DBRS Confirms Trans Québec & Maritimes Pipeline at A (low), Stable Trend

DBRS has today confirmed the Senior Unsecured Bonds rating of Trans Québec & Maritimes Pipeline Inc. (TQM or the Company) at A (low) with a Stable trend. The confirmation reflects the following factors:

(1) TQM generates stable earnings, with no throughput risk, under its current regulatory framework. Most of its revenues are derived from a commitment until October 31, 2018, from TransCanada PipeLines Limited (TCPL), one of its two 50% partners. The other 50% owner, Gaz Métro Limited Partnership (Gaz Métro), is the sole distributor of natural gas shipped within most of Québec. TCPL and Gaz Métro inc. (Gaz Métro’s general partner) are rated “A” by DBRS. TQM is part of the integrated TCPL Canadian Mainline system.

(2) The Company has a reasonable financial profile, supported by a 60% debt/40% equity capital structure, resulting in reasonable credit metrics (including cash flow-to-debt and EBIT interest coverage ratios of 18.3% and 4.54 times, respectively, in 2011). DBRS believes that TQM’s financial profile supports its position within its current rating category and recognizes the potential for its business risk to rise over time.

(3) All of TQM’s outstanding long-term debt is scheduled to mature prior to the expiry of the commitment from TCPL in October 2018. TQM has an $85 million revolving term loan agreement maturing in August 2016 ($60.5 million was outstanding as of December 31, 2011). The $75 million Series K Bonds mature in September 2014 and the $100 million Series L Bonds mature in September 2017.

(4) TQM faces rising business risk over the medium to long term. The Company faces long-term bypass risk if significant shale gas development in Québec and the U.S. Northeast allows producers to flow gas directly into Gaz Métro’s distribution network. Insufficient natural gas supply delivered to TQM in the long term could raise tolls to levels that further reduce gas demand in TQM’s markets. TCPL must decide whether to extend 80% of the contract demand under the Transportation Service Agreement that expires on October 31, 2013. While TCPL would still be required to pay the full tolls until October 30, 2018, refinancing of debt maturities beyond that date would require clarity with respect to the future nature of the tolling methodology.

Notes:
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.