Fitch Rates TransCanada Trust's Proposed Junior Subordinated Notes 'BBB'

(The following statement was released by the rating agency) Fitch Ratings-New York-01 March 2021: Fitch Ratings has assigned a 'BBB' rating to TransCanada Trust's (Trust) proposed issuance of junior subordinated notes. Proceeds from the offering are to be used to, in time, prepay public hybrid securities that have the same 50% debt content/50% equity content as has been assigned to the subject junior subordinated notes. The Trust's note will be guaranteed on a subordinated basis by TransCanada PipeLines Limited (TCPL) (Long-Term Issuer Default Rating (IDR) A-/Negative Outlook). TC Energy Corporation (TRP) (Long-Term IDR A-/Negative Outlook) is the ultimate parent of the TransCanada family of companies. Key Rating Drivers Leverage in Focus: TRP posted FY20 total debt-to-adjusted EBITDA to be approximately 5.1x in 2020, consistent with Fitch's expectations and in-line with TRP's ratings. Fitch has previously established the Outlook at Negative given its forecast that peak Keystone XL (KXL) spending (and the related finance plan) may cause leverage to rise above 5.5x in 2022-2023, which is a level at which, if sustained, Fitch may take a negative rating action, including a Downgrade rating action. With the withdrawal of the Presidential Permit for KXL, KXL has lost a permit that would allow it to operate the pipeline, upon completion. Accordingly, TRP and its KXL partner, the Government of Alberta (GOA) have suspended construction in order to evaluate its best option. In the event that KXL construction is abandoned, or in the event KXL is formally completed in accordance with the plan TRP has with its partner, TRP will need to be expected to post, on a sustained basis, leverage at or under 5.0x. The current leverage of 5.1x, 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 FY20. Low Business Risk: Fitch regards TRP's business risk as among the lowest in the midstream sector. The two largest natural gas pipeline segments (Canada and U.S.) have an extremely low business risk. Since the Federal Energy Regulatory Commission (FERC) changed the way it regulates natural gas pipelines in the mid-1990s, there have been no material FERC-regulated natural gas pipeline bankruptcies. This track record is impressive given the many new entrants as the industry vastly increased the service available to customers. The Canadian utility (all types of utilities) sector bankruptcy frequency is lower than that of the U.S. (as adjusted for the size difference between the countries). Counterparty Credit Risk: Fitch has reviewed TRP's counterparty credit risk. In forming its forecast leverage, Fitch at March 2020 assumed that one large U.S. customer of a TRP natural gas pipeline system enters bankruptcy. Further, a draw on a LOC (for the account of said customer) improves net cash flow (NCF) from operations, yet Fitch excludes this from adjusted EBITDA. Lastly, the capacity is resold at some discount to the contract, and in the last year of the Fitch forecast, a partial recovery in bankruptcy is assumed. (This prior assumption of a bankruptcy has materialized, as a general matter, upon the commencement in 4Q20 by Gulfport Energy Corporation NR of a bankruptcy procedure, and a motion before the bankruptcy judge pertaining to contracts with TRP; the outcome of this procedure is awaited, and at this point is not expected to be worse than the generic bankruptcy Fitch has assumed.) The foregoing treatment corresponds, as to sequence of cash flows, the experience of Kern River Gas Transmission Pipeline in 2003. Fitch notes that TC Energy has a good track record of managing counterparty credit risks. Beneficial Size and Scope: TRP is one of the largest North American midstream companies. TRP's three Natural Gas Pipelines segments transport product that fulfills over one-quarter of continental natural gas demand. TRP's two other segments also feature world-scale assets that furnish stable cash flows. For instance, the Power and Storage segment contains Bruce Power (6,400 megawatts), which annually vies for the status of the world's largest nuclear power station by kilowatt-hour production. Twenty percent of western Canadian crude oil exports are transported on the Liquids Pipelines segment's Keystone Pipeline system. Successful Execution on Growth Projects: The rating is further supported by TRP's development, construction and operational execution ability. Execution has been good during two years in which TRP administered the acquired large construction program of Columbia Pipeline Group, Inc.'s (CPG; IDR A-/Stable). In terms of operational execution, TRP took advantage of good market conditions in 2019 to take bids, and then execute contracts, on additional firm long-term service on the Marketlink crude oil pipeline. The Liquids Pipelines segment has successfully extended the reach of the base Keystone Pipeline. The Power and Storage segment features many plants that TC Energy caused to be built from either a "green field," or, in the case of Bruce Power, expanded in size by bringing "laid up" units back into commercial operation. ESG Considerations: TRP has an ESG relevance score of 4 for Exposure to Social Impacts related to social resistance to major projects or operations. This factor 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'. 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. 