TransCanada Corp.'s (TRP) recent C$1-billion equity issue may be 5% dilutive to the stock, but it puts the company in a good position to finance its current growth initiatves, says UBS analyst Grant Hofer.
In a note to clients, Mr. Hofer says the equity issue addresses the company’s near-term capital needs after increasing its ownership stake in the Keystone pipeline system to 80% from 50%. However, he now forecasts debt-to-capital ratios peaking at 49% in 2011 but then falling again to the 40% range by 2013.
With manageable financing through 2011/12. the analyst said TransCanada is well positioned to fund its current growth initiatives until the 2011/12 timeframe, when the Keystone Expansion pending will be at its peak.
Mr. Hofer said:
That said, there are still equity options outstanding that would allow shippers to acquire up to 15% of the Keystone system, reducing TRP’s funding commitments by more than C$1.5-billion.
Still, Mr. Hofer has reduced his target price, to C$39 from C$40, to reflect the dilutive effects of the financing, although this was offset by estimates for lower interest expense as well as changes to assumptions regarding output from Bruce Power and the Keystone project. “The result is a roughly 2-3% decline in near-term earnings outlook, but still showing solid long-term growth.” The stock remains one of Mr. Hofer's “top picks.”