DBRS Confirms Trans Québec & Maritimes Pipeline at A (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Bonds rating of Trans Québec & Maritimes Pipeline Inc. (TQM or the Company) at A (low), with Stable trends. The confirmation reflects TQM’s strong business risk profile supported by regulated predictable earnings from a take-or-pay contract with TransCanada Pipelines Limited (TCPL; rated A (low); 50% owner) and steady demand from Gaz Métro Limited Partnership (a subsidiary of Gaz Métro inc., rated “A”; 50% owner), the sole distributor of natural gas shipped within Québec to a diverse customer base.

TQM has effectively been part of the integrated TCPL Canadian Mainline system, and TCPL is committed to 100% throughput volumes under a cost-of-service, take-or-pay contract until October 30, 2018. TQM’s stable regulated operations with no volume risk and strong sponsorship from its owners provide for low cash flow volatility. However, TQM could face re-contracting risk when the current contract with TCPL expires. In the absence of long-term contracts, ratings could be negatively affected by increased cash flow volatility. However, DBRS believes that the re-contracting risk will be manageable given the strategic importance of TQM to the Québec market.

TQM has a reasonable financial profile as the Company has consistently managed its debt repayment and dividend payments to maintain the regulated 60% debt/40% equity capital structure together with relatively predictable cash flows and earnings. Cash flow-to-debt and EBIT interest coverage ratios of 17.6% and 3.79 times, respectively (last 12 months (LTM) June 30, 2014), support its position within the current rating category. Given the Company’s moderate capital expenditure needs and the National Energy Board’s (NEB) approval of the negotiated tolls in April 2014, credit metrics are expected to remain stable for 2014 to 2016.

TQM has $100 million Series L Bonds maturing in September 2017. In June 2014, TQM expanded its credit facility to $135 million from $85 million and extended the maturity date to August 2018. The facility was used to repay the $75 million Series K bond that matured on September 2014 mitigating near-term refinancing risk. DBRS notes that TQM’s long-term debt is scheduled to mature prior to the expiry of the TCPL contract in October 2018, which provides comfort for debt servicing. Refinancing of debt maturities beyond that date would require clarity with respect to tolling methodology and arrangements.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Pipeline and Diversified Energy Companies (January 2014), which can be found on our website under Methodologies.