TransCanada Corp. Stock Price Performance. Source: Reuters All figures in Canadian dollars, unless otherwise stated

Transcription

1 Equity Research Earnings Update April 30, 2007 Stock Rating: Sector Outperformer Sector Weighting: Market Weight mo. Price Target $43.00 TRP-TSX (4/27/07) $39.64 Key Indices: Toronto, S&P/TSX 60, TSXOilGas 3-5-Yr. EPS Gr. Rate (E) 7.0% 52-week Range $30.77-$41.35 Shares Outstanding 534.7M Float 534.7M Shrs Avg. Daily Trading Vol. 920,889 Market Capitalization $21,195.5M Dividend/Div Yield $1.36 / 3.4% Fiscal Year Ends December Book Value $17.58 per Shr 2007 ROE (E) 12.0% LT Debt $14.4B Preferred $0.90B Common Equity $9.4B Convertible Available No Earnings per Share Prev Current 2006 $1.90A 2007 $2.10E $2.05E 2008 $2.30E $2.25E P/E x x 19.3x x 17.6x Pipelines, Utilities, & Power TransCanada Corp. Q1 Solid - Could Have Been Great With Higher Storage Numbers TransCanada reported normalized Q1'07 EPS of $0.49 vs. our estimate of $0.54 and $0.46 in Q1'06. We are reducing our estimates by $0.05 due to weaker than expected storage results but maintaining our rating and target as the company showed solid growth in earnings and cash flow. We had estimated the company would report $50 million in operating income from storage but results came in at $30 million. It is now apparent that much of the company's full storage capacity may not have been in service, but is scheduled for service during Meanwhile, we believe pipeline earnings were understated and could rise materially later in the year. GTN and Mainline earnings were temporarily depressed as the company awaits regulatory decisions on both that should boost results by Q2. Despite the small reduction in our 2007 EPS estimate, TransCanada still shows better growth than most of its peers. Meanwhile, valuation on EV/EBITDA and cash flow remains lower than the group. On this basis, we maintain our Sector Outperformer rating. Stock Price Performance Dividends per Share 2003 $ $ $ $ E $1.36 Company Description TransCanada is a natural gas pipeline company with a substantial and growing power generation business. Core pipelines include the Canadian Mainline and the Alberta System. Matthew Akman 1 (416) Matthew.Akman@cibc.ca Gilbert Chan, CFA (416) Gilbert.Chan@cibc.ca Alda Pavao, CFA 1 (416) Alda.Pavao@cibc.ca Source: Reuters All figures in Canadian dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Find CIBC research on Bloomberg, Reuters, firstcall.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 (416) and cibcwm.com

2 Investment Summary TransCanada reported normalized Q1'07 EPS of $0.49 vs. our estimate of $0.54 and $0.46 in Q1'06. We are reducing our full year estimates by $0.05 due to weaker than expected storage results but maintaining our rating and target as the company showed solid growth in earnings and cash flow. For a full breakdown and empirical analysis of earnings by segment, please see the appendix to this comment. We were surprised that storage operating income was only slightly higher yearover-year and flat quarter-over-quarter. Our understanding was that revenues were booked when gas comes out of storage so that Q1 would normally be the most seasonally strong quarter. In addition, we had assumed that the increase in capacity would further boost results. Surprisingly high storage earnings from ATCO (ACO.X, SU) earlier in the week also pointed to higher results from TransCanada. As it turned out, the company reported only $30 million in operating income compared to our estimate of $50 million, which we frankly thought could have been conservative. It is now apparent that much of the company s full storage capacity was not in service but is due for start-up during Of the total 140 Bcf of owned and leased capacity, 10 Bcf of leased capacity was not in TransCanada s control until April, and it is possible that the majority of the 50 Bcf Edson facility was not on line in the quarter either. Although storage earnings were solid but not spectacular, we believe pipeline earnings were also understated and could rise materially later in the year: Mainline TransCanada reported only $57 million of earnings despite a recent settlement with shippers for an increase in the equity ratio from 36% to 40%. The company is booking earnings for now at the lower equity ratio until the National Energy Board approves the settlement. We believe the settlement will be approved in Q2 and that earnings would have been about $5 million higher ($0.01 in EPS) had the company booked earnings based on the settlement. In reality, therefore, normalized EPS for Q1 was probably $0.50. GTN TransCanada reported only $11 million of earnings at GTN as a rates case grinds its way through the FERC. The company raised tolls on January 1 but booked earnings at the lower 2006 tolling rate pending the outcome of the rates case. The company also booked a $3 million provision in the first quarter of this year for non-payment from a subsidiary of Calpine Corporation (bankrupt). We believe GTN s earnings could be 30%-50% higher once new rates come into force, potentially later this year. Earnings from Bruce Power should also improve through the year (reported only $29 million in EBIT). Output was reduced by planned outages and average power prices realized at Bruce B were only $53/MW-hr. We firmly believe these prices are unrealistically low and could literally be $20/MW-hr higher by 2009 if the province removes even the small coal-fired plants from service. In our models, every $1/MW-hr realized at Bruce is worth about $0.01 in EPS on a fullyear basis. Meanwhile in the near-term, even if prices do not improve, output should. Guidance was for full capacity at Bruce B for the remainder of the year. 2

