DBRS Places TransCanada Corporation & Related Issuers Under Review – Developing following Columbia Pipeline Group, Inc. Acquisition Announcement

DBRS Limited (DBRS) has today placed TransCanada Corporation’s (TCC or the Company) Preferred Shares – Cumulative rating Under Review with Developing Implications. DBRS has also placed the Issuer Rating, Unsecured Debentures & Notes, Junior Subordinated Notes and Commercial Paper ratings of TransCanada PipeLines Limited, the Medium Term-Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. as well as the Issuer Rating and Senior Unsecured Bonds rating of Trans Québec & Maritimes Pipeline Inc. Under Review with Developing Implications.

The rating actions follow TCC’s announcement that the Company has entered into an agreement to acquire Columbia Pipeline Group, Inc. (CPG), a Houston, Texas-based company that operates 18,000 kilometres (km) of natural gas pipelines and 296 billion cubic feet of natural gas storage capacity in the Marcellus and Utica Shale gas plays and 5,400 km of pipeline that extend from the Appalachia production basin to the U.S. Gulf Coast (the Acquisition).

The purchase price of the Acquisition is approximately USD 13 billion, including the assumption of approximately USD 2.8 billion of CPG’s debt. The Acquisition, which is expected to close in H2 2016, has been unanimously approved by the boards of directors of both companies, but remains subject to CPG shareholder approval and certain regulatory approvals. Upon closing, CPG will become an indirect wholly owned subsidiary of TCC and will cease to be a publicly held corporation.

TCC plans to finance the Acquisition in line with the Company’s current financial profile, primarily through asset sales, including the sale of its U.S. Northeast merchant power assets and a minority interest in the Company’s Mexican natural gas pipeline business as well as common equity issuance through a bought deal offering of subscription receipts for total gross proceeds of CAD 4.2 billion (the Offering). (TCC has also granted the Underwriters an option to purchase up to an additional CAD 210 million of subscription receipts at any time up to 30 days after closing of the Offering.) As noted, TCC also plans to assume CPG’s debt. DBRS notes that, to facilitate the potential timing gap between the Acquisition and the proposed asset sales, TCC has entered into syndicated bridge term loan credit facilities for up to USD 10.3 billion.

Based on its preliminary review, DBRS believes that the Acquisition, combined with the proposed asset sales noted above, is neutral with respect to TCC’s overall business risk profile. DBRS notes that the Acquisition provides increased diversification to TCC’s business, which DBRS views as moderately positive; however, CPG’s weak counterparty risk profile, which includes a large percentage of non-investment grade shippers, is moderately negative to TCC’s business risk profile. CPG has USD 5.6 billion of commercially secured growth projects currently in the regulatory and permitting processes and is implementing modernization initiatives of approximately USD 1.7 billion through 2021. TCC stated that it expects to fund CPG’s future growth in a manner that is consistent with the Company’s current financial profile; however, DBRS notes the increased near- to medium-term capital intensity and increased risks inherent in a combined growth project portfolio of CAD 23 billion between CPG and TCC. The sale of U.S. Northeast power assets would reduce TCC’s exposure to the merchant power business, which DBRS views as moderately positive from a business risk perspective while the potential sale of a minority interest in TCC’s Mexican natural gas pipeline business is viewed as neutral.

With respect to financial risk profile, DBRS expects initial pressure on TCC’s credit metrics as a result of the assumption of CPG’s existing debt and the potential for a time lag between closing of the Acquisition and TCC’s planned asset sales, partly offset by issuance of meaningful common equity. Execution risk associated with generating expected proceeds from the proposed asset sales is also present. TCC has indicated that it intends to fund the combined large medium-term capital expenditure commitments of both TCC and CPG “in a manner consistent with the Company’s current financial profile.”

DBRS’s ratings of TCC and its related issuers continue to 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. Currently, there are execution risks with respect to the Acquisition and related asset sales; the resulting impacts on the Company’s financial risk profile are uncertain. Consequently, DBRS has placed the ratings of TCC and its related issuers Under Review with Developing Implications. DBRS will further review the Acquisition as more information becomes available and aims to resolve the Under Review status once financing details are known and the transactions have closed.

Notes:
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 (December 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

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