Download 2017 outlook: Off the roller coaster, back on the growth train

Title: Pipelines, Utilities & Energy Infrastructure
Headline: 2012 sector outlook & top picks…Encore! Encore!
The NBF Daily Bulletin
January 24, 2017
Industry Comment
Pipelines, Utilities & Energy Infrastructure
2017 outlook: Off the roller coaster, back on the growth train
Industry Rating :
Overweight: N/A
Market Weight: Utilities
Underweight: Chemicals;
Energy Equipment & Services;
Oil, Gas & Consumable Fuels
(NBF Economics &
Strategy Group)
Patrick Kenny, CFA – (403) 290-5451 – [email protected]
Associate: Matthew Taylor, CPA, CA – (403) 290-5624 – [email protected]
Highlights

Back on the growth train: After a two-year roller coaster ride for the sector (-22% in
2015; +30% in 2016), we expect 2017 capital appreciation will revert back to more
normalized performance in line with annual per share growth of ~10% through 2018e.

Commodity prices and market access (positive): With our long-term WTI
assumption of US$60/bbl calling for 15-20% upside still to come, combined with political
support now on both sides of the border for market access (TMX, K-XL), we expect
continued valuation support across the Pipelines & Midstream space. Meanwhile,
despite rising competition from Marcellus/Utica gas supplies into Ontario, we expect a
rising sense of producer urgency for accessing U.S. markets to support organic growth
opportunities and enhance the value of pipe in the ground (read Alliance).

Alberta power prices (positive): We forecast 2017e spot prices of $32/MWh, up ~75%
from 2016 at $18/MWh, and continue to see upside towards $45/MWh by next decade
under the new capacity market design, supporting recent momentum for CPX / TA.

Potential impact of U.S. tax rate changes on Utilities (negative): Should congress
approve a reduced U.S. corporate tax rate of 15% (from 35%), we highlight ~15%
downside to U.S.-based utilities AFFO, suggesting ~10% downside risk to our 2018
estimates for both EMA and FTS – i.e., both approximately two-thirds U.S.-based.

Interest rates & FX (neutral): Although the 10-year GCAN rate is expected to move up
~40 bps to 2.1% by the end of 2017, credits spreads tightened ~70 bps to ~220 bps
since mid-2016 – keeping our long-term BBB bond rate assumption in check at 5.5%
(3.0% GCAN + 2.5% credit spread). On the FX front, we maintain our long-term outlook
of Cdn$1.30, in line with spot and strip levels out to 2020.

Target/Rating changes + Top Picks: Rolling forward our valuations to 2018e, our
targets bump up ~5%, while the only rating change is ENF to SP (from OP), reflecting
relative price appreciation since our November upgrade. For screening top picks, we
highlight attractive P/AFFO valuations relative to secured growth profiles and payout
ratios. Overall, our top picks for 2017 include VSN, TWM, KEY and CPX.
NBF PIPELINES, UTILITIES & ENERGY INFRASTRUCTURE ESTIMATES
Company
Price
Ticker
24-Jan-17
Target
Prev.
New
Rating
∆
Prev.
New
AFFO/sh - FD
∆
2017e
2018e
(1)
D/EBITDA
DPS
∆
2017e
2018e
∆
2017e
2018e
∆
High Payout
ALA
$33.13
$37.00
$38.00
3%
SP
SP
-
$2.58
$2.56
-1%
$2.16
$2.29
6%
5.8x
5.8x
0%
CUS
$1.63
$1.65
$1.65
0%
Tender
Tender
-
$0.23
$0.25
5%
$0.00
$0.00
0%
4.8x
4.9x
3%
ENF
$38.00
3%
OP
SP
↓
$2.54
$2.58
1%
$2.04
$2.24
10%
5.2x
4.8x
-8%
GEI
$19.61
$17.00
$18.00
6%
SP
SP
-
$1.46
$1.55
6%
$1.32
$1.32
0%
4.2x
3.9x
-7%
IPL
$28.75
$36.09
$30.00
$37.00
$31.00
3%
SP
SP
-
$2.19
$2.22
1%
$1.62
$1.72
6%
5.1x
5.0x
-3%
KEY
$39.46
$48.00
$49.00
2%
OP
OP
-
$3.16
$3.60
14%
$1.65
$1.79
8%
2.4x
1.8x
-27%
PPL
$41.93
$43.00
$44.00
3.4x
-21%
SPB
$12.47
$13.00
$14.00
8%
OP
OP
-
$1.19
$1.16
-3%
$0.72
$0.72
0%
1.6x
1.4x
-13%
TWM
$1.57
$2.00
$2.25
13%
OP
OP
-
$0.18
$0.20
12%
$0.04
$0.04
0%
0.0x
0.0x
0%
VNR
$20.88
$22.00
$22.00
0%
SP
SP
-
$1.29
$1.31
1%
$1.12
$1.16
4%
2.0x
1.7x
-11%
VSN
$13.52
$15.00
$17.00
13%
OP
OP
-
$1.10
$1.25
13%
$1.00
$1.00
0%
5.4x
5.0x
-8%
High Payout Average
2%
SP
SP
-
$2.76
$3.28
5%
19%
$1.97
$2.07
6%
5%
4.4x
4%
-9%
Low Payout
$51.00
0%
SP
SP
-
$4.52
$4.37
$1.51
15%
CU
$37.24
$44.00
$44.00
0%
OP
OP
-
$3.61
$3.85
7%
$1.43
$1.57
10%
5.2x
5.3x
3%
CPX
$24.56
$28.00
$29.00
4%
OP
OP
-
$3.39
$3.32
-2%
$1.61
$1.73
7%
3.3x
3.1x
-5%
ACO
$46.07
$51.00
-3%
$1.31
4.2x
4.4x
4%
EMA
$45.68
$52.00
$52.00
0%
SP
SP
-
$3.62
$4.17
15%
$2.17
$2.35
8%
6.4x
6.0x
-7%
ENB
$57.54
$63.00
$66.00
5%
OP
OP
-
$4.06
$4.24
5%
$2.39
$2.68
12%
5.5x
5.2x
-5%
FTS
$41.40
$47.00
$47.00
0%
SP
SP
-
$3.43
$3.58
4%
$1.62
$1.72
6%
6.3x
6.3x
0%
H
$24.33
$27.00
$27.00
0%
OP
OP
-
$1.18
$1.36
15%
$0.88
$0.93
5%
5.9x
5.9x
0%
TA
TRP
$7.81
$9.00
$9.00
0%
OP
OP
-
$1.11
$0.96
-14%
$0.16
$0.16
0%
4.0x
4.0x
1%
$64.24
$63.00
$66.00
5%
SP
SP
-
$4.21
$4.94
17%
$2.49
$2.73
10%
6.7x
6.0x
-10%
Low Payout Average
1%
Note: VSN D/EBITDA on a proportionately consolidated basis.
(1) Debt includes 50% preferred equity where applicable.
Source: NBF Estimates, Thomson Reuters
For required disclosures, please refer to the end of the document.
5%
8%
-2%
Page 2
2016 in review – don’t call it a comeback!
After a -22% fall from grace in 2015, the Energy Infrastructure space bounced back +30%
through 2016 versus the S&P TSX Energy Index total return of 35%, while outperforming the
S&P TSX’s total return of 21%. Below, we review individual highlights through the year.
NBF ENERGY INFRASTRUCTURE - 2016 LOOK BACK
2016 Total Return
VSN
63%
TA
Ticker
Total Return
VSN
63%
TA
55%
Performance Analysis
$2.7 bln Dawson buildout + $1 bln Power asset sale looming
+ suspension of $400 mln premium DRIP.
55%
$524 mln coal retirement comp. + sustainability vision coming into focus
(coal-to-gas conversions + 5,000 MW of new AB renewables by 2030).
GEI
48%
GEI
48%
WTI stabilized at ~$43/bbl (down 11% Y/Y) vs. down 50% in 2015 +
PPL
46%
5% dividend increase + Higher frac spreads + $591 mln acquisition of
IPL
42%
$1.35 bln acqusition of NGL Midstream assets + $3 bln PDH
CPX
41%
$300-400 mln Propane sale on deck + Private Equity offer for $19.94/sh.
PPL
46%
Montney assets + $2 bln PDH opportunity announced.
IPL
42%
CPX
41%
TRP
opportunity announced + consolidation of Cold Lake system.
TSX Energy
7% dividend hike + $734 mln coal retirement comp. + AB Power news
(new market structure by 2019 + $30 bln of new renewables by 2030).
39%
TRP
39%
US$13 bln acquisition of Columbia + US$3.7 bln U.S. power assets up
ENF
32%
10% dividend hike + outlook of 10% growth through 2019 intact +
ACO'X
28%
Dividend outlook of 15% growth through 2018 intact + rebounding
ENB
28%
$59 bln acquisition of Spectra + US$1.5 bln purchase of interest in
SPB
27%
US$325 mln CPD sale + actively pursuing M&A opportunities after
VNR
23%
4% dividend hike + growth outlook of 4% through 2018 intact + solar
for sale + MX pipeline system growth (US$575 EBITDA by 2018).
35%
ENF
Line 3R construction on track for late 2019.
32%
NBF EI
30%
ACO'X
28%
ENB
28%
SPB
commodity prices offset low AB Power prices.
Bakken system (DAPL) + 10% dividend increase.
failed CUS transaction.
27%
build-out in Vermont.
VNR
23%
CUS
22%
CUS agreed with Chemtrade to sell all of its outstanding shares
CUS
22%
ALA
17%
Lower frac spreads + lower AB power prices + slower
S&P TSX
21%
FTS
15%
for $1.65/sh.
progress on securing LNG and LNG initiatives.
US$11.3 bln acquisition of ITC + 7% dividend hike + ~$1 bln of LNG
investments announced in B.C.
ALA
17%
FTS
TWM
H
10%
10%
KEY
Closed over $150 mln of asset acquisitions in 2016 + announced $60-
10%
5% rate base & dividend outlook through 2020 + LDC consolidation
EMA
10%
10% dividend increase + extended 8% dividend growth through 2020 +
KEY
5%
Unplanned AEF outage + AECO -20% Y/Y + waiting on Montney growth
Ticker
Total Return
NBF EI
30%
WTI jumped ~105% to end 2016 at $54/bbl vs. Feb low of ~$26/bbl.
S&P TSX
21%
Low interest rates + stabilizing crude prices (ended 2016 at $54/bbl).
TSX Energy
35%
WTI jumped ~105% to end 2016 at $54/bbl vs. Feb low of ~$26/bbl.
modest FX tailwinds.
plans, muted 6% dividend hike + strong balance sheet + rebounding WTI.
5%
0%
14%
H
through 2019.
14%
EMA
TWM
65 mln of organic growth projects + disclosed Montney growth plans.
15%
20%
40%
60%
80%
Performance Analysis
Source: Bloomberg, NBF Estimates
How does the roller coaster ride look from a two-year perspective?
Including 2015, we look at two-year performance to screen potential buying opportunities –
names that have not yet fully recovered from the WTI’s initial collapse. Among the Pipelines
and Midstreamers, lagging stocks include Outperform-rated VSN and ENB, as well as Sector
Perform-rated GEI, ALA, IPL and ENF. In the Power & Utilities space, we highlight
Outperform-rated TA, CU and CPX, along with Sector Perform-rated ACO’X, with room left to
catch up to the rest of the space.
-
NBF ENERGY INFRASTRUCTURE - 2015/2016 STOCK PERFORMANCE
Pipelines & Midstreams vs. Peers
Outperformers
Power & Utilities vs. TSX Index
Underperformers
Outperformers
Underperformers
SPB
21%
ENB
2%
VNR
46%
CPX
3%
TRP
15%
ENF
-4%
EMA
27%
ACO'X
-1%
TWM
15%
IPL
-8%
H
20%
CU
-5%
PPL
9%
ALA
-12%
FTS
15%
TA
-21%
KEY
8%
VSN
-15%
2%
TSX Energy
4%
S&P TSX
GEI
-19%
CUS
-48%
11%
NBF EI
Source: Bloomberg
2017 macro outlook – off the roller coaster and back on the growth train
Below we outline our commodity price forecast for 2017, highlighting key assumptions
underlying the sector’s performance and overall market sentiment:
Commodities (positive): With the recovery in WTI prices topping US$50/bbl (~20% above
2016 actuals), and our long-term WTI crude oil price of US$60/bbl calling for another 15-20%
yet to go, we expect continued momentum fee-based, margin-based and commodity-based
Page 3
cash flows across the space. On the gas front, we reduced our long-term NYMEX and AECO
price assumptions to US$3.25/mcf and $2.90/mcf (was US$3.60/mcf and $3.60/mcf), lifting
our long-term NGL frac spread assumption by ~30% towards $29/bbl (was $22/bbl) – also
supporting the small wedge of commodity-based cash flows across the Pipeline & Midstream
space.
NBF COMMODITY FORECAST
Commodity
2016
Current
2017e
2018e
Actuals
19-Jan-17
Fwd Strip
Fwd Strip
Old
Long-term
New
∆
WTI (US$/bbl)
43.17
51.37
55.00
55.00
60.00
60.00
0%
Edm Par (CAD$/bbl)
52.65
70.28
68.00
68.00
69.00
69.00
0%
29.46
50.83
39.25
37.75
45.00
43.50
-3%
-13.71
-13.20
-15.75
-17.25
-15.00
-16.50
10%
WTI-WCS (%)
32%
26%
29%
31%
25%
28%
3%
NYMEX (US$/mcf)
2.49
3.46
3.00
3.25
3.60
3.25
-10%
AECO (CAD$/mcf)
2.05
2.84
2.70
3.10
3.60
2.90
-19%
FX (CAD/USD)
1.32
1.33
1.30
1.30
1.30
1.30
0%
MB Propane (US$/bbl)
20.38
31.47
24.75
26.00
24.00
27.00
13%
47%
61%
45%
47%
40%
45%
5%
26.77
40.22
31.50
34.25
30.00
34.75
16%
WCS (US$/bbl)
WTI-WCS Diff (US$/bbl)
% WTI
MB Butane (US$/bbl)
% WTI
58%
8%
42.26
52.07
55.00
55.00
60.00
60.00
0%
98%
101%
100%
100%
100%
100%
0%
22.75
35.00
26.50
26.50
22.25
29.00
30%
62%
Edm Condensate (US$/bbl)
% WTI
(1)
Frac-spread
($/bbl)
78%
58%
62%
50%
Note: Forward strip as at January 19, 2017.
Source: Bloomberg, NBF Energy Research group
Market access – playing the Trump card
Crude oil export pipelines (positive): The WCSB remains on pace to grow production by
~700 mbpd through 2022e to 4.7 mmbpd – driven by oil sands projects recently
commissioned (volume ramp-up) and under construction. Net of local refining demand
(currently ~600 mpbd), we estimate operational pipeline utilization of 98% for 2017e, pointing
towards a widening heavy oil differential over the next few years as the WCSB requires over
500 mbpd of additional pipeline capacity by next decade. As noted above, we forecast a
WTI-WCS heavy oil differential of US$15.75/bbl for 2017e, ~20% wider than current levels of
US$13.20/bbl – suggesting continued tailwinds for crude oil marketing / midstream
businesses within Gibson, Pembina, Keyera and Enbridge.
Meanwhile, should all major proposed export pipeline projects successfully come online (Line
3 Replacement, Trans Mountain Expansion, Keystone XL and Energy East), we forecast just
~65% operational pipeline capacity utilization, suggesting an over-built situation (absent
another material wave of oil sands growth projects). We outline each project below and the
potential impact of each related name on our coverage list.
Page 4
Major crude oil export pipelines

Keystone XL (TransCanada): the 830,000 bpd expansion of the existing 591,000
bpd Keystone pipeline system would extend from Hardisty, AB to Steele City, NE with
the last disclosed price tag of US$8 bln (of which ~US$3 bln was written off in Q4/15).
Recall, in November 2015 President Obama rejected TRP’s application to build the
pipeline, claiming it was not in the best interest of the United States. Meanwhile, the
company countered with a $15 bln lawsuit filed against the U.S. government under
NAFTA. On Jan. 24th, President Trump signed an executive order to move forward
with construction of the pipeline. That said, given the uncertainty surrounding any
renegotiated terms and/or conditions imposed by the U.S. administration, coupled
with any legal / regulatory issues outstanding at the State level (namely Nebraska),
we continue to apply a 25% probability to the project’s success. Overall, assuming no
change to the initial US$8 bln capital cost, US$1 bln EBITDA run-rate economics and
a 2020 in-service date, the project represents ~$8/sh unrisked upside (~12%) to our
base $62 valuation for TRP. Of note, our $66 target for TRP includes a 25%
probability weighting for both Keystone XL and Energy East (see below).

Energy East (TransCanada): TRP also continues to progress its $15.7 bln, 1.1
mmbpd Energy East pipeline project, despite regulatory delays / headwinds. Recall,
the National Energy Board’s (NEB) panel sessions in August 2016 were cancelled as
each of the three NEB panelists, plus the Chair of the NEB and the Vice Chair,
announced their decision to recuse themselves of any further duties related to the
project due allegations of reasonable apprehension of bias. On Jan. 9, 2017, the
NEB announced the assignment of a new three-member panel, but provided no
details on the timing or intended course of the proceedings. At present, the earliest
date we conceive of the project coming into service is early 2022, reflecting approval
in late 2018, with a three-year construction period. Overall, assuming no change to
the project’s capital cost or ~$2.2 bln EBITDA run rate, we calculate ~$8/sh unrisked
upside (~12%) to our base $62 valuation for TRP. Of note, our $66 target for TRP
includes a 25% probability weighting for both Energy East and Keystone XL (see
above).

Line 3 Replacement (Enbridge): At a hearing on Oct. 28th, the MNPUC (Minnesota
Public Utilities Commission) finalized the scope of the EIS (Environmental Impact
Statement) and established a firm date by which it must be completed (~280 days;
mid-2017), with the route approval process following completion of the EIS (~90
days). Overall, under the schedule approved by the MNPUC, the in-service date for
the Cdn$8.3 bln, 760,000 bpd Line 3 Replacement project (current operational
capacity: 390,000 bpd) remains on track for 2019 (albeit likely later in 2019), while
project costs are also expected to increase (was ~$4.9 bln in Canada; US$2.6 bln in
the U.S.). Meanwhile, in December 2016 ENB received approval from the
Government of Canada, subject to 37 binding conditions that will be enforced by the
NEB before construction can begin. We currently include the full value of the project
within our $66 target.

Trans Mountain Expansion (Kinder Morgan): in November 2016, the Government
of Canada granted approval for the Trans Mountain Expansion project, subject to 157
binding conditions. The ~$6.8 bln expansion from Edmonton, AB to Burnaby, BC will
twin the existing pipeline, increasing capacity from 300 mbpd to 890 mpbd. Despite
ongoing local opposition, the project is eyeing an in-service date of mid-2020.
Natural Gas pipelines (negative): WCSB producers are approaching the Dawn of a new era
with over 5 bcf/d of new pipeline capacity offering Marcellus/Utica producers access to upper
Midwest / eastern Canadian markets. Of note, ~1.5 bcf/d is destined for Dawn, ON by 2018
with ~0.3 bcf/d contracted on Nexus by EGD & Union Gas, plus ~1.2 bcf/d contracted on
Rover, entering Canada via the Vector Pipeline. As such, roughly half of the current ~3 bcf/d
of WCSB throughput on TransCanada’s Canadian Mainline could be squeezed out of Ontario
and in need of finding new markets.
