DBRS Morningstar Confirms Rating on Trans Québec & Maritimes Pipeline Inc. at A (low), Stable

DBRS Limited (DBRS Morningstar) confirmed Trans Québec & Maritimes Pipeline Inc.’s (TQM or the Company) Issuer Rating at A (low) with a Stable trend. TQM is an integral part of the Canadian Mainline natural gas pipeline system, which is owned by TransCanada PipeLines Limited (TCPL; rated A (low) with a Stable trend by DBRS Morningstar). TC Energy Corporation (rated Pfd-2 (low) with a Stable trend by DBRS Morningstar) owns 100% of TCPL, which in turn owns 50% of TQM. TQM is regulated by the Canada Energy Regulator (formerly the National Energy Board). The Company generates earnings from a long-term, cost-of-service-based take-or-pay contract with TCPL with a current term that extends to 2030. The contract covers 100% of throughput capacity and eliminates all commodity and volume risk. As a result, TQM’s rating is aligned with TCPL’s rating. TQM meets most of the natural gas demand in Québec through Énergir, L.P.’s distribution network. Énergir, L.P. is 71% owned by Énergir Inc. (rated “A” with a Stable trend by DBRS Morningstar), which owns the other 50% of TQM.

TQM’s financial performance for the last 12 months ended September 30, 2019 (LTM), was in line with DBRS Morningstar’s expectations, reflecting stable revenues from the five-year toll settlement for 2017 to 2021. TQM’s leverage increased above the regulated 60% debt to 40% equity capital structure because the Company incurred additional debt to fund expansion projects. Cash flow-to-debt and earnings before interest and taxes interest coverage ratios of 15.9% and 3.88 times (x), respectively, in the LTM remain consistent with the rating level.

Capex was higher in 2018 and in the LTM partially because TQM completed a brownfield compression expansion project, which was commissioned in November 2019. Capex is expected to remain elevated over the next few years as TQM adds capacity through brownfield expansionary compression projects, which will provide the Company with additional capacity to service the Québec, New England and Atlantic Canada markets. All additional capacity is expected to be fully contracted to TCPL under long-term take-or-pay contracts. Expansionary capex is expected to total approximately $375 million until 2022, which the Company expects to fund with debt and cash flow from operations. TQM expects its leverage to peak near the 65% level while the expansion projects are ongoing. After the projects are completed in 2022, the Company expects its leverage ratio to return to the regulated 60% level.

DBRS Morningstar continues to view TQM’s rating as supported by (1) the take-or-pay contract and strong sponsorship from its parent companies, TCPL and Énergir Inc.; (2) stable regulation; and (3) a reasonable financial profile. The rating also considers the challenges associated with high capex and concentration risk in the Québec market. DBRS Morningstar may take a negative rating action if the Company’s financial metrics deteriorate below a level acceptable for the A (low) rating category. DBRS Morningstar does not anticipate a positive rating action in the medium term. Any negative or positive rating action on TQM will be determined by TCPL’s credit profile.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada