Fitch Affirms TC Energy Corporation at 'A-'; Outlook Revised to Stable

(The following statement was released by the rating agency) Fitch Ratings-New York-30 March 2021: Fitch Ratings has affirmed TC Energy Corporation's (TRP) Long-Term Issuer Default Rating (IDR) at 'A-'and preferred share rating at 'BBB'. Fitch has also affirmed TransCanada PipeLines Limited's (TCPL) Long-Term IDR at 'A-', senior unsecured rating at 'A-', and Short-Term IDR and CP rating at 'F2'. In addition, Fitch has affirmed TransCanada Trust's (Trust) junior subordinated rating at 'BBB'. Trust's junior subordinated notes are guaranteed by TCPL on a subordinated basis. The Rating Outlook for TRP and TCPL has been revised to Stable from Negative. Fitch's old sensitivities array contained a sensitivity about the potential halting of construction on Keystone XL (KXL), which has since come to pass. Fitch's old sensitivity provided for a "springing" new leverage level of 5.0x. This sensitivity threshold represents a reduction from the "KXL-ongoing" old sensitivity level of 5.5x. In tandem, and as expected, Fitch's forecast for leverage is now lower than its previous forecast. The main reason for the leverage drop is due to TRP's KXL J.V. equity infusion plan to source part of those funds with TRP debt (either notes or hybrids). With no KXL, there is less debt in the forecast (and the same amount of EBITDA, as KXL was not scheduled to be completed until mid-2023). The forecast for 2021-2022 is 5.0x. Accordingly, Fitch has stabilized the rating. TRP has no room for its leverage to rise against the 5.0x leverage sensitivity. TRP's business segments are all low risk, and sometimes certain segments co-vary, one to another, making TRP on a consolidated basis very low risk. However, Fitch believes TRP has several challenges. The three largest challenges include Appalachia basin customers with vulnerable credit profiles, a fourth wave of Covid-19 infections causing potential volume weakness on peripheral parts of the Liquids Pipelines segment, and a technologically demanding multi-year capex program at investee Bruce Power L.P. (Bruce; BBB+/Stable). Further, in any given year, at least one of TRP's U.S. or Canadian natural gas pipelines is participating in a rate case. Key Rating Drivers Keystone XL Partners Have Halted Construction: President Biden issues an Executive Order to halt construction on Keystone XL. Fitch understands that construction could have continued, though circumscribed by water litigation at the federal appeals court level. However, President Biden's Executive Order, if not reversed, would mean, that even if KXL were eventually fully constructed it could not actually operate. Given these circumstances, Fitch expects that sometime before the end of 2021 the Keystone XL development plan will be fully formally ended, and consequently, the Keystone XL joint venture non-recourse debt will be repaid. Fitch stated 12 months ago in its sensitivities that the completion or abandonment of Keystone XL would mark the end of the period where Fitch would consider Total Debt with Equity Credit to Adjusted EBITDA (leverage) at or approaching 5.5x to be consistent with the 'A-' rating. Further, Fitch stated, regarding KXL developments, that the leverage sensitivity would drop to 5.0x. Leverage In Focus: TRP posted fiscal 2020 Total Debt with Equity Credit-to-Adjusted EBITDA of approximately 5.1x in 2020, consistent with Fitch's expectations and in line with TRP's ratings. The current 5.1x leverage, combined with TRP's historic commitment to credit quality, indicate that TRP is capable of managing leverage against Fitch's expectations for the current rating category. TRP's financial policy includes targeting debt-to-EBITDA leverage (on its calculation, which differs slightly from Fitch's) in "the high 4s," and the company achieved this target for fiscal 2020. Fitch forecasts 2021-2022 leverage will be 5.0x. Gulfport Bankruptcy: Assuming no event upsets of Fitch's forecast of the KXL termination, the negative leverage level sensitivity of "above 5.0x" will guide Fitch's evaluation of TRP. Fitch calculated 5.1x leverage as recently as 2020. The 2021-2022 forecast is 5.0x, just adequately consistent with the 'A-' rating. Considering this, even small problems affect credit quality. One example is the Gulfport Energy Corporation (Gulfport; NR) bankruptcy. Gulfport is a customer for the Columbia Pipeline Group system, as well as another TRP pipeline. Last year, given the weakness among a few of Columbia's large customers, Fitch initiated an assumption of a generic customer bankruptcy. In fact, the Gulfport bankruptcy probably will approximately realize the Fitch generic bankruptcy assumption. While the value of the re-contracting, if such occurs, has not been ascertained, it is possible that the Gulfport bankruptcy is slightly or moderately better for TRP