Morningstar DBRS Confirms Credit Ratings on TransCanada PipeLines Limited at BBB (high) and TC Energy Corporation at Pfd-3 (high)

DBRS Limited (Morningstar DBRS) confirmed TC Energy Corporation's (TCC or the Company) Preferred Shares - Cumulative rating at Pfd-3 (high). Morningstar DBRS also confirmed TransCanada PipeLines Limited's (TCPL; TCC's wholly owned subsidiary) Issuer Rating and Unsecured Debentures & Notes rating each at BBB (high), its Junior Subordinated Notes rating at BBB (low), and its Commercial Paper (CP) rating at R-2 (high). 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 Morningstar DBRS' expectation that no debt will be issued by TCC. Morningstar DBRS' credit 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 with respect to the senior debt of TCPL.

KEY CREDIT RATING CONSIDERATIONS
TCC's operating performance in 2023 and H1 2024 has been in line with Morningstar DBRS' expectations. The Company's earnings and cash flow have increased as a result of incremental earnings from assets placed in service over the past year and strong asset utilization. The Company's major projects including the Southeast Gateway and Bruce Power are progressing on schedule and budget and TCC expects to place approximately $7billion of assets into service in 2024. Morningstar DBRS notes that the Coastal GasLink achieved mechanical completion in November 2023 and is expected to be in service once LNG Canada is commissioned. In August 2024, TCC announced that it had received unanimous support from its customers for a new five-year revenue requirement settlement commencing on January 1, 2025. The settlement maintains the return on equity (ROE) and deemed common equity at existing levels while providing for increased deprecation rates and incentive mechanisms, which is expected to improve earnings and cash flow. The settlement is subject to final approval from the Canadian Energy Regulator.

TCC has made material progress towards its asset divestiture target of $3.0 billion in 2024 with announced/completed asset sales totaling $2.6 billion. The Company has also made significant progress towards spinning off its liquid business and expects to close the transaction in Q4 2024. Morningstar DBRS does not deem the asset sales and the spinoff of the liquids business to have a material impact on the Company's business risk profile. While the spinoff will result in lower EBITDA (approximately $1.4 billion), the impact of lower EBITDA on the Company's credit metrics will be partially offset by the corresponding reduction in debt and dividend payments.

TCC's financial risk profile has improved over the past year and is supportive of the current credit ratings. The material progress made by the Company towards its asset divestiture target coupled with stronger earnings has improved the Company's key credit metrics with the lease-adjusted cash flow-to-debt ratio in H1 2024 improving to 13.5% from 11.7% at year-end 2023. Morningstar DBRS expects the Company to maintain this ratio at around 14%. TCC has adequate liquidity with $8.2 billion available under various credit facilities as at June 30, 2024.

CREDIT RATING DRIVERS
Morningstar DBRS could consider a positive credit rating action if the Company (1) maintains a cash flow-to-debt ratio of 15% or more, (2) successfully navigates its elevated capital program through 2024 and 2025 with no notable additional project delays or cost overruns and pursues a capital expenditure program in the $6 billion to $7 billion range thereafter, and (3) has no material changes in its business risk profile. Although unlikely, the credit rating could be downgraded if (1) the cash flow-to-debt ratio declines below the 11% level for an extended period of time or (2) there are significant delays or cost overruns at its key projects.

EARNINGS OUTLOOK
Morningstar DBRS expects comparable 2024 EBITDA to be modestly higher as a result of incremental earnings from assets placed in service over the past year and strong asset utilization. Morningstar DBRS expects EBITDA in 2025 to be lower compared with 2024. However, the impact of the spinoff on EBITDA is expected to be partially offset by growth in earnings the Company's natural gas and power businesses.

FINANCIAL OUTLOOK
Morningstar DBRS expects the Company to generate modest free cash flow (cash flow after capital expenditures and dividends) deficit in 2024 after factoring in capital contribution from its non-controlling interests. However, Morningstar DBRS expects the Company to reduce overall debt materially from proceeds raised from the spin-off of its liquids business. As a result, despite the spin-off of the liquids business, Morningstar DBRS expects the Company's financial risk profile to remain supportive of the current credit ratings.

CREDIT RATING RATIONALE
TCC's credit ratings are underpinned by predominantly regulated and contracted cash flow (97% of the 2024 estimated comparable EBITDA), strong supply and demand fundamentals at its natural gas pipelines and power assets, and a diversified asset base. The credit ratings are constrained by the presence of structural subordination, minority interests, and competition in the North American natural gas transportation segment.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024); https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of TCC, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of TCC, the following FRA factors were considered more important: cash flow-to-debt ratio and EBIT interest coverage.

(C) Weighting of the BRA and the FRA
In the analysis of TCC, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431181.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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