DBRS Confirms Rating on Trans Québec & Maritimes Pipeline Inc.

DBRS Limited (DBRS) confirmed the Issuer Rating of Trans Québec & Maritimes Pipeline Inc. (TQM or the Company) at A (low) with a Stable trend. TQM is an integral part of the Canadian Mainline system owned by TransCanada Pipelines Limited (TCPL, rated A (low) with a Stable trend by DBRS; TQM’s 50% parent, 100% owned by TransCanada Corporation) and is regulated by the National Energy Board (NEB). Virtually all of the Company’s earnings are from a long-term, cost-of-service-based take-or-pay contract with TCPL with a current term to 2030, covering 100% of the throughput volumes and eliminating all commodity and volume risk for the Company. As a result, the DBRS rating for TQM is highly influenced by the credit quality of TCPL. TQM meets most of the total demand for natural gas in Québec through Énergir L.P.’s (Énergir; formerly Gaz Métro Limited Partnership. Énergir is 71% owned by Énergir Inc. (rated “A” with a Stable trend by DBRS; formerly Gaz Métro Inc.), TQM’s 50% parent) distribution network.

TQM is completing upgrades to its East Hereford Compressor station to increase pipeline capacity to serve incremental contracted natural gas demand in the New England market. The project has received all regulatory approvals from the NEB. Capital expenditure (capex) for the project is expected to total approximately $55 million ($28 million expected to be spent in 2018) and is expected to be in service in Q4 2019. Capex is expected to remain elevated for the next few years as the Company is carrying out additional facility expansion projects totaling $100 million. The Company expects to fund its capex with debt and cash flow from operations in order to maintain its leverage near the 60% regulated level.

TQM’s financial performance for the last 12 months (LTM) ended June 30, 2018, was in line with DBRS expectations, reflecting stable revenues from the NEB five-year toll settlement for 2017-2021. TQM has maintained its leverage near the regulated 60% debt, 40% equity capital structure. Cash flow-to-debt and earnings before interest and taxes interest coverage ratios of 18.2% and 5.07 times, respectively (LTM ended June 30, 2018), have remained relatively strong.

TQM’s rating is supported by (1) the take-or-pay contract and strong sponsorship, (2) stable regulation and (3) a reasonable financial profile. The challenges of high capex and concentration risk in the Québec market remain. DBRS may take a negative rating action if the Company’s financial metrics deteriorate below a level acceptable for the A (low) rating category. DBRS does not anticipate a positive rating action on TQM in the medium term and any positive or negative rating action will be highly influenced by TCPL’s credit profile.

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

The principal methodology is Rating Companies in the Pipeline and Diversified Energy Industry, which can be found on dbrs.com under Methodologies.
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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.