DBRS Confirms Ratings of Federated Co-operatives Limited at BBB (high), Stable Trends

DBRS Limited (DBRS) 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 reflect solid operating performance in F2018, primarily benefiting from increased Energy segment earnings and modest growth in Agriculture segment sales. The ratings continue to be supported by the strong brand and market position of the Co-operative Retailing System (CRS), the co-op structure and high barrier to entry of the refinery business, while also continuing to consider the single-asset nature of the refinery, the associated environmental and regulatory risks and intense competition.

FCL’s earnings profile is expected to 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 crude oil and fuel prices, refiners’ margins and capacity utilization of the refinery. Fuel volumes are expected to remain relatively stable, while revenues from non-Energy segments are expected to increase in the low single digits, primarily driven by continued growth of fertilizer business. EBITDA margins are expected to decrease modestly in the near to medium term primarily driven by the impact of changes in crude oil and fuel prices and modest margin contraction in the much smaller Agriculture segment, as the Company continues to invest in lower-margin Fertilizer business to offer a more complete farming solution to its member-owners. As such, DBRS expects EBITDA in the $1.2 billion range in F2019.

FCL’s financial profile is expected to remain relatively strong and supportive of the current ratings over the medium term based on its low relative financial leverage, cash-generating capacity and financial flexibility. Cash flow from operations is expected to continue to track operating income, while capex is expected to increase to approximately $450 million in F2019, largely due to turnaround at the refinery. FCL’s patronage allocation is expected to be similar to current levels, leading to modestly lower free cash flow (before changes in working capital but after distributions) in F2019. DBRS expects the Company will continue to use a portion of cash flow from operations to invest in growth, complete any potentially significant refinery projects, increase cash returns and/or grow the Company’s cash balance for potential future investments. DBRS believes FCL’s credit metrics should remain more than acceptable for the current ratings (i.e., lease-adjusted debt to EBITDA below 1.25 times over the near to medium term. Given the Company’s business risk profile, a positive rating action is unlikely at this time. Should the Company’s credit metrics weaken beyond the range on a through-the-cycle basis as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.

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

The principal methodologies are Rating Companies in the Merchandising Industry, Rating Companies in the Oil and Gas and Oilfield Services Industries and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

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.com.

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

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

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