DBRS Morningstar Confirms Ratings of 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 rating 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. 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 75% of EBITDA in 2020) relative to crude oil, a presence in multiple basins, and connectivity to major demand markets supports the Company's cash flow generation.

DBRS Morningstar notes that despite the volatile market conditions and demand disruption caused by the global pandemic, TCC performed better than expected and maintained key credit metrics in line with its credit ratings in 2020.

TCC and the Province of Alberta (the Province; rated AA (low) with a Negative trend by DBRS Morningstar) agreed to suspend the Keystone XL Pipeline Project following the revocation of the Presidential Permit in January 2021. TCC recognized an after-tax net impairment of $2.2 billion. The net financial exposure for TCC is expected to be approximately $1.0 billion at the end of Q1 2021 after considering the offsetting amounts recoverable with respect to the Province’s investment and guarantees. DBRS Morningstar notes that, although the impairment weakened TCC's debt-to-capital metric slightly, there was no impact on the Company's overall financial position.

Going forward, the Company intends to focus on in-corridor expansions, which carry low project execution risk, and develop renewable energy projects that would provide zero carbon energy for the electrification needs of its pipeline network and fleet. TCC is executing approximately $20 billion of commercially secured capital projects in the 2021–24 period. A substantial portion of this growth capital is focused on TCC's natural gas pipeline network and underpinned by cost of service regulation or medium- to long-term contracts. TCC plans to fund its capital program primarily with operating cash flow and incremental debt. Furthermore, TCC expects to grow dividends at an average annual rate of 5% to 7% which, combined with the growth capital program, is expected to result in free cash flow deficits and constrain any meaningful improvement in credit metrics in the medium term. DBRS Morningstar expects TCC to fund its capital commitments prudently and maintain credit metrics consistent with its current ratings.

DBRS Morningstar does not anticipate an upgrade to TCC's ratings in the near term. Ratings could be negatively affected if TCC's combined key credit metrics fall below the "A" range. 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 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/373262.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 19, 2020, https://www.dbrsmorningstar.com/research/370267), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021, https://www.dbrsmorningstar.com/research/375001), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020, https://www.dbrsmorningstar.com/research/369165), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021, https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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 info@dbrsmorningstar.com.

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.

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 additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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

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