Analyst Actions: TransCanada Corp's Tolling Proposals Analyzed at Credit Suisse
Tolling proposals: "TransCanada Corporation filed a National Energy Board (NEB) application seeking the approval of a 'comprehensive proposal to restructure services and tolling' on the Mainline system. Regulatory approval will be required for the proposal. In our view, the application highlights TRP's considerable flexibility and range of options facing the Mainline System. We believe the Street tends to underestimate the degree of flexibility and options facing TransCanada. This application may potentially start to change the Street's opinion and, as a result, should be viewed as a minor positive."
Selected details: "One of the over-arching themes in the application is that of toll reduction. The proposal contains tolls from Alberta's Nova Inventory Transfer System (NIT) to Dawn, Ontario (including an Alberta System Delivery Toll) at C$1.41/GJ which is roughly 32% lower than the C$2.08/GJ under existing 2011 interim tolls. Some of the strategies for toll reduction include: (a) depreciation changes for the three main geographical segments of the Canadian Mainline; (b) extending the Alberta System to areas in British Columbia and Saskatchewan; (c) "[m]odifications to the toll design and cost allocation methodology to better reflect costs accountability"; and, (d) initiatives for incremental revenue generation from system pricing.
Investment themes: "We believe TransCanada's asset base is favourably positioned for a number of investment themes, including: increasing future volumes from Alberta's oil sands; Northern natural gas; and, low cost generation exposure in a number of structurally tight power markets."
Valuation: "Our Neutral rating and target price of C$42.00 is obtained from multiple approaches, including: a variety of multiples such as an implied 16.5x P/E multiple and an 11.0x EV/EBITDA multiple; a dividend yield of 4.0%; and, a DCF. We reiterate our Neutral rating."
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