DBRS Confirms Ratings of TransCanada Corporation and TransCanada PipeLines Limited

DBRS Limited (DBRS) confirmed the ratings of TransCanada Corporation (TCC or the Company) and its wholly owned subsidiary, TransCanada PipeLines Limited (TCPL). All ratings are being confirmed with Stable trends. The Preferred Shares - Cumulative 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.

Calgary-based TCC’s ratings reflect the relatively stable cash flow generation supported by the Company’s diversified energy infrastructure asset portfolio of natural gas pipelines, liquids pipelines and power generation assets in Canada, the United States and Mexico. A majority of the Company’s operating cash flow is underpinned by rate-regulated assets and long-term contracts with no commodity risk. TCC has one of the largest natural gas pipeline networks in North America, with access to key producing basins and connectivity to strong demand markets. Demand for natural gas remains strong as natural gas continues to replace coal for power generation, liquified natural gas (LNG) exports grow in the United States and natural gas exports to Mexico rise. TCC’s liquids pipelines handle approximately 20% of western Canadian crude oil exported to the United States. TCC is also one of the largest independent power generators in Canada, with 6,100 megawatts (MW) of power generation, with an additional 900 MW contracted generation capacity coming into service when the Napanee gas-fired generation project is expected to be commissioned in late 2018.

DBRS notes the regulatory uncertainty caused by the recent Federal Energy Regulatory Commission (FERC) actions and notice of proposed rulemaking to flow through the benefit of lower corporate taxes to shippers through pipeline tariffs. TCC has indicated that the impact to earnings is not expected to be material given its relatively simple corporate structure, and as nearly 55% of the U.S. natural gas pipeline revenues in 2018 are based either on discounted or negotiated rate contracts, this percentage is likely to increase to over 60% as new projects come into service in 2019. However, because of the FERC rulings, funding through periodic asset drop-downs to TC Pipeline LP, a U.S. Midstream Limited Partnership (MLP) owned 25.5% by TCC, is no longer considered to be a viable funding option by the Company.

DBRS notes the execution risk in near- to medium-term capital intensity and the consequent pressure on credit metrics as TCC continues to execute on $21.3 billion of commercially secured capital projects (excluding Keystone XL) largely in the Natural Gas Pipelines segment in the 2018–2020 timeframe ($7.3 billion spent as at Q1 2018), including approximately $10.0 billion forecasted for 2018. The Company completed and placed $5.0 billion of growth projects in service in 2017. Going forward, DBRS expects the Company to fund its significant capital program with its growing operating cash flow and a balance of equity and debt.

TCC’s credit metrics have modestly improved since the USD 13.0 billion acquisition of the Columbia Pipeline Group (CPG) in 2016 and sale of merchant power assets in 2017. DBRS expects to see gradual improvement in credit metrics, as the Company is expected to benefit from cash flow growth from major projects in Canada and the United States that are expected to be placed in service in the next two years. DBRS does not expect a positive momentum to TCC’s ratings in the next two years. However, the ratings could be negatively impacted by delays in execution of capital projects, adverse changes to regulatory frameworks, weaker counterparty credit profiles and if TCC fails to maintain operating cash flow to debt at or above 15% by the end of 2019 and beyond, while consistently maintaining debt to capital at or below 60%.

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

The Junior Subordinated Notes rating of TransCanada PipeLines Limited pertains to the Junior Subordinated Notes that are due in 2067.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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.