Morningstar DBRS Confirms Trans Québec & Maritimes Pipeline Inc.'s Issuer Rating at BBB (high) With a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed Trans Québec & Maritimes Pipeline Inc.'s (TQM or the Company) Issuer Rating at BBB (high) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The Company is owned equally by TransCanada PipeLines Limited (TCPL; rated BBB (high) with a Stable trend by Morningstar DBRS) and Énergir, L.P. (Énergir; 71% owned by Énergir Inc. and rated "A" with a Stable trend by Morningstar DBRS). TQM's pipeline system extends east from TCPL's long-haul Canadian Mainline natural gas transmission network at Les Cèdres, Québec, and supplies natural gas to customers in Québec through Énergir's distribution network. TQM also serves markets in the northeastern United States and Atlantic Canada. The credit rating primarily reflects the assumption of strong implicit support from TCPL. The Company has a long-term cost-of-service (COS) take-or-pay contract with TCPL to transport natural gas that extends to 2042 and provides nearly all its earnings that do not vary with actual use of contracted capacity, eliminating any volume or commodity risk. TCPL is the only transportation shipper and operates the TQM pipeline system. As a result, TQM benefits from cost and operational efficiencies from TCPL's operations. TCPL's ownership, contractual commitment, and stewardship provide strong implicit support to TQM, and therefore TQM's credit rating is aligned with TCPL's credit rating.

In May 2024, the Canada Energy Regulator (CER) approved TQM's negotiated toll settlement for the 2024-25 period, which includes a fixed rate of return on the rate base and provides for tolling certainty under a COS regulatory framework. TQM's capital spending was high from 2019 to 2022 as a result of adding system capacity through brownfield compression expansion projects to service the markets in Québec, the northeastern U.S., and Atlantic Canada. TQM has placed these projects in service on time and on budget, and incremental capacity has been fully contracted with TCPL to 2042. TQM funded capital expenditures with a combination of debt, equity contribution from partners, and operating cash flow. TQM's capital spending in the next two years is likely to be mostly for maintenance capital.

Morningstar DBRS expects the Company's earnings and cash flow to be stable and predictable, supported by the long-term take-or-pay contract with TCPL. The Company has adequate liquidity to meet its funding obligations from internally generated cash flows, credit facilities, and equity contributions from its shareholders. As TCPL's long-term take-or-pay contract largely underpins TQM's cash flow, any changes to TCPL's credit profile will determine positive or negative credit rating changes for TQM.

CREDIT RATING DRIVERS
The credit rating is based on the assumption of implicit support from TCPL. Consequently, a positive credit rating action at TCPL would result in a corresponding positive credit rating action at TQM.

EARNINGS OUTLOOK
Morningstar DBRS expects earnings for 2024 to be comparable with 2023. The COS methodology under the terms of the TCPL transportation agreement allows for the pass-through of most costs and recovery of cost variances.

FINANCIAL OUTLOOK
TQM's cash flows are reasonably predictable, and Morningstar DBRS expects them to be in line with the CER Toll Settlement Agreement for 2024-25. Morningstar DBRS expects capital spending to be lower in 2024, as major capital projects were completed in 2021 and 2022, and expects TQM to generate a cash flow surplus.

CREDIT RATING RATIONALE
TCPL's long-term take-or-pay contract largely underpins TQM's cash flow; any changes to TCPL's credit profile will determine positive or negative credit rating changes for TQM.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

Morningstar DBRS applied the following principal methodology:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

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

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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