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Rating Action:

Moody's Changes TransCanada's Rating Outlook to Negative from Stable; Affirms A3 Rating

13 Mar 2018

Toronto, March 13, 2018 -- Moody's Investors Service, ("Moody's") affirmed the A3 senior unsecured and issuer ratings on TransCanada PipeLines Limited (TCPL), its Baa1 junior subordinate rating and Prime-2 short term commercial paper rating. At the same time, Moody's affirmed TransCanada Corporation's (TransCanada) Baa1 issuer rating, Nova Gas Transmission Ltd.'s (NGTL) A3 senior unsecured rating, TransCanada Trust's Baa2 subordinated unsecured notes rating, and TransCanada American Investments Ltd Prime-2 short-term commercial paper rating. The rating outlooks for TCPL, TransCanada, NGTL and TransCanada Trust have been changed to negative from stable. There is no rating outlook for TransCanada American Investments Ltd. For a complete list of rating actions see the bottom of this press release.

"TCPL's financial profile is weak for its rating, and we expect financial ratios to remain weaker for longer," said Gavin MacFarlane Vice-President/Senior Credit Officer. "We see EBITDA rising as the company completes its project backlog, but without any changes to corporate financing plans, leverage may not fall below the 5x level until 2019, later than we had previously been incorporating into our analysis since TCPL acquired the Columbia Pipeline Group."

RATINGS RATIONALE

Moody's current projections assume a slow and steady improvement in financial metrics, but Moody's expects debt to EBITDA to remain at or above the 5x threshold for TCPL's A3-rating for the next few years. Moody's incorporates a forecasted ratio of debt to EBITDA in the range of 5-5.5x by the end of 2018, falling to about 5x in 2019. The improvement is a result of growing EBITDA owing to the in-service of new projects, offset by modest incremental leverage. Moody's had previously expected the company to achieve a ratio of debt to EBITDA below 5.5x in 2017 and below 5x in 2018, 2019 and beyond. For the year ended 2017, the ratio of debt to EBITDA was 5.7x.

Moody's notes that our forecast excludes about CAD24 billion of projects that have not been committed to by TCPL, and therefore are not incorporated into our base case scenario. These projects exhibit risks that either make construction uncertain or have a long term spending profile. The largest project is the Keystone XL pipeline, which continues to be challenged by environmental opposition related to carbon dioxide emissions and climate change. In addition, projects of this size and complexity often pressure financial metrics during the construction period. Management may continue to announce and build new projects without progressing the CAD24 billion above.

As TCPL continues to posture towards pursuing the Keystone XL pipeline, along with other growth projects, Moody's will begin to incorporate these weaker financial ratios into our base case scenario, absent any mitigating actions related to corporate financial policies. Moody's believes TCPL has substantial levers at its disposal to drive an improvement in financial metrics. While the company has taken substantial actions, financial metrics are nonetheless weak and not consistent with the current rating.

Moody's has affirmed TCPL's A3 rating based on its predictable and growing cash flows. TCPL should see an increase in EBITDA by roughly $1.0-1.5billion over the next 1-2 years attributed to the in-service of numerous projects. The A3 rating also reflects TCPL's regulated and contracted nature of gas transmission businesses, its large size and portfolio diversification benefits. Cash flow is typically underpinned by either cost of service regulation or long-term contracts on favorable terms. Offsetting these strengths are weak financial metrics and a large but executable capital program. In addition, TCPL is exposed to longer-term climate change risks, due to its principal business being natural gas transmission. Financial metrics are expected to gradually improve as the company completes about CAD23 billion of capital projects over the period 2018-2021, primarily funded with cash flow from operations, equity, hybrids and dropdowns with some incremental debt.

TransCanada is the ultimate parent holding company of TCPL. TransCanada's Baa1 issuer rating reflects a 1-notch adjustment below the rating of TCPL as a result of its structural subordination to TCPL. The rated obligations of TransCanada Trust and TransCanada American Investments Ltd are affirmed reflecting a guarantee provided by TCPL. The TransCanada Trust Baa2 rating is two notches lower than TCPL's A3 senior unsecured rating and is consistent with a 2-notch differential we apply to preferred shares with investment grade companies. The TransCanada Trust notes are guaranteed by TCPL on a subordinated basis however the TransCanada Trust notes have an automatic exchange provision that converts the notes into preferred shares of TCPL in the event of financial distress. The Prime-2 short-term commercial paper rating for TransCanada American Investments Ltd reflects the guarantee provided by TCPL. NGTL's rating is strongly correlated with that of TCPL based on its strategic importance and TCPL's position as a key creditor.

Outlook

TCPL's negative outlook reflects weak ongoing financial metrics, where the ratio of debt to EBITDA is expected to remain at or above 5x over the next few years. The negative outlook incorporates an expectation that the company will successfully execute its capital program largely on time and budget. The negative outlook does not reflect any incremental growth capital projects, including the proposed Keystone XL pipeline. The negative outlook of TransCanada, NGTL and TransCanada Trust reflect the guarantee and strategic relationships with TCPL.

Factors that Could Lead to an Upgrade

A rating upgrade would require the successful completion of the large capital program and a ratio of debt to EBITDA around 4x. A change in the rating outlook to stable could occur with the successful completion of capital projects and a ratio of debt to EBITDA sustained below 5x.

Factors that Could Lead to a Downgrade

We could downgrade the rating if TCPL's leverage remains at or above 5x, a key downgrade threshold that remains unchanged. We could also downgrade the rating if the company fails to deliver its capital program on time and budget. We could also downgrade the rating if the company experiences increased cash flow variability in its core businesses or if the company changes its financial policies, for example increasing its payout ratio or increasing structural subordination.

Outlook Actions:

..Issuer: NOVA Gas Transmission Ltd.

....Outlook, Changed To Negative From Stable

..Issuer: TransCanada Corporation

....Outlook, Changed To Negative From Stable

..Issuer: TransCanada PipeLines Limited

....Outlook, Changed To Negative From Stable

..Issuer: TransCanada Trust

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: NOVA Gas Transmission Ltd.

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: TransCanada American Inv. Ltd.

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: TransCanada Corporation

.... Issuer Rating, Affirmed Baa1

..Issuer: TransCanada PipeLines Limited

.... Issuer Rating, Affirmed A3

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa1

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

....Senior Unsecured Shelf, Affirmed (P)A3

..Issuer: TransCanada Trust

....Subordinate Regular Bond/Debenture, Affirmed Baa2

The principal methodology used in these ratings was Midstream Energy published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gavin MacFarlane
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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