Page 5
CAD/US CROSS-BORDER PIPELINE PROJECTS
Pipeline
Ownership Structure
PNGTS: C2C Expansion Project DTE Energy / Spectra Energy
Cost
($bln)
In-service date
Capacity
(Bcf/d)
Regulatory
Approval Status
0.1
Q4/2016
0.2
Approved
%
Contracted
85%
3.3
Filed
95%
Rover
Energy Transfer Partners
4.2
mid-late 2017
Nexus
Spectra / Dominion
2.0
late 2017
1.5
Filed
67%
Iroquois: SoNo project
TRP / Gaz Metro
n/a
late 2017
0.3
Approved
100%
Source: Company Reports
Canadian Mainline (TransCanada)
In light of the Nexus and Rover pipelines targeting in-service dates of 2018, TRP recently
offered 10-year firm transportation tolls to producers from Empress, AB into Dawn, ON of up
to 1.5 Bcf/d at a discounted rate of $0.75-0.82/GJ (current toll: $1.65/GJ). The open season
for five- to 10-year contracts closed on Nov. 15, 2016 – due to insufficient interest, the
proposed tolling arrangement did not proceed. That said, we expect negotiations between
TRP and WCSB producers to continue through 2017. Overall, the western leg of the
Canadian Mainline represents ~5% of our long-term EBITDA estimates.
Alliance (Veresen, Enbridge)
The table below outlines the relative competitiveness of the 1.6 bcf/d Alliance pipeline into
Chicago versus the 6 bcf/d TransCanada Mainline into Dawn, ON – highlighting an improved
netback of ~30% for producers on Alliance and suggesting potential support for future
expansion of the pipeline. Of note, the pipeline has debottlenecking potential towards 2.4
bcf/d, while twinning the line could support egress of ~5 bcf/d into the Chicago market. For
2018e, Alliance represents >40% of AFFO contributions for Veresen and <2% for Enbridge.
ALLIANCE VS. DAWN PRICING FUNDAMENTALS
Chicago Citygate Pricing
Alliance
Zone 1
Market Price LTM (USD/mcf)
Tolls, Taxes and other Charges
Net Price received by Shipper
Source: Bloomberg, Company Reports
$2.51
-$0.91
$1.60
Alliance
Zone 2
$2.51
-1.04
$1.47
Dawn, ONT Pricing
TRP
Mainline
$2.34
-2.06
$0.28
TRP Great
Lakes
$2.34
-1.96
$0.38
TRP Proposed Rates
$2.34
-1.05 to
-1.25
$1.29
$1.09
Page 6
Alberta power market – reduce, renew, repeat
AB power (positive): On the Alberta power front, we forecast 2017e spot prices of
$32/MWh, up ~75% from 2016 actuals at $18/MWh. Meanwhile, we see further upside
towards $45/MWh as the market transitions from an “energy-only” market towards a
“capacity” market next decade. Of note, our $45/MWh assumption is based on marginal
variable costs for coal-fired plants of $40/MWh (including ~$20/MWh carbon tax), plus
$5/MWh capacity revenues.
NBF ALBERTA POWER FORECAST
Commodity
2016
2017e
2018e
2019e
Actual
New
New
New
Old
New
∆
AB Power ($/MWh)
18.22
32.00
39.00
43.00
50.00
45.00
-10%
AECO ($/mcf)
2.06
2.70
3.10
2.90
3.50
2.90
-17%
8.8x
11.9x
12.6x
14.8x
14.3x
15.5x
9%
Market heat rate
Long-term
Source: NBF Estimates
The table below reiterates our call on non-intermittent (non-wind) capacity to replace coal
retirements and support peak demand growth of ~2%. As shown, ~10,000 MW of new
non-wind generating capacity is required to maintain a reserve margin in line with the
long-term average of 19%. Combined with replacing two-thirds of retiring coal-fired
generation with new renewable generation (i.e., ~5,000 MW), the Alberta power market
requires ~15,000 MW of new capacity, underpinning ~$30 billion of investment opportunities
(~$2.0 mln per MW). The Alberta government will hold its first renewable energy auction in
early 2017 for up to 400 MW of new renewable projects in-service by 2019.
AB - REQUIRED GENERATION TO REPLACE COAL RETIREMENT
2030e AB generation capacity:
2015a AB generation capacity(1)
Required generation capacity by 2030e:
14,825 MW
Additions through 2030(1):
Fort Hills Switching Station
Various projects <50 MW
2016e peak demand
Annual growth through 2030
152 MW
2030e peak demand
11,863 MW
1.8%
15,229 MW
53 MW
Long-term reserve margin(1)
19%
Capacity to support LT reserve margin(1)
18,801 MW
Capacity to support LT reserve margin(1)
18,801 MW
Coal decommissions through 2030:
Post PPA coal facilities
- 6,289 MW
2030e AB generation capacity(1)
2030e AB generation capacity(1)
8,741 MW
Required generation capacity(1)
8,741 MW
10,060 MW
(1) Excludes wind generation capacity
Source: Company Reports, AESO, NBF Estimates
Notable large-scale renewable projects that have the potential to satisfy the lion’s share of the
Alberta Government’s 5,000 MW renewables capacity target include:

CPX - ~1,000 MW of Wind projects, including the ~$300 mln twinning of its
Halkirk wind farm (Halkirk 2) providing up to 150 MW; the development of the
300 MW Whitla wind project near Medicine Hat, AB; and ~550 MW of other
undisclosed renewables projects in Alberta.

TA – the company commenced the development of a pumped hydro project at
its existing Brazeau facility, representing incremental capacity of up to 900 MW
with construction beginning in 2021, subject to signing a long-term contract.

ATCO / CU – the company previously disclosed its vision of constructing three
large-scale hydro projects in northern Alberta, representing combined capacity
of over 4,500 MW. More to be seen in this regard as the newly minted Alberta
capacity market takes shape in the upcoming years.
Page 7
Potential impact of lower U.S. corporate tax rates?
U.S. tax rate changes (negative): Given President Trump’s campaign position towards
reducing corporate taxes towards 15% (from 35%), we highlight the potential impact to our
U.S.-based AFFO estimates for rate-regulated utilities. Why would a lower corporate tax rate
reduce our cash flow estimates? Under rate regulation, utilities earn revenue sufficient to
recover all expenses (including statutory income taxes) plus an allowable ROE, while actual
cash tax expense is largely sheltered through accelerated / bonus depreciation (at least
through 2019). As such, although U.S.-denominated earnings would remain unchanged, the
lower corporate tax rate has a negative impact on revenues, while cash tax expense (virtually
nil) remains unchanged – i.e., reducing cash flow available for distribution (AFFO).
Longer term however, we note a more muted impact on a discounted cash flow valuation
basis as a lower corporate tax rate extends the company’s U.S. cash tax horizon. As such,
although we expect a modest impact to our valuations should congress pass legislation
implementing a lower corporate tax rate, we do note downside risk to our 2018 AFFO
estimates for names with material U.S. exposure (EMA, FTS) and a potentially stubborn
overhang on the stock prices through 2017. With EMA and FTS generating approximately
two-thirds of their AFFO south of the border, the ~15% reduction to U.S.-based AFFO would
reduce our 2018 consolidated estimates by ~10%.
U.S. UTILITY FFO SENSITIVITY TO TAX RATE CHANGE
For Illustrative purposes only
Current
Revised
1,000,000
1,000,000
Change
Revenue Requirement
Rate base
WACC
9.43%
9.43%
Allowed return on rate base
94,300
94,300
150,000
150,000
50,000
17,000
Add: operating expenses (incl. D&A)
Add: Income taxes
tax rate
35%
15%
294,300
261,300
-20%
FFO
Earnings
94,300
94,300
Add back:
D&A(1)
75,000
75,000
Future Income Tax
50,000
17,000
219,300
186,300
-15%
(1) Assumes D&A is 50% of operating expenses for illustrative purposes
Source: FTS, NBF
2017 macro outlook – interest rates + Loonie
Interest rates (neutral) – Our NBF Economics and Strategy group is forecasting a 10-year
GCAN rate of 2.14% by the end of 2017, up ~40 bps from current levels of 1.76%. As such,
we revised up our long-term 10-year GCAN rate assumption by 50 bps to 2.5%.
NBF INTEREST RATE FORECAST
Rates
Current
2017e
2018e
Long-term
16-Dec-16
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Old
Overnight
0.50%
0.50%
0.50%
0.50%
0.50%
0.75%
1.00%
1.00%
1.25%
n/a
New
n/a
10-year
1.83%
1.96%
2.00%
2.05%
2.14%
2.30%
2.51%
2.55%
2.62%
2.00%
2.50%
Canada
US
Fed Fund
0.50%
0.75%
1.00%
1.00%
1.25%
1.50%
1.50%
1.75%
2.00%
n/a
n/a
10-year
2.59%
2.70%
2.78%
2.82%
3.03%
3.08%
3.15%
3.21%
3.24%
n/a
n/a
Note: forecast by NBF Economics and Strategy group as at December 16, 2016
Source: NBF Economics and Strategy group, NBF Estimates
However, with credits spreads having tightened ~70 bps to ~220 bps from ~290 bps since
mid-2016, we decreased our long-term credit spread assumption to 3.0% (was 3.5%), which
when combined with our revised 10-yr GCAN forecast, leaves our long-term BBB bond rate
assumption at 5.5% (unchanged). As highlighted in our July 17, 2016 thematic, “Yieldmania!
Recalibrating targets + bluesky upside potential”, for every 50 bps change to our long-term
interest rate assumption, our valuations decline ~5% across the Pipelines & Midstream
names, and ~8% for the Power & Utilities space.
Page 8
NOTABLE 10-YR CREDIT SPREADS
BBB BOND RATES SPREAD TO 10-YR GCAN
10-year Credit Spread (bps)
Last Year(1)
Current
∆
Historical Avg.: ~236 bps
H
105
126
-21
IPL
165
200
-35
PPL
190
268
-78
TA
440
642
-202
TRP
130
187
-57
VSN
290
403
-113
Average
202
277
-75
200
150
Jan-17
-37
Sep-16
-86
202
Jan-16
261
165
May-16
175
FTS
Jan-15
ENF
250
Sep-15
-85
Sep-14
260
May-15
175
Jan-14
ENB
300
Sep-13
-28
-36
May-14
133
221
Jan-13
105
185
May-13
CU
EMA
350
Jan-12
-121
Sep-12
-70
441
Sep-11
255
320
May-12
185
Jan-11
ALA
CPX
May-11
Ticker
400
Basis Points (bps)
Company
Source: Bloomberg, NBF Estimates
(1) Avg. 2016 rate
Source: NBF Fixed Income Group; NBF Estimates
CAD/USD FX outlook (neutral) – in line with forward strip pricing, we maintained our 2017e,
2018e and long-term CAD/USD exchange rate at $1.30.
NBF CAD/USD EXCHANGE RATE FORECAST
FX
2016
Current
2017e
2018e
Actuals
23-Jan-17
New
New
Old
New
1.32
1.33
1.30
1.30
1.30
1.30
CAD/USD
Long-term
Source: Bloomberg, NBF Estimates
2018 estimates + target and rating changes
Our 2018 estimates call for AFFO/sh growth of ~6% over 2017e, with dividends up ~5% on
average. Overall, our targets bump up ~5% on average, while the only rating change is ENF
to Sector Perform (from Outperform), reflecting relative price performance since upgrading
the name in November.
NBF PIPELINES, UTILITIES & ENERGY INFRASTRUCTURE ESTIMATES
Company
Price
Ticker
24-Jan-17
Target
Rating
Prev.
New
∆
Prev.
New
AFFO/sh - FD
∆
2017e
2018e
D/EBITDA(1)
DPS
∆
2017e
2018e
∆
2017e
2018e
∆
High Payout
ALA
$33.13
$37.00
$38.00
3%
SP
SP
-
$2.58
$2.56
-1%
$2.16
$2.29
6%
5.8x
5.8x
0%
CUS
$1.63
$1.65
$1.65
0%
Tender
Tender
-
$0.23
$0.25
5%
$0.00
$0.00
0%
4.8x
4.9x
3%
$38.00
3%
OP
SP
↓
$2.54
$2.58
1%
$2.04
$2.24
10%
5.2x
4.8x
-8%
GEI
$19.61
$17.00
$18.00
6%
SP
SP
-
$1.46
$1.55
6%
$1.32
$1.32
0%
4.2x
3.9x
-7%
IPL
$28.75
$30.00
$31.00
3%
SP
SP
-
$2.19
$2.22
1%
$1.62
$1.72
6%
5.1x
5.0x
-3%
KEY
$39.46
$48.00
$49.00
2%
OP
OP
-
$3.16
$3.60
14%
$1.65
$1.79
8%
2.4x
1.8x
-27%
PPL
$41.93
$43.00
$44.00
2%
SP
SP
-
$2.76
$3.28
19%
$1.97
$2.07
5%
4.4x
3.4x
-21%
SPB
$12.47
$13.00
$14.00
8%
OP
OP
-
$1.19
$1.16
-3%
$0.72
$0.72
0%
1.6x
1.4x
-13%
ENF
$36.09
$37.00
TWM
$1.57
$2.00
$2.25
13%
OP
OP
-
$0.18
$0.20
12%
$0.04
$0.04
0%
0.0x
0.0x
0%
VNR
$20.88
$22.00
$22.00
0%
SP
SP
-
$1.29
$1.31
1%
$1.12
$1.16
4%
2.0x
1.7x
-11%
VSN
$13.52
$15.00
$17.00
13%
OP
OP
-
$1.10
$1.25
13%
$1.00
$1.00
0%
5.4x
5.0x
-8%
High Payout Average
5%
6%
4%
-9%
Low Payout
ACO
$46.07
$51.00
$51.00
0%
SP
SP
-
$4.52
$4.37
-3%
$1.31
$1.51
15%
4.2x
4.4x
4%
CU
$37.24
$44.00
$44.00
0%
OP
OP
-
$3.61
$3.85
7%
$1.43
$1.57
10%
5.2x
5.3x
3%
CPX
$24.56
$28.00
$29.00
4%
OP
OP
-
$3.39
$3.32
-2%
$1.61
$1.73
7%
3.3x
3.1x
-5%
EMA
$45.68
$52.00
$52.00
0%
SP
SP
-
$3.62
$4.17
15%
$2.17
$2.35
8%
6.4x
6.0x
-7%
-5%
ENB
$57.54
$63.00
$66.00
5%
OP
OP
-
$4.06
$4.24
5%
$2.39
$2.68
12%
5.5x
5.2x
FTS
$41.40
$47.00
$47.00
0%
SP
SP
-
$3.43
$3.58
4%
$1.62
$1.72
6%
6.3x
6.3x
0%
H
$24.33
$27.00
$27.00
0%
OP
OP
-
$1.18
$1.36
15%
$0.88
$0.93
5%
5.9x
5.9x
0%
TA
TRP
$7.81
$9.00
$9.00
0%
OP
OP
-
$1.11
$0.96
-14%
$0.16
$0.16
0%
4.0x
4.0x
1%
$64.24
$63.00
$66.00
5%
SP
SP
-
$4.21
$4.94
17%
$2.49
$2.73
10%
6.7x
6.0x
-10%
Low Payout Average
1%
Note: VSN D/EBITDA on a proportionately consolidated basis.
(1) Debt includes 50% preferred equity where applicable.
Source: NBF Estimates, Thomson Reuters
5%
8%
-2%
Page 9
2017 investment stance estimates + target and rating changes
On the near-term per share growth front, top-tier names include GEI, TWM, KEY, PPL, SPB
and VSN. Overall, we forecast ~20% per share growth for the space from 2016e to 2018,
representing a two-year CAGR of ~10%, reflecting both secured growth projects under
construction, as well as rebounding cash flow contributions within certain activity-sensitive
business segments.
2016E TO 2018E AFFO/SH LEAP FROG CAGR
100%
80%
60%
40%
Group Avg.: 21%
20%
ENB
VNR
TA
CPX
CU
ALA
IPL
ACO
H
FTS
ENF
TRP
VSN
EMA
PPL
SPB
KEY
GEI
TWM
0%
Note: VSN run-rate AFFO/sh (pro forma midstream growth).
Source: NBF Estimates
We use a two-pronged approach for screening our top picks: P/AFFO valuation versus
secured AFFO/sh growth profile, and P/AFFO valuation versus AFFO payout ratio. Overall,
our top picks for 2017 screen well under both looks and include VSN, TWM, KEY and CPX.
2018E P/AFFO VS. PAYOUT RATIO
2018E P/AFFO VS. 2-YEAR LEAP FROG AFFO/SH CAGR
20.0x
H
VNR
2018e P/AFFO
16.0x
14.0x
FTS
12.0x
10.0x
8.0x
ENB
TRP
ACO
TA
CU
TWM
Attractive valuation
6.0x
20%
30%
40%
EMA
KEY
PPL
ALA
IPL
16.0x
VSN
ENB
14.0x
12.0x
10.0x
CPX
8.0x
IPL
GEI, TWM
ENF
TRP
ALA
FTS
ACO
CU
TA
CPX
60%
70%
80%
90%
PPL
EMA
SPB
KEY
VSN
Attractive valuation
6.0x
50%
Note: CUS omitted as rating is currently Tender.
Source: NBF Estimates
GEI
SPB
2018e Payout Ratio
(1) VSN: run rate valuation used.
ENF
H
18.0x
2018e P/AFFO
18.0x
0%
10%
20%
30%
2016e to 2018e Leap Frog AFFO/sh CAGR
40%
Page 10
APPENDIX: COMPANY PROFILES
AltaGas – Target: $38 / Rating: SP / Total Return: 21.2%
Cash flow quality: Cash flows are ~50% Utility
cost-of-service or Midstream take-or-pay, with the
other half largely generated by contracted power
or fee-based Midstream (gas processing / NGL
logistics). Commodity exposure has declined to
<5% of 2018e cash flow. Longer term, the
company’s ~$2.5 bln capital program is ~40%
weighted towards Midstream projects resulting in
increased
contributions
from
Midstream
take-or-pay (TOP) agreements and fee-based
contracts.
800
$3.00
$2.75
700
$2.50
600
$2.25
2020e
2019e
2018e
$1.75
2017e
$2.00
400
2016e
500
EBITDA: 9% CAGR │ AFFO/sh: 5% CAGR
AFFO/sh - FD
$3.25
2015a
EBITDA ($mln)
ALA - SECURED GROWTH OUTLOOK
900
ALA - 2018E CASH FLOW RISK PROFILE
Commoditybased
4%
Utility COS
35%
Midstream
Fee-based
6%
Midstream
TOP
17%
Power Feebased
38%
Source: NBF Estimates
Secured growth: Based on ~$1.3 bln of secured
projects (i.e., ~$1.2 bln remains under
development), we forecast 2020e EBITDA of
~$870 mln – representing 9% CAGR from 2015a
levels. On an AFFO/sh basis, we forecast a CAGR
of 5% for AFFO/sh (FD) through 2020e,
underpinning our 6% annual dividend growth from
2017-2019 – resulting in an AFFO payout ratio of
<85%.
Source: NBF Estimates
ALA - P/AFFO(1) OUTLOOK
16.0x
2018e
12.0x
11.0x
10.6x
2017e
11.0x
12.6x
13.0x
12.5x
14.0x
LT Avg.(2): 11.3x
13.2x
15.0x
10.0x
2016e
2019e
2020e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
9.0x
250%
8.0x
200%
7.0x
150%
6.0x
2020e
2019e
2018e
2017e
50%
2016e
100%
4.0x
2015a
5.0x
Total Payout
ALA - LEVERAGE OUTLOOK
D/EBITDA
Leverage: On the leverage front, we forecast
D/EBITDA of 5.5-6.0x through 2018e, trending
down towards our risk-adjusted comfort zone of
5.0x upon completion of the company’s $1.3 bln
portfolio of secured growth projects through 2019
– most notably the $450-$500 mln Ridley Island
Propane Export Terminal at Prince Rupert, B.C.
That said, with another $1.2 bln of projects in the
hopper (North Pine train 2, Townsend 3,
California power expansions and new Utilities
growth), we would not be surprised of an
opportunistic equity issue on any broader market
strength.
