PrefBlog

DBRS has announced that it:

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.

Yesterday, S&P announced that it had affirmed TRP at P-2(low) with a Negative Outlook:

• TC Energy Corp. (TC) recently announced the sale of a 40% interest in the Columbia Gas Transmission LLC and Columbia Gulf Transmission LLC systems for proceeds of approximately C$5.2 billion.
• TC previously indicated that it is committed to asset sales to help fund its capital program and the increased cost of Coastal GasLink Project, and to reduce leverage. The announced sale helps to partially achieve this goal.
• As a result, S&P Global Ratings affirmed all ratings, including its ‘BBB+’ issuer credit rating on TC, based on projected credit metrics that are forecast to be 5.0x in 2023 and 4.7x in 2024.
• The negative outlook indicates the uncertainty regarding the timing and amount of further asset sales, which the company has committed to in order to ensure that it can achieve a debt-to-EBITDA ratio of not greater than 4.75x on a consistent basis.

S&P Global Ratings today took the rating actions listed above.

Sale of partial interest helps to reduce leverage. TC has stated its commitment to funding its capital plan and deleveraging in part through asset sales. Given the ambitious capital plan that TC is pursuing, asset sales are the foundation of it achieving its stated objective of reducing debt to EBITDA to 4.75x or lower. The sale of the Columbia gas assets is a first step toward achieving this goal. Given the anticipated proceeds of approximately C$5.2 billion, we anticipate that debt to EBITDA will be about 5.0x in 2023. In addition, we forecast further asset sales in 2024 and beyond, which will bring credit metrics to approximately 4.7x.

Although historically we have considered financial metrics on a funds from operations (FFO)-to-debt basis, we believe that moving to debt to EBITDA as the basis for measuring leverage better aligns the company with its peer group, which is primarily located in the U.S., and which is evaluated on a debt-to-EBITDA basis. This is particularly the case, given that the company receives almost half of its revenue from its U.S. assets. We believe that TC’s businesses, which have a significant proportion of regulated or contractual arrangements, provide some mitigation with respect to the company’s leverage and are consistent with a ‘BBB+’ rating when leverage is about 4.7x.

The negative outlook reflects our view that there is execution risk in the company’s divesture program, the success of which is required in order for TC to deleverage its balance sheet to about 4.7x in 2024 and 2025.

We could take a negative rating action if adjusted debt to EBITDA remains above 4.75x on a consistent basis. This could result from increased debt to finance large capital projects or debt-funded acquisitions or from cost overruns or delays in projects entering service. This could also result from the company receiving lower proceeds for asset sales than forecast without any mitigations such as lower capital expenditures.

We could revise the outlook to stable if TC adopts a more conservative financial policy that improves credit measures, such that adjusted debt to EBITDA is consistently in the 4.7x-4.75x area or lower.

Affected issues are: TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F, TRP.PR.G, TRP.PR.H and TRP.PR.I.

This entry was posted on Tuesday, July 25th, 2023 at 9:43 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.