DBRS Confirms Federated Co-operatives Limited at BBB (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Federated Co-operatives Limited (FCL or the Company) at BBB (high) with Stable trends. The confirmations acknowledge greater-than-normal recent volatility in the Energy segment driven by crude oil and fuel prices and reflect solid operating performance in FCL’s other business segments. The ratings continue to be based on the strong brand and market position of the Co-operative Retailing System (CRS), as well as the nature of the co-op structure, the barriers to entry of its refinery business and low financial leverage. The ratings also continue to reflect the key challenges that constrain the Company’s rating from: single-asset risk related to the refinery; the intense competitive environment in which the CRS network operates, disadvantages of the co-op structure, and FCL’s geographic concentration in the Prairies.

DBRS believes that FCL’s earnings profile will remain acceptable for the BBB (high) rating on a through-the-cycle basis over the medium term based on the largely staple nature of its product offerings and the integrated nature of the CRS network, while also incorporating the inherent variance in refiners’ margins and capacity utilization. Fuel volumes are expected to grow in the low single digit range over the medium term, while revenues from the Company’s non-energy segments should increase in the low- to mid-single digits, driven by a combination of volume growth and price increases. EBITDA margins should decline modestly in the near-term as a result of the impact on diesel margins and the more discretionary Home and Building Supplies segment and of a weaker economic environment in Western Canada due to depressed crude oil prices. As such, DBRS forecasts that EBITDA should decline modestly in F2016, and recover to the $900 million range over the medium term.

FCL’s financial profile is expected to remain stable going forward, at a level considered strong, helping to support the current rating based on its stable long-term balance sheet debt despite fluctuations in member funds, low relative financial leverage and its cash-generating capacity. Cash flow from operations should continue to track operating income, while capex should increase moderately to approximately $450 million in F2016, reflecting maintenance capex and investments in new CRS network locations and other organic growth initiatives. The Company’s patronage allocation is expected to remain consistent with recent practice. As such, free cash flow should be in the $150 million range in F2016. Over the longer term, any free cash flow is expected to be used to invest in further growth (organic or by acquisition) and/or exceptional refinery projects, as well as possibly increasing cash returns to member-owners. DBRS expects FCL’s credit metrics to remain within the range considered acceptable for the current rating on a through-the-cycle basis (i.e., long-term debt-to-EBITDAR below 1.25 times). Should the Company’s metrics weaken beyond the range acceptable for the rating, as a result of more aggressive than expected financial management and/or weaker than expected operating performance (beyond normal variance in margins and utilization), the ratings could be pressured.

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.

The applicable methodologies are Rating Companies in the Merchandising Industry (August 2015), Rating Companies in the Oil & Gas Industry (September 2015), and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.