3 Despite the small reduction in our 2007 EPS estimate TransCanada still shows better growth than most of its peers. Using normalized earnings for the Mainline, EPS was up 8.7% y-o-y and cash flow per share before changes in working capital was up by 8.5%. Meanwhile, the 9.5x EV/EBITDA multiple is lower than peer pipeline and power companies at 10.0x EBITDA or higher. We are maintaining our Sector Outperformer rating based on the combination of attractive growth and relative valuation. Appendix Summary of Q1 07 Results Exhibit 1. Segmented Earnings for TransCanada (C$m, unless otherwise stated) Q1/07A Q1/06A 2007E 2006A Wholly-Ow ned Pipelines Mainline $57.0 $59.0 $247.9 $239.1 Alberta System $31.0 $33.0 $127.9 $136.0 ANR Pipeline $ $ Gas Transmission Northw est $11.0 $14.0 $60.5 $46.0 Foothills $5.0 $5.0 $20.4 $20.9 BC System $1.0 $2.0 $6.0 $6.0 Total Wholly-Owned Pipelines $126.0 $113.0 $595.2 $448.0 North American Pipeline Ventures Great Lakes $14.0 $12.0 $53.0 $44.1 TC Pipelines, L.P. $2.0 $1.0 $12.0 $4.0 Iroquois $5.0 $4.0 $18.7 $15.0 Portland $5.0 $6.0 $13.1 $13.1 Trans Quebec & Maritimes $2.0 $2.0 $7.0 $7.0 Other $1.0 $12.0 $16.0 $9.0 Total North American Pipeline Ventures $29.0 $37.0 $119.7 $92.2 Total Transmission $155.0 $150.0 $714.9 $540.2 Energy Segment Energy excluding Bruce Pow er $88.5 $43.0 $327.3 $265.9 Bruce Pow er L.P. $18.8 $43.8 $138.3 $155.0 Total Pow er $107.2 $86.8 $465.5 $420.9 Corporate & Other ($11.0) ($12.0) ($97.8) ($33.0) Earnings from Continuing Operations $251.2 $224.8 $1,082.7 $928.2 Unusual Items $15.0 $18.0 $15.0 $126.0 Discontinued Operations $0.0 $28.0 $0.0 $28.0 Reported Earnings $266.2 $270.8 $1,097.7 $1,082.2 Average Shares Outstanding (mln) Operating EPS $0.49 $0.46 $2.05 $1.90 Reported EPS $0.52 $0.56 $2.08 $2.22 Notes: 1. Unusual items in Q1/07 include a $10 million benefit from resolution of income tax matters and a $5 million benefit from an internal restructuring. 2. Unusual item in Q1/06 includes a $29 million bankruptcy settlement receipt($18 million after tax) from Mirant. In Q2/06, a $33 million adjustment from changes to future federal and provincial income tax rates and a $13 million after-tax gain on the sale of Northern Borders Partners. An income tax benefit of $50 million w as booked in the corporate segment in Q3/06 and an income tax refund and related interest of $12 million in Q4/06. Source: Company reports and CIBC World Markets Inc. 3

