Research: Rating Action: Moody’s Confirms TransCanada Ratings on Pipeline Investments in Mexico;  stable prospects

Research: Rating Action: Moody’s Confirms TransCanada Ratings on Pipeline Investments in Mexico; stable prospects

About $ 34 billion of affected debt

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

See below for a full list of evaluation actions.

Affirmations:

.. Issuer: TC Energy Corporation

…. Issuer rating, Baa2 affirmed

.. Issuer: TransCanada PipeLines Limited

…. Issuer rating, Baa1 affirmed

…. Junior subordinated bond / regular bond, Baa2 affirmed

…. Senior unprotected shelf, affirmed (P) Baa1

…. Senior unsecured commercial card, established P-2

…. Senior Unsecured Mid-Term Notes Program, Established (P) Baa1

…. Senior Unsecured Regular Bond / Bond, Baa1 stated

Outlook actions:

.. Issuer: TC Energy Corporation

…. Outlook remains stable

.. Issuer: TransCanada PipeLines Limited

…. Outlook remains stable

RATING RATING

“TC Energy’s rating statement reflects our view that there is only a modest increase in business risk associated with the recently announced growth in the company’s Mexican pipeline segment,” said Gavin MacFarlane, Vice President – Senior Credit Officer. “TC Energy has announced a CAD 1.8 billion discrete stock issue and we expect other credit-enhancing measures, including the ability to issue hybrid securities and asset sales, to support the balance sheet during construction,” he said. MacFarlane 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 of Mexico coast. This physical expansion of the company’s Mexican gas transportation business is inherently bad in terms of credit due to the higher level of business and political risk associated with the business in Mexico than the rest of the company’s business portfolio. However, the growth in the segment will be mitigated by the 15% stake that Comision Federal de Electricidad (CFE Baa2 stable) will have in a subsidiary of TC Energy based in Mexico at SGP in service. In addition to SGP, this subsidiary will own a portfolio of Mexican pipeline assets currently held by TC Energy. Furthermore, TC Energy has undertaken to limit the size of the segment to around 10% of EBITDA, an important driver for affirming the ratings.

Despite the increased corporate and political risk, we note that the company’s Mexican gas transportation businesses have a relatively low risk profile, similar to other TransCanada-owned businesses. All activities of the Mexican pipeline are under contract with the CFE, which is wholly owned by the government of Mexico (Baa2 stable) and represents practically all the revenues of the segment. These contracts have a long duration, expiring around the middle of the century, and are all take-or-pay capacity contracts that typically have low volume risk. The new Transportation Services Agreement (TSA) eliminates volume risk for the businesses held by the new pipeline holding and pipelines have no responsibility for gas supply.

Although TransCanada currently has limited budgetary capacity to pursue such a large project, in conjunction with the announcement to proceed with SGP, the company has announced a share issue for CAD 1.8 billion purchased agreements to help finance the project. Additionally, we expect the company to provide additional support to its balance sheet through a mix of asset sales and incremental hybrids during construction while maintaining its current credit quality.

The rating affirmation also reflects the predictable and growing cash flow, large size and diversification of TransCanada’s portfolio. This cash flow is typically supported by the regulation of the cost of the service or by long-term contracts with investment grade counterparties. Compensating for these strengths are weak financial parameters and a large capital program with high, albeit declining, execution risk even with the new project. We expect a proportionately consolidated debt to EBITDA ratio of approximately 5.5 times in 2022 which will gradually decline in subsequent years. The company will continue with its CAD 33 billion capital program over the period 2022-2028, with an execution risk related to approximately CAD 23 billion still needed to complete the projects. We expect the equity and dividend program to be funded primarily with cash flows from operations, shares in the form of CAD 1.8 billion discrete stock issue and dividend reinvestment program, hybrids, asset sales with some of incremental debt.

Assessment perspectives

The stable outlook on TC Energy and TransCanada reflects Moody’s expectation that the company will continue to generate predictable cash flows and that its consolidated debt pro-EBITDA will peak 5.5 times in 2022 and gradually decline thereafter.

FACTORS THAT COULD LEAD TO AN UPDATE OR DOWNGRADE OF RATINGS

Factors that could lead to an update

• An update is unlikely in the near term given the expected weakness in financial metrics, however we may update the company if it makes significant progress on its CAD 33 billion capital program in terms of time and budget and we expect consolidated debt to be proportionate to the EBITDA is less than 4.5x on a sustained basis

Factors that could lead to a downgrade

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

• If the company experiences greater cash flow variability in its core businesses

• The company changes or becomes aggressive in its financial policies

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

TransCanada is TC Energy’s primary subsidiary and debt issuer based in Calgary, Alberta. TC Energy is an energy infrastructure company with 5 operational business segments: Canadian natural gas pipelines, US natural gas pipelines, Mexican natural gas pipelines, liquid and energy pipelines, and storage.

REGULATORY INFORMATION

For a further specification of Moody’s main rating assumptions and sensitivity analyzes, see the Methodological Assumptions and Assumptions Sensitivity sections in the disclosure form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category / debt class or security, this announcement provides certain regulatory information in relation to each rating of a bond or subsequently issued security of the same series, category / debt class, security. or under a program where ratings derive solely from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory information in relation to the credit rating action on the support provider and in relation to each particular credit rating action for the securities that derive your credit rating. from the rating of the support provider. For provisional ratings, this announcement provides some regulatory disclosures in relation to the provisional rating assigned, and in relation to a final rating that can be assigned after the final debt issuance, in any case in which the structure and terms of the transaction have not changed prior to the assignment of the final rating in such a way as to affect the rating. For more information, see the issuer / deal page for the respective issuer on https://ratings.moodys.com.

For all affected securities or rated entities that receive direct credit support from the primary entities of this credit rating action and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. There are exceptions to this approach for the following disclosures, if applicable to the jurisdiction: ancillary services, rated entity information, rated entity information.

The ratings have been communicated to the rated entity or its designated agents and issued without changes resulting from this disclosure.

These evaluations are required. Please refer to Moody’s Policy for the designation and assignment of unsolicited credit ratings available on its website. https://ratings.moodys.com.

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

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 Scale credit rating on this Credit Rating Announcement has been issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with with article 4 paragraph 3 of Regulation (EC) no. 1060/2009 on credit rating agencies. More information on the EU endorsement status and Moody’s office that issued the rating can be found at https://ratings.moodys.com.

The Global Scale credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under law applicable to credit rating agencies in the United Kingdom. Further information on the UK endorsement status and Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

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

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

Gavin Mac Farlane
Vice President – Senior Credit Officer
Finance Infrastructure Group
Moody’s Canada Inc.
Via York 70
Suite 1400
Toronto, SU M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653

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

Issuing office:
Moody’s Canada Inc.
Via York 70
Suite 1400
Toronto, SU M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653

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