DBRS Limited (DBRS Morningstar) downgraded the ratings of TC Energy Corporation (TCC or the Company) and TransCanada PipeLines Limited (TCPL; TCC's wholly owned subsidiary) as follows:
--- TCC’s Preferred Shares - Cumulative rating to Pfd-3 (high) from Pfd-2 (low)
--- TCPL’s Issuer Rating to BBB (high) from A (low)
--- TCPL’s Unsecured Debentures & Notes rating to BBB (high) from A (low)
--- TCPL’s Junior Subordinated Notes rating to BBB (low) from BBB
--- TCPL’s Commercial Paper rating to R-2 (high) from R-1 (low)
Concurrently, DBRS Morningstar downgraded the Medium-Term Notes & Unsecured Debentures rating of Nova Gas Transmission Limited (NGTL) and the Issuer Rating of Trans Québec & Maritimes Pipeline Inc. (TQM) to BBB (high) from A (low). The ratings of NGTL and TQM are aligned with the ratings of TCPL based on the assumption of implicit support. All trends are Stable. DBRS Morningstar also removed the ratings from Under Review with Negative Implications, where they were placed on February 3, 2023, following the updated and materially higher cost estimate from the Company for the Coastal GasLink Project with a potential for additional increases. DBRS Morningstar considered the development to be credit negative as the costs were materially higher than DBRS Morningstar’s previous expectation and will have to be fully borne by TCC through the construction period. At the time, DBRS Morningstar expected to resolve the Under Review with Negative Implications status after having more certainty on the Company’s funding plan and the scope of the asset divestiture program.
DBRS Morningstar believes the agreement to monetize a 40% interest in TCC’s Columbia Gas Transmission, LLC and Columbia Gulf Transmission, LLC (collectively, Columbia Assets) systems for total expected cash proceeds of $5.2 billion (USD 3.9 billion) significantly bridges the funding gap in 2023. Nevertheless, the rating downgrades reflect DBRS Morningstar’s expectation that the Company’s financial risk profile will no longer be supportive of an A (low) rating. In addition, the ratings are also negatively affected by (1) the expected increase in structural subordination after the sale of the Columbia Assets as TCC intends to recapitalize the Columbia Assets with additional debt; (2) cash flow leakage because of the increase in minority interest at the Columbia Assets; and (3) the execution risks associated with the elevated capital program planned for 2023 and 2024.
TCC’s business risk profile continues to be strong and is underpinned by predominantly regulated and contracted cash flow (95% of the 2023 estimated comparable EBITDA), strong supply and demand fundamentals at its natural gas pipelines and power assets and a diversified asset base. The impact of the sale of the Columbia Assets on TCC’s business risk profile is not material, and DBRS Morningstar expects the negative impact, if any, of additional capital rotation transactions on the Company’s business risk profile will be modest. DBRS Morningstar also expects TCC to maintain its net economic exposure in Mexico to approximately 10% of total consolidated comparable EBITDA.
While the sale of the Columbia Assets aids in deleveraging, TCC’s financial risk profile will still be weaker relative to its financial risk profile when its ratings were last confirmed in June 2022. DBRS Morningstar expects the Company’s EBITDA and cash flow to grow annually in the 5% range over the next three years. However, given the large capital program ($30 billion between 2023 and 2026) and significant dividends, DBRS Morningstar expects the Company to generate material free cash flow (cash flow after capital expenditures and dividends) deficits in 2023 and 2024, which will likely have to be funded with debt and proceeds from capital rotation. As a result, factoring in the proceeds of the sale of TCC’s stake in the Columbia Assets in 2023, DBRS Morningstar expects the Company’s lease-adjusted debt-to-cash flow ratio (last 12 months ended Q1 2023: 11.9%) to average around 12% in 2023 and 2024. DBRS Morningstar believes the Company has adequate additional levers available, including an extensive portfolio of contracted assets with stable cash flows, that could be monetized to deleverage further and potentially improve the Company’s financial risk profile.
DBRS Morningstar could consider a positive 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 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. Conversely, TCC’s ratings could be subject to a negative rating action 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.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
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 (July 4, 2023; https://www.dbrsmorningstar.com/research/416784).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022; https://www.dbrsmorningstar.com/research/404917)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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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.
DBRS Morningstar 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. DBRS Morningstar trends and credit ratings are under regular surveillance.
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