DBRS Confirms Agrium at BBB, Trend Stable

DBRS has today confirmed the Issuer Rating and Senior Debt rating of Agrium Inc. (Agrium or the Company) at BBB with Stable trends, reflecting the Company’s position as one of the world’s leading agricultural retailers, as well as an important primary producer of nitrogen, potash and phosphate-based fertilizers.

The Company has deepened its business profile with a number of acquisitions, particularly in its Retail unit, as well as through internal expansions in its Wholesale unit. A strategic review of its Advanced Technologies unit is expected to result in the divestment of Agrium’s Turf and Ornamental and Direct Solutions businesses, with the remainder reporting as part of the Wholesale unit with minor impact on the Company’s overall business profile.

Agrium’s financial metrics weakened in 2013, although they remain solid for its ratings, as earnings and operating cash flow declined materially due to softer markets for primary fertilizers and despite record profitability in Retail. Net debt remained steady at $3.1 billion due to receipt of $1.3 billion related to the Viterra Inc. transaction and despite a $322 million deficit in net free cash flow and $498 million in share repurchases.

A sharp drop in Agrium’s Wholesale earnings led to a 31% drop in income before non-recurring in 2013, compared to record performance in 2011 and near-record performance in 2012, despite ongoing strong performance of the Company’s Retail unit. Revenue fell 1.9% in 2013 to $15.7 billion due to a 14.2% drop in Wholesale revenue, partially offset by gains in the Retail unit, where operations were acquired and business performance improved. In Wholesale, 2013 average product prices were down across the board, including: potash down over 20%; phosphates down 9% to 12%; and nitrogen-based products down 0% to 16%.

DBRS views Agrium’s liquidity as adequate, based on solid operating cash flow, adequate short-term credit availability and low near-term debt maturity payments. The Company had cash balances at December 31, 2013, of $801 million and about $2.2 billion in revolving credit capacity.

Lower expected average potash and phosphate prices in the Wholesale unit, as well as lower potash output due to an expansion tie-in at Vanscoy, are expected to lead to a further erosion of earnings in the Wholesale unit in 2014, which, along with higher earnings in Retail due to added operating units and solid margins particularly in North America where farm income was strong in 2013, are expected to result in an overall reduction in 2014 operating profit. Higher interest expense is also expected to reduce 2014 earnings, due to expected higher debt balances as the Company invests in its Vanscoy, Saskatchewan, and Borger, Texas, expansion projects.

Accordingly, Agrium’s credit metrics are expected to weaken further in 2014 as earnings are anticipated to soften and debt levels are expected to rise. Continued high capex for current expansions to 2015 and higher dividend payments will contribute to financing needs.

Agrium continues to invest heavily in brownfield expansions through its Wholesale unit and also seeks to expand its Retail unit. With lower earnings and operating cash flow expected by DBRS in 2014, materially higher dividend levels and ongoing high capital expenditures, the Company’s net free cash flow deficit could exceed 2013 levels, in a negative $500 million- $1,000 million range, resulting in weaker credit metrics in the near term. Agrium will need to be judicious in its spending choices if it wishes to maintain the strength of its credit metrics, particularly those related to its balance sheet.

Notes:
All figures are in U.S. 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 Mining Industry (June 2011) and Rating Companies in the Industrial Products Industry (June 2013), which can be found on our website under Methodologies.

DBRS 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@dbrs.com.