DBRS Morningstar Comments on TC Energy Corporation’s Keystone XL Pipeline Project

DBRS Limited (DBRS Morningstar) notes that TC Energy Corporation (TC Energy or the Company, rated Pfd-2 (low) with a Stable trend by DBRS Morningstar) has announced that it will proceed with the construction of the approximately USD 8.0 billion Keystone XL Pipeline Project (KXL or the Project) to transport 830,000 barrels of crude oil per day from Hardisty, Alberta, to Steele City, Nebraska, where it will connect with TC Energy’s existing pipeline facilities to reach the U.S. Gulf Coast. KXL is expected to be in service in 2023.

TC Energy has stated that the Government of Alberta (GoA, rated AA (low) with a Negative trend by DBRS Morningstar) has agreed to support the Project with a USD1.1 billion equity contribution that will substantially cover the planned project funding costs for 2020. The remaining USD 6.9 billion investment is expected to be spent in 2021 and 2022 and is to be funded through a USD 4.2 billion project-level credit facility that will be fully guaranteed by the GoA (the GoA Guarantee) and a USD 2.7 billion investment by TC Energy. The Company plans to fund the USD 2.7 billion investment through a combination of internally generated cash flow, hybrid securities, and common equity through its dividend reinvestment program. For additional funding support, the Company intends to file a CAD 1.0 billion equity shelf to issue at-the-money equity to be utilized if and when appropriate. TC Energy expects to acquire the GoA equity of USD 1.1 billion and refinance the USD 4.2 billion credit facility in the debt markets after the Project is placed in service.

KXL is underpinned by 20-year transportation shipping agreements (TSAs) with largely investment-grade counterparties and is expected to generate USD 1.3 billion of incremental EBITDA. Under the terms and conditions of the TSAs, 50% of any difference between the estimated capital cost and final cost of the Project will be reflected in pipeline tolls.

DBRS Morningstar has concluded that the financing plan with the GoA Guarantee, as announced, is not expected to affect the ratings of TC Energy and its 100% owned subsidiary, TransCanada Pipelines Limited (rated A (low) and R-1 (low) with Stable trends by DBRS Morningstar). However, DBRS Morningstar notes that a prolonged weakness in oil prices, which are at currently very low levels, could result in multiple-notch downgrades to the credit ratings of counterparties to the Company’s transportation contracts and would negatively affect the Company’s credit profile. Furthermore, cost escalation from project delays caused by the Coronavirus Disease (COVID-19) crisis and/or regulatory, legal, social, and political opposition to the Project, if unmitigated, could also have a negative impact on the Company’s credit profile.

For the purpose of the assessment, amounts outstanding under the USD 1.1 billion GoA equity contribution together with accrued dividends, if any, are considered as debt by DBRS Morningstar because TC Energy is obligated to acquire the GoA equity shares after the Project is in service; as such, the equity shares do not form a permanent part of the Company’s capital structure.

DBRS Morningstar notes that KXL, when completed, will provide much needed egress to Canada’s oil sand producers and transportation optionality as the pipeline system provides a direct route from Hardisty, Alberta, to Gulf Coast refineries and export markets. At the same time, TCPL’s existing pipeline facilities will continue to service the midwestern and Chicago area markets via the Base Keystone pipeline. DBRS Morningstar considers the addition of new 20-year transportation contracts with largely investment-grade counterparties to the mix of TC Energy’s existing regulated cost-of-service and long-term contracts as supportive for the Company’s business risk profile. DBRS Morningstar does note, however, that Company’s financial metrics, as adjusted for the GoA equity contribution effects mentioned earlier, will be pressured in the 2021–23 period when the bulk of the capital for the Project is likely to be spent. However, the existence of the GoA Guarantee is expected to mitigate this expected weakness. TC Energy’s financial metrics are expected to improve in 2024 with the full-year cash flow from KXL.

DBRS Morningstar assumes that the GoA Guarantee will be unconditional and irrevocable and covers all obligations for payment of principal and accrued interest in the event of default or the project failing to reach completion, and that the GoA Guarantee will only be released on project completion and refinancing of the project-level credit facility.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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