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

DBRS Limited (DBRS Morningstar) confirmed TC Energy Corporation's (TCC or the Company) Preferred Shares – Cumulative rating at Pfd-2 (low). DBRS Morningstar also confirmed TransCanada PipeLines Limited's (TCPL; TCC's wholly owned subsidiary) Issuer Rating and Unsecured Debentures & Notes rating at A (low), Junior Subordinated Notes at BBB, and Commercial Paper rating 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's ratings are based on 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 senior debt of TCPL.

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. The Company's pipelines connect multiple key resource basins to major demand centers and export markets. TCC’s operating cash flow is largely underpinned by cost of service rate-regulated and long-term contracted assets.

DBRS Morningstar notes that recent geopolitical events have highlighted the need for energy reliability and security. The growing demand for energy and global liquefied natural gas (LNG) exports continues to drive higher volumes across TCC's transportation network and supports the need for well-connected and reliable energy infrastructure assets. TCC continues to expand its capabilities with an approximately $25 billion contractually secured capital program over the 2022 to 2028 period, primarily focused on regulated rate base and in-corridor expansions, improving connectivity to LNG export facilities, decarbonizing pipeline networks, and life-extension projects at the Company's nuclear power generation units. The Company is also pursuing numerous long-term energy transition initiatives in renewables, hydrogen, and carbon capture, utilization, and storage to lower emissions and provide low-carbon energy alternatives.

TCC owns 35% equity interest in Coastal GasLink Limited Partnership and is developing the Coastal GasLink Pipeline Project (Coastal GasLink) to construct a natural gas pipeline connecting natural gas supply from the Western Canadian Sedimentary Basin to an LNG and export facility being constructed in Kitimat, British Columbia, owned by LNG Canada. The partners of Coastal GasLink are in dispute with LNG Canada with respect to the recovery of cost overruns and delays to the project schedule as a result of scope changes, permit delays, and the Coronavirus Disease (COVID-19) pandemic. The project is 63% complete, and TCC expects construction activities to continue as the parties are in discussions to resolve this dispute. The additional debt financing required and amounts to be contributed as equity by the partners to complete the project have not been determined at this stage. DBRS Morningstar notes that TCC's financial profile could weaken if the higher capital costs cannot be recovered through contractual arrangements.

TCC intends to fund its capital program primarily with operating cash flow and incremental debt. TCC expects to grow dividends at an average annual rate of 3% to 5%, which was lowered in Q3 2021 from the previous guidance of 5% to 7% to provide the capacity and financial flexibility to fund the large capital program. DBRS Morningstar notes that the dividend growth commitment, combined with the sizable capital program, is expected to result in free cash flow deficits and continue to pressure TCC's credit metrics. DBRS Morningstar expects TCC to fund its capital commitments prudently and maintain credit metrics consistent with the "A" rating category.

DBRS Morningstar does not anticipate an upgrade to TCC's ratings in the medium term. Ratings could be negatively affected by adverse regulatory decisions, weaker contract profiles, material cost escalation that cannot be recovered from customers, and combined key credit metrics weakening below the "A" rating category.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodologies are Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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 Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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 additional 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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