Research: Rating Action: Moody’s Confirms TransCanada Ratings for Mexican Gas Pipeline Investments;  Outlook stable

Research: Rating Action: Moody’s Confirms TransCanada Ratings for Mexican Gas Pipeline Investments; Outlook stable

Approximately $34 billion in debt affected

Toronto, August 5, 2022 — Moody’s Investors Service (“Moody’s”) confirmed TransCanada Pipelines Limited’s (TransCanada’s) ratings, including Baa1 Senior Unsecured and Issuer Ratings, Baa2 Junior Subordinate Rating and Prime-2 Short Term Rating for commercial paper. At the same time, Moody’s affirmed the Baa2 issuer rating of TransCanada parent company TC Energy Corporation (TC Energy). The outlook for both companies remains stable.

Below is a full list of rating actions.

Affirmations:

..Issuer: TC Energy Corporation

…. Issuer Rating, Confirmed Baa2

..Issuer: TransCanada PipeLines Limited

…. Issuer rating, Baa1 confirmed

….Junior Subordinated Regular Bond/Obligation, Confirmed Baa2

….Senior Unsecured Shelf, Confirmed (P)Baa1

….Senior Unsecured Commercial Paper, confirmed P-2

….Senior Unsecured Medium-Term Note Program, confirmed (P)Baa1

….Senior Unsecured Regular Bond, Confirmed Baa1

Outlook Actions:

..Issuer: TC Energy Corporation

….Outlook remains stable

..Issuer: TransCanada PipeLines Limited

….Outlook remains stable

REASONS FOR VALUATION

“The affirmation of TC Energy’s ratings reflects our view that business risk increases only modestly with the recently announced growth of the company’s Mexican natural gas pipelines segment,” said Gavin MacFarlane, Vice President – Senior Credit Officer. “TC Energy has announced a C$1.8 billion discretionary equity offering and we anticipate further credit-friendly measures, including the possibility of issuing hybrid securities and selling assets to support the balance sheet during the construction phase,” added MacFarlane added.

On August 4, TC Energy announced it is moving forward on the $4.5 billion Southeast Gateway Pipeline (SGP) project along the Gulf Coast of Mexico. This significant expansion of the Company’s Mexican gas transportation business is inherently credit negative as there is a higher degree of commercial and political risk associated with operating in Mexico relative to the rest of the Company’s portfolio of assets. However, growth in this segment will be held back by the 15 percent stake that the Comision Federal de Electricidad (CFE Baa2 stable) will operate in a Mexico-based subsidiary of TC Energy at SGP. In addition to SGP, this subsidiary will own a portfolio of Mexican natural gas pipelines currently held by TC Energy. Additionally, TC Energy has committed to capping the size of the segment at around 10% of EBITDA, a key factor in confirming the ratings.

Despite the increased commercial and political risk, we note that the Company’s Mexican gas transmission assets have a relatively low risk profile that is similar to other TransCanada-owned assets. All of the Mexican natural gas pipeline’s assets are contractually tied to the CFE, which is wholly owned by the Mexican government (Baa2 Stable) and accounts for virtually all of the segment’s revenues. These contracts have long terms expiring around mid-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 assets held by the new pipeline holding company and the pipelines are not responsible for sourcing gas.

Although TransCanada currently has limited balance sheet capacity to pursue such a large project, concurrent with its announcement of proceeding with SGP, the Company announced a CA$1.8 billion equity issue to help fund the project. Additionally, we expect the company to continue to support its balance sheet through a mix of asset sales and incremental hybrids during the construction phase and to maintain its current credit quality.

The rating affirmation also reflects the predictable and growing cash flow, size and diversification of TransCanada’s portfolio. This cash flow is typically underpinned either by regulation of service costs or by long-term contracts with investment-grade counterparties. These strengths are offset by weak financials and a substantial capital program with increased, albeit decreasing, execution risk even on the new project. We forecast a proportionate consolidated debt to EBITDA ratio of around 5.5x in 2022, which will gradually decrease in subsequent years. The Company will continue its $33 billion capital program over the period 2022-2028 with approximately $23 billion of execution risk remaining to be expended to complete the projects. We expect the capital program and dividends to be funded primarily from cash flow from operations, equity in the form of the CAD$1.8 billion discrete equity offering and dividend reinvestment program, hybrids, asset sales with some additional debt.

