DBRS Maintains Nova Gas Transmission Ltd. Under Review – Developing Implications

DBRS Limited (DBRS) has today maintained its status of Under Review with Developing Implications placed on the Medium Term-Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. (NGTL, or the Company). The rating of A (low) was placed Under Review with Developing Implications on March 17, 2016, following TransCanada Corporation’s (TCC; NGTL’s 100% indirect parent) announcement that TCC has entered into an agreement to acquire Columbia Pipeline Group, Inc. (CPG), a Houston, Texas-based company that operates 24,000 kilometres of natural gas pipelines and 296 billion cubic feet of natural gas storage capacity in the Marcellus and Utica Shale gas plays and 5,400 km of pipeline extending from the Appalachia production basin to the U.S. Gulf Coast (the Acquisition). Please refer to DBRS press release “DBRS Places TransCanada Corporation & Related Issuers Under Review – Developing following Columbia Pipeline Group, Inc. Acquisition Announcement.” TransCanada Pipelines Ltd. (TCPL; 100% owned by TCC) provides strong financial and liquidity support to NGTL, and NGTL is an integral part of TCPL’s pipeline system in Western Canada. As a result, the DBRS rating for NGTL is highly influenced by the credit quality of TCPL.

The purchase price of the Acquisition is approximately USD 13 billion, including the assumption of approximately USD 2.8 billion of CPG’s debt. The Acquisition is expected to close in H2 2016, and upon closing, CPG will become an indirect wholly owned subsidiary of TCC and cease to be a publicly held corporation. TCC plans to finance the Acquisition in line with the Company’s current financial profile, primarily through asset sales, including the sale of its U.S. Northeast merchant power assets and a minority interest in the Company’s Mexican natural gas pipeline business, as well as common equity issuance through a bought deal offering of subscription receipts that closed on April 1, 2016, for total gross proceeds of CAD 4.4 billion. DBRS notes that, to facilitate the potential timing gap between the Acquisition and the proposed asset sales, TCC has entered into syndicated bridge term loan credit facilities for up to USD 6.9 billion.

Based on its preliminary review, DBRS believes that the Acquisition, combined with the proposed asset sales noted above, is neutral with respect to TCC’s overall business risk profile. DBRS notes that the Acquisition provides increased diversification to TCC’s business, which DBRS views as moderately positive; however, CPG’s weak counterparty risk profile, which includes a large percentage of non-investment grade shippers, is moderately negative to TCC’s business risk profile. CPG has USD 5.6 billion of commercially secured growth projects currently in the regulatory and permitting processes and is implementing modernization initiatives of approximately USD 1.7 billion through 2021. DBRS notes the increased near- to medium-term capital intensity and increased risks inherent in a combined growth project portfolio of CAD 23 billion between CPG and TCC. The sale of U.S. Northeast power assets would reduce TCC’s exposure to the merchant power business, which DBRS views as moderately positive from a business risk perspective, while the potential sale of a minority interest in TCC’s Mexican natural gas pipeline business is viewed as neutral.

With respect to financial risk profile, DBRS expects initial pressure on TCC’s credit metrics as a result of the assumption of CPG’s existing debt and the potential for a time lag between closing of the Acquisition and TCC’s planned asset sales, partly offset by the issuance of $4.4 billion of subscription receipts on April 1, 2016. DBRS has stated that there is execution risk associated with generating expected proceeds from the proposed asset sales. TCC has indicated that it intends to fund the combined large medium-term growth capital expenditure commitments of both TCC and CPG “in a manner consistent with the Company’s current financial profile.”

DBRS’s ratings of TCC and its related issuers continue to reflect (1) expected improvement in TCC’s overall business risk profile over the medium term, (2) potential medium-term pressure on its credit metrics and (3) environmental, regulatory and political risks with respect to its natural gas and liquids pipelines segments. Currently, there are execution risks with respect to the Acquisition and related asset sales; the resulting impacts on the Company’s financial risk profile are uncertain. Consequently, DBRS maintains the status of Under Review with Developing Implications on the ratings of NGTL. The Acquisition has been unanimously approved by the boards of directors of both companies and the necessary regulatory approvals for the Acquisition have been obtained. A special meeting for Columbia stockholders to approve the transaction is scheduled for June 22, 2016. TCC and CPG anticipate that the closing of the transaction will be effective by July 1, 2016. DBRS will further review the Acquisition as more information becomes available and aims to resolve the Under Review status once financing details are known and the asset sale transactions have closed.

Notes:
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 methodology is Rating Companies in the Pipeline and Diversified Energy Industry (December 2015), which can be found on our website under Methodologies.

This rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS has access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS 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 info@dbrs.com.

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