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

DBRS Limited (DBRS) has confirmed the Issuer Rating and Senior Unsecured Notes (the Notes) rating of Federated Co-operatives Limited (FCL or the Company) at BBB (high) with Stable trends. The confirmations of the ratings reflect solid operating performance in F2016 and Q1 F2017, despite a challenging environment that saw further declines in oil and fuel prices as well as intense competition and unfavourable economic conditions in Western Canada. The ratings continue to be supported by the strong brand and market position of the Co-operative Retailing System (CRS), the co-op structure, the barriers to entry of the refinery business and low relative financial leverage. The ratings also continue to consider the 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.

DBRS believes that FCL’s earnings profile should remain relatively stable on a through-the-cycle basis over the medium term based on the staple-nature of the products offered and the integrated nature of the CRS network while continuing to reflect the variance in margins and capacity utilization of the refinery. Fuel volumes should continue to grow in the low-single-digit range per year over the medium term, while revenues from the non-Energy segment should increase in the low- to mid-single digits, benefitting from notable growth in the Ag business. EBITDA margins should remain relatively stable or decline modestly in the near term primarily because of changes in oil and fuel prices. As such, DBRS forecasts that EBITDA should increase on a through-the-cycle basis over the medium term toward the $975 million level.

FCL’s financial profile should continue to be supportive of the current BBB (high) ratings over the medium term based on its low relative financial leverage and cash generating capacity. Cash flow from operations should continue to track operating income, while capital expenditures (capex) are expected to be exceptionally low in F2017, but normalize going forward, remaining in the $400 million- to $500 million-per-year range. The Company’s patronage allocation is expected to remain stable, which should result in free cash flow before changes in working capital above the $300 million level in F2017 and typically in the $150 million- to $250 million-per-year range when capex normalizes. FCL is expected to use free cash flow to invest in growth (organic or through acquisition) and/or any exceptional refinery project or to increase cash returns to member-owners. FCL’s credit metrics should remain more than acceptable for the current ratings (i.e., lease-adjusted long-term debt-to-EBITDA below 1.25 times). Should the Company’s credit metrics weaken beyond this range on a through-the-cycle basis as a result of more-aggressive-than-expected financial management and/or weaker-than-expected operating performance, 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 principal methodologies are Rating Companies in the Merchandising Industry, Rating Companies in the Oil & Gas Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.