DBRS Confirms Ratings of Federated Co-operatives Limited

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 during the last 12 months ended April 30, 2018, benefitting from increased Energy segment earnings and notable growth in the Crop Supplies and Fertilizer segment combined with stable balance sheet debt. 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, environmental and regulatory risks related to the refinery, as well as the intense competitive environment in which the CRS network operates, disadvantages of the co-op structure and FCL’s geographic concentration.

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 steady over the near term, while revenues from non-Energy segments should increase in the low-single digits, benefiting from continued build-out of the fertilizer offering. EBITDA margins are expected to remain relatively stable or improve modestly in the near term because of strong margins driven by the impact of changes in crude oil and fuel prices. As such, EBITDA should increase to above $1 billion, and DBRS believes EBITDA could increase further to above $1.1 billion in F2018.

FCL’s financial profile should continue to be supportive of the current 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 are expected to increase notably toward the $450 million level in F2018 due to a large turnaround at the refinery. FCL’s patronage allocation policy is not expected to change, which DBRS believes should therefore result in free cash flow (before working capital changes but after distributions) declining modestly toward the $250 million level. DBRS expects that FCL will continue to use a portion of free cash flow to invest in growth, complete any exceptional refinery projects, increase cash returns to its member-owners and grow the Company’s cash balance. DBRS believes 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) over the near to medium term. Should FCL’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 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.

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.