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 has 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 Power 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 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 has 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). TRP obtains about 95% of its run-rate EBITDA from regulatory rate orders or very long-term contracts (contracts characterized from their inception). This 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 at LTM June 30, 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 are approximately as supportive as previous ones; --U.S. natural gas pipelines experience immaterial, if any, rejections of take-or-pay contracts by bankrupt customers, and ongoing routine contract expirations are succeeded by new contracts at similar terms; --Arbitrations that affect the Transportadora de Gas Natural de la Huasteca, S. de R.L. de C.V. system are resolved with a delay; --Contracted cash flows are obtained through successful operational performance at the Liquids Pipelines and Power and Storage segments; --Balanced funding of common equity (including retaining cash via the dividend reinvestment plan), subordinated debt and senior debt. Fitch acknowledges that in the event KXL is halted, leverage may be kept in check without the need for any type of common equity. --CAD/USD rate of $1.33 throughout the quarters of the forecast period. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --The Outlook could be changed from Negative to Stable in the event the forecast for the out years is at or below 5.5x, in the event KXL resumes construction; 5.0x, otherwise. The attainment of leverage in this area is possible in the event of, among other things, an increase in the issuance of hybrid securities or issuance of common shares, thereby displacing senior debt issuance; --A positive rating action is not anticipated in the medium-term; however, total debt-to-adjusted EBITDA sustained below 3.5x could lead to a positive rating action. Factors that could, individually or collectively, lead to negative rating action/downgrade: --Adverse regulatory outcomes; --A significant amount of forecasted contracted U.S. natural gas pipeline revenues in the medium-term are regarded as unlikely to be received because of rejections of the contracts in bankruptcy. It is acknowledged that for capacity built in the last several years TRP has from many (but not all) large long-term shippers which are not rated in the investment grade category approximately one year of revenues supported by LOC or similar; --Nonpayment by CFE for pipelines in operation where such nonpayment, with the passage of time, threatens to cause a breaching of the negative sensitivity on leverage; --Any of the following events (or similar events) relating to Coastal GasLink (CGL): a placement of the CGL project debt on-balance sheet; or the injection of partner equity for significant CGL cost over-run; --During the Keystone XL construction period, a large debt-financed acquisition (debt for the purchase price, or alternatively and if applicable, to fund a target's outsized suite of development projects); --An equity-financed acquisition that represents a change in the current business strategy of operating businesses that are based on cost-of-service principles or very long-term take-or-pay contracts; --Setting a lower performance standard (than TRP's past history) for on-time, on-budget construction completion; --Lack of sufficient issuance of common equity (including the dividend reinvestment plan) and subordinated debt; --During the time period that GOA-guaranteed debt is outstanding, if leverage is expected to be sustained above 5.5x. After the GOA debt guarantee either is withdrawn because KXL is completed, or GOA performs under the guarantee in an "abandonment" case, the leverage level will be "sustained above 5.0x" (and, in the context of the Fitch assumption of a "in excess of CAD6 billion" of run-rate capex [excluding investments in joint ventures]). 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 Feb. 12, 2021, TRP had approximately CAD10.2 billion available out of CAD12.4 billion committed under its revolving credit facilities, in addition to a Dec. 31, 2020 cash balance of CAD1.5 billion on its balance sheet. 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 December 2020. The combined liquidity is adequate to cover debt maturities in 2021, which consist primarily of subsidiary debt retirements. Fitch considers TC Energy's consolidated liquidity to be 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 removes from TRP EBITDA distributions to non-controlling interests. The buy-in of TC Pipelines, approved Feb. 26, 2021, will lessen this deduction from EBITDA. Fitch excludes GOA-guaranteed debt (under a facility that closed Jan. 4, 2021) from its calculation of TRP forecasted leverage. Fitch looks at a variety of leverage calculations but features in its commentary the foregoing calculation. Date of Relevant Committee 30 March 2020 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. TransCanada Trust ----junior subordinated; Long Term Rating; New Rating; 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: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@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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