DBRS Morningstar Confirms Rating on Trans Québec & Maritimes Pipeline Inc. at A (low), Stable

DBRS Limited (DBRS Morningstar) confirmed Trans Québec & Maritimes Pipeline Inc.’s (TQM or the Company) Issuer Rating at A (low) with a Stable trend. TransCanada PipeLines Limited (TCPL; rated A (low) with a Stable trend by DBRS Morningstar) owns 50% of the Company and Énergir, L.P. (Énergir; 71% owned by Énergir Inc., which is rated “A” with a Stable trend by DBRS Morningstar) indirectly owns the other 50%. TQM forms an integral part of TCPL's Canadian Mainline natural gas transmission system and meets nearly all the natural gas demand in Québec through Énergir's distribution network, and also serves markets in the U.S. northeast and Atlantic Canada. The Company largely generates earnings from its long-term, cost-of-service-based take-or-pay contract with TCPL that extends to 2040 with no exposure to commodity and volume risk. TCPL manages and operates TQM and, as a result, the Company benefits from cost efficiencies from the larger TCPL Canadian Mainline operation. Because of TCPL’s strong implicit support, TQM’s rating is generally aligned with TCPL’s rating.

TQM currently operates under a negotiated five-year toll settlement for the 2017–21 period approved by the Canada Energy Regulator (formerly the National Energy Board), which includes a fixed rate of return on the rate base and provides tolling methodology certainty. DBRS Morningstar expects TQM's capital spending to be high over the 2020–22 period as the Company adds system capacity through brownfield projects to service the markets in Québec, the northeast U.S., and Atlantic Canada. TQM expects the incremental capacity to be fully contracted with TCPL to 2042. TQM expects to fund the approximately $490 million of capital expenditures (capex), including maintenance capex, with a combination of debt, equity contribution from partners, and operating cash flow. DBRS Morningstar expects leverage for 2021 to peak near 66% during the construction period, then improve to 60% in late 2022 and for the full-year 2023 as the projects are placed in service.

DBRS Morningstar expects the volatile market conditions and demand disruption caused by the Coronavirus Disease (COVID-19) pandemic to have no material impact on the Company’s earnings and cash flow, given the long-term take-or-pay contract with TCPL. TQM has not experienced any project delays and expects to meet its target completion dates. The Company has adequate liquidity to meet its obligations from internally generated cash flows, committed credit facilities, and strong sponsorship from its parents. As TCPL's long-term contract largely underpins TQM's cash flow, any changes to TCPL’s credit profile will determine positive or negative rating changes for TQM.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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@dbrsmorningstar.com.

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

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