DBRS Confirms Ratings of TransCanada Corporation & TransCanada PipeLines Limited, Trends Stable

DBRS Limited (DBRS) has today confirmed the ratings of TransCanada Corporation (TCC or the Company) and its wholly owned subsidiary, TransCanada PipeLines Limited (TCPL), both with Stable trends. The preferred share rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the strength of TCPL and the expectation that no debt will be issued at TCC. The ratings primarily reflect (1) expected improvement in TCC’s overall business risk profile over the medium term, (2) potential medium-term pressure on its credit metrics and (3) environmental, regulatory and political risks with respect to its natural gas and liquids pipelines segments.

(1) TCC’s planned $46 billion growth capital expenditures (capex) program ($12 billion of small- to medium-term projects and $34 billion of large-scale, medium- and longer-term projects) would improve TCC’s overall business risk profile by expanding its lower-risk liquids pipeline segment and reducing its proportional exposure to the Canadian Mainline natural gas pipeline and to volume and/or commodity price risk within its Energy segment. The growth projects are largely contracted with good counterparties and, if completed, would also reduce the proportion of its EBITDA that is exposed to commodity price risk.

(2) DBRS expects TCC’s credit metrics to be pressured in the medium term, particularly if some of its large-scale projects are approved in the next few quarters. Key credit metrics targeted by TCC are cash flow-to-debt of at least 15% and cash flow-to-interest of at least 3.0 times (x; 13.8% and 4.0x, respectively, as calculated by DBRS as at March 31, 2015). The negative impacts of the weaker Canadian dollar on outstanding U.S.-dollar debt and pre-funding of near-term spending in Q1 2015 were key factors contributing to artificially weak metrics at the end of Q1 2015. DBRS expects that the length of time of credit metric underperformance would be dependent on the timing of approval and capex spending pattern of the projects that are currently awaiting regulatory approvals and/or final investment decisions.

(3) TCC faces environmental, regulatory and political risks with respect to several projects, including Keystone XL, which has been repeatedly delayed due to environmental and political issues. Future project execution could entail longer lead times and higher construction costs than before, potentially affecting Energy East and other large projects. Regulatory risk was highlighted by the National Energy Board’s March 2013 and November 2014 Canadian Mainline decisions, which eliminated the full throughput protection of the previous tolling methodology and resulted in lower earnings despite higher throughput in Q1 2015 and could potentially lead to lower Canadian Mainline earnings going forward.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (January 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.