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Tota Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: ALA currently
trades at a premium to its historical P/AFFO
multiple at 12.6x 2018e P/AFFO versus 11.3x – a
warranted re-rate, in our view, given the
company’s improving cash flow quality profile (i.e.,
<5% commodity price exposure). Overall, our $38
target (was $37) is based on a risk-adjusted
dividend yield of 6.00% applied to our 2018e
dividend of $2.29/sh, a 16.75x multiple of our
2018e Free-EBITDA of $668 mln and our DCF/sh
valuation of $38.50.
th
Meanwhile, on Jan. 12 , ALA confirmed that it is in discussions regarding a potential
transaction with a third party, although no agreement has been reached and there is no
assurance that these discussions will continue or that any transaction will be agreed upon. Of
note, media reports cited WGL Holdings Inc. (WGL: NYSE), with an enterprise value of ~US$6
bln. Since the news, the stock is down 4% - likely reflecting a potential corresponding equity
offering. That said, as highlighted in our Jan. 13th Flash, a transaction with WGL would improve
ALA’s business mix / cash flow risk profile further to over 60% cost-of-service / take-or-pay
(from ~50%). Combined with estimated near-term cash flow accretion of up to 10% suggests a
bump to our pro forma valuation. Overall, based on a 12-month total return opportunity of
21.2% (group: 17.2%), we maintain our rating of Sector Perform and recommend investors wait
on the sidelines as we wait for more details regarding a possible transaction.
Page 11
Financial outlook: In the table below we highlight our financial outlook through 2021e.
ALTAGAS - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
$49.42
$33.33
$17.32
$37.50
$45.00
$50.00
$50.00
$50.00
Alberta Power - $/MWh
FX - CAD/USD
$1.10
Capital Structure
2014
Market Price
$1.28
2015
$1.32
2016e
$1.30
2017e
$1.30
2018e
$1.30
2019e
$1.30
2020e
$60.00
$1.30
2021e
$43.34
$30.90
$32.28
$32.28
$32.28
$32.28
$32.28
134
146
167
174
182
188
193
198
Market Capitalization - $mln
5,789
4,520
5,382
5,615
5,872
6,056
6,218
6,383
Ending Net Debt - $mln
2,965
3,857
3,825
3,935
4,029
3,761
3,490
3,214
Preferred Equity - $mln
788
985
985
985
985
985
985
985
33
35
36
36
36
36
36
36
9,575
9,397
10,228
10,571
10,922
10,838
10,729
10,618
Outstanding Shares - mln
NCI - $mln
Enterprise Value
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
$32.28
2021e
Adj. EBITDA by Segment
Gas
248
172
164
203
215
292
303
302
Power
106
178
298
303
306
306
301
297
Utilities
278
257
269
282
286
294
303
303
G&A
(78)
(25)
(23)
(26)
(28)
(28)
(28)
(26)
554
581
708
762
778
865
879
876
(146)
(167)
(196)
(184)
(173)
(160)
(133)
(114)
(14)
(24)
(39)
(30)
(30)
(30)
(30)
(30)
NCI
(8)
(9)
(11)
(13)
(14)
(17)
(19)
(19)
Other
51
46
28
7
5
(2)
(5)
FFO
437
428
490
541
566
655
692
705
Maintenance Capex
AFFO(1)
(88)
(101)
(105)
(103)
(110)
(113)
(113)
(113)
349
327
385
439
456
542
579
592
Dividends
210
255
315
366
406
448
474
487
-
906
(94)
-
-
-
-
-
Growth Capex
479
511
425
421
408
15
-
-
Net Equity Issued
550
450
602
239
264
189
166
170
3,754
4,842
4,810
4,920
5,014
4,746
4,475
4,199
6.1x
7.5x
6.1x
5.8x
5.8x
4.9x
4.5x
4.2x
14%
10%
12%
13%
13%
16%
18%
20%
4.4x
3.9x
3.8x
4.4x
4.8x
5.8x
7.3x
8.8x
Total Adj. EBITDA
Interest (incl. pref. dividends)
Cash Taxes
Acquisitions
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
FFO/Debt
(2)
FFO/Interest
D/Cap
(2)
(2)
Per Share
53%
2014
Ending Net Debt
54%
2015
52%
2016e
52%
2017e
52%
2018e
50%
2019e
48%
2020e
(7)
47%
2021e
$26.77
$33.10
$28.85
$28.29
$27.56
$25.30
$23.23
$21.23
EBITDA
$4.09
$3.98
$4.25
$4.38
$4.28
$4.61
$4.56
$4.43
FFO - FD
AFFO - FD(1)
$3.40
$3.09
$3.11
$3.18
$3.18
$3.54
$3.64
$3.61
$2.72
$2.36
$2.44
$2.58
$2.56
$2.93
$3.04
$3.04
Adj. Earnings - FD
$1.28
$1.02
$1.04
$1.23
$1.27
$1.54
$1.65
$1.67
Dividends
FFO Payout Ratio (3)
$1.67
$1.86
$2.03
$2.16
$2.29
$2.43
$2.50
$2.50
69%
48%
60%
65%
68%
72%
68%
69%
AFFO Payout Ratio (4)
60%
78%
82%
83%
89%
83%
82%
82%
Earnings Payout Ratio
127%
181%
193%
175%
180%
157%
151%
149%
DRIP Participation
Forward Trading Metrics
34%
2014
EV/EBITDA
EV/Free-EBITDA(5)
38%
2015
65%
2016e
65%
2017e
65%
2018e
35%
2019e
35%
2020e
35%
2021e
16.5x
13.3x
13.4x
13.6x
12.6x
12.3x
12.3x
20.0x
17.0x
15.5x
15.8x
14.5x
14.2x
14.1x
P/FFO
14.0x
9.9x
10.2x
10.1x
9.1x
8.9x
8.9x
P/AFFO
18.3x
13.2x
12.5x
12.6x
11.0x
10.6x
10.6x
P/E
42.5x
29.8x
26.3x
25.4x
21.0x
19.5x
19.3x
4.3%
6.3%
6.7%
7.1%
7.5%
7.7%
7.7%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 12
ATCO – Target: $51 / Rating: SP / Total
Return: 13.5%
ACO - 2018E CASH FLOW RISK PROFILE
Cash flow quality: ATCO’s cash flows are ~75%
cost-of-service, ~15% fee-based and <10%
commodity-based – representing ~90% of cash
flows supported by regulated utilities or contracted
power assets providing investors with confidence
in steady, stable cash flows.
Fee-forservice
15%
Marginbased
4%
Cost-ofservice
73%
Commoditybased
8%
Source: NBF Estimates
2,000
$5.00
$4.00
1,750
$3.00
1,500
$2.00
2020e
2019e
2018e
$0.00
2017e
$1.00
1,000
2016e
1,250
AFFO/sh - FD
$6.00
2015a
EBITDA ($mln)
ACO - SECURED GROWTH OUTLOOK
2,250
Secured growth: Based on a consolidated capital
program of ~$5 bln through 2019, we forecast
2020e EBITDA of ~$2.1 bln – representing a
compounded average five-year growth rate
(CAGR) of 7% from 2015a levels. Meanwhile, we
forecast a top-tier CAGR of 11% for AFFO/sh (FD)
through 2020e from relatively depressed levels in
2015.
EBITDA: 7% CAGR │ AFFO/sh: 11% CAGR
Source: NBF Estimates
0%
2020e
100%
1.0x
2019e
200%
2.0x
2018e
300%
3.0x
2017e
400%
4.0x
2016e
500%
5.0x
2015a
6.0x
Total Payout
ACO - LEVERAGE OUTLOOK
D/EBITDA
Leverage: On the leverage front, we forecast
2020e D/EBITDA of 3.8x, down from 2015a levels
of 4.8x, and falling below our risk-adjusted comfort
zone for ATCO of 4.5x.
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
ACO - P/AFFO(1) OUTLOOK
2018e
9.2x
2017e
LT Avg.(2): 7.3x
9.5x
10.4x
10.0x
8.6x
12.0x
10.1x
14.0x
2019e
2020e
8.0x
6.0x
4.0x
2016e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
Valuation and investment stance: Rolling our
valuation forward to 2018e estimates largely
offsets revisions to our AB power price forecast,
resulting in an unchanged target of $51.00 – which
is based on a risk-adjusted dividend yield of 3.00%
applied to our 2018e dividend of $1.51, a 12.5x
multiple of our 2018e Free-EBITDA of $1.5 bln and
our DCF/sh valuation of $52.50. Based on a
12-month total return opportunity of 13.5% (group:
17.2%), we maintain our Sector Perform rating.
Page 13
Financial outlook: In the table below we highlight our detailed financial outlook.
ATCO - FINANCIAL OUTLOOK
Key Assumptions
2014
2015e
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
AECO - $/mcf
$4.44
$2.69
$38.95
$50.90
$49.25
$49.25
$49.25
$49.25
Alberta Power - $/MWh
Capital Structure
$49.42
2014
Market Price
$33.33
2015e
$17.32
2016e
$32.00
2017e
$39.00
2018e
$43.00
2019e
$50.00
2020e
$50.00
2021e
$47.66
$35.70
$46.08
$46.08
$46.08
$46.08
$46.08
115
115
115
115
115
115
115
115
5,487
4,110
5,283
5,283
5,283
5,283
5,283
5,283
Ending Net Debt - $mln
6,885
7,256
7,726
8,374
8,830
8,819
7,888
6,931
NCI - $mln
5,057
3,990
4,714
4,739
4,767
4,795
4,824
4,852
17,429
15,356
17,723
18,396
18,880
18,898
17,995
17,066
Outstanding Shares - mln
Market Capitalization - $mln
Enterprise Value - $mln
Financial Information ($mln)
2014
2015e
2016e
2017e
2018e
2019e
2020e
$46.08
2021e
Adj. EBITDA by Segment
Structures & Logistics
144
78
115
126
92
92
92
92
Utilities
940
1,054
1,121
1,215
1,264
1,319
1,295
1,288
Energy
208
146
668
679
700
732
748
757
ATCO Australia
156
120
-
-
-
-
-
-
-
-
-
-
-
Corporate & Other
36
NCI
Total Adj. EBITDA
Interest
(30)
371
139
-
-
-
-
-
-
1,855
1,530
1,874
2,020
2,056
2,143
2,135
2,137
(298)
(294)
(379)
(399)
(391)
(378)
(326)
(301)
(98)
(54)
(99)
(142)
(151)
(160)
(170)
(171)
143
(349)
(420)
833
975
Cash Taxes
Distributions to NCI & Other
(7)
(433)
(500)
(500)
(525)
(540)
(540)
(540)
(540)
333
475
520
503
552
570
583
99
114
131
150
173
173
173
173
-
-
-
-
-
-
-
-
1,779
1,387
1,023
1,475
1,260
885
-
-
2
-
-
-
-
-
Growth Capex
Net Equity Issued
(9)
Ending Net Debt
(4)
1,110
(541)
1,136
Acquisitions
1,092
(530)
Maintenance Capex
AFFO(1)
Dividends
1,043
(513)
1,602
(466)
1,045
(470)
FFO
1,123
6,885
7,256
7,726
8,374
8,830
8,819
7,888
6,931
Net Debt/EBITDA
3.8x
4.8x
4.2x
4.2x
4.4x
4.2x
3.8x
3.3x
FFO/Debt
35%
19%
21%
20%
19%
20%
23%
27%
FFO/Interest
9.0x
5.7x
5.2x
5.2x
5.4x
5.8x
6.6x
7.2x
D/Cap
Per Share
70%
2014
71%
2015e
71%
2016e
69%
2017e
67%
2018e
64%
2019e
59%
2020e
54%
2021e
Ending Net Debt
$59.81
$63.03
$67.39
$73.04
$77.02
$76.92
$68.80
$60.45
EBITDA
$16.15
$13.32
$16.37
$17.62
$17.93
$18.69
$18.62
$18.63
FFO - FD
AFFO - FD(1)
$13.11
$6.34
$7.71
$8.21
$8.16
$8.58
$8.74
$8.85
$9.84
$2.89
$4.14
$4.52
$4.37
$4.79
$4.95
$5.07
Adj. Earnings - FD
$3.36
$2.78
$3.00
$3.30
$3.32
$3.53
$3.65
$3.76
Dividends
FFO Payout Ratio (2)
$0.86
$0.99
$1.14
$1.31
$1.51
$1.51
$1.51
$1.51
17%
7%
16%
15%
16%
18%
18%
17%
AFFO Payout Ratio (3)
9%
34%
27%
29%
34%
31%
30%
30%
Earnings Payout Ratio
25%
36%
38%
40%
45%
43%
41%
40%
DRIP Participation
Forward Trading Metrics
55%
2014
EV/EBITDA
EV/Free-EBITDA(4)
P/FFO
55%
2015e
55%
2016e
55%
2017e
55%
2018e
55%
2019e
55%
2020e
55%
2021e
11.4x
8.2x
8.8x
8.9x
8.8x
8.9x
8.4x
16.9x
11.2x
11.9x
12.1x
11.8x
11.8x
11.3x
7.5x
4.6x
5.6x
5.6x
5.4x
5.3x
5.2x
P/AFFO
16.5x
8.6x
10.2x
10.5x
9.6x
9.3x
9.1x
P/E
17.2x
11.9x
14.0x
13.9x
13.0x
12.6x
12.3x
2.1%
3.2%
2.8%
3.3%
3.3%
3.3%
3.3%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Total dividends / FFO
(3) Total dividends / (FFO - Maintenance capex)
(4) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 14
Canadian Utilities – Target: $44 / Rating: OP / Total Return: 22.0%
Cash flow quality: ~80% of CU’s cash flows are
cost-of-service, ~15% fee-based and ~5%
commodity-based / margin-based (merchant
power and NGL frac spreads). Longer term, we
expect cost-of-service cash flows to continue to
edge up as the company focuses on organic utility
growth, while merchant power exposure
continues to decline as Alberta shifts towards a
capacity market next decade.
CU - 2018E CASH FLOW RISK PROFILE
Fee-forservice
16%
Marginbased
1%
Cost-ofservice
79%
Commoditybased
4%
Source: NBF Estimates
$4.50
1,750
$4.00
1,500
2020e
2019e
2018e
$3.00
2017e
$3.50
1,000
2016e
1,250
AFFO/sh - FD
$5.00
2,000
2015a
EBITDA ($mln)
CU - SECURED GROWTH OUTLOOK
2,250
Secured growth: With a capital program of ~$5
bln through 2019, we forecast 2020e EBITDA of
~$2.0 bln – representing a five-year compounded
average growth rate (CAGR) of 7% from 2015a
levels. Meanwhile, we forecast a CAGR of 5% for
AFFO/sh (FD) through 2020e.
EBITDA: 7% CAGR │ AFFO/sh: 5% CAGR
Source: NBF Estimates
0%
2020e
75%
2.0x
2019e
150%
3.0x
2018e
225%
4.0x
2017e
300%
5.0x
2016e
375%
6.0x
2015a
7.0x
Total Payout
CU - LEVERAGE OUTLOOK
D/EBITDA
Leverage: On the leverage front, we forecast
D/EBITDA ratio of 5.3x in 2018e, trending down
to 4.8x by 2020e, slightly under our comfort zone
of 5x – confirming no need for further equity
issues (above DRIP) to fully fund the company’s
capital program through 2020e.
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
CU - P/AFFO(1) OUTLOOK
16.0x
LT Avg.(2): 12.2x
8.8x
8.5x
9.5x
10.0x
8.8x
12.0x
10.2x
14.0x
2019e
2020e
8.0x
6.0x
2016e
2017e
2018e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
Valuation and investment stance: Rolling our
valuation forward to 2018e estimates largely
offsets revisions to our AB power price forecast,
resulting in an unchanged target of $44.00 –
which is based on a risk-adjusted dividend yield of
3.5% applied to our 2018e dividend of $1.57/sh, a
15.5x multiple of our 2018e Free-EBITDA of $1.5
bln and our DCF/sh valuation of $44.50. Based on
a 12-month total return opportunity of 22.0%
(group: 17.2%), we maintain our Outperform
rating.
Page 15
Financial outlook: In the table below we highlight our detailed financial outlook.
CANADIAN UTILITIES - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
$49.42
$33.33
$17.30
$42.50
$50.00
$50.00
$50.00
$50.00
Alberta Power - $/MWh
Capital Structure
2014
Market Price
2015
2016e
2017e
2018e
2019e
2020e
$60.00
2021e
$40.91
$31.94
$37.39
$37.39
$37.39
$37.39
$37.39
263
266
268
270
271
273
275
276
10,760
8,490
10,037
10,091
10,151
10,211
10,271
10,332
Ending Net Debt - $mln
7,193
7,472
8,061
8,919
9,542
9,696
8,889
8,059
Preferred Equity - $mln
1,302
1,670
1,670
1,670
1,670
1,670
1,670
1,670
19,255
17,632
19,768
20,680
21,363
21,577
20,830
20,061
Outstanding Shares - mln
Market Capitalization - $mln
Enterprise Value - $mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
$37.39
2021e
Adj. EBITDA by Segment
1,163
1,132
1,121
1,215
1,264
1,319
1,295
1,288
Pipelines & Liquids
Electricity
255
192
668
679
700
732
748
757
ATCO Australia
180
153
-
-
-
-
-
-
85
(21)
(9)
(9)
(9)
(9)
(9)
Corporate & Other
Total Adj. EBITDA
1,683
Interest (incl. pref. dividends)
1,884
1,955
2,041
2,034
2,035
(352)
(454)
(475)
(467)
(454)
(402)
(73)
(33)
(72)
(74)
(82)
(87)
(93)
(93)
77
302
254
139
139
139
139
139
1,327
1,372
1,456
1,473
1,544
1,640
1,679
1,704
Other
Maintenance Capex
AFFO(1)
1,729
(360)
Cash Taxes
FFO
1,455
(61)
(411)
(460)
(480)
(500)
916
912
976
973
1,044
1,140
1,179
1,204
280
312
347
385
426
428
431
433
-
-
-
-
-
-
-
-
1,773
1,327
915
1,500
1,300
925
-
-
105
102
53
53
59
59
59
60
8,495
9,142
9,731
10,589
11,212
11,366
10,559
9,729
4.7x
5.7x
5.1x
5.2x
5.3x
5.2x
4.8x
4.4x
FFO/Debt (2)
17%
17%
17%
15%
15%
16%
18%
20%
FFO/Interest (2)
6.2x
6.4x
5.5x
5.3x
5.6x
6.0x
7.1x
7.8x
Dividends
Acquisitions
Growth Capex
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
D/Cap
(2)
Per Share
62%
2014
Ending Net Debt
62%
2015
63%
2016e
65%
2017e
(500)
65%
2018e
(500)
64%
2019e
(500)
(377)
61%
2020e
(500)
58%
2021e
$32.30
$34.39
$36.25
$39.23
$41.30
$41.62
$38.44
$35.21
EBITDA
$6.40
$5.48
$6.45
$6.98
$7.21
$7.48
$7.41
$7.37
FFO - FD
AFFO - FD(1)
$5.05
$5.17
$5.44
$5.46
$5.69
$6.01
$6.12
$6.17
$3.49
$3.44
$3.65
$3.61
$3.85
$4.18
$4.29
$4.36
Adj. Earnings - FD
$2.19
$2.01
$2.03
$2.07
$2.24
$2.40
$2.47
$2.55
Dividends
FFO Payout Ratio (3)
$1.07
$1.18
$1.30
$1.43
$1.57
$1.57
$1.57
$1.57
25%
21%
23%
24%
26%
28%
26%
26%
AFFO Payout Ratio (4)
31%
34%
36%
40%
41%
38%
37%
36%
Earnings Payout Ratio
49%
58%
64%
69%
70%
65%
63%
62%
DRIP Participation
Forward Trading Metrics
30%
2014
EV/EBITDA
EV/Free-EBITDA(5)
P/FFO
32%
2015
14%
2016e
14%
2017e
14%
2018e
14%
2019e
14%
2020e
14%
2021e
13.2x
10.2x
10.5x
10.6x
10.5x
10.6x
10.2x
19.4x
14.1x
14.3x
14.2x
13.9x
14.1x
13.6x
7.9x
5.9x
6.8x
6.6x
6.2x
6.1x
6.1x
P/AFFO
11.9x
8.8x
10.4x
9.7x
9.0x
8.7x
8.6x
P/E
20.3x
15.7x
18.1x
16.7x
15.6x
15.1x
14.7x
2.9%
4.1%
3.8%
4.2%
4.2%
4.2%
4.2%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 16
Capital Power – Target: $29 / Rating: OP / Total Return: 24.7%
Cash flow quality: Merchant Alberta power
contributions represent ~30% of 2018e EBITDA,
and are set to expand by 2021 as PPAs (Power
Purchase Agreements) on Genesee 1 and 2 expire
at the end of 2020, partly offset by the $700 mln
(net) Genesee 4&5 projects expected online
2022/2023, 50% contracted with ENMAX.