than Fitch's assumptions a year ago for generic customer bankruptcy. Fitch has forecast a Gulfport outcome, and has incorporated this in the 2021-2022 forecast of 5.0x leverage in each year. Further, Fitch has assumed a generic customer bankruptcy in 2023. Stability and Non-Emitting Power in Ontario: TC Energy benefits from its ownership in Bruce, one of the largest nuclear facilities in the world, which operates under a supportive contract with the Province of Ontario. TC Energy's successful restarting of the Bruce facility played an essential role in Ontario's phase-out of coal-fired generation and will remain a part of the backbone of the Province's baseload generation capacity for decades to come, with the current refurbishment program underway. Bruce's favorable contractual terms provide meaningful stability and visibility into distributions to TC Energy and, when combined with Bruce's unique asset characteristics and operational capabilities, are supportive of TC Energy's credit quality, in Fitch's view. TRP has an ESG relevance score of '4' for social resistance to a major project or operation. The major project that garners the most attention at this time is TRP's investment in the joint venture Coastal GasLink. This social resistance item is generally viewed as having a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. Derivation Summary TRP's credit profile compares well with its peers on the factors of scale and breadth of operations. The company is the most geographically diverse in the midstream sector, being unique in having a material business outside of the U.S. and Canada. (The Mexico business is mature, and its base assets have a stable history; Fitch expects that business to continue to be strong, although in-progress construction projects might be delayed for a lengthy period of time.) Across all its regions, construction and operating risk in the business segments range from low-to-medium complexity, with Bruce being the primary driver of "medium" risk. Regulatory risk with respect to permitting is of moderate difficulty in the current politicized environment for energy. Fitch believes that TCPL has good relations with each of the Canadian Energy Regulator (CER) and the Federal Energy Regulatory Commission of the U.S. (FERC). TC Energy Corporation is similar to Enterprise Products Operating LLC (EPO; BBB+/Stable) on many points of comparison. Both are very large companies, each have for many years had a relatively simple structure; each demonstrates a good track record of execution; and each implements balanced financial policies. The two companies have little segmental overlap, with Crude Oil Pipelines the one segment that is common to both companies (for each company this segment was the last one added to the portfolio of segments, which makes for a statement about the recent era of the North American oil business). TRP obtains about 95% of its run-rate EBITDA from regulatory rate orders or very long-term contracts (contracts characterized from their inception). This very long-term stable cash flow profile is the main reason that TRP is one notch higher than EPO at 'A-'. The cash flow profile offsets the large leverage profile advantage EPO enjoys. TRP had adjusted debt-to-EBITDA leverage of approximately 5.1x in 2020, and the company has an aspiration to be the top credit in the sector. EPO's leverage for fiscal 2020 was approximately 3.6x. TRP is weakly positioned in its ratings category and EPO is strongly positioned in its rating category. The 1.5 turns of leverage, which for most recent periods EPO was superior to TRP, almost equals the importance of the revenue-assurance features that serve as the solid foundation for TRP. Key Assumptions --Fitch price deck. --Canadian and U.S. natural gas pipelines driven by rate case outcomes earn the returns/profit levels set forth in those regulatory proceedings; further, future rate case outcomes (including the in-progress Columbia Gas Transmission, LLC case) are approximately as supportive as previous ones by the relevant regulator; --Gulfport bankruptcy will lead to an outcome of less revenues for the capacity contracted for by Gulfport (either in the event of Gulfport retaining its contract rights, or TRP re-marketing the capacity if Gulfport rejects the contract). --U.S. natural gas pipelines experience in 2023 an immaterial rejection of a take-or-pay contract by a generic bankrupt customer, and re-contracting leads to a significant decrease in revenues from the subject capacity ---At U.S. natural gas pipelines, ongoing routine contract expirations are succeeded by new contracts at similar terms (if not simply amended to extend the term of the contract); --Contracted cash flows are obtained through successful operational performance at the Liquids Pipelines and Power and Storage segments; --Arbitrations that affect the Transportadora de Gas Natural de la Huasteca, S. de R.L. de C.V. system are resolved over the forecast period; --CAD$/US$ rate of $1.25; --Over the course of 2021, the KXL construction is declared long-term suspended, and the financing structure is thereupon satisfied and terminated in accordance with its terms; --Dividends are in accordance with TRP's publicly expressed aspiration for multi-year material growth in rate of increase for the per share dividend. