DBRS Morningstar Confirms Ratings of TC Energy Corporation and TransCanada PipeLines Limited

DBRS Limited (DBRS Morningstar) confirmed the Preferred Shares – Cumulative rating of TC Energy Corporation (TCC or the Company) at Pfd-2 (low). DBRS Morningstar 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 are 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 Morningstar ratings are determined using the consolidated credit profile of TCC. The Junior Subordinated Notes rating is two notches below the issuer rating to reflect the appropriate degree of subordination to other classes of debt of TCPL.

DBRS Morningstar expects the volatile market conditions and demand disruption caused by the coronavirus global pandemic to have a modestly negative impact on earnings and operating cash flow for TCC in 2020. The current unstable conditions could cause customer distress, project delays, lower spot volumes on the Company's pipelines, and lower margins in the liquids marketing business. TCC expects earnings for 2020 to be in line with 2019 results but anticipates some slowdown in project construction activities. Although the full impact of the pandemic is uncertain, the length of time needed for a global economic recovery from the current coronavirus crisis will likely determine the extent of credit deterioration for the Company.

TCC generates relatively stable cash flow from its diversified energy infrastructure asset portfolio of natural gas pipelines, liquids pipelines, and power and storage assets in North America. A majority of TCC’s operating cash flow is underpinned by cost-of-service, rate-regulated, and long-term contracted assets with no commodity price risk. A higher focus on natural gas transportation (nearly 70% of EBITDA in 2019) relative to crude oil, a presence in multiple basins, and connectivity to major demand markets support the Company's cash flow generation.

TCC decided to proceed with the construction of the USD 8.0 billion Keystone XL Pipeline Project (KXL) to transport 830,000 barrels of crude oil per day from Hardisty, Alberta, to the U.S. Gulf Coast. KXL is expected to be completed in 2023 and generate annual EBITDA of USD 1.3 billion. DBRS Morningstar considers the incremental EBITDA and 20-year transportation contracts with largely investment-grade counterparties underpinning KXL as supportive for the Company’s business risk profile. DBRS Morningstar notes, however, that Company’s financial metrics will be pressured in the 2021–23 period when the bulk of the capital for the project will be spent. (Please refer to the press release "DBRS Morningstar Comments on TC Energy Corporation’s Keystone XL Pipeline Project" published March 31, 2020.)

TCC is executing approximately $43.4 billion of commercially secured capital projects in the 2020–23 period ($10.0 billion in 2020). This amount includes KXL and 100% of capital for the $6.6 billion Coastal GasLink Pipeline Project. TCC plans to fund its capital program with operating cash flow, debt including hybrid securities, joint ventures, project financing and dividend reinvestment plan.

TCC intends to also file a $1.0 billion equity shelf to enable an at-the-market equity issuance program which will be utilized if and as deemed appropriate.

TCC has adequate liquidity to meet its obligations from (1) internally generated cash flows, and (2) approximately $10.3 billion available (as at April 29, 2020) under its $13.5 billion committed credit facilities and associated commercial paper programs. The approximately $5.0 billion received from the sale of Ontario natural gas–fired plants in April 2020 and the partial monetization of 65% of the Coastal GasLink Pipeline Project in May 2020 provide additional liquidity.

TCC’s guidance to grow dividends by 8% to 10% annually through 2021 and the large growth capital program are expected to result in free cash flow deficits and constrain any meaningful improvement in credit metrics. Furthermore, TCC expects growth to moderate to the 5% to 7% range after 2021. DBRS Morningstar expects TCC to fund its capital commitments prudently and maintain credit metrics consistent with its current ratings.

DBRS Morningstar notes that current depressed market conditions have resulted in heightened counterparty risk. Customer distress or downgrades to the credit ratings of counterparties to the Company’s transportation contracts would negatively affect the Company’s credit profile.

DBRS Morningstar does not anticipate an upgrade to TCC's ratings in the near term. TCC’s ratings could be negatively affected if the operating cash flow-to-debt metric weakens to a level that is inconsistent with the current ratings. Adverse regulatory decisions, weaker contract profiles, and cost escalation from project delays caused by environmental, legal, and political opposition to the Company's projects could also affect the ratings.

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.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019); DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019); Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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