Valuation Outlook

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

FACTORS THAT COULD RESULT IN AN UPGRADE OR DOWNGRADE IN RATINGS

Factors that could lead to an upgrade

• Given the projected weakness in financials, an upgrade is unlikely in the near term, but we could upgrade the company if it makes significant progress on its CAD$33 billion capital program, on time and on budget and we forecast consolidated debt to EBITDA below 4.5 will be x sustainable

Factors that could lead to a downgrade

• A downgrade could occur if the forecast proportion of consolidated debt to EBITDA remains at or above 5.5x for an extended period of time

• When the company experiences increased cash flow variability in its core businesses

• The company changes its financial policy or becomes aggressive

The main methodology used in these ratings was Midstream Energy, published February 2022 and available at https://ratings.moodys.com/api/rmc-documents/379531. Alternatively, you can check out the Assessment Methods 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 segments: Canadian Natural Gas Pipelines, US Natural Gas Pipelines, Mexico Natural Gas Pipelines, Liquids Pipelines and Power and Storage.

LEGAL DISCLOSURES

For more details on Moody’s key rating assumptions and sensitivity analyses, see the methodology assumptions and sensitivity to assumptions sections of the disclosure document. For Moody’s rating symbols and definitions, see https://ratings.moodys.com/rating-definitions.

For ratings provided for a program, series, category/class of debt instrument, or security, this announcement contains certain regulatory disclosures with respect to each rating of a subsequently issued bond or debenture of the same series, category/class of instrument, security or under a program for which ratings are derived solely from existing ratings in accordance with Moody’s rating practices. For ratings provided by a support provider, this announcement contains certain regulatory disclosures in relation to the support provider’s credit assessment action and in relation to each individual credit assessment action for securities that derive their credit ratings from the support provider’s credit assessment. For preliminary ratings, this announcement contains certain regulatory disclosures in relation to the preliminary rating assigned and in relation to a final rating that may be assigned after the final issuance of the Debt Instruments, in each case where the transaction structure and terms have not changed before issuing the final rating in a way that would have affected the rating. For more information, see the issuer’s issuer/deal page https://ratings.moodys.com.

For any affected security or rated entity that receives direct credit support from the primary entity(ies) of that rating action and whose ratings may change as a result of that rating action, the related regulatory disclosures are those of the guarantor entity. Exceptions to this approach exist for the following disclosures where applicable to the jurisdiction: Benefits, Disclosures to Reviewed Entities, Disclosures by Reviewed Entities.

The ratings have been disclosed to the rated entity or its nominated representative(s) and are issued without any changes resulting from this disclosure.

These reviews are requested. Please see Moody’s policy on the naming and assignment of unsolicited credit ratings, which is available on Moody’s website https://ratings.moodys.com.

The regulatory disclosures contained in this press release relate to the credit rating and, where applicable, the associated rating outlook or rating summary.

For Moody’s general principles for assessing environmental, social and governance (ESG) risk in our credit analysis, see https://ratings.moodys.com/documents/PBC_1288235.

The global scale credit rating in this rating communication was prepared by an affiliate of Moody’s outside the EU and is confirmed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Article 4(3) of the rating agency Regulation (EC) No. 1060/2009 on credit rating agencies. For more information on EU endorsement status and the Moody’s office that issued the rating, go to https://ratings.moodys.com.

The Global Scale Credit Rating in this Ratings Release has been issued by an affiliate of Moody’s outside the UK and is certified by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA in accordance with UK rating agency laws . For more information on UK endorsement status and the Moody’s office that provided the credit rating go to https://ratings.moodys.com.

Please visit https://ratings.moodys.com for updates on changes by Moody’s lead rating analyst and the rating entity.

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

Gavin MacFarlane
VP – Senior Loan Officer
infrastructure financing group
Moody’s Canada Inc.
70 York Street
Suites 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer Service: 1.212.553.1653

Michael G Haggarty
Deputy General Manager
infrastructure financing group
JOURNALISTS: 1 212 553 0376
Customer Service: 1.212.553.1653

Approving office:
Moody’s Canada Inc.
70 York Street
Suites 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer Service: 1.212.553.1653

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