Credit rating agency Moody’s Investors Service has downgraded TransCanada Corp. over concerns about the pipeline company’s debt burden and some uncertainty about its capital spending program.
In its first rating change for TransCanada since 2008, Moody’s downgraded the company’s corporate rating to Baa2 from Baa1, and also downgraded the rating of subsidiary TransCanada Pipelines Ltd., which issues the bulk of the company’s debt, to Baa1 from A3. The changes affect $38-billion worth of securities.
“TransCanada’s financial profile has been weak for several years,” Moody’s vice-president Gavin MacFarlane wrote in a note explaining the action. “The downgrade reflects our expectation that debt-to-earnings before interest, taxes, depreciation and amortization [EBITDA] will improve from 5.6 times at the end of 2018, but remain around five times in 2019 and 2020.”
Moody’s also noted that TransCanada has had some trouble with its $36-billion capital spending program, including some cost overruns, which contribute to its “weak financial metrics.” Debt rating agency Standard & Poor’s downgraded the company one year ago.
“We are disappointed with this action given we are on track to achieve the targeted credit metrics previously set out by the agency, see the execution risk from our Columbia Pipeline Group acquisition and associated growth projects as largely behind us, and continue to maintain a strong business risk profile,” TransCanada spokesperson Grady Semmens said.
The latest downgrade is at odds with the recent performance of TransCanada’s shares. Since the start of the year, the company’s stock has jumped 25.5 per cent, while the S&P/TSX Composite Index has climbed 13.6 per cent over the same period. Recent fears about a looming recession and slower economic growth have sent bond yields plummeting, pushing investors back into dividend-yielding stocks such as TransCanada.
Equity analysts have also been optimistic about the company’s outlook, especially after management boosted TransCanada’s dividend by 8.7 per cent when reporting year-end results in February, to $3 a share annually. The company also plans to continue raising the dividend by 8 per cent to 10 per cent a year annually through 2021.
Moody’s, however, is concerned about the company’s overall debt burden because it is not expected to materially improve over the next few years.
Lately TransCanada has expressed a commitment to tackle its debt load, stating that it hopes to gets its debt-to-EBITDA ratio under five times. The company also announced its intention in January to sell a majority stake in its Coastal GasLink pipeline in British Columbia. Proceeds from such a sale could be used for debt repayment.
When explaining its downgrade, Moody’s noted the company has the ability to improve its leverage metrics through actions such as asset sales, but added "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.”
The rating agency also noted that its forecasts exclude roughly $20-billion worth of TransCanada projects, including the Keystone XL project, because they have not yet been fully committed to or their construction is uncertain. Although these projects will ultimately boost revenues, they may also put pressure on the company’s balance sheet during their construction.
Despite the uncertainty, Moody’s gave TransCanada credit for its diversified geographic footprint, which means the company is not dependent on any one basin for the bulk of its projects. In fiscal 2018, TransCanada earned one-third of its EBITDA, the highest of any segment, from its natural gas pipelines in the United States.