Meanwhile, with $734 mln of cash coal retirement
compensation to be received from the Alberta
Government over the next 14 years (i.e., $52.4 mln
per year), we expect CPX to secure incremental
renewable or gas-fired power contracts post 2020.
600
$3.50
$3.00
500
$2.50
400
$2.00
2021e
2020e
2019e
2018e
$1.00
2017e
$1.50
200
2016e
300
EBITDA: -1% CAGR │ AFFO/sh: -3% CAGR
AFFO/sh - FD
$4.00
2015a
EBITDA ($mln)
CPX - SECURED GROWTH OUTLOOK
700
CPX - 2018E CASH FLOW RISK PROFILE
Fee-based /
Contracted
70%
Commoditybased
30%
Source: NBF Estimates
Secured growth: We forecast 2021e EBITDA
(i.e., excluding any contributions from Genesee
4&5) of $436 mln, representing a CAGR of -1%
from 2015a levels (AFFO/sh CAGR: -3%) as the
impact of the Alberta carbon tax is partly offset by
continued cost savings initiatives. Of note, CPX
announced plans to invest ~$10 mln per year of
“maintenance capex” to reduce coal-fired carbon
emissions by ~10% representing annual carbon
tax savings of ~$30 mln commencing in 2021.
Source: NBF Estimates
5.0x
175%
4.0x
150%
125%
3.0x
100%
2.0x
75%
2021e
2020e
2019e
2018e
2017e
25%
2016e
50%
0.0x
2015a
1.0x
Total Payout
CPX - LEVERAGE OUTLOOK
D/EBITDA
Leverage: On the leverage front, despite absorbing
the full impact of the carbon tax, we forecast a
sustainable balance sheet of <4x D/EBITDA by
2021e, trending down to <3x upon completion of the
$700 mln (net) Genesee 4 & 5 natural gas-fired
projects. Of note, we revised our long-term power
price assumption to $45/MWh (from $50/MWh), in
line with our revised outlook for long-term natural
gas AECO prices to $2.90/mcf (from $3.60/mcf).
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Tota Payout = (growth capex + total dividends) / AFFO
CPX - P/AFFO(1) OUTLOOK
LT Avg.(2): 6.8x
9.2x
12.0x
7.4x
7.4x
7.4x
6.0x
2017e
2018e
2019e
2020e
5.5x
8.0x
7.2x
10.0x
4.0x
2016e
2021e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
Valuati Source: NBF Estimates
on and investment stance: CPX recently
reiterated its annual dividend growth guidance of
7% through 2018, while highlighting spot power
prices of just <$10 MWh required to maintain
100% dividend coverage through 2019e. Overall,
our $29 target (was $28) is based on a
risk-adjusted dividend yield of 6.00% applied to
our 2018e dividend of $1.73, an 11.0x multiple of
our 2018e Free-EBITDA of $438 mln and our
DCF/sh valuation of $28.50.
With $734 mln of coal retirement cash compensation expected over the next 14 years helping
to protect the balance sheet and payout ratio, coupled with ~$30 bln of new renewables
investment expected in AB by 2030, we reiterate CPX’s bluesky upside potential from AB &
U.S. renewable development of ~$6/sh (~20%) upside to our $29 valuation on an investment
of ~$3 bln (~1,000 MW in AB and 1,239 MW in the U.S.). Combined with CPX currently
trading at a 7.4x 2018e P/AFFO multiple (i.e., >13% FCF yield) with a 52% payout ratio –
versus the low-payout group averages of 11.4x and 48%, we reiterate our Outperform rating
with a 12-month total return opportunity of 24.7% (group: 17.2%).
Page 17
Financial outlook: In the table below we highlight our detailed financial outlook.
CAPITAL POWER - FINANCIAL OUTLOOK
Key Assumptions
2014
AECO - $/mcf
Alberta Power - $/MWh
FX - CAD/USD
2015
2018e
2019e
2020e
2021e
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
$49.42
$33.33
$17.30
$32.00
$39.00
$43.00
$45.00
$45.00
2014
Market Price
2017e
$2.69
$1.10
Market Capitalization
2016e
$4.44
$1.28
2015
$1.32
2016e
$1.30
2017e
$1.30
2018e
$1.30
2019e
$1.30
2020e
$1.30
2021e
$26.00
$17.77
$24.19
$24.19
$24.19
$24.19
$24.19
102
97
96
96
96
96
96
96
Market Capitalization - $mln
2,660
1,730
2,325
2,325
2,325
2,325
2,325
2,325
Outstanding Shares - mln
$24.19
Ending Net Debt - $mln
1,438
1,535
1,277
1,415
1,248
1,275
1,306
1,397
Preferred Equity - $mln
464
464
659
659
659
659
659
659
NCI - $mln
552
68
62
62
62
62
62
62
5,114
3,797
4,324
4,461
4,294
4,322
4,353
4,444
Enterprise Value - $mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
Adj. EBITDA by Segment
AB Commercial
211
254
277
249
224
225
213
AB Contracted
161
184
166
162
162
162
163
-
92
97
120
120
120
120
120
120
ON + BC Contracted
US Contracted
G&A
319
7
27
35
38
41
41
41
41
(84)
(100)
(119)
(44)
(44)
(44)
(44)
(44)
Total Adj. EBITDA
387
462
478
526
503
505
494
436
Interest (incl. pref dividends)
(78)
(116)
(107)
(111)
(105)
(106)
(109)
(112)
Cash Taxes
(11)
(4)
(1)
(4)
(3)
(3)
(3)
(2)
Distributions to NCI
(24)
(13)
-
-
-
-
-
-
Other
41
36
-
-
-
-
-
-
FFO
315
365
371
411
395
395
382
323
Maintenance Capex
AFFO(1)
(75)
(62)
(58)
(85)
(75)
(75)
(65)
(65)
n/a
303
313
326
320
320
317
258
Dividends
133
141
145
155
166
172
172
172
18
-
-
-
-
-
-
-
168
75
75
320
10
200
200
200
Acquisitions
Growth Capex
Net Equity Issued
61
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
FFO/Debt (2)
FFO/Interest
D/Cap
(2)
(2)
Per Share
-
-
-
-
-
1,902
1,999
(97)
1,936
2,074
1,907
1,934
1,965
2,056
4.3x
3.8x
3.4x
3.3x
3.1x
3.2x
3.3x
4.0x
20%
21%
24%
24%
26%
26%
24%
20%
4.9x
3.6x
4.0x
4.5x
4.6x
4.5x
4.3x
3.5x
50%
2014
Ending Net Debt
42%
2015
(22)
40%
2016e
42%
2017e
40%
2018e
41%
2019e
43%
2020e
45%
2021e
$14.06
$15.76
$13.29
$14.71
$12.98
$13.27
$13.59
$14.53
EBITDA
$3.78
$4.74
$4.98
$5.47
$5.23
$5.25
$5.14
$4.54
FFO - FD
AFFO - FD(1)
$3.11
$3.79
$3.86
$4.28
$4.10
$4.11
$3.98
$3.35
$2.37
$3.14
$3.25
$3.39
$3.32
$3.33
$3.30
$2.68
Adj. Earnings - FD
$0.58
$1.15
$1.15
$1.39
$1.26
$1.27
$1.16
$0.70
Dividends
FFO Payout Ratio (3)
$1.31
$1.41
$1.51
$1.61
$1.73
$1.79
$1.79
$1.79
42%
39%
39%
38%
42%
43%
45%
53%
55%
47%
46%
48%
52%
54%
54%
AFFO Payout Ratio (4)
Forward Trading Metrics
2014
EV/EBITDA
EV/Free-EBITDA(5)
2015
2016e
2017e
2018e
2019e
2020e
67%
2021e
11.1x
7.9x
8.2x
8.9x
8.5x
8.7x
10.0x
12.8x
9.0x
9.8x
10.4x
10.0x
10.1x
11.7x
P/FFO
6.9x
4.6x
5.7x
5.9x
5.9x
6.1x
7.2x
P/AFFO
8.3x
5.5x
7.1x
7.3x
7.3x
7.3x
9.0x
22.6x
15.5x
17.4x
19.2x
19.1x
20.8x
34.5x
5.4%
8.5%
6.7%
7.1%
7.4%
7.4%
7.4%
P/E
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / Funds from operations
(4) Total dividends / (Funds from operations - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
14.0%
Page 18
Emera – Target: $52 / Rating: SP / Total
Return: 18.6%
Cash flow quality: For 2018e, EMA’s cash flow
risk profile is 93% cost-of-service, 6%
fee-for-service and 1% commodity-based. Recall,
the company closed the US$10.4 bln acquisition of
Florida-based TECO Energy Inc. (100% rate
regulated)
in
mid-2016.
Meanwhile,
cost-of-service contributions continue to edge
higher with a full year’s contribution from the ~$2
bln Maritime Link and Labrador Island Link
investments (online Q1/18).
2,500
$4.50
$4.00
2,000
$3.50
1,500
$3.00
2020e
2019e
2018e
$2.00
2017e
$2.50
500
2016e
1,000
EBITDA: 5% CAGR(1) │ AFFO/sh: 12% CAGR
AFFO/sh - FD
$5.00
2015a
EBITDA ($mln)
EMA - SECURED GROWTH OUTLOOK
3,000
EMA - 2018E CASH FLOW RISK PROFILE
Fee-forservice
6%
Commoditybased
1%
Cost-ofservice
93%
Source: NBF Estimates
Secured growth: Based on an $8.3 bln capex
program through 2020e pro forma the acquisition
of TECO, we forecast 2020e EBITDA of ~$2.8 bln
– representing a five-year CAGR of 5% from
2015a levels (adjusted for TECO acquisition). On
the AFFO/sh (FD) front, we forecast a 12% CAGR
through 2020e, underpinning ~6% average annual
rate base growth and ~8% annual dividend growth
while maintaining a 75-85% payout target ratio of
regulated earnings.
(1) EBITDA CAGR adjusted for TECO acquisition.
Source: NBF Estimates
14.5x
15.1x
16.0x
Avg.(2):
15.5x
LT
16.4x
17.6x
20.0x
19.4x
EMA - P/AFFO(1) OUTLOOK
24.0x
2019e
2020e
12.0x
8.0x
2016e
2017e
2018e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
300%
8.0x
250%
200%
6.0x
150%
4.0x
100%
2020e
2019e
2018e
0%
2017e
50%
0.0x
2016e
2.0x
2015a
D/EBITDA
10.0x
Total Payout
EMA - LEVERAGE OUTLOOK
Leverage: We forecast D/EBITDA of 5.9x through
2020e – slightly above our risk-adjusted comfort
zone of 5.0x to 5.5x, with a capital structure of ~63%
debt vs. the company’s long-term target of 55%.
Delevering is expected to occur through
optimization of free cash flow and ~US$1 bln of
TECO debt repayments - highlighting the need for
future incremental common equity (target: 35%) to
rightsize the balance sheet. Meanwhile, we
continue to highlight near-term downside risk of
~15% to our 2017e AFFO estimate if the incoming
U.S. administration reduces U.S. corporate tax
rates to 15% (down from 33%).
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: Rolling our
valuation forward to 2018e, our target remains
unchanged at $52.00 – which is based on a
risk-adjusted dividend yield of 4.50% applied to
our 2018e dividend of $2.35, a 14.0x multiple of
our 2018e Free-EBITDA of $2.0 bln and our
DCF/sh valuation of $54.00. Overall, based on a
12-month total return opportunity of 18.6% (group:
17.2%), we maintain our Sector Perform rating.
Page 19
Financial outlook: In the table below we highlight our detailed financial outlook.
EMERA - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
NYMEX - US$/mcf
$4.38
$2.70
$3.30
$3.30
$3.30
$3.30
$3.30
$3.30
FX - CAD/USD
$1.32
$1.30
$1.30
$1.30
$1.30
$1.30
$1.30
$1.30
Capital Structure
2014
Market Price
2015
2016e
2017e
2018e
2019e
2020e
2021e
$38.64
$43.23
$45.60
$45.60
$45.60
$45.60
$45.60
144
147
208
208
209
209
209
210
Market Capitalization - $mln
5,556
6,364
9,486
9,497
9,510
9,523
9,538
9,554
Outstanding Shares - mln
$45.60
Ending Net Debt - $mln
3,421
3,132
15,178
15,743
15,878
16,101
16,212
15,855
Preferred Equity - $mln
710
710
710
710
710
710
710
710
NCI - $mln
307
134
109
104
100
96
91
87
9,993
10,339
25,482
26,054
26,198
26,429
26,552
26,205
Enterprise Value - $mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
Adj. EBITDA by Segment
Florida & New Mexico
-
-
642
1,470
1,510
1,548
1,613
NSPI
473
491
486
524
533
542
550
552
Maine
123
136
146
151
158
164
171
171
Caribbean
Energy
93
118
144
130
130
130
130
130
184
243
142
143
207
211
170
153
88
79
119
98
80
87
87
87
-
-
-
-
106
106
106
106
962
1,066
1,679
2,517
2,724
2,787
2,826
2,811
Corporate & Other
Maritime Link
Total Adj. EBITDA
Interest (incl. pref dividends)
1,613
(214)
(243)
(610)
(702)
(705)
(705)
(706)
(704)
Cash Taxes
(20)
(92)
(53)
(56)
(82)
(84)
(77)
(74)
NCI
(22)
(39)
(22)
(26)
(26)
(26)
(26)
(26)
Other
(28)
40
(118)
(279)
(285)
(291)
(298)
(298)
FFO
678
731
876
(321)
(340)
(500)
(700)
(757)
(769)
(771)
(773)
357
392
376
753
868
912
949
937
Earnings
310
365
421
489
581
615
633
623
Dividends
207
240
323
452
489
529
572
595
Acquisitions
155
136
8,409
-
-
-
-
-
Growth Capex
109
29
735
877
827
619
503
-
Maintenance Capex
AFFO(1)
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
FFO/Debt (2)
FFO/Interest
D/Cap
(2)
(2)
Per Share
1,625
1,681
1,720
1,710
310
87
323
12
313
14
15
15
4,131
3,842
15,888
16,453
16,588
16,810
16,922
16,565
3.9x
3.3x
9.3x
6.4x
6.0x
5.9x
5.9x
5.8x
18%
21%
7%
9%
10%
10%
10%
11%
5.5x
4.8x
2.9x
3.3x
3.5x
3.6x
3.7x
3.7x
55%
2014
Ending Net Debt
1,453
48%
2015
72%
2016e
72%
2017e
71%
2018e
71%
2019e
71%
2020e
71%
2021e
$23.80
$21.28
$72.97
$75.59
$76.14
$77.09
$77.51
$75.68
EBITDA
$6.69
$7.24
$8.07
$12.08
$13.06
$13.35
$13.51
$13.42
FFO - FD
AFFO - FD(1)
$4.61
$4.94
$6.29
$6.98
$7.80
$8.06
$8.23
$8.17
$2.43
$2.63
$3.37
$3.62
$4.17
$4.37
$4.54
$4.48
Adj. Earnings - FD
$2.11
$2.48
$2.46
$2.35
$2.79
$2.95
$3.03
$2.98
Dividends
FFO Payout Ratio (3)
$1.48
$1.66
$2.00
$2.17
$2.35
$2.54
$2.74
$2.84
35%
31%
33%
30%
31%
30%
31%
33%
AFFO Payout Ratio (4)
58%
62%
56%
60%
56%
58%
60%
64%
Earnings Payout Ratio
67%
66%
77%
92%
84%
86%
90%
95%
DRIP Participation
Forward Trading Metrics
29%
2014
EV/EBITDA
EV/Free-EBITDA(5)
P/FFO
36%
2015
8%
2016e
3%
2017e
3%
2018e
3%
2019e
3%
2020e
3%
2021e
9.4x
6.2x
10.1x
9.6x
9.4x
9.4x
9.4x
13.8x
8.8x
14.0x
13.2x
13.0x
12.9x
13.0x
7.8x
6.9x
6.5x
5.8x
5.7x
5.5x
5.6x
P/AFFO
14.7x
12.8x
12.6x
10.9x
10.4x
10.0x
10.2x
P/E
15.6x
17.6x
19.4x
16.3x
15.5x
15.1x
15.3x
4.3%
4.6%
4.8%
5.1%
5.6%
6.0%
6.2%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 20
Enbridge – Target: $66 / Rating: OP / Total Return: 18.9%
ENB - 2018E CASH FLOW RISK PROFILE
Cash flow quality: Pro forma the $59 bln
acquisition of Spectra Energy Corp. (SE: NYSE)
Fee-forservice
expected to close by March, over 90% of ENB’s
4%
cash flows are generated by cost-of-service /
Margintake-or-pay agreements, with ~5% from
Cost-ofbased
fee-based contracts and <5% from margin-based
service
3%
92%
or commodity-based operations. Of note, we
Commoditybased
classify the 2.85 mmbpd Canadian Mainline
1%
(~12% of EBITDA) as half cost-of-service, half
fee-based given the provision within the CTS
(Competitive Toll Settlement) to revert back to Source: NBF Estimates
cost-of-service should volumes decline to 1.35 mmbpd (currently >2.5 mmbpd).
13,000
$6.00
$5.00
10,000
$4.00
2020e
2019e
2018e
$2.00
2017e
$3.00
4,000
2016e
7,000
EBITDA: 20% CAGR │ AFFO/sh: 8% CAGR
AFFO/sh - FD
$7.00
2015a
Con. EBITDA ($mln)
ENB - SECURED GROWTH OUTLOOK
16,000
Secured growth: Based on ENB’s $23 bln of
commercially secured projects entering service
through 2019e (excluding the US$1.5 bln Bakken
Pipeline System acquisition pending regulatory
approval), we forecast 2020e EBITDA of ~$15 bln
– representing a CAGR of 20% from 2015a levels,
with an AFFO/sh (FD) CAGR of 8%. Recall,
including ENB’s $48 bln portfolio of unsecured
growth opportunities, the company is guiding
towards dividend growth of 10-12% through 2024.
Source: NBF Estimates
0%
2015a
2020e
75%
0.0x
2019e
150%
2.0x
2018e
225%
4.0x
2017e
300%
6.0x
2016e
375%
8.0x
Total Payout
ENB - LEVERAGE OUTLOOK
10.0x
D/EBITDA
Leverage: Pro forma Spectra, we forecast 2017e
D/EBITDA of 5.5x, trending down towards ~4.0x by
2020e – well below the company’s target of 5.0x. Of
note, we conservatively assumed a Q4 2019e
in-service date for the Cdn$8.3 bln Line 3
Replacement project, which remains subject to
Enbridge obtaining the appropriate permits for
construction in Minnesota (expected by late 2017).
Overall, we do not expect any further equity to be
issued (above DRIP) at the ENB level through
2020e.
