TC PipeLines L.P. #BBB-# Ratings Affirmed Following Announced 35% Distribution Outlook Stable

Stocks and Financial Services Press Releases Wednesday May 30, 2018 09:26
TORONTO--30 May--S&P Global Ratings
TORONTO (S&P Global Ratings) May 29, 2018--S&P Global Ratings today affirmed its ratings, including its 'BBB-' long-term corporate credit rating, on TC PipeLines L.P. (TCPLP). The outlook is stable.

The affirmation follows the 35% distribution reduction and anticipated conversion to C-Corp, which we believe help mitigate the impact of a recent Federal Energy Regulatory Commission (FERC) decision and U.S. tax reform. The decision affecting master limited partnerships (MLPs) and U.S. tax reform create a challenging environment for TCPLP. We have revised our forecasts after TCPLP revised its EBITDA guidance to account for these developments. The partnership believes the FERC decision and U.S. federal tax reform might result in up to a $100 million reduction in EBITDA a year effective 2019. As a result, the partnership cut its distributions in first-quarter 2018 by 35% to 65 cents a unit to manage leverage and improve financial flexibility. In addition, the partnership is exploring the possible conversion to a C-Corp, which will result in additional cost savings.

The stable outlook reflects our view of TCPLP's stable, contracted cash flows and diversified portfolio of pipeline investments. We factor in the potential for group support from TransCanada by applying our group rating methodology and assign a group status of moderately strategic to the partnership, leading to a one-notch uplift to TCPLP's stand-alone-credit-profile (SACP). We expect the partnership to maintain debt-to-EBITDA metrics in the middle of the aggressive financial risk profile category, at about 5.0x.

We would consider a downgrade if debt-to-EBITDA rises and stays above 5.5x, which could result from weakness in volumes or reduced tolls on any of its pipeline assets or a more aggressive financing strategy of using more debt than equity to finance growth programs or on future dropdowns. In addition, we could lower the rating if the partnership had a covenant breach.

We believe an upgrade during our two-year outlook horizon is highly unlikely, but we will consider one if debt-to-EBITDA falls and stays below 4.5x. This could result from favorable higher-than-forecast volumes at its pipeline or higher tolls than forecast. In addition, a revision of our group status to strategically important or highly strategic could result in a two-notch upgrade. We see any future dropdowns as the inflection point to revise our group assessment, considering TransCanada has dropped down several of its US natural gas pipelines into TCPLP.

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