Fitch Ratings-New York-April 08: Fitch Ratings has assigned an 'A-' rating to TransCanada PipeLines Limited's (TCPL) proposed issuance of Canadian dollar-denominated senior unsecured notes. Proceeds from the offering are for general corporate purposes.
TransCanada Corporation (TRP) is the ultimate parent of the TransCanada family of companies. The Rating Outlook is Stable.
A full list of ratings follows at the end of this release. The ratings on TCPL and TRP reflect the group's large scale and cash flow predictability.
The predictable quality of TCPL's cash flow stems from the company's strong portfolio of assets which generate approximately 95% of cash flows 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 large capital investment program and rapid dividend growth rate guidance, while also improving leverage metrics. TRP expects to grow dividends by at least 8% per annum through 2021.
KEY RATING DRIVERS
Diversity Tempers Leverage: TCPL exhibits diversity across a few parts of its profile and 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 oversight. Customer diversity exists in contracts with large energy companies such as the Independent Electricity System Operator and the oil shippers on the Keystone Pipeline system. The current state of segment 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 the recent achievement of an 88.5% availability factor at the Bruce Power nuclear power facility in the 2017-2018 period.
Beneficial Size & Scope: TCPL is one of the largest midstream companies in North America. Its Natural Gas Pipelines segment transports product that fulfil 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 the second largest nuclear power station in the world (6,400 megawatts). Additionally, 20% 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 abilities. During two years of administering the large construction program of Columbia Pipeline Group, Inc. (CPG; IDR BBB+/Stable), execution has been successful and included work in a U.S. National Forest in 2018. The Liquids Pipelines segment has successfully extended the reach of the base Keystone Pipeline.
Furthermore, TCPL's Energy segment features numerous successfully completed "green field" projects and, in the case of Bruce Power, expansions 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 construction programs. Concerns focus on an approximately $36.6 billion capital spending plan, of which $13.2 billion has been spent to date. Given the large capital spending plan, where most of the projects take over a year from the ground-breaking milestone to the revenue-generating milestone, leverage is high compared to management's target. Recent adjusted debt (debt valued at 12/31/18) to EBITDA was 5.6x (FY18), slightly higher than Fitch expectations. We believe TRP is committed to a strong balance sheet. This commitment is highlighted by, among other things, the company's FY18 issuance of $1.1 billion of common equity, mainly through its at-the-market program. Additionally, TRP benefits from a healthy 35% participation rate in its dividend reinvestment plan, translating into a reinvestment in common equity of approximately $870 million in 2018. A challenge to significantly increasing EBITDA in 2019, and thereby cutting leverage, is that three projects in Mexico are currently receiving payments under Force Majeure provisions. Such payments are not accounted for by TCPL as revenues. The company expects to bring the largest of these projects into revenue-generating status this quarter. TCPL has decades of experience in making investments outside of Canada, and Fitch expects the company to be successful in Mexico.
DERIVATION SUMMARY
TRP's credit profile compares well with its peers given its scale and breadth of operations in Canada, the U.S., and Mexico. Construction 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 that TCPL has good relations with each of the NEB and the FERC. Among midstream companies ranked highest with respect to EBITDA from natural gas transmission pipelines, TRP is comparable to Kinder Morgan (NYSE:KMI), Inc. (KMI, BBB-/Positive). Fitch expects KMI's adjusted debt to EBITDA to be approximately 4.5x over the long term. TRP's leverage policy is for a long-term run-rate of high 4x, and Fitch calculates TRP's FY18 adjusted debt to EBITDA at 5.6x. TRP's IDR is currently three notches higher than KMI's, with potential for further notching in light of KMI's Positive Outlook. Differentiating factors include: (a) TRP's expected trough-capex period leverage is lower than KMI's, (b) TRP has virtually no direct commodity price risk, and (c) TRP lacks sensitivity to GDP- and commodity price-related volumetric risk.
KEY ASSUMPTIONS
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; --The sum of (i) growth spending for projects that will complete in 2019 to 2023, (ii) recoverable maintenance capex and (iii) non-recoverable capex is $36.6 billion (of which $13.2 billion had been spent as of Dec. 31, 2018). Keystone XL is not included in this total; --Balanced funding between debt and equity.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action --A positive rating action is not anticipated in the medium term, but 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
Liquidity at TRP is adequate. As of Feb. 11, 2019, TRP had approximately $11.8 billion available out of $12.8 billion committed under its revolving credit facilities, in addition to a Dec. 31, 2018 cash balance of $446 million on its balance sheet. The credit facilities support commercial paper programs for several subsidiaries and are guaranteed at the TCPL-level. The company successfully extended the maturity dates on credit facilities that were due in December 2018. The combined liquidity is adequate to cover debt maturities in 2019, which 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 currently rates the following: TransCanada Corporation
--Long-Term IDR 'A-'; --Senior unsecured 'A-'; --Preferred stock 'BBB'. TransCanada Pipelines Limited --Long-Term IDR 'A-';
--Short-Term IDR 'F2'; --Senior unsecured rating 'A-'; --Commercial Paper rating 'F2'. TransCanada Trust --Junior subordinated notes 'BBB'.
The Rating Outlook is Stable.
Contact: Primary Analyst Thomas Brownsword Senior Director +1-646-582-4881 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Michael Ruggirello, CFA Associate Director +1-416-644-6586 Committee Chairperson Dino Kritikos Senior Director +1-312-368-3150 Date of Relevant Rating Committee: June 26, 2018 Summary of Financial Statement Adjustments
- As per Fitch's "Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" sector-specific criteria, Fitch treats the relevant securities for TCPL as 50% debt and 50% equity. Referenced leverage metrics are adjusted as follows: consolidated balances and flows are used; junior subordinated notes and preferred shares are given 50% debt credit, 50% equity credit; distributions from investees accounted for under the equity method of accounting are included in EBITDA, and equity earnings from these entities are excluded. Fitch looks at a variety of leverage calculations but features in its commentary the foregoing calculation.
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