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
ENB - P/AFFO(1) OUTLOOK
10.2x
12.0x
LT Avg.(2): 11.6x
11.2x
14.0x
11.0x
16.0x
13.4x
14.0x
18.0x
10.0x
8.0x
Valuation and investment stance: Rolling our
valuation forward to 2018e, our $66 target (was
$63) is based on a risk-adjusted dividend yield of
4.0% applied to our 2018e dividend of $2.68, a
16.0x multiple of our 2018e Free-EBITDA of $11.1
bln and our DCF/sh valuation of $67.50.
ENB’s stock price is up only 2% since announcing
the $59 bln acquisition of Spectra on Sept. 6th
(1) AFFO/sh (basic) = FFO/sh (basic) - Maint. capex
(group: 3%), despite the transaction reducing pro
(2) Based on consensus CFPS and adjusted for maint. capex.
forma leverage by ~0.5x on a D/EBITDA basis,
Source: Thomson Reuters, NBF Estimates
while diversifying the company’s business mix
closer towards ~50% Liquids, 50% Gas (was ~75% Liquids) and extending the company’s
sector-leading dividend growth profile of 10-12% to 2024 from 2020. Combined with a
12-month total return opportunity of 18.9% (group: 17.2%), we maintain our Outperform
rating.
6.0x
2016e
2017e
2018e
2019e
2020e
Page 21
Financial outlook: In the table below we highlight our detailed financial outlook.
ENBRIDGE - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
AECO - $/mcf
$4.44
$4.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.10
$1.28
$1.31
$1.30
$1.30
$1.30
$1.30
$1.30
Capital Structure
2014
Market Price
2015
2016e
2017e
2018e
2019e
2020e
$60.00
2021e
$59.74
$46.00
$56.63
$56.63
$56.63
$56.63
$56.63
829
847
911
1,635
1,667
1,703
1,722
1,722
Market Capitalization - $mln
49,524
38,962
51,566
92,589
94,379
96,415
97,491
97,491
Ending Net Debt - $mln
34,723
41,475
39,950
63,164
63,696
58,847
54,940
51,403
Preferred Equity - $mln
6,515
6,515
6,515
6,515
6,515
6,515
6,515
NCI - $mln
4,264
3,441
3,667
2,822
1,607
409
Outstanding Shares - mln
Enterprise Value - $mln
Financial Information ($mln)
95,026
2014
90,393
2015
101,698
2016e
165,091
2017e
166,198
2018e
162,187
2019e
(756)
158,191
2020e
$56.63
6,515
(1,937)
153,472
2021e
Consolidated Adj. EBITDA by Segment
Liquids
5,340
5,702
5,988
6,582
7,452
7,611
Gas Distribution
849
1,579
1,634
1,666
1,666
1,666
Energy Services
34
-
-
-
-
-
666
4,655
4,973
5,382
5,384
5,382
455
Gas Pipelines & Processing
Power
Corporate & Other
Total Consolidated Adj. EBITDA
5,142
5,972
347
364
404
455
456
(289)
(292)
(241)
(177)
(13)
6,948
12,009
12,758
13,909
14,945
(9)
15,105
D&A
2,235
3,212
3,327
3,450
3,682
3,682
Consolidated Adj. EBIT
4,713
8,797
9,431
10,628
11,431
11,591
(1,811)
(2,654)
(2,680)
(2,661)
(2,734)
(2,697)
(92)
(174)
(211)
(149)
(162)
(165)
(880)
(1,240)
(1,427)
(1,427)
(1,427)
(1,427)
Interest (incl. pref. dividends)
Cash Taxes
Distributions to NCI
Other
3,557
3,626
3,866
4,098
4,098
4,430
8,285
8,739
10,257
11,207
11,400
(1,653)
(1,672)
(1,672)
(1,672)
(1,672)
6,633
7,067
8,585
9,535
9,728
3,545
4,492
5,046
5,628
6,191
-
-
-
-
-
3,476
Maintenance Capex
AFFO(1)
2,506
3,154
3,784
Dividends
1,176
1,596
1,945
(970)
Acquisitions (Dispositions)
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
FFO/D (2)
D/Cap
(2)
(2)
Per Share
(720)
309
Growth Capex
FFO/Interest
3,874
2,501
FFO
(341)
9,554
6,553
4,679
7,272
6,481
2,303
-
905
703
3,044
1,519
1,925
2,162
-
-
41,238
47,990
46,465
69,679
70,211
65,362
61,455
57,918
7.4x
7.5x
6.2x
5.5x
5.2x
4.5x
3.9x
3.6x
13%
14%
11%
13%
13%
17%
20%
21%
3.8x
3.2x
3.7x
6.1x
6.3x
7.3x
7.6x
7.9x
74%
2014
Ending Net Debt
(40)
(646)
74%
2015
72%
2016e
76%
2017e
73%
2018e
67%
2019e
64%
2020e
60%
2021e
$48.40
$55.29
$49.34
$41.91
$41.39
$37.69
$35.43
$33.39
EBITDA
$6.08
$6.92
$7.43
$7.27
$7.58
$8.09
$8.62
$8.71
FFO - Basic
AFFO - Basic(1)
$4.19
$4.57
$4.88
$5.07
$5.24
$6.02
$6.51
$6.62
$3.02
$3.72
$4.17
$4.06
$4.24
$5.04
$5.54
$5.65
Adj. Earnings - Basic
$1.90
$2.20
$2.30
$2.92
$3.23
$3.76
$4.06
$4.17
Dividends
FFO Payout Ratio (3)
$1.40
$1.86
$2.12
$2.39
$2.68
$2.95
$3.24
$3.57
34%
41%
44%
43%
51%
49%
50%
54%
AFFO Payout Ratio (4)
47%
51%
51%
53%
64%
59%
59%
64%
DRIP Participation
38%
40%
43%
43%
43%
43%
0%
Forward Trading Metrics
2014
EV/EBITDA
EV/Free-EBITDA(5)
2015
2016e
2017e
2018e
2019e
2020e
0%
2021e
15.9x
13.0x
8.5x
12.9x
11.9x
10.9x
10.5x
18.1x
14.3x
9.8x
14.9x
13.6x
12.2x
11.8x
P/FFO - Basic
13.1x
9.4x
11.2x
10.8x
9.4x
8.7x
8.6x
P/AFFO - Basic
16.0x
11.0x
14.0x
13.4x
11.2x
10.2x
10.0x
P/E - Basic
27.1x
20.0x
19.4x
17.5x
15.1x
13.9x
13.6x
3.1%
4.6%
4.2%
4.7%
5.2%
5.7%
6.3%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 22
Enbridge Income Fund – Target: $38 / Rating: SP / Total Return: 10.9%
Cash flow quality: ENF’s cash flows are ~2/3rds
cost-of-service / take-or-pay and 1/3rd fee-based.
Of note, we classify the fixed-fee Mainline (>50%
of EBITDA) as half cost-of-service, half fee-based
– given a provision within the CTS (Competitive
Toll Settlement) under which Enbridge can revert
back to the cost-of-service model should volumes
decline to 1.35 mmbpd from current levels of >2.5
mmbpd (capacity: 2.85 mmbpd).
ENF - 2018E CASH FLOW RISK PROFILE
Fee-forservice
33%
Cost-ofservice
67%
Source: NBF Estimates
$3.50
4,000
$3.00
3,000
$2.50
2,000
$2.00
1,000
2020e
2019e
2018e
2017e
2016e
$1.50
2015
-
EBITDA: 9% CAGR(1) │ AFFO/sh: 4% CAGR
AFFO/sh - FD
EBITDA ($mln)
ENF - SECURED GROWTH OUTLOOK
5,000
Secured growth: Based on ~$9 bln of
commercially-secured projects coming into
service, we forecast 2020e EBITDA of ~$3.9 bln –
representing a CAGR of 9% from 2015a levels
(adjusted for the $30 bln asset drop down). From
an AFFO/sh perspective, we forecast a CAGR of
4% through 2020e, with strong EBITDA growth
partly offset by ongoing dilution related to ~$1.4
bln of equity being issued per year through 2019e
(~50% public; ~50% ENB).
(1) EBITDA CAGR adjusted for asset drop down from ENB.
Source: NBF Estimates
50%
2015
2020e
100%
0.0x
2019e
150%
2.0x
2018e
200%
4.0x
2017e
250%
6.0x
2016e
300%
8.0x
Total Payout
ENF - LEVERAGE OUTLOOK
10.0x
D/EBITDA
Leverage: We forecast D/EBITDA of 5.2x for
2017e, trending down to 3.2x by 2020e and sitting
well below our risk-adjusted comfort zone for ENF
of 5.0x – of course assuming successful
completion of over $2 bln of common equity being
issued to the public over the next three years.
D/EBITDA(1) │ Total Payout(2)
(1) 2015e D/EBITDA adjusted for asset acquisition.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
OUTLOOK
14.0x
LT Avg.(2): 10.9x
11.4x
12.0x
14.2x
16.0x
11.5x
20.0x
13.2x
ENF - P/AFFO
(1)
8.0x
Valuation and investment stance: Rolling
forward our valuation to 2018e, our $38 target
(was $37) is based on a risk-adjusted dividend
yield of 6.0% applied to our 2018e dividend of
$2.24, a 16.5x multiple of our 2018e Free-EBITDA
of $3.0 bln and our DCF/sh valuation of $39.75.
Although the equity overhang remains, we
continue to view ENF as a relatively defensive
(1) AFFO = FFO - Maint. capex
name with a steady dividend growth profile. As
(2) Based on consensus CFPS and adjusted for maint. capex.
such, we believe investors should look to
Source: Thomson Reuters, NBF Estimates
accumulate a position on any broader market
weakness potentially pushing the stock back below $33, which would represent an attractive
20% total return to our target price. For now, based on a 12-month total return opportunity of
10.9% (group: 17.2%), we move the stock back to Sector Perform (from Outperform).
4.0x
2016e
2017e
2018e
2019e
2020e
Page 23
Financial outlook: In the table below we highlight our detailed financial outlook.
ENBRIDGE INCOME FUND - FINANCIAL OUTLOOK
Key Assumptions
2014
2015e
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.10
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
Capital Structure
2014
Market Price
2015e
2016e
2017e
2018e
2019e
2020e
$1.30
2021e
$40.35
$27.17
$35.98
$35.98
$35.98
$35.98
$35.98
138
722
759
811
865
920
929
938
Market Capitalization - $mln
5,587
19,628
27,305
29,177
31,106
33,099
33,427
33,758
Ending Net Debt - $mln
2,597
13,809
15,212
14,762
14,985
13,630
12,462
11,151
Enterprise Value - $mln
8,184
33,437
42,517
43,939
46,091
46,730
45,889
44,909
Outstanding Shares - mln
Financial Information ($mln)
2014
2015e
2016e
2017e
2018e
2019e
2020e
$35.98
2021e
Adj. EBITDA by Segment
2,042
2,403
2,689
2,984
3,492
Green Power
Liquids Pipelines
250
257
257
257
258
257
Gas Pipelines
192
192
192
192
192
192
Corporate & Other
Total Adj. EBITDA
383
1,232
Interest
3,659
43
-
-
-
-
-
2,527
2,852
3,138
3,433
3,942
4,108
(355)
(369)
(473)
(470)
(463)
(463)
Cash Taxes
(51)
(90)
(96)
(109)
(128)
(136)
Other
(42)
(49)
(52)
(56)
(59)
FFO
380
958
Fund and ECT op, admin and interest exp
2,079
2,344
2,516
2,799
3,292
(59)
3,449
(217)
(222)
(230)
(238)
(244)
(246)
(121)
(125)
(125)
(125)
(125)
(125)
Maintenance Capex
Fund Group AFFO(1)
(13)
(40)
367
918
1,742
1,998
2,161
2,436
2,923
3,078
Dividends
192
712
1,562
1,632
1,761
1,917
1,999
2,013
1,760
2,712
13
-
-
-
-
-
40
1,545
2,276
1,590
2,340
933
-
-
868
5,746
1,493
1,453
1,488
1,530
-
-
2,597
13,809
15,212
14,762
14,985
13,630
12,462
11,151
Net Debt/EBITDA
6.8x
11.2x
6.0x
5.2x
4.8x
4.0x
3.2x
2.7x
FFO/Debt
15%
7%
14%
16%
17%
21%
26%
31%
n/m
8.7x
6.7x
7.4x
6.3x
7.0x
8.1x
8.4x
Acquisitions
Growth Capex
Net Equity Issued
Ending Net Debt
FFO/Interest
D/Cap
74%
Per Share
2014
Ending Net Debt
61%
2015e
62%
2016e
58%
2017e
55%
2018e
49%
2019e
46%
2020e
43%
2021e
$18.76
$19.12
$20.05
$18.20
$17.33
$14.82
$13.41
$11.89
EBITDA
$2.77
$3.53
$3.40
$3.63
$3.74
$3.84
$4.26
$4.39
FFO - FD
AFFO - FD(1)
$2.74
$2.74
$2.82
$2.98
$3.00
$3.13
$3.56
$3.69
$1.99
$2.63
$2.36
$2.54
$2.58
$2.72
$3.16
$3.29
$1.39
$1.59
$1.87
$2.04
$2.24
$2.46
$2.48
$2.48
51%
74%
75%
70%
70%
68%
61%
58%
70%
78%
89%
82%
82%
79%
68%
65%
0%
0%
23%
27%
27%
27%
0%
Dividends
FFO Payout Ratio (2)
AFFO Payout Ratio
(3)
DRIP Participation
Forward Trading Metrics
2014
EV/EBITDA
EV/Free-EBITDA(4)
2015e
2016e
2017e
2018e
2019e
2020e
0%
2021e
6.6x
13.2x
14.9x
14.0x
13.4x
11.9x
11.2x
6.9x
13.9x
15.6x
14.6x
13.9x
12.2x
11.5x
P/FFO
14.7x
9.6x
12.1x
12.0x
11.5x
10.1x
9.8x
P/AFFO
15.4x
11.5x
14.2x
14.0x
13.2x
11.4x
10.9x
3.9%
6.9%
5.7%
6.2%
6.9%
6.9%
6.9%
Dividend Yield
(1) AFFO = FFO - Maintenance capex - Fund & ECT op, admin, and interest exp.
(2) Total dividends / FFO
(3) Total dividends / (FFO - Maintenance capex)
(4) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 24
Fortis – Target: $47 / Rating: SP / Total
Return: 17.4%
Cash flow quality: over 95% of FTS’ business is
rate regulated cost-of-service, underpinned by the
late 2016 closing of the company’s US$11.8 bln
acquisition of ITC Holdings Inc. We expect little
change to the company’s long-term cash flow risk
profile as the company unveiled a base capital
program for 2017/2018 of $2.9 bln per year, which
if held flat through 2021, underpins a five-year rate
base CAGR of 5.1%.
FTS - SECURED GROWTH OUTLOOK
$4.25
4,000
$3.50
3,500
3,000
$2.75
2,500
$2.00
2020e
2019e
2018e
2017e
2016e
2015a
2,000
AFFO/sh - FD
EBITDA ($mln)
4,500
FTS - 2018E CASH FLOW RISK PROFILE
Fee-forservice
4%
Cost-ofservice
96%
Source: NBF Estimates
Secured growth: Based on the company’s ~$13
bln capital program through 2021e, including the
recent positive FID of the Woodfibre pipeline
($600 mln), we forecast ~12% annual EBITDA
growth, while AFFO/sh increases ~7% per year –
supporting the company’s annual dividend growth
guidance of 6% through 2021 while maintaining a
sub-50% AFFO payout ratio.
EBITDA: 12% CAGR │ AFFO/sh: 7% CAGR
Source: NBF Estimates
375%
10.0x
300%
2020e
2019e
0%
2018e
75%
2.0x
2017e
150%
4.0x
2016e
225%
6.0x
2015a
8.0x
Total Payout
FTS - LEVERAGE OUTLOOK
12.0x
D/EBITDA
Leverage: We forecast 2018e D/EBITDA of 6.3x,
above our risk-adjusted comfort zone of 5.5x,
albeit supported by over 95% long-term
cost-of-service cash flows. As such, we do not
forecast any incremental equity issues (above
DRIP) through our forecast period.
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: Rolling our
valuation forward to 2018e, our unchanged $47
LT Avg. : 10.9x
target is based on a risk-adjusted dividend yield of
14.0x
3.5% applied to our 2018e dividend of $1.72/sh, a
12.0x
15.0x multiple of our 2018e Free-EBITDA of $2.8
10.0x
bln and our DCF/sh valuation of $47.50. Of note,
8.0x
we await congress approval of any U.S. corporate
6.0x
tax reform, while highlighting ~10% downside to
2016e
2017e
2018e
2019e
2020e
our near-term AFFO/sh estimates stemming from
(1) AFFO = FFO - Maint. capex
a revised U.S. corporate tax rate of 15% from
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
~35%. That said, with a more muted 5% estimated
impact to our DCF valuation, we would be buyers of the name below $40 on any market noise
surrounding U.S. tax reform. Maintain Sector Perform rating with a 12-month total return
opportunity of 17.4% (group: 17.2%).
FTS - P/AFFO
(1)
OUTLOOK
16.0x
10.3x
10.7x
11.2x
11.7x
10.4x
(2)
Page 25
Financial outlook: In the table below we highlight our detailed financial outlook.
