Research: Rating Action: Moody’s Affirms TransCanada’s Ratings for Mexico Pipeline Investment;  outlook stable

Research: Rating Action: Moody’s Affirms TransCanada’s Ratings for Mexico Pipeline Investment; outlook stable

Approximately $34 billion worth of debt securities were affected

Toronto, August 5, 2022 – Moody’s Investors Service (“Moody’s”) has affirmed the ratings of TransCanada Pipelines Limited (TransCanada), including its Baa1 senior unsecured and issuer ratings, Baa2 junior subordinated rating and Prime-2 short-term commercial credit rating books. At the same time, Moody’s affirmed the Baa2 rating of TransCanada’s issuer, parent company TC Energy Corporation (TC Energy). The outlook for both entities remains stable.

See below for a complete list of rating actions.

Affirmations:

..Issuer: TC Energy Corporation

…. Issuer Rating Affirmed Baa2

..Issuer: TransCanada PipeLines Limited

…. Issuer Rating Affirmed Baa1

….Junior Subordinated Ordinary Notes/Bonds Affirmed Baa2

…. Senior Unsecured Shelf Confirmed (P)Baa1

….Senior Unsecured Commercial Paper, Confirmed P-2

….Senior Unsecured Medium Term Bond Program Affirmed (P)Baa1

….Senior Unsecured Ordinary Notes/Bonds Affirmed Baa1

Outlook Actions:

..Issuer: TC Energy Corporation

….View remains stable

..Issuer: TransCanada PipeLines Limited

….View remains stable

RATIONALE FOR RATINGS

“TC Energy’s ratings affirmation reflects our view that there is only a moderate increase in business risk associated with the recently announced growth in the company’s Mexican natural gas pipeline segment,” said Gavin McFarlane, vice president – senior credit officer. “TC Energy has announced a C$1.8 billion discretionary equity issuance and we expect other credit-friendly measures, including the possibility of a hybrid securitization and asset sale, to support the balance sheet during construction,” McFarlane added.

On August 4, TC Energy announced that it is moving forward with the $4.5 billion Southeast Gateway Pipeline (SGP) project along the Gulf Coast. This substantial expansion of the company’s Mexican gas transportation business is itself credit negative due to the higher level of business and political risk associated with doing business in Mexico compared to the rest of the company’s asset portfolio. However, growth in the segment will be tempered by the 15% interest that Comision Federal de Electricidad (CFE Baa2 stable) will have in TC Energy’s Mexico-based subsidiary in the operating SGP. In addition to SGP, this subsidiary will own a portfolio of Mexican pipeline assets currently held by TC Energy. In addition, TC Energy is committed to capping segment size at around 10% of EBITDA, an important driver of rating affirmations.

Despite the increased business and political risk, we note that the company’s Mexican gas transportation assets have a relatively low risk profile that is similar to other assets owned by TransCanada. All Mexican natural gas pipeline assets are contracted to CFE, which is wholly owned by the government of Mexico (Baa2 stable) and accounts for nearly all of the segment’s revenue. These contracts have long maturities, expiring around mid-century, and are all take-or-pay capacity contracts that typically have low volume risk. The new Transportation Services Agreement (TSA) de-risks the volume of assets held by the new pipeline holding company, and the pipelines bear no responsibility for gas deliveries.

Although TransCanada currently has limited balance sheet capacity to pursue such a large project, concurrently with its announcement to proceed with the SGP, the company announced the issuance of purchased capital from a CAD 1.8 billion deal to help finance the project. We also expect the company to provide additional support to its balance sheet through a combination of asset sales and gradual hybrids during construction, maintaining its current credit quality.

