Canaccord
Infrastructure -- Pipelines
BISON AND GTN INTEREST DROPDOWN REDUCES EXTERNAL FUNDING NEED
Investment recommendation
TransCanada announced the sale of a 45% stake in the GTN and Bison natural gas pipelines to TC Pipelines LP (a sponsored investment in which TransCanada currently holds a 33% interest). The sale price is US$1.05 billion, including the US$146 million assumption of 45% of debt associated with GTN. Following the transaction, TransCanada will own a 30% stake in the pipelines, and TC Pipelines LP will own the remaining 70%. TC Pipelines LP has announced a common equity issue to fund the purchase. As TransCanada is not participating in the TC Pipelines equity issue, its ownership in TC Pipelines will decline from 33% to just over 29%. For TransCanada, the transaction value is consistent with that of the April 2011 sale where the company sold an initial 25% stake to TC Pipelines. TransCanada has ~$12 billion of capital expenditures planned for the 2013-2015 period, plus an additional ~$4 billion to complete Keystone XL if approved. Combined with the recent $600 million preferred equity issue in March and free cash flow generated from operations, we believe the dropdown addresses much of TransCanada’s equity capital requirements for its current slate of growth projects in the near term. Note that we expect the company could require additional preferred equity sometime within the next 12 months. We forecast that the dropdown of the pipelines will have a neutral to slightly positive impact on earnings and cash flow per share. Due to the relatively minor estimated impact of the dropdown on EPS and CFPS, we are making no changes to our 2013 and 2014 EPS or CFPS estimates. Our HOLD rating and C$51.00 target price remain unchanged.