FORTIS - FINANCIAL OUTLOOK
Key Assumptions
FX - CAD/USD
Capital Structure
Market Price
2014
2015
$1.10
2014
2016e
$1.28
2015
2017e
$1.32
2016e
2018e
$1.30
2017e
2019e
$1.30
2018e
2020e
$1.30
2019e
2021e
$1.30
2020e
$1.30
2021e
$38.96
$37.41
$40.26
$40.26
$40.26
$40.26
$40.26
276
282
401
407
414
420
428
435
Market Capitalization - $mln
10,753
10,533
16,163
16,398
16,651
16,923
17,216
17,533
Ending Net Debt - $mln
11,464
12,000
21,391
22,445
23,465
23,980
24,340
24,431
Preferred Equity - $mln
1,820
1,820
1,623
1,623
1,623
1,623
1,623
1,623
421
473
485
386
296
211
128
49
24,458
24,826
39,662
40,852
42,034
42,736
43,308
43,635
Outstanding Shares - mln
NCI - $mln
Enterprise Value - $mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
$40.26
2021e
Adj. EBITDA by Segment
UNS Energy
207
646
665
721
750
782
810
Central Hudson
145
192
218
233
246
271
293
301
-
-
282
1,232
1,305
1,347
1,368
1,389
FortisBC - Gas
506
516
502
507
530
552
570
580
FortisAlberta
345
374
361
370
379
384
385
383
FortisBC - Electricity
158
155
152
153
156
158
160
163
Eastern Canada
253
219
232
239
246
250
257
259
Caribbean
89
108
144
126
130
134
138
140
Fortis Generation
26
111
125
145
145
145
145
145
Corporate & Other
3
28
(42)
(50)
(50)
(50)
(50)
1,732
2,349
Fortis ITC
Total Adj. EBITDA
Interest (incl. pref. dividends)
2,639
3,677
3,836
834
(50)
3,974
4,077
4,145
(615)
(630)
(692)
(927)
(992)
(1,011)
(1,023)
(1,027)
Cash Taxes
(47)
(59)
(77)
(129)
(140)
(162)
(169)
(175)
NCI
(10)
(23)
(40)
(40)
(40)
(40)
(40)
(40)
Other
113
(57)
FFO
1,173
Maintenance Capex
1,580
-
-
-
-
-
-
1,830
2,581
2,664
2,761
2,844
2,902
(390)
(800)
(1,025)
(1,025)
(1,025)
(1,025)
(1,025)
AFFO(1)
783
780
1,049
1,556
1,639
1,736
1,819
1,877
Dividends
314
390
480
658
708
762
822
887
Acquisitions
2,648
38
13,730
-
-
-
-
-
Growth Capex
1,227
1,322
1,261
2,018
2,034
1,592
1,482
1,228
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
117
164
4,726
234
252
271
292
315
13,284
13,820
23,014
24,068
25,088
25,603
25,963
26,054
7.1x
5.5x
8.4x
6.3x
6.3x
6.2x
6.2x
6.1x
9%
12%
8%
11%
11%
11%
11%
11%
3.0x
3.7x
3.8x
3.9x
3.8x
3.8x
3.9x
3.9x
FFO/Debt (2)
FFO/Interest (2)
D/Cap
(2)
Per Share
Ending Net Debt
(781)
61%
2014
59%
2015
62%
2016e
62%
2017e
62%
2018e
62%
2019e
61%
2020e
61%
2021e
$34.94
$36.16
$49.24
$51.12
$52.81
$53.19
$53.12
$52.37
EBITDA
$7.68
$8.43
$8.57
$9.09
$9.35
$9.53
$9.62
$9.61
FFO - FD
AFFO - FD(1)
$5.20
$5.67
$5.94
$6.38
$6.49
$6.62
$6.71
$6.73
$3.47
$2.80
$3.29
$3.43
$3.58
$3.76
$3.89
$3.96
Adj. Earnings - FD
$1.48
$2.07
$2.26
$2.43
$2.44
$2.53
$2.59
$2.64
Dividends
FFO Payout Ratio (3)
$1.28
$1.40
$1.53
$1.62
$1.72
$1.82
$1.93
$2.05
31%
27%
25%
26%
25%
27%
28%
29%
AFFO Payout Ratio (4)
40%
50%
47%
47%
48%
49%
50%
52%
Earnings Payout Ratio
94%
66%
69%
67%
71%
72%
75%
78%
DRIP Participation
Forward Trading Metrics
37%
2014
EV/EBITDA
EV/Free-EBITDA(5)
42%
2015
24%
2016e
36%
2017e
36%
2018e
36%
2019e
36%
2020e
36%
2021e
10.4x
9.4x
10.8x
10.6x
10.6x
10.5x
10.4x
15.8x
13.4x
15.0x
14.5x
14.3x
14.0x
13.9x
6.9x
6.3x
6.3x
6.2x
6.1x
6.0x
6.0x
P/AFFO
13.9x
11.4x
11.7x
11.2x
10.7x
10.3x
10.2x
P/E
18.8x
16.6x
16.5x
16.5x
15.9x
15.5x
15.3x
3.6%
4.1%
4.0%
4.3%
4.5%
4.8%
5.1%
P/FFO
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 26
Gibson – Target: $18 / Rating: SP /
Total Return: -1.5%
GEI - 2018E CASH FLOW RISK PROFILE
Cash flow quality: For 2018e, Gibson’s cash flow
is 45% cost-of-service (15-year take-or-pay
Fee-forstorage contracts within Terminals & Pipelines
service
segment),
~30%
fee-based
and
~25%
30%
margin-based. Longer term, we expect the
company’s cash flow quality will continue
improving as growth projects are solely focused
on
long-term
contracted
Infrastructure
investments. In fact, pro forma the sale of the Source: NBF Estimates
Industrial Propane business, GEI’s cash flows will
be approximately two-thirds cost-of-service / take-or-pay.
EBITDA ($mln)
$2.25
$2.00
$1.75
$1.50
$1.25
$1.00
$0.75
$0.50
400
300
200
100
2020e
2019e
2018e
2017e
2016e
2015a
-
EBITDA: 1% CAGR │ AFFO/sh: 1% CAGR
AFFO/sh - FD
GEI - SECURED GROWTH OUTLOOK
500
Marginbased
25%
Cost-ofservice
45%
Secured growth: Based on ~$150 mln of secured
growth for 2017, we forecast 2018e EBITDA of
~$370 mln, representing a five-year AFFO/sh (FD)
CAGR of 1% - i.e., bringing AFFO/sh back to 2015
levels. Of note, both the Edmonton and Hardisty
terminals have sufficient potential tank locations to
accommodate further storage growth potentially
stemming from the recently approved Trans
Mountain expansion, as well as ~400,000 bpd of
oil sands production growth through 2019/2020.
Source: NBF Estimates
6.0x
375%
5.0x
300%
4.0x
225%
3.0x
150%
2.0x
2020e
2019e
2018e
2017e
0%
2016e
75%
0.0x
2015a
1.0x
Total Payout
GEI - LEVERAGE OUTLOOK
D/EBITDA
Leverage: Assuming an 8-10x price tag for the
Industrial Propane business ($300-$400 mln), our
pro forma payout ratio jumps to just under 100%
(from 90%), while D/EBITDA would improve to
~3.5x (from 4.2x), albeit remaining slightly above
the company’s 2.5x to 3.0x historical comfort zone.
Combined with the 1-2 year lag in redeploying the
sale proceeds into Infrastructure projects (i.e.,
2018/2019), we do not forecast any further dividend
increases at this time.
D/EBITDA │ Total Payout(1)
(1) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
GEI - P/AFFO(1) OUTLOOK
11.6x
12.0x
11.5x
12.3x
LT Avg.(2): 11.1x
13.1x
16.0x
26.5x
20.0x
2019e
2020e
8.0x
4.0x
2016e
2017e
2018e
Valuation and investment stance: Updating our
financial outlook for our revised commodity price,
and rolling our valuation to 2018e, our target
increases $1.00 to $18.00 – which is based on a
risk-adjusted dividend yield of 7.5% applied to our
2018e dividend of $1.32, a 12.0x multiple of our
2018e Free-EBITDA of $332 mln and our DCF/sh
valuation of $18.00.
With the Industrial Propane sale looming, and oil
prices back above US$50/bbl, GEI is up ~30%
Source: Thomson Reuters, NBF Estimates
since the sale process was announced on July 21,
2016, resulting in the stock now trading at 2018e 12.3x, which is in line with the Midstream
peer group average of 12.3x 2018e P/AFFO. Recall, we estimate ~$2.50/sh upside to our
current valuation (i.e., from $18.00 to $20.50) based on ~$250 mln of sale proceeds (i.e., net
of the ~$100 mln pre-allocated for the Edmonton tankage, online mid-2018) being redeployed
towards unsecured Infrastructure projects, assuming a 5x capital deployment multiple,
resulting in a more sustainable long-term payout ratio of <85%, and improvement of the
company’s business mix to ~85% Infrastructure (from ~70%). Based on a 12-month total
return opportunity of -1.5% (group: 17.2%), we maintain Sector Perform.
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Page 27
Financial outlook: In the table below we highlight our detailed financial outlook.
GIBSON - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.10
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
Capital Structure
Market Price
2014
2015
2016e
2017e
2018e
2019e
2020e
$1.30
2021e
$27.19
$13.82
$19.41
$19.41
$19.41
$19.41
$19.41
124
126
142
142
142
142
142
142
Market Capitalization - $mln
3,385
1,743
2,751
2,751
2,751
2,751
2,751
2,751
Ending Net Debt - $mln
1,033
1,244
1,307
1,438
1,425
1,376
1,330
1,288
Enterprise Value - $mln
4,418
2,987
4,058
4,188
4,176
4,127
4,081
Outstanding Shares - mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
$19.41
4,039
2021e
Adj. EBITDA by Segment
Infrastructure
165
181
200
246
267
276
271
265
Logistics
148
90
37
45
45
50
50
50
Wholesale
120
100
22
60
60
65
65
65
43
41
34
40
40
40
40
40
Industrial Propane
Other
G&A - Cash
G&A - Stock Based
11
6
(0)
(37)
(40)
(33)
(26)
(26)
(26)
(26)
(26)
(14)
(20)
(23)
(20)
(20)
(20)
(20)
(20)
Total Adj. EBITDA
446
366
248
346
367
385
380
374
Interest
(67)
(80)
(83)
(89)
(97)
(95)
(93)
(91)
Cash Taxes
(49)
(48)
(6)
(15)
(15)
(17)
(17)
(17)
Other
(18)
5
(15)
FFO
312
243
144
-
-
-
-
-
242
255
273
270
266
Maintenance Capex
(59)
(47)
(28)
(35)
(35)
(37)
(37)
(37)
AFFO(1)
253
196
116
207
220
236
233
229
Dividends
145
158
178
187
187
187
187
187
Acquisitions
128
40
-
-
-
-
-
-
Growth Capex
304
346
224
150
20
-
-
-
43
29
221
-
-
-
-
-
1,033
1,244
1,307
1,438
1,425
1,376
1,330
1,288
3.4x
Net Equity Issued
Ending Net Debt
Net Debt/EBITDA (2)
2.3x
3.4x
5.3x
4.2x
3.9x
3.6x
3.5x
FFO/Debt
30%
20%
11%
17%
18%
20%
20%
21%
FFO/Interest
5.7x
4.1x
2.7x
3.7x
3.6x
3.9x
3.9x
3.9x
D/Cap
Per Share
45%
2014
53%
2015
57%
2016e
67%
2017e
75%
2018e
86%
2019e
102%
2020e
127%
2021e
Ending Net Debt
$8.30
$9.86
$9.22
$10.14
$10.05
$9.71
$9.38
$9.09
EBITDA
$3.55
$2.91
$1.75
$2.44
$2.59
$2.71
$2.68
$2.64
FFO - FD
AFFO - FD(1)
$2.50
$1.93
$1.01
$1.71
$1.80
$1.92
$1.91
$1.88
$2.01
$1.56
$0.82
$1.46
$1.55
$1.66
$1.65
$1.62
$1.18
$1.26
$1.32
$1.32
$1.32
$1.32
$1.32
$1.32
Dividends
FFO Payout Ratio (3)
47%
65%
124%
77%
73%
69%
69%
70%
AFFO Payout Ratio (4)
57%
81%
154%
90%
85%
79%
80%
82%
DRIP Participation
25%
18%
0%
0%
0%
0%
0%
Forward Trading Metrics
2014
2015
2016e
2017e
2018e
2019e
2020e
0%
2021e
EV/EBITDA
EV/Free-EBITDA(5)
12.1x
12.0x
11.7x
11.4x
10.9x
10.8x
10.9x
13.8x
13.6x
13.1x
12.6x
12.0x
12.0x
12.1x
P/FFO
14.1x
13.6x
11.4x
10.8x
10.1x
10.2x
10.3x
P/AFFO
12.4x
23.8x
13.3x
12.5x
11.7x
11.8x
12.0x
4.6%
9.6%
6.8%
6.8%
6.8%
6.8%
6.8%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) EBITDA includes stock based compensation.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 28
Hydro One – Target: $27 / Rating: OP / Total Return: 14.6%
Cash flow quality: Hydro One’s cash flows are
H - 2018E CASH FLOW RISK PROFILE
100% cost-of-service as the company remains
Cost-ofsolely focused on its core rate-regulated electricity
service
100%
Transmission (~60% EBITDA) and Distribution
(~40% EBITDA) utilities businesses in Ontario,
with ~98% and ~25% market share, respectively.
On Oct. 27, 2016, the Ontario Energy Board
(OEB) revised Hydro One’s 2017 allowable ROE
to 8.78% from 9.19%, reflecting updated cost of
capital parameters based on changes in long-term
bond yields year-over-year. However, since the Source: NBF Estimates
November U.S. election and corresponding move back up in long-term bond yields, the
OEB’s allowable ROE methodology would have Hydro One’s allowable ROE for 2018e
moving back into the 9.2% range for 2018e, representing ~5% upside to our current
estimates.
H - P/AFFO(1) OUTLOOK
2017e
2018e
13.7x
16.0x
14.0x
13.1x
16.1x
18.0x
16.7x
20.0x
18.5x
22.0x
12.0x
2016e
(1) AFFO = FFO - Maint. capex
Source: Thomson Reuters, NBF Estimates
2019e
2020e
375%
6.0x
300%
5.0x
225%
4.0x
150%
3.0x
75%
2.0x
0%
Total Payout
H - LEVERAGE OUTLOOK
7.0x
2020e
Leverage: We forecast D/EBITDA remaining flat
at just below 6.0x through 2020e – in line with our
risk-adjusted comfort zone of 6.0x for a company
of Hydro One’s cash flow quality. That said, should
Hydro One become more active on the M&A front
through 2017/2018 through consolidation of LDCs
(local gas distribution companies) across Ontario,
or U.S. acquisitions, we could see incremental
equity issuances from treasury (i.e., over and
above any potential secondary offerings from the
Ontario Government’s 70% ownership – targeting
a minimum 40% equity stake longer term).
2019e
Source: NBF Estimates
2018e
EBITDA: 4% CAGR │ AFFO/sh: 6% CAGR
2017e
2020e
2019e
$1.00
2018e
$1.20
1,250
2017e
1,500
2016e
$1.40
1,750
2015a
$1.60
2,000
Secured growth: Based on growth capex of
~$1.6 bln per year, we forecast 2020e EBITDA of
~$2.3 billion – representing a CAGR of 4% from
2016e levels, with an AFFO/sh (FD) CAGR of 6%,
and underpinning our annual dividend growth rate
forecast of 5% through 2020e. Meanwhile, the
company expects to file its five-year incentive
based rate case for its Distribution business during
H1 2017, with the potential for future cost savings
to be shared with consumers while boosting
returns above the allowable ROE.
D/EBITDA
2,250
AFFO/sh - FD
$1.80
2016e
EBITDA ($mln)
H - SECURED GROWTH OUTLOOK
2,500
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: Rolling our
valuation forward to 2018e, our unchanged $27
target is based on a risk-adjusted dividend yield of
3.5% applied to our 2018e dividend of $0.93/sh, a
20.0x multiple of our 2018e Free-EBITDA of $1.4
bln, our DCF/sh valuation of $25.25 and 50%
risked M&A upside potential of $1.50/sh. Based on
a 12-month total return opportunity of 14.6%, we
maintain our Outperform rating.
Page 29
Financial outlook: In the table below we highlight our detailed financial outlook.
HYDRO ONE LTD. - FINANCIAL OUTLOOK
Market Capitalization
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
Stock Price
n/a
$0.00
$24.22
$24.22
$24.22
$24.22
$24.22
Outstanding Shares - mln
595
595
595
595
595
595
595
595
Market Capitalization - $mln
n/a
-
14,411
14,411
14,411
14,411
14,411
14,411
8,638
10,121
11,223
11,903
12,530
13,169
13,709
13,402
323
418
418
418
418
418
418
418
71
75
72
72
72
72
72
72
n/a
10,614
26,124
26,804
27,431
28,070
28,610
28,303
Net Debt - $mln
Preferred Equity - $mln
NCI - $mln
Enterprise Value - $mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
$24.22
2021e
Adj. EBITDA by Segment
Transmission
Distribution
1,194
1,110
1,187
1,163
1,251
1,325
1,366
1,366
742
866
835
887
913
945
961
961
-
-
-
-
-
2,050
2,163
2,270
2,327
2,327
Telecom
1
Adj. EBITDA
1,937
Interest (incl. pref. dividends)
(392)
(415)
(453)
(430)
(437)
(464)
(459)
(158)
(23)
(18)
(21)
(22)
(22)
(23)
2
(10)
(5)
(4)
(4)
(4)
(4)
(4)
(110)
(111)
(110)
(110)
(110)
(110)
(110)
(168)
1,295
Maintenance Capex
AFFO(1)
Dividends
1,460
1,465
1,599
1,696
1,727
1,732
(702)
(751)
(760)
(788)
(800)
(818)
(818)
608
581
709
706
810
897
909
914
270
872
500
525
551
579
608
608
66
90
379
-
-
-
-
-
838
893
832
852
880
951
834
-
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
1,283
(687)
Acquisitions
Growth Capex
2,014
(79)
NCI
FFO
1,953
(8)
(397)
Cash Taxes
Other
(23)
-
-
-
-
-
-
-
-
8,961
10,539
11,641
12,321
12,948
13,587
14,127
13,820
5.8x
4.5x
5.3x
5.7x
5.9x
5.9x
5.9x
6.0x
FFO/D (2)
15%
12%
13%
12%
13%
13%
12%
13%
FFO/Interest (2)
4.3x
4.3x
4.6x
4.3x
4.8x
5.0x
4.8x
4.8x
D/Cap (2)
Per Share
Ending Net Debt
53%
2014
51%
2015
54%
2016e
55%
2017e
55%
2018e
56%
2019e
56%
2020e
55%
2021e
$14.52
$17.01
$18.86
$20.00
$21.06
$22.13
$23.04
$22.52
EBITDA
$3.26
$3.28
$3.38
$3.45
$3.64
$3.81
$3.91
$3.91
FFO - FD
AFFO - FD(1)
$2.18
$2.16
$2.45
$2.45
$2.68
$2.84
$2.89
$2.90
$1.02
$0.98
$1.19
$1.18
$1.36
$1.50
$1.52
$1.53
Adj. Earnings - FD
$1.23
$1.12
$1.17
$1.13
$1.29
$1.41
$1.42
$1.42
Dividends
FFO Payout Ratio (3)
$0.45
$1.47
$0.84
$0.88
$0.93
$0.97
$1.02
$1.02
AFFO Payout Ratio (4)
Earnings Payout Ratio
Forward Trading Metrics
21%
68%
34%
36%
34%
34%
35%
35%
44%
150%
70%
74%
68%
65%
67%
66%
37%
2014
131%
2015
72%
2016e
78%
2017e
71%
2018e
69%
2019e
72%
2020e
71%
2021e
EV/EBITDA
EV/Free-EBITDA(5)
5.4x
5.3x
12.7x
12.4x
12.1x
12.1x
12.3x
8.5x
20.7x
20.8x
20.0x
19.1x
19.0x
18.8x
P/FFO
0.0x
0.0x
9.9x
9.0x
8.5x
8.4x
8.4x
P/AFFO
0.0x
20.4x
20.5x
17.8x
16.1x
15.9x
15.8x
P/E
0.0x
20.7x
21.5x
18.7x
17.2x
17.1x
17.0x
3.5%
3.6%
3.8%
4.0%
4.2%
4.2%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex)
Source: Company Reports, NBF Estimates
Page 30
Inter Pipeline – Target: $31 / Rating: SP / Total Return: 13.5%
Cash flow quality: IPL’s cash flows are ~60%
cost-of-service / take-or-pay, ~30% fee-based
and <10% commodity-based (NGL frac spread).
The majority of IPL’s cash flows are longer-term
contracted oil sands pipelines that service
long-life projects with sunk capital. On the
commodity-based front, following the mid-2016
$1.35 bln acquisition of the Williams’ Canadian
off-gas midstream business, NGL frac-spread
contributions have doubled (was <5%).
IPL - P/AFFO(1) OUTLOOK
18.0x
2018e
12.0x
13.0x
2017e
12.3x
13.1x
14.0x
LT Avg.(2): 11.8x
13.9x
16.0x
2019e
2020e
12.0x
10.0x
2016e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
IPL - LEVERAGE OUTLOOK
7.0x
150%
6.0x
125%
5.0x
100%
4.0x
75%
3.0x
50%
2.0x
25%
Total Payout
Leverage: On the leverage front, we forecast
consolidated D/EBITDA remaining well within our
risk-adjusted comfort zone for the company of
4.5x to 5.0x. For the PDH & PP complex
opportunity, we note the company could pursue
project level debt financing opportunities,
assuming high quality, long-term off-take
contracts are in place. Furthermore, we note that
we assume the company shuts off its DRIP at the
end of 2017, which if left on would reduce
leverage by another half-turn for 2018-2020.
2020e
Source: NBF Estimates
2019e
EBITDA: 4% CAGR │ AFFO/sh: 4% CAGR
2018e
2020e
2019e
2018e
2017e
$1.50
2016e
$1.75
800
Source: NBF Estimates
Growth profile: With a modest secured growth
capital program of $280 mln for 2017, we currently
forecast a five-year EBITDA and AFFO/sh CAGR
of 4% through 2020e. That said, by mid-year, IPL
expects to make a final investment decision on its
~$3.2
bln
integrated
PDH
(propane
dehydrogenation) and PP (polypropylene)
complex, potentially online mid-2021. On the
dividend front, we forecast two more dividend
increases of 6% per year for 2018 and 2019,
maintaining a target payout ratio of ~80%.
