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

DBRS has today 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. (TCPL USA), has also been confirmed. All trends remain Stable.

The ratings and trends reflect the following DBRS expectations: (1) The decision with respect to the Company’s Canadian Mainline 2012 Tolls Application and Restructuring Proposal (the Restructuring Proposal) that is currently before the National Energy Board (NEB) will be such that the Company is allowed to continue to recover, and earn a reasonable rate of return on, all of the costs that were incurred in the construction of the Canadian Mainline. A decision is currently expected in late Q1 2013. (2) The Keystone XL Pipeline, approval of which has been repeatedly delayed, is approved by the United States Department of State in 2013 and construction is allowed to proceed, with an expected in-service date in late 2014 or early 2015. A decision is currently expected in Q1 2013. Should a negative decision result, DBRS expects TCC to mitigate the result with incremental projects of similar quality to support its overall business risk profile. (3) Despite an expected moderate weakening in 2013, TCPL maintains reasonably strong credit metrics in line with its targeted cash flow-to-debt ratio of at least 15% and cash flow-to-interest of at least three times (15.8% and 3.6 times on a DBRS-adjusted basis at September 30, 2012). DBRS expects increased diversification and reduced proportional exposure to the currently challenging natural gas pipeline segment, with major capital projects placed in service by 2015 as expected.

While DBRS acknowledges the Company’s current strong business risk profile, including the regulatory/contractual framework of its pipelines and the base load/long-term contractual support in its Energy segment, material deviation from the above-noted expectations would likely result in negative rating action for all of the ratings listed in the table below, except for the CP ratings.

DBRS views the above-noted expectations as important in maintaining the current ratings, for the following reasons:

(1) Despite continuing decline in the Canadian Mainline’s contribution to TCC’s earnings and EBITDA (13% and 23%, respectively in the nine months ending September 30, 2012 (9M 2012), compared with 21% and 27%, respectively, in 2009), it remains an important contributor to TCC’s overall credit profile. Any material change to its cost recovery and rate of return methodology would be an indication of increased business risk and would raise similar concerns with respect to other NEB-regulated entities that could face similar issues in the future, including those owned by TCC.

(2) DBRS considers the approval, construction and placement into service of Keystone XL (included in TCC’s Oil Pipelines segment – see below) to be an important component of the projected improvement of TCC’s current business risk profile. TCC projects that, between 2011 and 2015, its EBITDA will grow by 36% from $4.5 billion to $6.1 billion, which will be derived from the following sources: Canadian Pipelines (31%; down from 42%), Oil Pipelines (30%; up from 13%), Energy & Corporate (22%; down from 24%) and U.S. & Mexico Gas Pipelines (17%; down from 21%). In the absence of Keystone XL, DBRS would expect TCC to mitigate the result with incremental projects of similar quality to support its overall business risk profile.

(3) TCC’s financial profile remains reasonable, as capex has been lower than previously anticipated due to the Keystone XL delay, partly offsetting weaker earnings and cash flow in 9M 2012. DBRS believes that the weakness in credit metrics in 9M 2012, compared with prior periods, was partly due to factors that are not likely to reoccur on an ongoing basis, including the Sundance A power purchase agreement (PPA) force majeure, the increased planned outage days at Bruce Power’s Unit A3 and A4 and the lower-than-expected capacity payments at the Ravenswood natural gas and oil-fired generating facility. TCC has a large capex program ($6.5 billion in 2013, $4 billion in 2014 and $2.5 billion in 2015) that it expects to fund with a combination of retained cash flow ($7.5 billion) and senior debt and subordinated capital issuance ($5.5 billion). The Company will likely experience a significant free cash flow deficit in 2013 as capex on Keystone XL gets underway, likely resulting in a moderately negative impact on credit metrics prior to improvement starting in 2014, as some projects are placed into service and begin to generate cash flow. DBRS expects TCPL’s credit metrics to subsequently improve modestly and to remain within the current rating category.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

Commercial Paper issued by TransCanada Keystone Pipeline, LP is guaranteed by TransCanada PipeLines Limited and TransCanada PipeLine USA Ltd.

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.