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

DBRS has today confirmed the ratings of Trans Québec & Maritimes Pipeline Inc. (TQM or the Company) at A (low) with Stable trends. The confirmation reflects the following factors:

(1) TQM generates stable earnings, with no throughput risk, under its current regulatory framework. A major part of its revenue is derived from TransCanada PipeLines Limited (TCPL), one of its two 50% partners, under a transportation service agreement (TSA) until October 2018. TQM is part of the integrated TCPL Canadian Mainline system (Canadian Mainline). The other 50% partner, a wholly owned subsidiary of Gaz Métro Limited Partnership (Gaz Métro), is the sole distributor of natural gas shipped within Québec. TCPL is rated “A” (Under Review with Negative Implications) and Gaz Métro inc. is rated “A”, with a Stable trend.

(2) The Company has a reasonable financial profile, supported by a 60% debt/40% equity capital structure with relatively stable and predictable cash flows and earnings (cash flow-to-debt and EBIT interest coverage ratios of 18.8% and 4.31 times, respectively, in 2012). DBRS believes that TQM’s reasonable financial profile supports its position within its current rating category and recognizes the potential for its business risk to rise over time.

(3) 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. TCPL must decide whether to extend its committed 80% of the contract demand under the TSA that expires on October 31, 2013. However, TCPL’s TSA requires the full payment of tolls until October 30, 2018.

(4) TMQ has $75 million Series K Bonds maturing in September 2014, $100 million Series L Bonds maturing in September 2017, and an $85 million revolving term loan maturing in August 2016 ($51.8 million outstanding as of December 31, 2012). All of TQM’s outstanding long-term debt is scheduled to mature prior to the expiry of the commitment from TCPL in October 2018. Refinancing of debt maturities beyond that date would require clarity with respect to tolling methodology and arrangements.

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.

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