2017e
$2.00
900
Commoditybased
9%
2016e
$2.25
Cost-ofservice
58%
2015e
$2.50
1,000
Fee-forservice
32%
D/EBITDA
$2.75
1,100
AFFO/sh - FD
1,200
2015a
EBITDA ($mln)
IPL - SECURED GROWTH OUTLOOK
IPL - 2018E CASH FLOW RISK PROFILE
D/EBITDA │ Total Payout(1)
(1) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: Rolling our
valuation forward to 2018e, while bumping up our
NGL frac spread contributions in line with our
revised commodity price assumptions, our target
nudges up to $31 (was $30) – which is based on a
risk-adjusted dividend yield of 5.5% applied to our
2018e dividend of $1.72, a 16.5x multiple of our
2018e Free-EBITDA of $1,032 mln and our
DCF/sh valuation of $30.75.
With the stock trading at 13.0x 2018e P/AFFO
versus historical average of ~12x, combined with
a 12-month total return opportunity of 13.5% (group: 17.2%), we maintain our Sector Perform
rating. That said, we would be buyers of the name before mid-year on any material broader
market weakness, ahead of the company announcing a positive FID on the PDH & PP
opportunity, representing ~15% upside to our valuation.
Source: Thomson Reuters, NBF Estimates
Page 31
Financial outlook: In the table below we highlight our detailed financial outlook.
INTER PIPELINE - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.10
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
$1.30
Capital Structure
2014
Market Price
Outstanding Shares - mln
Market Capitalization - $mln
Ending Net Debt - $mln
Enterprise Value - $mln
Financial Information ($mln)
2015
2016e
2017e
2018e
2019e
2020e
$60.00
2021e
$35.94
$22.21
$28.60
$28.60
$28.60
$28.60
$28.60
326
336
369
379
379
379
379
$28.60
379
11,724
7,472
10,539
10,850
10,850
10,850
10,850
10,850
4,934
4,792
5,792
5,551
5,419
5,280
5,061
4,835
16,658
12,264
16,331
16,401
16,269
16,131
15,911
15,685
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
Net Adj. EBITDA by Segment
Oil Sands
343
596
600
651
657
657
676
682
Conventional
191
195
196
198
203
220
221
220
NGL Extraction
142
101
113
175
171
202
203
202
91
117
149
145
149
149
149
149
Bulk Liquid Storage
(87)
(70)
(91)
Total Net Adj. EBITDA
G&A
680
939
967
Interest
(94)
(142)
(143)
(141)
(138)
(136)
(134)
(131)
Cash Taxes
(45)
(70)
(68)
(50)
(51)
(55)
(56)
(57)
7
7
7
-
-
-
-
-
FFO
547
733
763
890
902
949
970
977
Maintenance Capex
AFFO(1)
(42)
(64)
(50)
(70)
(60)
(60)
(60)
(60)
505
669
713
820
842
889
910
917
Dividends
416
492
536
604
651
691
691
691
-
128
1,911
-
-
-
-
-
1,142
284
147
280
60
60
-
-
566
94
866
305
-
-
-
-
4,934
4,792
5,792
5,551
5,419
5,280
5,061
4,835
Net Debt/EBITDA
7.3x
5.1x
6.0x
5.1x
5.0x
4.6x
4.4x
4.2x
FFO/Debt
13%
18%
16%
19%
19%
21%
22%
23%
FFO/Interest
6.8x
6.2x
6.3x
7.3x
7.5x
8.0x
8.3x
8.5x
Other
Acquisitions
Growth Capex
Net Equity Issued
Ending Net Debt
D/Cap
Per Share
66%
2014
Ending Net Debt
63%
2015
62%
2016e
(88)
1,081
59%
2017e
(88)
1,092
59%
2018e
(88)
1,140
59%
2019e
(88)
1,160
58%
2020e
(88)
1,165
57%
2021e
$15.13
$14.25
$15.72
$14.63
$14.28
$13.92
$13.34
$12.74
EBITDA
$2.13
$2.91
$2.73
$2.85
$2.88
$3.00
$3.06
$3.07
FFO - FD
AFFO - FD(1)
$1.67
$2.19
$2.22
$2.38
$2.38
$2.50
$2.56
$2.58
$1.54
$2.00
$2.08
$2.19
$2.22
$2.34
$2.40
$2.42
$1.31
$1.48
$1.57
$1.62
$1.72
$1.82
$1.82
$1.82
76%
67%
70%
68%
72%
73%
71%
71%
AFFO Payout Ratio (3)
82%
74%
75%
74%
77%
78%
76%
75%
DRIP Participation
64%
19%
17%
51%
0%
0%
0%
Dividends
FFO Payout Ratio (2)
Forward Trading Metrics
2014
2015
2016e
2017e
2018e
2019e
2020e
0%
2021e
EV/EBITDA
EV/Free-EBITDA(4)
17.7x
12.7x
15.1x
15.0x
14.3x
13.9x
13.7x
19.1x
13.4x
16.1x
15.9x
15.1x
14.7x
14.4x
P/FFO
16.4x
10.0x
12.0x
12.0x
11.4x
11.2x
11.1x
P/AFFO
18.0x
13.8x
13.0x
12.9x
12.2x
11.9x
11.8x
4.1%
7.0%
5.7%
6.0%
6.4%
6.4%
6.4%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Total dividends / FFO
(3) Total dividends / (FFO - Maintenance capex)
(4) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 32
Keyera – Target: $49 / Rating: OP / Total Return: 28.4%
KEY - 2018E CASH FLOW RISK PROFILE
Cash flow quality: Although ~60% of Keyera’s
cash flows are fee-based (volume-exposed),
Marginbased
excluding oil sands related NGL Infrastructure
13%
services, KEY’s gas processing plants
Fee-forrepresent ~35% of 2018e cash flows. In 2016e,
service
Commodity61%
based
KEY’s gas plants experienced just a 2% decline
13%
in throughput. However, with certain TCPL
restrictions being lifted, combined with stronger
Cost-ofservice
NGL prices supporting liquids-rich drilling
13%
activity, we expect relatively stable G&P
Source: NBF Estimates
contributions through 2017. On the commodity
front, the company’s iso-octane business at AEF is back to running at full capacity following a
six-week turnaround in late 2016 – with the lucrative spread between premium gasoline
prices and landlocked field butane costs remaining well intact.
$1.50
EBITDA: 8% CAGR │ AFFO/sh: 10% CAGR
AFFO/sh - FD
$2.00
400
2020e
$2.50
500
2019e
$3.00
600
2018e
$3.50
700
2017e
800
2016e
$4.00
2015a
EBITDA ($mln)
KEY - SECURED GROWTH OUTLOOK
900
Growth profile: Based on the company’s over
$1.4 bln secured growth program online through
2017/2018 (Edmonton condensate tanks, Norlite
pipeline, Grand Rapids pipeline, Baseline
Terminal), we forecast ~10% secured AFFO
growth through 2020e from 2016e (i.e., excluding
the abnormally strong performance from AEF in
2015 due to record iso-octane margins).
Combined with a payout ratio of ~50%, we forecast
8% annual dividend growth through 2019.
Source: NBF Estimates
KEY - P/AFFO(1) OUTLOOK
18.0x
11.1x
11.4x
11.0x
12.0x
12.4x
14.0x
LT Avg.(2): 12.2x
15.3x
16.0x
4.0x
250%
3.0x
200%
150%
2.0x
100%
2020e
2019e
2018e
2017e
0%
2016e
50%
0.0x
2015a
1.0x
Total Payout
KEY - LEVERAGE OUTLOOK
D/EBITDA
Leverage: We forecast peak D/EBITDA of just
2.6x in 2016e – well below the company’s
covenant of 4.0x – while trending down to just 1.8x
by 2018e (i.e., pro forma secured growth), and
sitting well under our comfort zone for KEY of 2.5x
to 3.0x, suggesting over $1.0 bln of ‘dry powder’
for M&A activity or further organic growth
expansions. Overall, we peg Keyera as being one
of the best positioned from a financial perspective
to take advantage of any near-term growth
opportunities.
D/EBITDA │ Total Payout(1)
(1) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: Our $49 target
(was $48) is based on a risk-adjusted dividend yield of
3.75% applied to our 2018e dividend of $1.79/sh, a
14.0x multiple of our 2018e Free-EBITDA of $772 mln
and our DCF/sh valuation of $48.75.
Although 2016 was a quiet year for KEY on the growth
front, we remain bullish on the name for 2017 on the
8.0x
heels of a more constructive commodity price
2016e
2017e
2018e
2019e
2020e
environment for Keyera’s customers, which when
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
combined with a strong balance sheet, points towards
Source: Thomson Reuters, NBF Estimates
incremental organic growth and/or M&A opportunities
being secured by the company. Meanwhile, we would expect the stock’s valuation of 11.0x
2018e P/AFFO to catch up and potentially surpass the company’s historical average of 12.2x
as the company continues to grow its Montney footprint (Wapiti region) as well as its Mont
Belvieu, Texas exposure. Combined with a 12-month total return opportunity of 28.4% (group:
17.2%), we maintain our Outperform rating.
10.0x
Page 33
Financial outlook: In the table below we highlight our detailed financial outlook.
KEYERA - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.10
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
Capital Structure
Market Price
2014
2015
2016e
2017e
2018e
2019e
2020e
$1.30
2021e
$40.54
$40.26
$39.42
$39.42
$39.42
$39.42
$39.42
169
172
186
191
191
191
191
191
Market Capitalization - $mln
6,837
6,913
7,320
7,516
7,516
7,516
7,516
7,516
Ending Net Debt - $mln
1,299
1,617
1,601
1,698
1,437
1,092
742
483
Enterprise Value - $mln
8,137
8,530
8,921
9,214
8,953
8,608
8,257
7,999
Outstanding Shares - mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
$39.42
2021e
Adj. EBITDA by Segment
G&P
201
259
282
281
279
276
291
289
NGL Infrastructure
189
220
248
291
379
403
403
403
Marketing
180
288
161
200
224
224
225
224
Other
53
132
11
8
6
4
4
2
G&A
(82)
(83)
(80)
(76)
(76)
(76)
(76)
(76)
Total Adj. EBITDA
541
815
623
704
812
831
847
842
Interest
(51)
(52)
(61)
(64)
(66)
(58)
(55)
(55)
Cash Taxes
(32)
(88)
(19)
(10)
(20)
(20)
(20)
(61)
Other
33
(125)
1
-
-
-
-
-
FFO
491
550
543
630
726
753
772
726
Maintenance Capex
(41)
(65)
(71)
(35)
(40)
(40)
(40)
(85)
AFFO(1)
450
485
472
595
686
713
732
641
Dividends
204
239
277
311
340
368
382
382
Acquisitions
221
25
200
-
-
-
-
-
Growth Capex
787
706
559
509
85
-
-
-
Net Equity Issued
381
119
514
188
-
-
-
-
1,299
1,617
1,601
1,698
1,437
1,092
742
483
Net Debt/EBITDA
2.4x
2.0x
2.6x
2.4x
1.8x
1.3x
0.9x
0.6x
FFO/Debt
33%
34%
34%
37%
51%
69%
104%
150%
FFO/Interest
9.5x
11.5x
9.9x
10.8x
12.0x
14.0x
15.1x
14.2x
D/Cap
50%
54%
46%
45%
40%
34%
25%
Ending Net Debt
Per Share
2014
2015
2016e
2017e
2018e
2019e
2020e
18%
2021e
Ending Net Debt
$7.70
$9.42
$8.62
$8.91
$7.54
$5.73
$3.89
$2.53
EBITDA
$3.33
$4.80
$3.46
$3.74
$4.26
$4.36
$4.44
$4.41
FFO - FD
AFFO - FD(1)
$3.02
$3.24
$3.02
$3.35
$3.81
$3.95
$4.05
$3.81
$2.77
$2.85
$2.63
$3.16
$3.60
$3.74
$3.84
$3.36
$1.25
$1.41
$1.54
$1.65
$1.79
$1.93
$2.00
$2.00
42%
44%
51%
49%
47%
49%
49%
53%
AFFO Payout Ratio (3)
45%
49%
59%
52%
50%
52%
52%
60%
DRIP Participation
32%
61%
60%
60%
0%
0%
0%
Dividends
FFO Payout Ratio (2)
Forward Trading Metrics
2014
2015
2016e
2017e
2018e
2019e
2020e
0%
2021e
EV/EBITDA
EV/Free-EBITDA(4)
10.0x
13.7x
12.7x
11.3x
10.8x
10.2x
9.8x
10.8x
15.5x
13.3x
11.9x
11.3x
10.7x
10.9x
P/FFO
12.5x
13.3x
11.8x
10.3x
10.0x
9.7x
10.4x
P/AFFO
14.2x
15.3x
12.5x
11.0x
10.5x
10.3x
11.7x
3.5%
3.8%
4.2%
4.5%
4.9%
5.1%
5.1%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Total dividends / FFO
(3) Total dividends / (FFO - Maintenance capex)
(4) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 34
Pembina Pipeline – Target: $44 / Rating: SP / Total Return: 9.6%
Cash flow quality: By 2018e (pro forma secured
growth), PPL’s cash flows will be ~55%
cost-of-service / take-or-pay, with the majority of
its conventional pipeline system contracts under
long-term commitments, combined with the 100%
take-or-pay Redwater fractionation II & III
expansions, as well as legacy oil sands pipelines.
The fee-based cash flows are largely
Montney-based gas processing and NGL
Infrastructure services.
PPL - 2018E CASH FLOW RISK PROFILE
Fee-forservice
28%
Marginbased
13%
Cost-ofservice
55%
Commoditybased
4%
Source: NBF Estimates
1,600
$3.50
$3.00
1,400
$2.50
1,200
$2.00
2020e
2019e
2018e
$1.00
2017e
$1.50
800
2016e
1,000
AFFO/sh - FD
$4.00
2015a
EBITDA ($mln)
PPL - SECURED GROWTH OUTLOOK
1,800
Secured growth: Based on ~$5 bln of secured
projects entering service between 2016e and
2018e, we forecast 2018e EBITDA of ~$1.7 bln –
representing a five-year CAGR of 13% from 2015a
levels, and an AFFO/sh CAGR of 6%. On the
dividend front, we forecast a 5% dividend increase
for each of 2017 and 2018, while maintaining a
long-term AFFO payout ratio of <75%.
EBITDA: 13% CAGR │ AFFO/sh: 6% CAGR
Source: NBF Estimates
0%
2020e
75%
1.0x
2019e
150%
2.0x
2018e
225%
3.0x
2017e
300%
4.0x
2016e
375%
5.0x
2015a
6.0x
Total Payout
PPL - LEVERAGE OUTLOOK
D/EBITDA
Leverage: Pro forma the company’s ~$5 bln
portfolio of secured growth projects, we have line
of sight to sub-3.5x D/EBITDA by 2018e, which is
below our risk-adjusted comfort zone of 4.0x to
4.5x for Pembina. As such, we forecast sufficient
balance sheet capacity to fund the ~$2 bln (net)
combined PDH and polypropylene upgrading
facility, expected to consume 22,000 bpd of
propane and be in-service by 2021, subject to
positive FID by late 2017 / early 2018.
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
PPL - P/AFFO(1) OUTLOOK
20.0x
12.3x
12.4x
14.0x
15.3x
12.4x
16.0x
12.8x
LT Avg.(2): 12.8x
18.0x
12.0x
10.0x
8.0x
Valuation and investment stance: Rolling
forward our valuation to 2018e, our $44 target
(was $43) is based on a risk-adjusted dividend
yield of 4.75% applied to our 2018e dividend of
$2.07/sh, a 14.5x multiple of our 2018e
Free-EBITDA of $1.7 bln and our DCF/sh
valuation of $44.00.
Pembina is nearing the finish line on its
unprecedented growth phase, bringing on over
(2) Based on consensus CFPS and adjusted for maint. capex.
$5 bln of long-term contracted projects, which will
Source: Thomson Reuters, NBF Estimates
have the company entering 2018e with a free
cash flow yield (AFFO yield) of ~8% and a strong balance sheet of 3.4x. Based on the stock
trading at a 12.8x 2018e P/AFFO multiple, in line with historical average, combined with a
12-month total return opportunity of 9.6% (group: 17.2%), we maintain our Sector Perform
rating, but would look to accumulate a position in the name on any material market weakness
by mid-year as we approach a potential positive FID on the PDH & PP investment opportunity,
representing a further 5% upside to our current valuation.
2016e
2017e
(1) AFFO = FFO - Maint. capex
2018e
2019e
2020e
Page 35
Financial outlook: In the table below we highlight our detailed financial outlook.
PEMBINA PIPELINE - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.10
$1.33
$1.30
$1.30
$1.30
$1.30
$1.30
Capital Structure
2014
Market Price
2015
2016e
2017e
2018e
2019e
2020e
$1.30
2021e
$42.34
$30.15
$41.46
$41.46
$41.46
$41.46
$41.46
338
372
396
402
402
402
402
402
14,311
11,210
16,412
16,665
16,665
16,665
16,665
16,665
Ending Net Debt - $mln
2,881
3,295
4,210
5,717
5,331
4,819
4,290
3,751
Preferred Equity - $mln
880
1,100
1,510
1,510
1,510
1,510
1,510
1,510
18,072
15,605
22,132
23,892
23,506
22,994
22,466
21,927
Outstanding Shares - mln
Market Capitalization - $mln
Enterprise Value - $mln
Financial Information ($mln)
2014
2015
2016e
2017e
2018e
2019e
2020e
$41.46
2021e
Adj. EBITDA by Segment
Conventional Pipelines
291
386
486
588
758
758
760
758
Oil Sands & Heavy Oil
133
135
138
149
149
149
149
149
Gas Services
100
136
194
251
273
276
276
276
Midstream
509
394
467
556
636
672
673
672
G&A
(101)
(96)
932
955
Interest (incl. pref. dividends)
(161)
(115)
(218)
(223)
(305)
(291)
(276)
(260)
Cash Taxes
(103)
(41)
(73)
(118)
(95)
(101)
(103)
(105)
Other
63
79
60
-
-
-
-
-
FFO
731
878
946
1,102
1,316
1,362
1,380
1,390
Maintenance Capex
AFFO(1)
-
-
-
-
-
-
-
-
731
878
946
1,102
1,316
1,362
1,380
1,390
Dividends
554
615
733
785
831
851
851
851
Acquisitions
458
27
529
-
-
-
-
-
1,412
1,811
1,900
1,880
100
-
-
-
Total Adj. EBITDA
Growth Capex
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
FFO/Debt (2)
FFO/Interest
D/Cap
(2)
(2)
Per Share
(107)
1,178
(100)
1,443
(100)
1,716
(100)
1,755
(100)
1,759
(100)
1,755
306
841
813
239
-
-
-
-
3,761
4,395
5,720
7,227
6,841
6,329
5,800
5,261
3.6x
4.0x
4.2x
4.4x
3.4x
3.1x
2.8x
2.5x
22%
23%
20%
18%
23%
26%
29%
32%
7.9x
8.0x
8.1x
6.9x
5.9x
6.4x
6.8x
7.2x
36%
2014
36%
2015
40%
2016e
45%
2017e
44%
2018e
42%
2019e
41%
2020e
39%
2021e
Ending Net Debt
$8.52
$8.86
$10.63
$13.77
$12.81
$11.54
$10.22
$8.88
EBITDA
$2.76
$2.57
$2.98
$3.59
$4.27
$4.37
$4.38
$4.37
FFO - FD
AFFO - FD(1)
$2.20
$2.52
$2.43
$2.76
$3.28
$3.39
$3.43
$3.46
$2.20
$2.52
$2.43
$2.76
$3.28
$3.39
$3.43
$3.46
$1.72
$1.79
$1.90
$1.97
$2.07
$2.12
$2.12
$2.12
76%
70%
77%
71%
63%
62%
62%
61%
AFFO Payout Ratio (4)
76%
70%
77%
71%
63%
62%
62%
61%
DRIP Participation
44%
61%
63%
31%
0%
0%
0%
Dividends
FFO Payout Ratio (3)
Forward Trading Metrics
2014
2015
2016e
2017e
2018e
2019e
2020e
0%
2021e
EV/EBITDA
EV/Free-EBITDA(5)
18.9x
13.2x
15.3x
13.9x
13.4x
13.1x
12.8x
18.9x
13.2x
15.3x
13.9x
13.4x
13.1x
12.8x
P/FFO
16.8x
12.4x
15.0x
12.7x
12.2x
12.1x
12.0x
P/AFFO
16.8x
12.4x
15.0x
12.7x
12.2x
12.1x
12.0x
4.2%
6.3%
4.7%
5.0%
5.1%
5.1%
5.1%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 36
Superior Plus – Target: $14 / Rating: OP / Total Return: 18.0%
Cash flow quality: With the sale of the
Construction Products business in 2016, the
company’s commodity-based exposure bumps up
to ~40% by 2018e (was ~30%) as Specialty
Chemicals represents a larger proportion of cash
flows. Longer term, with ~$650-950 mln of “dry
powder”
targeting
propane
distribution
acquisitions,
we
expect
margin-based
contributions to increase back towards ~70%
under a more normalized capital structure.
