Canaccord Infrastructure -- Pipelines
KEYSTONE XL START-UP PUSHED OUT; RECORDING FULL RETURNS ON CANADIAN MAINLINE
Investment recommendation
TransCanada reported first quarter recurring earnings of $0.50 per share, below the $0.53 consensus and our $0.55 expectation. Earnings per share were negatively impacted by lower than expected availability at Bruce Power, lower hedge prices on Alberta production, and continued throughput decline on the U.S. natural gas pipeline systems. These negative issues were offset by recording a higher allowed ROE (11.5% versus 8.08% last year) on the Mainline, which added about $0.03 to Q1/13 EPS. Importantly, given the company’s revised outlook on the timing of a U.S. Department of State decision for Keystone XL, management has shifted the expected start-up date for the project to the second half of 2015 (versus late 2014/early 2015 previously). With timing delays, the company expects its capital costs for the project to escalate from its current estimate of $5.3 billion, although management will not provide any details on the magnitude of potential cost increases until it receives U.S. Department of State approval for the project.
Valuation
Our 12-month target is derived from a combination of valuation metrics, including earnings and dividend yields relative to long-term interest rates, a dividend discount model, and earnings multiples relative to its energy utility peers. We value the company on the longer-term potential of existing assets and projects under construction. We note that there is the potential for upside to our target price once more certainty is provided surrounding the timing and likelihood of an approval for the cross-border section of Keystone XL. We also incorporate an approximate 100 basis point increase for our estimate of the future long-term Government of Canada bond yield.