OREANDA-NEWS. Fitch Ratings has affirmed IFM (US) Colonial Pipeline 2 LLC's (IFM Colonial) long-term Issuer Default Rating (IDR) at 'BB+' and its senior secured notes at 'BBB-'. The senior secured notes have a Recovery Rating of 'RR1'. 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 Rating Outlook remains Stable.

KEY RATING DRIVERS

The ratings are supported by dividends from Colonial's stable, FERC-regulated operations that provide solid cash flows and relatively predictable dividends to its owners, including IFM Colonial. Furthermore, IFM Colonial's rating is supported by its debt service reserve account which currently holds six months of cash to service the secured IFM Colonial notes.

Concerns include cash flow concentration from a non-controlling, minority interest in Colonial. Furthermore, Colonial is a 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. Some of this concern is lessened by the fact that each of Colonial's five ultimate owners is entitled to appoint one of the five directors to Colonial's board, and by a supermajority requirement of 75% shareholder vote for asset sales, and the issuance of debt greater than one year. 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 (13.12%);
--Shell Midstream Partners, LP (3%; a subsidiary of Shell Pipeline Co. LP);
--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 2012 and 2015, Colonial has paid dividends in the range of $308 million and $352 million.

Fitch expects Colonial's financial profile to remain solid over the next few years and enabling it to continue the payment of predictable quarterly dividends to its shareholders, including IFM Colonial.

Strong Market Position:
IFM Colonial benefits from Colonial's key position as the leading shipper of refined liquid petroleum products in the Southeast, Mid-Atlantic, and Northeast. It is 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. 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.

KEY ASSUMPTIONS

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

--Steady and moderate growth in IFM's cash flow, driven directly by higher dividend distribution from Colonial Pipeline;
--No debt issuance assumed in the forecasted years;
--IFM's interest coverage is projected to remain strong requiring the debt service reserve account to hold six months of debt service coverage over the forecasted years which extend through FY18.

RATING SENSITIVITIES

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 that 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.

LIQUIDITY

IFM Colonial is expected to have adequate liquidity to service its debt over the next few years. Its sources of liquidity are restricted to cash on the balance sheet and cash held in the debt service reserve account.

FULL LIST OF RATINGS

Fitch has affirmed the following ratings:

IFM (US) Colonial Pipeline 2 LLC:
--Long-term IDR at 'BB+';
--Senior secured at 'BBB-'/RR1.

The Rating Outlook is Stable.