Fitch Affirms IFM Colonial Pipeline’s Rating At BB+; Outlook Remains Stable (Money Watch)

Market Watch – 3/25/15

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-’. In addition, Fitch assigns a recovery rating of ​‘RR1’ on the senior secured notes. 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.

Today’s rating action affects $250 million of long-term debt. The ​‘BBB-/RR1’ rating for IFM Colonial’s senior secured notes reflects its substantial collateral coverage and outstanding recovery prospects in a distressed scenario. The one-notch uplift from IFM Colonial’s IDR reflects Fitch’s notching criteria for issuers with ​‘BB+’ IDR’s.

The Rating Outlook remains Stable.

KEY RATINGS DRIVERS

The ratings are supported by the following strengths:

–Colonial’s stable, FERC-regulated operations that provide solid 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 East Coast;

–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 the quarterly dividend payments from its minority interest in Colonial. Some of this concern is lessened by the fact that each of Colonial’s owners is entitled to appoint one of the five directors to Colonial’s board, and by the supermajority requirements in the board’s bylaws. Some of the more important bylaws include a supermajority vote of at least 75% of the shareholder vote for asset sales, and the issuance of debt greater than one year. Shareholders also 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 (14.51%);

–Shell Midstream Partners, LP (1.61%);

–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.

Predictable Dividends

Despite these concerns, Colonial’s FERC-regulated tariffs and high utilization rates have generated robust cash flows. EBITDA margins have averaged about 57% 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 along the East Coast.

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.

KEY ASSUMPTIONS

Fitch’s key assumptions within the rating case for the issuer include:

–A consistent dividend payment from Colonial Pipeline;

–The Colonial board remains supportive of a conservative financial profile at the pipeline;

–IFM Colonial’s only debt issuance remains the $250 million in senior secured notes.

RATING SENSITIVITIES

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

–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 to IFM Colonial;

–A material weakening of credit metrics at Colonial which would lead to reduced dividends for IFM Colonial;

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

Additional information is available at ​‘www.fitchratings.com’.

Applicable Criteria and Related Research:

–‘2015 Outlook: Natural Gas Pipelines (Stability Despite Price Uncertainty)’ (December 2014);

–‘Pipelines, Midstream and MLP Stats Quarterly — Third Quarter 2014’ (December 2014);

–‘MLP End Game (Common Goals — Divergent Strategies)’ (November 2014);

–‘What Investors Want to Know: Pipelines, Midstream and MLPs’ (October 2014);

–‘Midstream Spending Significantly Rising for MLPs and C‑Corps’ (August 2014);

–‘Corporate Rating Methodology — Including Short-Term Ratings and Parent and Subsidiary Linkage’ (May 2014);

–‘Rating Pipelines, Midstream and MLPs — Sector Credit Factors’ (January 2014).