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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Bonds rating of Trans Québec & Maritimes Pipelines Inc. (TQM or the Company) at A (low) with Stable trends. TQM’s rating reflects its low-risk business profile, underpinned by regulated and predictable earnings from a long-term take-or-pay contract with TransCanada Pipelines Limited (TCPL: rated A (low): 50% owner) and steady demand from Gaz Métro Limited Partnership (Gaz Métro; rated “A,” 50% owner), which is the sole distributor of natural gas shipped within Québec to a diverse customer base.

TQM is part of the integrated TCPL Canadian Mainline system (Canadian Mainline), and is regulated by the National Energy Board (NEB) with regard to its transportation tolls and its facilities. Virtually all of the Company’s earnings are from a cost-of-service-based take-or-pay contract with TCPL, covering 100% of the throughput volumes and eliminating all commodity and volume risk for the Company. TQM recently renewed and executed a 15-year firm Transportation Service Agreement (TSA) with TCPL until October 30, 2030, under the same terms and conditions and replacing the old take-or-pay contract that was to expire on October 30, 2018. The new TSA provides TQM with stable volumes, predictable earnings and demonstrates the long-term commitment and supportive sponsorship from its owners. TQM meets nearly 60% of the total demand for natural gas in Québec, and the demand from Gaz Métro’s distribution network has been growing at a steady rate. Furthermore, TCPL’s Canadian Mainline Settlement in 2014 with three of the largest Local Distribution Companies (LDCs) in Ontario, including Gaz Métro, ensures that customers enjoy greater access to competitive sources of gas supplies and supports steady throughput volumes on TQM.

TQM’s financial profile supports its position within its current rating category. The Company’s capital expenditure needs were moderate historically, and TQM has managed its debt levels and dividend payments to maintain the regulated 60% debt/40% equity capital structure. Cash flow-to-debt and EBIT interest coverage ratios of 18.0% and 4.17 times, respectively (last 12 months (LTM) ended June 30, 2015), have remained relatively strong. However, TQM’s capex needs are expected to trend relatively higher in the medium term, compared to historic levels, largely for replacement of sections of the pipeline and building new facilities as a result of growth in dwellings near the pipeline’s right-of-way and class location designation changes mandated by the NEB. DBRS ex¬pects the Company to finance any future cash flow deficits by managing its dividends and issuing new debt prudently in order to maintain its debt-to-capital ratio within regulatory levels.

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

The applicable methodology is Rating Companies in the Pipeline and Diversified Energy Industry (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.