DBRS Comments on TransCanada’s Response to Keystone XL Denial

DBRS Limited (DBRS) notes that TransCanada Corporation (TCC, or the Company) announced today that it has filed a Notice of Intent to initiate a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) in response to the U.S. Administration’s decision to deny a Presidential border crossing permit for the Keystone XL pipeline project (KXL) on the basis that the denial was arbitrary and unjustified. Through the NAFTA claim, TCC will be seeking to recover more than USD 15 billion in costs and damages suffered by the Company as a result of the U.S. Administration’s breach of its NAFTA obligations. Concurrently, TCC has filed a lawsuit in the U.S. Federal Court in Houston, Texas, asserting that the President’s decision to deny construction of KXL exceeded his power under the U.S. Constitution.

TCC has also announced that, as a result of the permit denial, it expects to take a non-cash after-tax writedown in Q4 2015 estimated at $2.5 billion to $2.9 billion of the $4.3 billion (USD 3.1 billion) carrying value invested in the project after adjusting for anticipated asset recoveries and the realization of certain income tax benefits. Additional tax benefits of up to $0.4 billion may be realized in the future, under certain circumstances, as a result of the writedown. DBRS notes that while the outcome of pursuing a remedy under NAFTA, the length of time it may take for a resolution of the legal process and the associated legal costs are unknown factors at this time, the Company does not expect these factors to have a material impact on its financial profile.

Overall, DBRS views the impact of TCC’s legal actions to be credit neutral. DBRS had previously commented (Press release dated November 6, 2015) that it viewed the denial of the KXL permit as having no impact on the credit ratings of TCC, and its wholly owned subsidiaries (TransCanada PipeLines Limited and Nova Gas Transmission Limited). Today’s announcement does not impact the Company’s business risk profile as the current ratings reflect environmental, regulatory and political risks with respect to several of the Company’s development projects, including KXL. Furthermore, TCC expects the support for this energy infrastructure project from shippers, underpinned by long-term contracts, to continue through the remedial process. DBRS has modeled the impact of the $2.9 billion writedown (maximum of the range) together with TCC’s recent approximately $300 million share buyback (December 2015), and the USD 654 million acquisition of Ironwood Power Plant (October 2015; 100% debt financed, expected to close Q1 2016) on the Company’s credit metrics on a pro forma basis, and has concluded that the writedown does not have an impact on the Company’s financial risk profile as key credit metrics are expected to remain reasonable for the current rating of A (low), with a Stable trend.

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.

The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (December 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

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