovery in the propane distribution segment; offset by growing competition at Certarus Ltd. (Certarus) that puts pressure on the sales margin. The Company's 2025 adjusted EBITDA could moderately grow to approximately $500 million if the expected benefit from the Company's recently launched `Superior Delivers' efficiency and growth initiatives materialize as planned. EBITDA margins are expected to be in the upper teens, reflecting Superior Plus's ability to pass incremental costs to customers. Morningstar DBRS does not anticipate any major acquisition activity in the medium term as the Company focus on growing organically.

FINANCIAL OUTLOOK
Interest expenses are expected to trend down to approximately $90 million, benefitting from favourable variable rates on the updated revolving credit facilities. As a result, cash flow from operations growth is expected to outpace EBITDA and amount to approximately $340 million. The Company's capital expenditure is expected to remain elevated at approximately $190 million. About 60-65% of capital spending is estimated to be for the expansion of mobile storage units at Certarus, as the Company explores organic growth opportunities in the compressed natural gas (CNG) and renewable natural gas (RNG) distribution segment; albeit at a moderate pace vis-à-vis the last twelve months. Superior Plus has guided for a capital policy that favors growth spending, and distributions to shareholders in a form of dividends are expected to be lower, compared with 2024. As a result, free cash flow after capital expenditure and changes in working capital is expected to be positive.

CREDIT RATING RATIONALE
The credit ratings are underpinned by the Company's strong market position and a solid brand as a propane distributer, ranking number one in Canada and number four in the United States. The Company has strategically increased its footprint and product mix in the low carbon energy distribution through the acquisition of Certarus, a distributor of CNG, RNG, and hydrogen for commercial and industrial uses. The credit ratings acknowledge the fragmented nature of the mobile energy distribution market, exposure to external factors including weather and seasonality, and growing alternative energy supply from electrification and piped natural gas.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Superior Plus, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Superior Plus, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Superior Plus, the BRA and the FRA carry approximately equal weight.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Merchandising Industry (August 14, 2024), https://dbrs.morningstar.com/research/437891

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

--Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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