Fitch Affirms IFM Colonial's Rating at 'BB+'; Outlook Remains Stable

NEW YORK--()--Fitch Ratings has affirmed IFM (US) Colonial Pipeline 2 LLC's (IFM Colonial) Issuer Default Rating (IDR) at 'BB+' and its senior secured notes at 'BBB-'. The notes are secured by a first priority security interest in a debt service reserve account which holds cash, the receipt account which holds cash received from Colonial Pipeline LLC (Colonial) and all of its shares in Colonial.

The Rating Outlook remains Stable. Today's rating action affects $250 million of long-term debt.

KEY RATINGS DRIVERS

The ratings are supported by the following strengths:

--Colonial's stable, FERC-regulated operations that provide robust cash flows and relatively predictable dividends to its owners;

--Colonial's strong market position as the largest refined liquid petroleum products pipeline in the U.S. and the lowest cost method of moving refined product from the Gulf Coast to the Northeast;

--A debt service reserve account which currently holds six months of cash to service the secured IFM Colonial notes.

Key rating factors include the following concerns:

--Cash flow concentration from a non-controlling, minority interest in Colonial;

--Colonial's single-asset business, which exposes Colonial - and the dividends it pays its owners - to concentrated regulatory, economic, and operating risk.

Minority Interest in Colonial:

The primary rating concern for IFM Colonial is that its sole source of cash flow is quarterly dividend payments from a non-controlling, minority interest in Colonial. Each of Colonial's five owners is entitled to appoint one of the five directors to Colonial's board, so each shareholder (including IFM Colonial) has limited individual control in determining the dividend and operating policies of Colonial.

At a 15.8% ownership stake, IFM Colonial has the lowest equity interest of the five companies that own Colonial. Some of this concern is lessened, though, by a supermajority requirement of 75% shareholder vote for asset sales and the issuance of debt greater than one year. In addition, shareholders have the right of first refusal on any stock sales.

IFM Colonial's limited control of Colonial is further balanced by the nature of Colonial's other owners, which are either long-term investment companies or subsidiaries of major oil & gas companies. These companies and their ownership interest in Colonial are as follows:

--Koch Capital Investments Co. LLC (28.09%);

--KKR-Keats Pipeline Investors LP (23.44%);

--Caisse de depot et placement du Quebec (16.55%);

--Shell Pipeline Co. LP (16.12%);

--IFM Colonial (15.8%).

Single-Asset Entity:

Colonial is a single-asset pipeline company, which exposes it to a greater amount of regulatory, economic, and operating risk than a company with multiple assets. A risk factor that weighs on the financial performance of Colonial pipeline would not be able to be mitigated by potentially better performance at another asset's operations.

Relatively Predictable Dividends:

Despite these concerns, Colonial's FERC-regulated tariffs and high utilization rates have generated robust cash flows. EBITDA margins have averaged over 57.9% the past four years. Overall, management has prudently managed the balance sheet and dividends. Between 2010 and 2013, dividends have been in the range of $299 million and $341 million.

Fitch expects Colonial's financial profile to remain solid over the next few years and enable Colonial to continue the payment of relatively predictable quarterly dividends.

Strong Market Position:

IFM Colonial benefits from Colonial pipeline's key position as the leading shipper of refined liquid petroleum products in the Southeast, Mid-Atlantic, and Northeast. Refinery closures on the East coast should enable Colonial Pipeline to maintain its competitive position.

Debt Service Reserve Account:

The secured notes have a debt service reserve account, which holds cash to meet at least the next six months of interest expense payments. Currently, the account has cash for six months of debt service ($8 million) since the debt service coverage ratio is above 2.0x. The account's reserves would increase to meet at least the next 12 months and 24 months of interest expense if IFM Colonial's interest coverage ratio drops below 2.0 times (x) and 1.25x, respectively. Fitch expects IFM Colonial's interest coverage ratio to remain well above 2.0x for the next few years.

Liquidity:

In addition to having $8 million of cash in the debt service reserve account, IFM Colonial also had $11 million in cash on the balance sheet as of year-end 2013. IFM Colonial has no other forms of liquidity. There are no debt maturities until the $250 million of secured notes come due in 2021. Fitch believes there is adequate liquidity until the notes come due.

Company Description:

IFM Colonial is a holding company whose only asset is a 15.8% direct ownership interest in Colonial. In terms of barrel-miles, Colonial owns and operates the largest refined liquid petroleum products pipeline in the U.S., stretching over 5,500 miles and serving customers in 13 states and the District of Columbia along the East Coast. IFM Colonial is an indirect wholly owned subsidiary of Codan Trust Company Limited and affiliated with an Australian investment management company that manages pension funds.

RATING SENSITIVIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Positive rating action is not viewed as likely given the structure of the issuer which limits the current rating.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Changes in the structure of IFM Colonial that result in a weakened credit profile;

--Significant operational issues at Colonial which reduce cash available for shareholders;

--Reduced dividends from Colonial which would reduce the debt service coverage ratio;

--Debt service coverage below 2.0x for a sustained period of time.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Rating Pipelines, Midstream, and MLPs - Sector Credit Factors' (Jan. 13, 2014);

--'2014 Outlook: Crude Oil and Refined Products Pipelines North American Oil & Gas' (Dec. 10, 2014);

--'Pipelines, Midstream, and MLP Stats Quarterly - Third Quarter 2013' (Dec. 17, 2013);

--'Investor FAQs: Recent Questions on the Pipeline, Midstream and MLP Sectors' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Rating Pipelines, Midstream and MLPs - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082

Pipelines, Midstream, and MLP Stats Quarterly - Third-Quarter 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726243

Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715517

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825120

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Contacts

Fitch Ratings
Primary Analyst:
Kathleen Connelly, +1-212-908-0290
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Ralph Pellecchia, +1-212-908-0586
Senior Director
or
Committee Chairperson:
Mark Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Kathleen Connelly, +1-212-908-0290
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Ralph Pellecchia, +1-212-908-0586
Senior Director
or
Committee Chairperson:
Mark Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com