DBRS Limited (DBRS Morningstar) has placed the ratings of TC Energy Corporation (TCC or the Company), TransCanada PipeLines Limited (TCPL; TCC's wholly owned subsidiary), Nova Gas Transmission Limited (NGTL), and Trans Québec & Maritimes Pipeline Inc. (TQM) Under Review with Negative Implications. The ratings of NGTL and TQM are based on the ratings of TCPL. The rating actions follow the updated cost estimate of $14.5 billion (previously $ 11.2 billion) provided by the Company for the Coastal GasLink Project (the Project) with a potential for additional increases of $1.2 billion if construction extends well into 2024. While the Company is pursuing cost mitigants and recoveries, the process is unlikely to be completed before the Project is placed in service. DBRS Morningstar considers the increase in Project cost to be credit negative as the costs are materially higher than DBRS Morningstar’s previous expectation and will have to be fully borne by TCC through the construction period.
DBRS Morningstar’s ratings on TCC and TCPL are based on the expectation that TCC will maintain its overall financial risk profile in the “A” rating category. However, the increase in Project cost has reduced the Company’s financial flexibility, and TCC will have to depend on the successful execution of its proposed asset divestiture program to bridge the funding gap and maintain its financial risk profile. While the Company has an extensive portfolio of contracted assets with stable cash flows that could be monetized, the size of the divestiture program does entail execution and timing risks. In addition, the impact of the asset sales on cash flow and possibly the Company’s business risk profile is uncertain at this time.
DBRS Morningstar expects to resolve the Under Review Status after reviewing the Company’s updated financing plan and having more certainty with regard to the scope of the asset divestiture program. Despite the increase in Project cost, TCC’s rating is underpinned by its strong business risk profile, and DBRS Morningstar expects any negative rating action to likely be limited at most to one notch lower from the current ratings.
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 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies applicable to the ratings are Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022; https://www.dbrsmorningstar.com/research/404917); DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683); and DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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.
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.
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