Fitch Rates TransCanada PipeLines Limited's Proposed Senior Unsecured Notes Offering 'A-'.
Fitch has also affirmed TransCanada Corporation's (TRP) long-term IDR at 'A-', preferred share rating at 'BBB' and senior unsecured rating at 'A-'. TransCanada is the parent of TCPL. Fitch has also affirmed TransCanada Trust's (Trust) junior subordinated rating at 'BBB'. Trust's junior subordinated notes are guaranteed by TCPL on a subordinated basis. The Rating Outlook for TCPL and TRP is Stable.
The ratings on TCPL, TRP and Trust reflect the group's large scale, as well as the cash flow stability provided by the company's strong portfolio of assets, which generate approximately 95% of cash flows stemming from either regulatory rate orders or long-term contracts. The regulatory-based cash flows and the contract cash flows remove almost all customer-demand variability from TCPL's earnings. Concerns include execution of a currently large capital investment program, which has a potential to grow significantly, and rapid dividend growth rate guidance. At its low-end of dividend guidance, TRP expects to grow dividends by 8% per annum through 2021.
KEY RATING DRIVERS
Diversity Tempers Leverage: TCPL exhibits diversity across a few parts of its profile. TCPL earns revenues largely on regulatory-based and long-term contracted businesses. The company enjoys regulatory diversity by having large operations in natural gas pipelines subject to the National Energy Board and the Federal Energy Regulatory Commission. Customer diversity exists in contracts with large energy companies such as the Ontario Power Authority and the oil shippers on the Keystone Pipeline. The current state of diversification at TCPL is part of a good execution track record. The Liquids Pipelines segment is less than a decade old and has produced, under foundational 20-year contracts, consistent cash flows each year since inception. The Energy segment has achieved impressive results in managing complicated engineering and construction activities, with a recent achievement a 90% availability factor at the Bruce Power nuclear facility in 2017.
Beneficial Size and Scope: TCPL is one of the largest North American midstream companies. TCPL's Natural Gas Pipelines segment transports product that fulfills over one-quarter of continental natural gas demand. TCPL's two other segments also feature world-scale assets that furnish stable cash flows. For instance, the Energy segment contains Bruce Power (6,400 megawatts). Twenty percent of western Canadian crude oil exports are transported on the Liquids Pipelines segment's Keystone Pipeline system.
Successful Execution: The rating is further supported by TCPL's development, construction and operational execution ability. During two years of administering the large construction program of Columbia Pipeline Group, Inc.'s (CPG; IDR BBB+/Stable), execution has been acceptable. The Liquids Pipelines segment has successfully extended the reach of the base Keystone Pipeline. The Energy segment features many plants that TransCanada caused to be built from a "green field," or, in the case of Bruce Power, expanded in size by bringing "laid up" units back into commercial operation.
High Capital Spending and Leverage: The rating considers TCPL's execution risk on its building programs. Concerns focus on an approximately CAD21.1 billion capital spending plan. CAD7.3 billion has been spent thus far. Given the large capital spending plan, where most of the projects take over a year from the ground-breaking milestone to revenue-generating milestone, leverage is high compared with management's target. LTM adjusted debt to EBITDA at first-quarter 2018 was 5.7x. Fitch expects 2018 leverage to fall below 5.5x. TRP is committed to a strong balance sheet. In first-quarter 2018, the company issued CAD340 million of common equity, mainly through its at-the-market program. In 2017, the dividend reinvestment plan participation rate was 36%, translating into an issuance of common equity of CAD790 million. In 2017, the company raised CAD3.5 billion of subordinated debt, for which Fitch gives 50% equity credit.
TRP's credit profile compares well with its peers given its scale and breadth of its operations in Canada, the U.S. and Mexico. The diversity of its segments compares favorably even against the largest midstream companies. Construction risk and operating risk in the business segments range from low-to-medium complexity, with Bruce Power being the primary driver of "medium" risk. Regulatory risk with respect to permitting is of moderate difficulty in the current politicized environment for energy. Fitch believes the NEB and the FERC have good relations with TCPL.
Among midstream companies ranked highest with respect to EBITDA from natural gas transmission pipelines, a comparable for TRP is Kinder Morgan, Inc. (KMI; BBB-/Stable). Fitch expects KMI's adjusted debt to EBITDA to be approximately 5.3xfor 2018. TRP's leverage policy is for a long-term run-rate of 5.0x. Fitch calculates LTM adjusted debt to EBITDA at first-quarter 2018 of 5.7x. Fitch's expectation for TRP's leverage in 2018 is below 5.5x. TRP's IDR is set three notches higher than KMI's due to a few factors: (a) TRP's expected trough-capex period leverage being lower than KMI's, (b) TRP having virtually no direct commodity price risk, and (c) TRP's lack of sensitivity to GDP- and commodity price-related volumetric risk.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
--Natural gas pipelines earn the returns/profit levels underlying their recent rate cases, including successful re-contracting at the U.S. pipelines.
--Contracted cash flows are obtained through successful operational performance at the Liquids Pipelines and Energy operations.
--Capital spending of approximately CAD22 billion from 2018-2022 (Keystone XL is not included in this total).
--Maintenance capital spending of CAD450 million-CAD550 million per year.
--Balanced funding between debt and equity.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
--A positive rating action not anticipated in the medium term; however, adjusted leverage below 3.5x on a sustained basis could lead to a positive rating action.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
--Adverse regulatory outcomes from any of the regulators who approve its revenue requirements;
--An acquisition that represents a change in the current business strategy of operating businesses that are based on cost-of-service principles or very long-term take-or-pay contracts;
--TRP-adjusted debt to EBITDA at TRP above 5.5x on a near-term basis;
--New projects fail to achieve the initial returns expected, with the aggregate effect that the company fails to keep on a path to significantly reduce adjusted debt to EBITDA. The end-point for leverage reduction at TRP is approximately 4.5x in 2019, assuming none of its current slate of preliminarily commercially agreed development projects reach final investment decision in or before 2019.
Liquidity at TRP is adequate. As of April 23, 2018, TRP had approximately CAD8.5 billion available out of CAD11.3 billion committed under its revolving credit facilities, in addition to a cash balance of CAD1.2 billion on its balance sheet. The credit facilities support commercial paper programs for several subsidiaries and are guaranteed at the TCPL level. Four of the credit facilities mature in December 2018, but they are extendible on lenient terms and have successfully rolled over in the past. The combined liquidity is adequate to cover debt maturities in 2018 and 2019, which are substantial and consist primarily of subsidiary debt retirements.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating:
TransCanada Pipelines Limited
--Proposed issuance of senior unsecured notes 'A-'.
Fitch has affirmed the following ratings:
--Long-term IDR at 'A-';
--Senior unsecured 'A-';
--Preferred stock at 'BBB'..
TransCanada Pipelines Limited
--Long-term IDR at 'A-';
--Short-term IDR at 'F2';
--Senior unsecured rating at 'A-';
--Commercial Paper rating at 'F2'.
--Junior subordinated notes at 'BBB'.
The Rating Outlook is Stable.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Sep 21, 2018|
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