TCC Stock Pitch

TransCanada Corp, TSX (TRP.TO)

Nikola MitrovicYousuf Aziz; Nirusan Kirupagaran; Amin Sammara; Richard Zhang

Oil and Gas

Buy Recommendation

Table of Contents

Company Overview

Industry Outlook

Valuation

Risks and Catalysts

Recommendation

Investment Thesis

Business Overview

Summary Asset Map

Company Overview Thesis Valuation Risks & Catalysts Recommendation

Management

TransCanada Corporation (TRP) is a midstream and

energy infrastructure company headquartered in Calgary,

Alberta.

It operates three segments: Natural Gas Pipelines, Liquids

Pipelines and Energy on approx. 60 pipelines across Canada

and the United States

Pipelines total approximately 57,000 kilometers with an

estimated capacity of 368 billion cubic feet (bcf).

Additionally, the company has operating rights to 11,000

kilometers of partially owned pipelines.

Russell K.Girling – President and Chief Executive Officer

- Became Chief Executive Officer and President as of July 1, 2010

Alexander J.Pourbaix – Chief Operating Officer

- Performed as Vice-President of the TransCanada Energy Ltd.

before joining TransCanada corp. as COO in 2012Promoted to

Chief Financial Officer in May 2012

Donald R.Marchand – Chief Financial Officer

- Joined as Chief Financial Officer in July 2010, held the roles of

Vice President., and Treasurer

Earnings Overview

Segment EBITDA Funds From Operations and Payout Ratio


3,663

3,284

4,000

4,268

4,532

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2011 2012 2013 2014 2015

Funds from Operations has experienced steady growth from

2012 and estimates anticipate this trend to continue, despite

volatile energy markets.

2670 2875 2741 29083250

587 698752

1059

976

1119862

1406

1360

2010 2011 2012 2013 2014

Natural Gas Oil Energy

Oil Pipelines have quickly emerged to be an integral portion

of the company’s EBITDA. This coupled with strong growth

from the natural gas pipeline segment, shows TRP’s

continued growth and future growth potential.

Relative Trading Performance


11000

11500

12000

12500

13000

13500

14000

14500

15000

15500

16000

35

40

45

50

55

60

1/12/2015 4/12/2015 7/12/2015 10/12/2015 1/12/2016

TRP TSX

Industry Overview


Canadian Energy Infrastructure will experience tumultuous year

Fed Interest Rate Hike End of lower interest rate environment

Commodity Price Uncertainty Less demand for infrastructure

Currency Differences Opportunity for cross border pipelines

Thesis Breakdown

Thesis III: Strategic Power Assets

Thesis I: Keystone XL Rejection

Thesis II: Robust Earnings Structure


Thesis I: Keystone XL Rejection


The Keystone XL Rejection hurts Canadian energy producers more than it does TransCanada

• $2.5 billion of non-cash write offs

• $750 million of re-purposable assets

TransCanada still has over $35 billion of commercially secured projects for the next decade:

• Energy East 1.1 million barrels/day 14,000 jobs $10 billion tax revenue

• Houston Terminal connection to Gulf Coast markets 200,000 barrels/day

Legal action for financial compensation of US$15 billion in costs and damages:

1. Claim under Chapter 11 of the North American Free Trade Agreement (NAFTA)

2. Lawsuit filed in US Federal Court asserting that President Obama’s denial of the pipeline

permit exceeded his constitutional power

Refiling its permit application under a new US President in 2017

Rejection is viewed as a “Credit Positive” for the company by credit rating agencies.

Thesis II: Robust Earnings


Segment Revenue Breakdown

Consistent demand for TRP services

Revenues continue to expand, despite the industry headwinds TRP experienced

Provide services based on fixed monthly fee Not dependent on volume

Insulation through fixed fees allows TRP to continue dividend and capital spending plans

Three segments provide additional support through differentiated services

Revenue

53.59%20.66%

25.75%

Natural Gas Pipelines Liquids Pipelines Energy

Thesis III: Strategic Power Assets


Attractive and Expanding Asset Base

Bruce Power Contract Extension and Refurbishment

TransCanada

19 Plants with 11,500 MW capacity across Alberta, Eastern

Canada and New England

Strong investment grade counterparties including PJM and

Ontario Power Generation

Diverse asset base of natural gas, coal, nuclear and renewable

Increasing focus on “clean” energy developing new Natural Gas

and Solar assets to take advantage of attractive PPA rates

World’s largest nuclear power facility at 6,300 MW capacity

TransCanada (48.5%) and OMERS joint venture

Recently renegotiated attractive IESO PPA until 2064

Power and Capacity prices rise in-line with inflation

Fuel cost pass-through mechanism

Power price adjusted for major component replacement (MCR)

~$8.25bn capex through to 2033

Includes compensation for MCR outages

Cash flow and earnings accretive over contract lifespan

Comparable Companies Analysis


TRP Pipeline Comparable Companies

Company Ticker Country Market Cap Current YieldLTM

EV/EBITDA

($ mm) (%) (ratio)

