NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an initial 'BBB-' rating to IFM (US) Colonial Pipeline 2 LLC's (IFM Colonial) pending $250 million issuance of senior secured notes due 2021.
In addition, Fitch has assigned an initial 'BB+' long-term Issuer Default Rating (IDR) to IFM Colonial. The Rating Outlook is Stable.
Proceeds from the issuance would be used to repay IFM Colonial's existing $216 million term loan, pay approximately $10 million in hedge break costs, establish a debt service reserve account, and for general corporate purposes.
The rating actions affect $250 million of long-term debt.
Key rating factors include the following concerns:
--Cash flow concentration from a non-controlling, minority interest in Colonial Pipeline Co. (Colonial);
--Colonial's single-asset business, which exposes Colonial - and the dividends it pays its owners - to concentrated regulatory, economic, and operating risk.
These concerns are mitigated 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.;
--A debt service reserve account for the proposed notes.
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 owners are also affiliated with entities that have strong credit profiles. 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%);
--ConocoPhillips through two subsidiaries: ConocoPhillips Pipe Line Co. (8.53%) and Phillips Petroleum International Investment Co. (8.02%);
--Shell Pipeline Co. LP (16.12%).
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 58% the past four years, and Colonial has maintained a modest capital expenditure plan with low working capital requirements. 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. The pipeline's 2009 throughput represented about 45% of the refined liquid petroleum products consumed on the East Coast.
Debt Service Reserve Account:
The proposed secured notes would be required to have a debt service reserve account, which would be enough to meet at least the next six months of interest expense payments. 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 dropped 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.
Company Description:
IFM Colonial is a holding company whose primary asset is a 15.8% direct ownership interest in Colonial and Colonial Ventures, L.L.C. (Ventures). In terms of barrel-miles, Colonial owns and operates the largest refined liquid petroleum products pipeline in the U.S., stretching 5,600 miles and serving customers in 13 states along the East Coast. Ventures is a dormant entity with no material assets. IFM Colonial is an indirect wholly-owned subsidiary of Codan Trust Company Limited and affiliated with an Australian investment management company that manages Australian pension fund investments.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Rating Oil and Gas Exploration and Production Companies: Sector Credit Factors' (April 7, 2010);
--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines' (Aug. 22, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Oil and Gas Sector Exploration and Production Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509845
U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030
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