The ratings affirmation also reflects the predictable and growing cash flow, large size and diversification of TransCanada’s portfolio. This cash flow is typically supported by either cost-of-service adjustments or long-term contracts with investment-grade counterparties. Offsetting these strengths are weak financials and a large capital program with increased, albeit diminishing, execution risk even with the new project. We forecast a proportionately consolidated debt-to-EBITDA ratio of around 5.5x in 2022, which will gradually decline over the coming years. The company will continue with its CAD 33 billion capital program for the period 2022-2028, with execution risk associated with approximately CAD 23 billion still to be spent on project completions. We expect the capital program and dividends to be primarily funded with cash flows from operations, equity capital in the form of a C$1.8 billion discretionary equity issuance, and a dividend reinvestment program, hybrids, asset sales with some additional debt.

Rating Outlook

The stable outlook for TC Energy and TransCanada reflects Moody’s expectation that the company will continue to generate predictable cash flow and that its consolidated debt-to-EBITDA ratio will peak at 5.5x in 2022 and gradually decline from there.

FACTORS THAT MAY LEAD TO UPGRADES OR DOWNGRADES

Factors that could lead to an upgrade

• An improvement is unlikely in the near term given the projected weakness in the financials, but we could improve the company if it makes significant progress on its C$33 billion capital program on time and budget and we forecast the consolidated debt-to-EBITDA ratio to be below 4.5x on an ongoing basis

Factors that could lead to a downgrade

• A downgrade may occur if the projected ratio of proportionately consolidated debt to EBITDA remains at or above 5.5x for an extended period of time

• If the company experiences increased volatility of cash flows in its core activities

• The company changes or becomes aggressive in its financial policy

The primary methodology used in these ratings is Midstream Energy, published in February 2022 and available at https://ratings.moodys.com/api/rmc-documents/379531. Alternatively, please see the Evaluation Methodologies page https://ratings.moodys.com for a copy of this methodology.

TransCanada is the principal subsidiary and debt issuer of TC Energy, headquartered in Calgary, Alberta. TC Energy is an energy infrastructure company with 5 operating business segments: Canadian natural gas pipelines, US natural gas pipelines, Mexican natural gas pipelines, liquids and energy pipelines, and storage.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the Methodological Assumptions and Assumption Sensitivity sections of the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued under a program, series, category/class of debt or security, this release provides certain regulatory disclosures in connection with any rating of a subsequently issued bond or bond of the same series, category/class of debt, security or under a program, for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued by a maintenance provider, this announcement provides certain regulatory disclosures in connection with the maintenance provider’s credit rating action and in connection with any particular credit rating action for securities that derive their credit ratings from the provider’s credit rating of maintenance. For pre-ratings, this announcement provides certain regulatory disclosures in relation to the pre-assigned rating and in relation to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and terms of the transaction have not changed prior to the determination of the final rating in a way that would affect the rating. For further information, please see the issuer/deal page for the relevant issuer at https://ratings.moodys.com.

For all affected securities or rated entities receiving direct credit support from the underlying entity(ies) of this credit rating action and whose ratings may change as a result of this credit rating action, the related regulatory disclosures will be those of the entity- guarantor Exceptions to this approach exist for the following disclosures, if applicable to a jurisdiction: ancillary services, disclosure to an assessee, disclosure by an assessee.

The ratings have been disclosed to the assessee or its selected agent(s) and are issued without modification as a result of such disclosure.

These ratings are requested. Please see Moody’s Policy on the Determination and Assignment of Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

The regulatory disclosures contained in this press release relate to the credit rating and, if applicable, the related rating outlook or review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The global credit rating in this Credit Rating Announcement is issued by one of Moody’s non-EU affiliates and approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No. 1060/2009 on credit rating agencies. Additional information on EU approval status and the Moody’s office that issued the credit rating is available at https://ratings.moodys.com.

The global credit rating in this Credit Rating Announcement is issued by one of Moody’s non-UK affiliates and approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. Further information on UK approval status and the Moody’s office that issued the credit rating is available at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and the Moody’s entity that issued the rating.

Please see the issuer/deal page at https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Gavin Macfarlane
VP – Senior Credit Officer
Infrastructure Finance Group
Moody’s Canada Inc.
70 York Street
Apartment 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653

Release office:
Moody’s Canada Inc.
70 York Street
Apartment 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653

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