Enbridge Income Fund Holdings Inc. ENF-CA Canada C$2,654.18 6.8% nmf

Inter Pipeline Ltd. IPL-CA Canada C$7,159.17 7.3% 15.0x

Kinder Morgan Inc Class P KMI-US United States US$31,196.58 14.6% 17.0x

Pembina Pipeline Corporation PPL-CA Canada C$10,724.99 6.3% 19.3x

Spectra Energy Corp SE-US United States US$17,040.41 6.4% 13.5x

Williams Companies, Inc. WMB-US United States US$13,713.20 14.0% 20.1x

Low Low 6.4% 13.5x

High High 14.6% 20.1x

Average Average 9.8% 16.4x

LTM EV / EBITDA 15.9x 16.4x 16.9x

LTM EBITDA 3784.00 3784.00 3784.00

Implied EV 60108.76 62000.76 63892.76



TRP Power Comparable Companies

Company Ticker Country Market Cap Current YieldLTM

EV/EBITDA

($ mm) (%) (ratio)

TransAlta Corporation TA-CA Canada C$1,238.49 16.5% 6.6x

Algonquin Power & Utilities Corp. AQN-CA Canada C$2,814.33 3.5% 14.4x

Capital Power Corporation CPX-CA Canada C$1,713.43 8.5% 14.8x

Dynegy Inc. DYN-US United States US$1,520.19 0.0% 15.9x

NRG Energy, Inc. NRG-US United States US$3,292.56 5.5% 7.0x

Calpine Corporation CPN-US United States US$5,106.41 0.0% 9.2x

AES Corporation AES-US United States US$5,954.83 5.0% 7.4x

Low Low 0.0% 6.6x

High High 16.5% 14.8x

Average Average 6.5% 9.9x

LTM EV / EBITDA 9.4x 9.9x 10.4x

LTM EBITDA 3784.00 3784.00 3784.00

Implied EV 35487.25 37379.25 39271.25



Implied Share Price:$49.60

Summary

LTM FY 2014

Gas Pipeline 2877.00 2741.00

Liquids Pipeline 907.00 698.00

Power 886.00 862.00

Consolidated

Adjusted EBITDA4670.00 4301.00

Comparables

Valuation34051.88

Target Share Price 49.60

Diluted Shares O/S 710.00

Current Share Price 46.00

Implied

Comparables

Upside

8%

TransCanada Comparables ValuationIn [C$] million unless otherwise noted

TRP Comparables Valuation

Range Low Medium High

Consolidated EV 68,417.88 70,752.88 73,087.88

Consolidated LTM

EBITDA4,670.00 4,670.00 4,670.00

Consolidated EV /

EBITDA14.65 15.15 15.65

Cash 755.00 755.00 755.00

Debt 33,122.00 33,122.00 33,122.00

Preferred Equity 2,499.00 2,499.00 2,499.00

NCI 1,835.00 1,835.00 1,835.00

Implied Equity

Value31,716.88 34,051.88 36,386.88

Shares O/S 710.00 710.00 710.00

Target Share Price 44.67 47.96 51.25

Current Share

Price46.00 46.00 46.00

Implied Upside -3% 4% 11%

Discounted Cash Flow Analysis


2014A 2015LTM 2016E 2017E 2018E 2019E 2020E

EBIT 3,341 3,766 3,638 3,856 4,127 4,416 4,722

Tax Rate 25% 25% 25% 25% 25% 25% 25%

Less: Taxes 835 942 910 964 1,032 1,104 1,181

Net Operating Profit After Taxes (NOPAT) 2,506 2,825 2,729 2,892 3,096 3,312 3,542

Plus: Depreciation 1,611 1,729 1,777 1,946 2,150 2,372 2,615

Less: Change in Working Capital -189 -817 -164 -164 -164 -164 -164

Less: Capital Expenditure 3,550 3,700 6,515 4,330 3,030 1,689 1,440

Unlevered Free Cash Flow 756 1,671 -1,845 672 2,379 4,159 4,880

Free Cash Flow Analysis (CAD Millions)

Implied Share Price:$55.08

Enterprise Value Analysis

Discounted Free Cash Flow 7,713

Discounted Terminal Value 57,571

Implied Enterprise Value: 65,284

Less: Debt 26,990

Less: Preferred Shares 2,499

Plus: Cash 755

Equity Value: 39,049

Diluted Shares Outstanding 709

Implied Share Price: $55.08

Implied Upside 20%

Risks and Catalysts


Risks

Catalysts

Commodity Price Risk – Price forecasts continue to decrease, negatively impacting infrastructure

demands.

Currency Risk – Exchange rate currently favourable for TRP, but considerations may change in the

future

Project Opposition – Environmental activism in both Canada and the United States will continue to

have a negative impact on future projects for the company, notably the Energy East Pipeline.

Market Uncertainty – Economic conditions across the world continue to have negative impacts on

stock prices and future project initiatives.

Dividend Levels – Worsening market conditions may force TRP to reiterate their dividend, a poor

signal to investors.

East Energy Pipeline, Heartland Pipeline – new pipelines will provide for additional capacity going

forward, increasing revenues and segment EBITDAs.

Commodity Price Increases – Although revenues not directly tied to commodity prices, TRP will

experience a significant positive impact when oil prices rebound.

Recommendation


Buy TransCanada Corp (TRP) at Current Share Price: $46.00

Target Price: $52.34

14% Upside

Documents

TCC Stock Pitch