DBRS Confirms Ratings of TransCanada Corporation and Subsidiaries

DBRS Limited (DBRS) has today confirmed the ratings of TransCanada Corporation (TCC or the Company) and its wholly owned subsidiary, TransCanada PipeLines Limited (TCPL). Concurrently, DBRS has also confirmed the Medium Term-Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. and the Issuer Rating and Senior Unsecured Bonds rating of Trans Québec & Maritimes Pipeline Inc. These actions remove all of the ratings from Under Review with Developing Implications where they were placed on March 17, 2016. All trends are Stable. The Preferred Shares 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 by TCC.

These rating actions follow TCC’s recent announcement that the monetization of its remaining U.S. Northeast thermal and wind power assets has closed for approximately USD 2.1 billion. This announcement, including the sale of hydroelectric generation assets for USD 1.065 billion in April 2017, completes the last leg of the financing for the acquisition of Columbia Pipeline Group Inc. (CPG). The proceeds of the sales were used to repay the outstanding balance on the USD 6.9 billion CPG acquisition bridge facility on June 7, 2017. The USD 13.0 billion CPG acquisition (including USD 2.8 billion of CPG debt) closed in mid-2016 and was largely financed by issuance of $7.8 billion of common equity and proceeds of asset sales (refer to the November 1, 2016, DBRS press release entitled “DBRS Comments on TransCanada’s Strategic Initiatives Announcement”).

TCC’s announcements are consistent with DBRS’s expectations for funding the CPG acquisition, and DBRS continues to view the acquisition as credit neutral to TCC. Operational integration of CPG with TCC was completed in April 2017. CPG adds diversification to TCC’s business, as it positions the Company competitively in the prolific gas basins of North America (Marcellus, Utica, Montney, Duverney and Deep Basin), with increased connectivity to the U.S. Northeast, Midwest and Gulf Coast demand markets. Combined with TCC’s existing assets, CPG provides added optionality for shippers to use TCC’s transportation services. However, CPG’s shorter-duration contracts and relatively weaker counterparty risk profile offset some of the diversification benefits. DBRS views the sale of the U.S. Northeast power assets and the termination of Alberta power purchase agreements in 2016 as moderately credit positive, as they minimize TCC’s exposure to the volatile merchant power business. In February 2017, CPG acquired the outstanding common units of Columbia Pipeline Partners LP for USD 921 million, which simplifies its ownership structure and provides a 100% ownership interest.

TCC’s Q1 2017 results were in line with expectations, with increased contribution from the U.S. and Mexican natural gas businesses. However, DBRS notes the execution risk in near- to medium-term capital intensity and the consequent pressure on credit metrics from TCC’s $23.0 billion project portfolio, including USD 7.1 billion at CPG, of commercially secured growth projects largely in the natural gas pipeline segment through 2020 ($7.5 billion spent as at Q1 2017). DBRS expects gradual improvement in credit metrics, as the Company is expected to benefit from both a full year of cash flow from CPG starting in 2017 and growth from major projects in Canada and the United States, which are coming into service in the next two to three years. Going forward, DBRS expects the Company to fund its significant capital program in a manner that is consistent with its current ratings and maintain credit metrics in the middle of the “A” rating range.

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 principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry; DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers; and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

This rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.