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Rating Action:

Moody's Downgrades TransCanada PipeLines to Baa1; Outlook stable

03 Apr 2019

Approximately CAD38 billion of debt affected

Toronto, April 03, 2019 -- Moody's Investors Service ("Moody's") today downgraded the senior unsecured ratings of TransCanada PipeLines Limited (TCPL) to Baa1 from A3.

At the same time, Moody's downgraded other issuers within the family including TransCanada Corporation's (TransCanada) issuer rating to Baa2 from Baa1, Nova Gas Transmission Ltd.'s (NGTL) senior unsecured rating to Baa1 from A3, TransCanada Trust's subordinated unsecured notes to Baa3 from Baa2. Moody's affirmed the Prime-2 short-term commercial paper ratings on TCPL, TransCanada American Investments Ltd and TransCanada PipeLine USA Ltd (TCPL USA). The rating outlooks for TCPL, TransCanada, NGTL and TransCanada Trust have been changed to stable from negative. There is no rating outlook for TransCanada American Investments Ltd or TCPL USA. For a complete list of rating actions see the bottom of this press release.

RATINGS RATIONALE

"TransCanada's financial profile has been weak for several years," said Gavin MacFarlane VicePresident/Senior Credit Officer. "The downgrade reflects our expectation that debt to EBITDA will improve from 5.6x at the end of 2018, but remain around 5x in 2019 and 2020."

Contributing to the weak financial metrics, the company has experienced challenges executing its large capital program leading to delays in EBITDA growth and some cost-overruns. Moody's recognizes that the company has levers it may utilize to drive a significant improvement in leverage metrics, for example material asset sales, however these have not materialized and are subject to some execution risks. In addition, Moody's forecasts a decline in the company's distribution coverage metric, which reduces financial flexibility over the next few years.

TCPL's Baa1 rating is driven by its predictable and growing cash flow, owing to the regulated and contracted nature of its businesses, and its large size and portfolio diversification benefits. Cash flow is typically underpinned by either cost of service regulation or long term contracts. Offsetting these strengths are weak financial metrics and a large but executable capital program. Moody's sees financial metrics improving as the company executes a CAD36 billion of capital program over the period 2019-2023 that we expect to be primarily funded with cash flow from operations, assets sales, equity, hybrids and some incremental debt. TCPL's rating incorporates our expectation that EBITDA will continue to grow towards CAD10 billion from CAD8.9 billion in 2018 and debt will remain close to CAD50 billion. The rating incorporates our expectation that debt to EBITDA will improve from 5.6 to about 5x in 2019.

Our forecasts exclude about CAD20 billion of projects that have not yet been fully committed, for example Keystone XL, and have risks that either make construction uncertain or have a long term spending profile. Large projects like Keystone XL could place pressure on financial metrics during construction.

TransCanada is the ultimate parent holding company of TCPL. TransCanada's Baa2 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 reflect a guarantee provided by TCPL. The TransCanada Trust Baa3 rating is two notches lower than TCPL's Baa1 senior unsecured rating and is consistent with a 2-notch differential Moody's applies 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 on TransCanada American Investments Ltd and TCPL USA reflects the guarantee provided by TCPL. NGTL's Baa1 rating is strongly correlated with that of TCPL based on its strategic importance and TCPL's position as a key creditor.

Moody's views the midstream sector, including TCPL, as having moderate risk exposure to carbon transition risks. TCPL's exposure is indirect as change in commodity prices affect its shippers, which may then have an impact on volumes through its systems and counterparty risks. A key issue for the sector is that regulations can drive competitive changes among basins. TCPL is somewhat insulated from this issue as a result of its diversification.

Outlook

TCPL's stable outlook reflects Moody's expectation that debt to EBITDA will be about 5x in 2019. The stable outlook does not reflect any incremental growth capital projects, including the proposed Keystone XL pipeline. The stable outlook of TransCanada, NGTL and TransCanada Trust reflects guarantees and strategic relationships with TCPL. Moody's has revised the financial metrics it associates with TransCanada following the downgrade to reflect changes in its credit profile.

Factors that Could Lead to an Upgrade

A rating upgrade would require the successful completion of the capital program and a ratio of debt to EBITDA below 4.5x on a sustained basis.

Factors that Could Lead to a Downgrade

TCPL's ratings could be downgraded if leverage remains at or above 5.5x. The rating could also be downgraded if there are material changes to the capital program; if the company experiences increased cash flow variability in its core businesses or if the company changes its financial policies.

Downgrades:

..Issuer: TransCanada Corporation

.... Issuer Rating, Downgraded to Baa2 from Baa1

..Issuer: TransCanada PipeLines Limited

.... Issuer Rating, Downgraded to Baa1 from A3

....Junior Subordinated Regular Bond/Debenture, Downgraded to Baa2 from Baa1

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa1 from (P)A3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

....Senior Unsecured Shelf, Downgraded to (P)Baa1 from (P)A3

..Issuer: NOVA Gas Transmission Ltd.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

..Issuer: TransCanada Trust

....Subordinate Regular Bond/Debenture, Downgraded to Baa3 from Baa2

Affirmations:

..Issuer: TransCanada PipeLines Limited

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

..Issuer: TransCanada American Inv. Ltd.

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

..Issuer: TransCanada PipeLine USA Ltd.

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

Outlook Actions:

..Issuer: TransCanada Corporation

....Outlook, Changed To Stable From Negative

..Issuer: TransCanada PipeLines Limited

....Outlook, Changed To Stable From Negative

..Issuer: NOVA Gas Transmission Ltd.

....Outlook, Changed To Stable From Negative

..Issuer: TransCanada Trust

....Outlook, Changed To Stable From Negative

The principal methodology used in these ratings was Midstream Energy published in December 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

TCPL is the principal subsidiary and debt issuer of TransCanada, headquartered in Calgary, Alberta. TransCanada is an energy infrastructure company with five operating business segments: Canadian Natural Gas Pipelines (28% of EBITDA), U.S. Natural Gas Pipelines (35% of EBITDA), Mexico Natural Gas Pipelines (7% of EBITDA), Liquids Pipelines (21% of EBITDA), and Energy (9% of EBITDA), all figures comparable EBITDA as of 12 months ended December 31 2018.

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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