DBRS Confirms TransCanada Corporation and Subsidiaries at “A,” Pfd-2 (low), R-1 (low)

DBRS has confirmed the ratings of TransCanada PipeLines Limited (TCPL or the Company) as listed below. DBRS has also confirmed the rating of the Preferred Shares of TransCanada Corporation (TCC) at Pfd-2 (low). The rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the credit strength of TCPL. The R-1 (low) Commercial Paper (CP) rating of TransCanada Keystone Pipeline, LP (Keystone USA), guaranteed by TCPL and its wholly owned subsidiary, TransCanada PipeLine USA, Ltd., has also been confirmed. All trends remain Stable.

The confirmation reflects the Company’s continued predictable cash flow from its regulated pipelines, which accounted for over 70% of consolidated EBITDA (for the first nine months (9M) of 2011). Pipeline EBITDA is supported by stable earnings that are mostly on a cost-of-service basis and/or contracted, and by incremental earnings contributed by newly constructed pipelines The remaining 30% of EBITDA is mostly contributed by power generation assets (60% in Canada and 40% in the United States). Although EBITDA from power generation is less predictable than the pipeline business, a sizable share of the power output is protected by long-term contracts with creditworthy parties.

TCPL maintains a stable balance sheet and reasonable credit metrics for the current rating category. This has been achieved despite substantial capex over the past two years to place in service a number of new crude oil and natural gas pipeline and power projects, notably Keystone Phases I and II (Base Keystone) and the North Central Corridor projects.

Incremental cash flow from these projects is expected to provide further support to the Company’s balance sheet and credit metrics going forward. Furthermore, the $6 billion investment Base Keystone has improved the Company’s business risk profile, with 90% of its 591,000 barrels per day (b/d) capacity under contracts with an average term of 18 years.

As TCPL’s Canadian Mainline (Mainline) and Alberta System (NOVA Gas Transmission Ltd.) have experienced a gradual decline in throughput, until recently, the Company, in addition to Base Keystone, has expanded its power generation business to diversify away from its natural gas pipeline business with a number of sizable acquisitions. About 60% of TCPL’s 10,800 megawatts (MW) of capacity (mostly natural gas, nuclear and coal power purchase agreements) are located in Canada and are under long-term contracts, mitigating price risk. TCPL’s exposure to cost overruns with respect to its share of capital costs ($2.4 billion TCPL share expected; $2.2 billion spent to September 30, 2011) related to the Bruce A refurbishment and restart of Unit 1 and Unit 2 has declined significantly as the units are expected to be in service in 2012. The energy segment is expected to almost double its EBITDA (compared to 2010) to $1 billion by 2013, with a significant part of its earnings expected to be derived from low-cost base load generation and capacity payments. Despite these benefits, DBRS believes that power generation entails higher risk than the pipeline businesses, reflecting power price risk on the uncontracted capacity as in the case of the 2,480 MW Ravenswood plant in New York, where the wholesale power price has been in decline over the past few years.

Despite its expansion of the energy business, DBRS believes TCPL’s business fundamentals remain strong, as the natural gas and oil pipeline businesses continue to be major cash flow contributors to TCPL. This should help the Company maintain solid liquidity and stable metrics, particularly with the addition of newly built natural gas and crude oil pipelines and the advanced pipeline projects expected to be completed over the medium term.

The proposed Keystone XL project has become a heated political issue and has faced serious challenges on regulatory and environmental fronts. The regulatory approval for the project has been delayed until 2013. The delay should substantially reduce the Company’s planned capex and project risk over the next 24 months. Should Keystone XL get regulatory approvals in 2013, DBRS expects the balance sheet to be under pressure during the construction of the project as a result of the substantial external funds that would be required to finance approximately $7.0 billion in capex. However, once the project is completed, TCPL should benefit from the predictable and strong cash flow expected to be generated from the project. Over the long term, cash flow from the Keystone XL should more than offset the potential decline in cash flow from the Mainline, which is currently working through a proposal designed to improve its competitiveness by reducing its tolls significantly.

Capex over the next two years (excluding the Keystone XL project) is likely to be much lower than the $3.6 billion level of the 12 months ending September 30, 2011. DBRS expects free cash flow to be relatively neutral until the significant capex on Keystone XL or another large project is well underway. As a result, debt levels are expected to remain stable or decrease slightly over the medium term. Combined with higher cash flow expected from newly completed pipeline projects, DBRS expects TCPL’s credit metrics to improve modestly and remain well within the current rating category.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies, which can be found on our website under Methodologies.

Commercial Paper guaranteed by TransCanada PipeLines Limited and TransCanada PipeLine USA Ltd.