4 Canadian Mainline First quarter earnings from the Canadian Mainline were down $2 million compared to the same period in 2006 primarily due to a lower ROE (8.46% vs. 8.88% in 2006) and a lower average investment base. However, the company booked earnings based on the 36% equity ratio in place until the NEB likely approves a negotiated settlement for a 40% equity ratio (expected in Q2 07). Earnings would likely have been about $5 million higher than reported had the company booked the thicker equity ratio. Alberta System The Alberta System earned $31 million in Q1 07, $2 million lower than Q1 06 mainly due to a lower average investment base and a lower allowed ROE (8.51% in 2007 versus 8.93% in 2006). ANR Pipeline The ANR acquisition was completed on February 22, 2007 and earnings were included from this date. We understand that no proceeds from natural gas sales were included in the $21 million result. As such, we see this one-month contribution as a very strong start to the year for ANR. Gas Transmission Northwest Normalized first quarter earnings from the GTN system were down $3 million from Q1 06 due to lower operating revenues from a decline in firm contracted volumes and a provision with respect to the non-payment of contract transportation revenues from a subsidiary of Calpine Corporation (CPN, NR). We see earnings rising later this year with a regulatory settlement or decision from FERC. North American Pipeline Ventures TransCanada s Other Pipelines saw net earnings of $29 million in Q1 07, which included the Tamazunchale pipeline that started operations in December 2006 and a higher proportionate share of earnings from Great Lakes. Gas Storage Natural Gas Storage saw operating income increase $8 million compared to Q1 06 primarily due to increased capacity and higher natural gas storage spreads at CrossAlta, as well as incremental income from some of the Edson facility startup. Power (Excluding Bruce) Western operations saw first quarter operating income increase $15 million from Q1 06 mainly due to higher realized power prices and slightly higher generation volumes. Eastern operations reported operating income of $67 million, $18 million higher than the first quarter of This increase was primarily due to the commencement of operations from the Becancour cogen plant and the first of six wind farms at the Cartier Wind project. Bruce Power Investment TransCanada s share of first quarter operating income from Bruce Power was lower than in the same period of 2006 primarily due to decreased generation volumes and higher operating costs associated with additional planned outage 4

5 days. We think costs were much higher than they will be later in the year when maintenance subsides we also see the likelihood of higher realized prices. Corporate Net expenses were $11 million in Q1/07, in-line with corporate expenses from the same period in Price Target Calculation Our $43 price target is derived based on our dividend discount valuation analysis, with regard and reference to 2008E relative P/E and EV/EBITDA. The price target is in-line with our dividend discount valuation. Our $43 target price implies a 9.9x 2008E EV/EBITDA multiple and a 19.1x multiple of our 2008E EPS forecast of $2.25. The price target also implies a 3.2% dividend yield. Given TransCanada s attractive yield and dividend growth profile, we are using a target P/E multiple at the higher end of the forecasted group average, but within the stock s normal historical trading range of 12x-21x earnings. Key Risks to Price Target TransCanada could fall short of our 2007 and 2008 earnings forecasts (and fail to meet our target price) for various reasons, including the impact of negative regulatory decisions, weak power prices and lower natural gas prices. Increased competition for pipeline and power generation assets by financial players also raises risk to returns on possible acquisitions. In addition, the pipeline and utility stocks are sensitive to changes in Canadian bond yields. If broader market risk dissipates and bond yields rise rapidly, valuation in the sector could fall. 5

6 Our EPS estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2006 Current $0.46A $0.41A $0.50A $0.53A $1.90A 2007 Prior $0.54E $0.44E $0.57E $0.56E $2.10E 2007 Current $0.49A $0.45E $0.54E $0.57E $2.05E 2008 Prior $2.30E 2008 Current $2.25E 6

7 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department within the Corporate and Leveraged Finance Division. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for TransCanada Corp. (TRP) 2a TransCanada Corp. is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for TransCanada Corp. in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from TransCanada Corp. in the past 12 months. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by TransCanada Corp. 7

8 Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets: Stock Prices as of 04/29/2007: Atco Ltd. (7, 13) (ACO.X-TSX, $48.81, Sector Underperformer) Companies Mentioned in this Report that Are Not Covered by CIBC World Markets: Stock Prices as of 04/29/2007: Calpine Corporation (CPN-NYSE, US$0.31, Not Rated) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report. 8

9 Key to Important Disclosure Footnotes: 1 CIBC World Markets Corp. makes a market in the securities of this company. 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. 2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. 3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months. 4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. 5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company. 6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities. 6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. 8 A partner, director or officer of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. 9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. 10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares. 9

10 CIBC World Markets Price Chart HISTORICAL PERFORMANCE OF CIBC WORLD MARKETS' RECOMMENDATIONS FOR TRANSCANADA CORP. (TRP) Date Change Type Closing Price Rating Price Target Coverage 07/06/ SO Matthew Akman 11/15/ SO Matthew Akman 12/06/ SO Matthew Akman 07/08/ SO Matthew Akman 08/02/ SO Matthew Akman 10/14/ SO Matthew Akman 11/01/ SO Matthew Akman 12/27/ SO Matthew Akman 02/06/ R - Matthew Akman 02/14/ SO Matthew Akman 10

11 CIBC World Markets' Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 29 Apr 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted % Restricted % Ratings Distribution: Pipelines, Utilities, & Power Coverage Universe (as of 29 Apr 2007) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) 0 0.0% Restricted % Restricted % Pipelines, Utilities, & Power Sector includes the following tickers: ACO.X, CU, EEP, EMA, ENB, FTS, RRI, SE, TA, TRP. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. Important disclosures required by IDA Policy 11, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at or by writing to CIBC World Markets Inc., BCE Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request. 11

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