DBRS Confirms Ratings of TC Energy Corporation and TransCanada PipeLines Limited

DBRS Limited (DBRS) confirmed the Preferred Shares – Cumulative rating of TC Energy Corporation (TCC) at Pfd-2 (low). DBRS also confirmed the Issuer Rating and Unsecured Debentures & Notes rating of TransCanada PipeLines Limited (TCPL; TCC’s wholly owned subsidiary) at A (low), as well as the rating of TCPL’s Junior Subordinated Notes at BBB and the rating of TCPL’s Commercial Paper at R-1 (low). All trends remain Stable. The Preferred Shares - Cumulative rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the credit strength of TCPL and the expectation that no debt will be issued by TCC. DBRS ratings are determined using the consolidated credit profile of TCC.

TCC’s ratings reflect the relatively stable cash flow generation supported by the Company’s diversified energy infrastructure asset portfolio of natural gas pipelines, liquids pipelines and power generation assets in North America. The Company’s credit metrics have modestly improved in the past three years and DBRS expects further improvement in metrics to support the current rating. A majority of TCC’s operating cash flow is underpinned by cost of service rate-regulated and long-term contracted assets with no commodity risk. Liquefied natural gas exports, the power sector and the petrochemical sector continue to drive end-user natural gas demand growth in North America. TCC’s infrastructure assets are difficult to replicate and provide connectivity from prolific basins of the Marcellus/Utica Shale Formation, the Permian Basin and Western Canadian Sedimentary Basin to strong and growing demand markets. TCC’s natural gas pipelines serve approximately 25% of continental natural gas demand and its liquids pipelines handle approximately 20% of western Canadian crude oil exported to the United States. TCC is also one of the largest independent power generators in Canada, with approximately 6,000 megawatts (MW) of power generation.

TCC continues to execute on $30.3 billion of commercially secured capital projects (excluding the Keystone XL Pipeline) in the 2019–2023 period ($9.9 billion spent as at Q1 2019). The Company plans to spend approximately $ 7.1 billion in capex for 2019 and placed approximately $5.3 billion of growth projects in service in Q1 2019.

DBRS is concerned that TCC’s medium-term capital intensity, combined with its guidance to grow dividends by 8% to 10% annually through 2021, is expected to result in free cash flow deficits and constrain any significant improvement in credit metrics. TCC plans to self-fund a majority of its large capital program with operating cash flow and portfolio management involving asset divestitures and joint ventures without issuing discrete equity. TCC has identified assets generating approximately $500 million in EBITDA for these portfolio management initiatives. DBRS expects to see gradual improvement in credit metrics, as the Company benefits from cash flow growth from major capital projects placed in service in the next two years and concerted debt reduction initiatives.

While DBRS does not anticipate an upgrade to the ratings in the near term, TCC’s ratings could be negatively affected by delays in execution of capital projects, adverse regulatory decisions and weaker contract profiles. TCC’s ratings could also be pressured should the Company fail to maintain operating cash flow to debt at or above 15% and debt to capital at or below 60% by the end of 2019.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 2018), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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