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. TransCanada PipeLines Limited (TCPL; rated A (low) with a Stable trend by DBRS Morningstar) owns 50% of the Company and Énergir, L.P. (Énergir; 71% owned by Énergir Inc., rated “A” with a Stable trend by DBRS Morningstar) indirectly owns the other 50%. TQM forms an integral part of TCPL's Canadian Mainline natural gas transmission system and meets nearly all the natural gas demand in Québec through Énergir's distribution network, and also serves markets in the U.S. Northeast and Atlantic Canada. The Company generates earnings from its long-term, cost-of-service (COS)-based take-or-pay contract with TCPL that extends to 2042 with no exposure to commodity and volume risk. TCPL is the sole transportation shipper on TQM, and is also the manager and operator of TQM. As a result, the Company benefits from cost efficiencies from the large TCPL Canadian Mainline operation. Because of TCPL's strong implicit support, TQM’s rating is generally aligned with TCPL's rating.

TQM currently operates under a negotiated five-year toll settlement for the 2017–21 period approved by the Canada Energy Regulator (CER), which includes a fixed rate of return on the rate base and provides for tolling certainty under a COS regulatory framework. TQM is in the process of finalizing a new toll settlement in November 2021 for the 2022–23 period with the CER, which is expected to be consistent with the current settlement. DBRS Morningstar expects TQM's capital spending to be high over the 2021–23 period as the Company adds system capacity through brownfield projects to service the markets in Québec, the Northeast U.S., and Atlantic Canada. The incremental capacity has been fully contracted with TCPL to 2042. TQM expects to fund the approximately $406 million of capital expenditures (capex), including maintenance capex, in the 2021–23 period with a combination of debt, equity contribution from partners, and operating cash flow. DBRS Morningstar expects leverage for 2021 to peak near 67% during the construction period, then improve to 60% in late 2022 and for the full-year 2023 as the projects are placed in service and some equity contributions from the partners are realized.

DBRS Morningstar expects the Company's earnings and cash flow to be predictable, given the long-term take-or-pay contract with TCPL and regulated tolls, and gradually grow in the 2021–23 period as projects are completed and placed in service. TQM did not experience any major project delays from Coronavirus Disease (COVID-19) pandemic and expects to meet its target completion dates for its capital projects. The Company has adequate liquidity to meet its obligations from internally generated cash flows, committed credit facilities, and strong sponsorship from its parents. As TCPL's long-term contract largely underpins TQM's cash flow, any changes to TCPL's credit profile will determine positive or negative rating changes for TQM.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, which can be found at https://www.dbrsmorningstar.com/research/373262 ).

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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.dbrsmorningstar.com or contact us at [email protected].

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