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --A positive rating action is not anticipated in the medium term; however, Total Debt with Equity Credit to Operating EBITDA sustained at or below 3.5x could lead to a positive rating action. Factors that could, individually or collectively, lead to negative rating action/downgrade: --The ratio of Total Debt with Equity Credit to Operating EBITDA forecasted to be sustained above 5.0x; --Adverse regulatory outcomes; --A forecast of customer bankruptcy-driven reductions in revenues, beyond the amount assumed in the rating case; --Non-payment by Comision Federal de Electricidad for pipelines in operation where such nonpayment, with the passage of time, threatens to cause a breaching of the negative sensitivity on leverage; --A negative event at the KXL joint venture, which is inconsistent with Fitch's assumption of an orderly winding down of the joint venture's financing structure; --An acquisition which raises the business risk of TRP. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Liquidity at TRP is adequate. As of Dec. 31, 2020, TRP had approximately CAD$10 billion of revolving credit facilities. Against these facilities, approximately CAD$6 billion of CP was issued, leaving approximately CAD$4 billion available for other uses. In addition, at the same date, TRP held a cash balance of approximately CAD$1.5 billion. The credit facilities support CP programs for several subsidiaries and are guaranteed at the TCPL-level. The company successfully extended the maturity dates on credit facilities that were due in mid-December 2020. Fitch considers TC Energy's consolidated liquidity adequate for its repayment of maturities and proposed capital expenditures over its forecast. Compared to conservatively financially managed integrated peers such as Enterprise Products Partners, TRP's liquidity is slightly less robust owing to closer maturities for the majority of its revolvers, but is comparable to Enbridge's short-term liquidity profile, which also has a number of its corporate revolvers coming due within the next 24 months. Summary of Financial Adjustments As per Fitch's "Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" sector-specific criteria, Fitch treats the relevant securities for TRP and Trust as 50% debt and 50% equity. Referenced leverage metrics are adjusted as follows: consolidated balances and flows are used; hybrids get 50% debt credit, 50% equity credit; distributions from investees accounted for under the equity method of accounting are included in EBITDA, and equity earnings from these entities are excluded. Fitch looks at a variety of leverage calculations but features in its commentary the foregoing calculation. In the forecast period, the largest equity investment is Bruce. Bruce in the past two years (and expected in the forecast period) had both distributions to owners, and receipt of equity investments. The distributions are evaluated by ensuring that distributions are greater than Bruce EBITDA less Bruce interest expense. Further, the contributions from TRP and the other owner to Bruce Power is evaluated by ensuring that Bruce Power capex is significant compared to such contribution. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations TRP has an ESG relevance score of '4' for social resistance to a major project or operation. The major project that garners the most attention at this time is TRP's investment in the joint venture Coastal GasLink. This social resistance item is generally viewed as having a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. TransCanada Trust ----junior subordinated; Long Term Rating; Affirmed; BBB TransCanada Pipelines Limited; Long Term Issuer Default Rating; Affirmed; A-; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F2 ----senior unsecured; Long Term Rating; Affirmed; A- ----senior unsecured; Short Term Rating; Affirmed; F2 TC Energy Corporation; Long Term Issuer Default Rating; Affirmed; A-; Rating Outlook Stable ----preferred; Long Term Rating; Affirmed; BBB Contacts: Primary Rating Analyst Thomas Brownsword, Senior Director +1 646 582 4881 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Rating Analyst Michael Ruggirello, CFA Associate Director +1 416 644 6586 Committee Chairperson Shalini Mahajan, CFA Managing Director +1 212 908 0351 Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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