SPB - LEVERAGE OUTLOOK
150%
4.0x
3.0x
100%
2.0x
50%
1.0x
Total Payout
Leverage: We forecast 2018e D/EBITDA of 1.4x
(from 3.1x in 2015) versus the company’s target of
3.0x (2.2x at Q3/16) excluding any significant
acquisitions, while looking to maintain its BB
(high) and BB ratings plus stable outlook with
DBRS and S&P, respectively. As noted above, we
forecast “dry powder” of $650-950 mln for M&A
upside.
0%
0.0x
2020e
Source: NBF Estimates
2019e
EBITDA: -1% CAGR │ AFFO/sh: 2% CAGR
2018e
2020e
2019e
2018e
2017e
2016e
$0.00
2015a
-
Secured growth: As outlined at its Investor Day in
late 2016, the company is targeting 3-12% annual
EBITDA growth through 2020, with the low end of
the range based solely on continued operational
improvements and cost savings initiatives.
Meanwhile, the upper end of the range assumes
full allocation of the company’s “dry powder” of
$650-950 mln at attractive valuation multiples.
Without modeling in any acquisitions, we forecast
a five-year AFFO/sh CAGR of 2%.
2017e
$0.50
100
Source: NBF Estimates
2016e
$1.00
200
Marginbased
59%
2015a
300
AFFO/sh - FD
EBITDA ($mln)
$1.50
Commoditybased
41%
D/EBITDA
SPB - SECURED GROWTH OUTLOOK
400
SPB - 2018E CASH FLOW RISK PROFILE
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
SPB - P/AFFO(1) OUTLOOK
18.0x
8.7x
9.9x
12.0x
10.7x
10.4x
14.0x
10.3x
LT
13.9x
16.0x
Avg.(2):
10.0x
8.0x
Valuation and investment stance: Rolling forward
our valuation to 2018e, our $14 target (was $13) is
based on a risk-adjusted dividend yield of 5.00%
applied to our 2018e dividend of $0.72, a 12.5x
multiple of our 2018e Free-EBITDA of $182 mln and
our DCF/sh valuation of $14.50.
SPB currently trades at a 2018e P/AFFO multiple of
10.7x – a justified premium to its long-term average,
(2) Based on consensus CFPS and adjusted for maint. capex.
in our view, given the company’s underlevered
and finance lease payments
balance sheet poised for near-term M&A
Source: Thomson Reuters, NBF Estimates
opportunities. Combined with an attractive 2018e
payout ratio of 61% (peers: 63%) and over 15% M&A upside stemming from an under-levered
balance sheet, we reiterate our Outperform rating with a 12-month total return opportunity of
18.0% (group: 17.2%).
6.0x
2016e
2017e
2018e
2019e
2020e
(1) AFFO = FFO - Maint. Capex - Finance Lease Payments
Page 37
Financial outlook: In the table below we highlight our detailed financial outlook.
SUPERIOR PLUS - FINANCIAL OUTLOOK
Key Assumptions
2015
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$48.75
$43.20
$55.00
$55.00
$60.00
$60.00
AECO - $/mcf
$2.55
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
$1.30
Capital Structure
Market Price
2015
2017e
2018e
2019e
2020e
2021e
$10.76
$12.45
$12.45
$12.45
$12.45
$12.45
141
143
143
143
143
143
143
1,513
1,778
1,778
1,778
1,778
1,778
1,778
Outstanding Shares - mln
Market Capitalization - $mln
Ending Net Debt - $mln
Enterprise Value - $mln
Financial Information ($mln)
2016e
$60.00
$12.45
816
472
402
337
263
179
90
2,329
2,250
2,180
2,115
2,040
1,957
1,868
2015
2016e
2017e
2018e
2019e
2020e
2021e
Adj. EBITDA by Segment
Energy Services
170
162
172
172
172
172
172
89
106
110
110
110
110
110
Specialty Chemicals
Construction Products
45
Realized Losses on FX
-
Corporate Costs
27
(30)
-
-
-
(9)
(5)
-
-
(31)
(19)
(24)
(24)
(24)
(24)
(24)
Total Adj. EBITDA
267
247
258
248
253
258
258
Interest
(56)
(76)
(20)
(16)
(12)
(7)
(2)
(2)
(5)
(4)
(4)
(4)
(4)
(4)
9
42
6
6
6
6
6
FFO
217
208
239
234
243
252
258
Maintenance Capex
(45)
(55)
(50)
(50)
(50)
(50)
(50)
Finance Leaes Payments
(24)
(22)
(16)
(16)
(16)
(16)
(16)
149
131
173
168
177
186
192
Dividends
93
102
103
103
103
103
103
Acquisitions
(2)
(8)
-
-
-
-
-
Growth Capex
50
27
-
-
-
-
-
Net Equity Issued
137
23
-
-
-
-
-
Ending Net Debt
607
383
319
259
191
114
31
Total Debt/EBITDA
3.1x
1.9x
1.6x
1.4x
1.0x
0.7x
0.3x
FFO/Debt
36%
54%
75%
90%
127%
222%
836%
FFO/Interest
3.9x
2.7x
11.8x
14.4x
20.2x
34.9x
127.0x
D/Cap
46%
29%
25%
22%
17%
11%
Cash Taxes
Other
AFFO
(1)
Per Share
2015
2016e
2017e
2018e
2019e
2020e
3%
2021e
Ending Net Debt
$4.32
$2.68
$2.23
$1.82
$1.34
$0.80
EBITDA
$2.00
$1.74
$1.80
$1.74
$1.77
$1.80
$1.80
FFO - FD
(1)
AFFO - FD
$1.63
$1.44
$1.65
$1.61
$1.65
$1.70
$1.73
$1.15
$0.89
$1.19
$1.16
$1.20
$1.26
$1.29
$0.72
$0.72
$0.72
$0.72
$0.72
$0.72
$0.72
43%
49%
43%
44%
42%
41%
40%
62%
78%
59%
61%
58%
55%
54%
0%
22%
0%
0%
0%
0%
Dividends
FFO Payout Ratio (3)
AFFO Payout Ratio (4)
DRIP Participation
Forward Trading Metrics
2015
EV/EBITDA
EV/Free-EBITDA(5)
2016e
2017e
2018e
2019e
2020e
$0.22
0%
2021e
9.2x
9.4x
8.7x
8.8x
8.4x
7.9x
7.6x
11.0x
12.2x
10.8x
11.0x
10.4x
9.8x
9.4x
7.2x
P/FFO
7.4x
7.5x
7.5x
7.7x
7.5x
7.3x
P/AFFO
9.4x
13.9x
10.4x
10.8x
10.3x
9.9x
9.6x
Dividend Yield
6.0%
6.7%
5.8%
5.8%
5.8%
5.8%
5.8%
(1) AFFO = FFO - Maintenance capex - Finance Lease Payments
(2) Interest incl. convertible debenture interest
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 38
Tidewater Midstream – Target: $2.25 / Rating: OP / Total Return: 45.9%
Cash flow quality: ~65% of TWM’s cash flows
are currently supported by take-or-pay
agreements through 2018e. Furthermore, we
would view the margin-based cash flows (16%;
NGL Marketing volumes) to be heavily linked to
the take-or-pay contracts as existing customers
look to optimize their netbacks through
Tidewater’s NGL Infrastructure and Marketing
capabilities. Overall, we view only ~20% of 2018e
cash flows subject to volume risk, down from
~30% at IPO in mid-2015.
Growth profile: TWM has achieved impressive
growth since IPO in mid-2015 with an EBITDA
CAGR through 2020e of 25%, translating into a
top-tier AFFO/sh CAGR of 12%. We now expect
TWM to achieve a run-rate EBITDA level of $84
mln by mid-2018, based on the company’s
previously disclosed $125 mln capital program. Of
note, TWM is working towards a final investment
decision (FID) on Phase II of the Montney
infrastructure / egress hub (Montney gas storage),
while recently announcing a potential 50-100
mmcf/d Montney sour gas plant (~$100-200 mln).
100%
1.0x
50%
0.0x
0%
2020e
150%
2.0x
2019e
200%
3.0x
Total Payout
TWM - LEVERAGE OUTLOOK
4.0x
2015a
Leverage: We forecast a debt free balance sheet
by 2018e with ample balance sheet capacity of
over $200 mln to pursue unsecured organic
growth and/or further M&A opportunities,
assuming a ~6x capital deployment multiple while
maintaining a pro forma D/EBITDA ratio of <2.0x.
2018e
Source: NBF Estimates
Source: NBF Estimates
2017e
(1) EBITDA CAGR adjusted for IPO timing.
Marginbased
16%
2016e
EBITDA: 25% CAGR(1) │ AFFO/sh: 12% CAGR
Fee-forservice
21%
COS / Takeor-pay
63%
D/EBITDA
$0.00
AFFO/sh - FD
$0.05
-
2020e
$0.10
20
2019e
$0.15
40
2018e
$0.20
60
2017e
80
2016e
$0.25
2015e
EBITDA ($mln)
TWM - SECURED GROWTH OUTLOOK
100
TWM - 2018E CASH FLOW RISK PROFILE
D/EBITDA │ Total Payout(2)
(1) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
TWM - P/AFFO
(1)
OUTLOOK
14.0x
12.7x
16.0x
7.7x
8.0x
7.7x
10.0x
7.7x
8.7x
12.0x
2018e
2019e
2020e
6.0x
2016e
2017e
(1) AFFO = FFO - Maint. capex
Source: Thomson Reuters, NBF Estimates
Valuation and investment stance: Rolling
forward our valuation to 2018e, our $2.25 target
(was $2.00) is based on a risk-adjusted dividend
yield of 2.25% applied to our 2018e dividend of
$0.04, a 10.0x multiple of our 2018e
Free-EBITDA of $67 mln, our DCF/sh valuation of
$2.00, plus $0.25/sh of risked M&A upside
potential from the company’s pristine balance
sheet.
As noted above, we forecast run-rate EBITDA
potential of $84 mln by mid-2018 – i.e., run-rate EV/EBITDA multiple of 6.3x, roughly half the
Midstream peer average valuation of 12.6x. Assuming a more normalized 8.0x-9.0x
valuation, we note 30%-45% upside to the current stock price, underpinning our $2.25 target
and Outperform rating.
Page 39
Financial outlook: In the table below we highlight our detailed financial outlook.
TIDEWATER - FINANCIAL OUTLOOK
Key Assumptions
2014
2015e
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.10
$2.70
$3.10
$2.90
$2.90
Capital Structure
2014
Market Price
2015e
2016e
2017e
2018e
2019e
2020e
$60.00
$2.90
2021e
$1.00
$1.44
$1.54
$1.54
$1.54
$1.54
$1.54
$1.54
Outstanding Shares - '000
n/a
168,065
284,158
328,389
328,389
328,389
328,389
328,389
Market Capitalization - $'000
n/a
242,013
437,603
505,719
505,719
505,719
505,719
505,719
Ending Net Debt - $'000
n/a
30,431
50,793
(31,998)
(84,312)
(136,626)
(189,205)
(241,716)
Enterprise Value - $'000
Financial Information ($'000)
n/a
2014
272,444
2015e
488,396
2016e
473,722
2017e
421,407
2018e
369,093
2019e
316,514
2020e
264,003
2021e
Ajd. EBITDA by Segment
NGL Marketing
n/a
1,814
(14,470)
9,310
13,147
13,147
13,249
13,350
Gas Services
n/a
11,956
57,043
63,792
67,234
67,234
67,405
67,234
n/a
(3,782)
(9,496)
(7,150)
(7,150)
(7,150)
(7,150)
(7,150)
Total Adj. EBITDA
G&A
n/a
9,988
33,077
65,952
73,231
73,231
73,503
73,434
Interest
n/a
(1,641)
Cash Taxes
n/a
-
Other
n/a
585
FFO
n/a
8,932
Maintenance Capex
AFFO(1)
n/a
-
n/a
8,932
Dividends
n/a
Acquisitions
n/a
Growth Capex
n/a
Equity Issued
Ending Net Debt
(581)
(419)
(214)
(1,573)
(1,079)
31,204
(1,781)
(1,781)
(1,789)
(1,787)
-
-
-
-
-
63,959
71,450
71,450
71,715
71,647
(1,250)
(6,000)
(6,000)
(6,000)
(6,000)
(6,000)
29,954
57,959
65,450
65,450
65,715
65,647
3,354
10,218
13,136
13,136
13,136
13,136
13,136
209,840
85,848
-
-
-
-
-
3,378
32,418
27,583
-
-
-
-
n/a
217,392
80,500
65,550
-
-
-
n/a
30,431
50,793
(31,998)
(84,312)
(136,626)
(189,205)
(241,716)
Net Debt/EBITDA
n/a
3.0x
1.5x
0.0x
0.0x
0.0x
0.0x
0.0x
FFO/Debt
n/a
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
CF/Interest
n/a
n/m
D/Cap
n/a
13%
Per Share
2014
2015e
0%
2016e
0%
2017e
0%
2018e
0%
2019e
0%
2020e
0%
2021e
Ending Net Debt
n/a
30,431
n/m
n/m
n/m
n/m
n/m
n/m
EBITDA
n/a
$0.06
$0.12
$0.20
$0.22
$0.22
$0.22
$0.22
FFO - FD
AFFO - FD(1)
n/a
$0.11
$0.12
$0.20
$0.22
$0.22
$0.22
$0.22
n/a
$0.11
$0.11
$0.18
$0.20
$0.20
$0.20
$0.20
Dividends
FFO Payout Ratio (2)
AFFO Payout Ratio
(3)
Forward Trading Metrics
n/a
$0.02
$0.04
$0.04
$0.04
$0.04
$0.04
$0.04
n/a
38%
36%
21%
18%
18%
18%
18%
n/a
38%
38%
23%
20%
20%
20%
2014
2015e
EV/EBITDA
EV/Free-EBITDA(4)
2016e
2017e
2018e
2019e
2020e
20%
2021e
8.2x
7.4x
6.5x
5.8x
5.0x
4.3x
8.6x
8.1x
7.0x
6.3x
5.5x
4.7x
P/FFO
12.1x
7.9x
7.1x
7.1x
7.1x
7.1x
P/AFFO
12.7x
8.7x
7.7x
7.7x
7.7x
7.7x
2.8%
2.6%
2.6%
2.6%
2.6%
2.6%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Total dividends / Funds from operations
(3) Total dividends / (Funds from operations - Maintenance capex)
(4) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 40
TransAlta – Target: $9.00 / Rating: OP / Total Return: 17.3%
Cash flow quality: TransAlta’s cash flows are
~45% fee-based, ~30% cost-of-service and ~25%
merchant. Meanwhile, by next decade, TA’s
merchant exposure will reduce further as the
Alberta market transitions from an “energy-only”
market to a “capacity” market, comprised of both
energy revenues and capacity payment
revenues. Furthermore, we would expect TA to
pursue
additional
contracted
growth
opportunities, redeploying a portion of the ~$524
mln of coal retirement compensation to be
received through 2030 (i.e., $37.4 mln per year).
Leverage: In late 2016, TA announced a
preferred share exchange offer, which would
convert the five currently outstanding tranches
into one series, reducing total debt by ~$300 mln
th
(vote scheduled for Feb. 16 ). Including the
exchange, we forecast 2021e D/EBITDA of 3.9x,
remaining within our risk-adjusted comfort zone of
3.5x to 4.0x. Meanwhile, TA is planning to raise
$400-600 mln of non-recourse project level debt
to help retire ~$1 bln of debt maturing in
2017/2018, and potentially lifting the company’s
2016e FFO/D ratio from 15% to over 20% - i.e.,
back to investment grade territory.
TA - P/AFFO(1) OUTLOOK
18.0x
LT Avg.(2): 13.2x
2016e
2017e
9.6x
7.6x
5.1x
6.0x
4.8x
10.0x
6.6x
7.4x
14.0x
2.0x
2018e
2019e
2020e
2021e
TA - LEVERAGE OUTLOOK
150%
6.0x
5.0x
100%
4.0x
3.0x
50%
2.0x
1.0x
Total Payout
Source: NBF Estimates
0%
2021e
2021e
2020e
2019e
2018e
2017e
2016e
2015a
EBITDA: -3% CAGR │ AFFO/sh: -7% CAGR
2020e
$0.00
2019e
$0.25
700
2018e
$0.50
Growth profile: Based on expiring coal-fired
PPAs by the end of 2020 and rising carbon taxes,
we forecast 2021e EBITDA of $839 mln –
representing a compounded average growth rate
(CAGR) of -3% from 2015a levels, with an
AFFO/sh CAGR of -7% (i.e., ~40% drop from
2015a). That said, TA has committed to converting
Sundance units 3-6 and Keephills 1 & 2 to
gas-fired generation by 2023, as well as pursue
the development of the 600 to 900 MW Brazeau
pump storage project by mid next decade.
2017e
$0.75
800
Source: NBF Estimates
2016e
$1.00
900
Commoditybased
24%
Fee-forservice
46%
2015a
EBITDA ($mln)
$1.25
1,000
AFFO/sh - FD
$1.50
Cost-ofservice
31%
D/EBITDA
TA - SECURED GROWTH OUTLOOK
1,100
TA - 2018E CASH FLOW RISK PROFILE
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: Rolling
forward our valuations to 2018e while revising our
long-term power price assumption to $45/MWh
(from $50/MWh), our unchanged $9.00 target is
based on a risk-adjusted dividend yield of 1.75%
applied to our 2018e dividend of $0.16/sh, a 10.0x
multiple of our 2018e Free-EBITDA of $719 mln
and our DCF/sh valuation of $9.00.
TA is up ~25% since announcement of an
agreement with the Government of Alberta for
$524 mln of compensation for TA’s coal assets
being phased out early by 2030. Based on a 12-month total opportunity of 17.3% (group:
17.2%), we maintain our Outperform rating, and given the company’s positive change in
outlook on the sustainability front post-2020 (coal-to-gas conversions, pumped hydro project
at Brazeau, $30 bln of AB renewables required by 2030, etc.), we would continue buying the
name on any broader market weakness.
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
Page 41
Financial outlook: In the table below we highlight our detailed financial outlook.
TRANSALTA - FINANCIAL OUTLOOK
Key Assumptions
2014
2015
2016e
2017e
2018e
2019e
2020e
2021e
Alberta Power Price - $/MWh
$49.42
$33.33
$17.32
$32.00
$39.00
$43.00
$45.00
$45.00
Centralia Power Price - US$/MWh
$32.78
$23.37
$19.99
$25.50
$32.50
$35.00
$35.00
$35.00
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$2.05
$2.70
$3.10
$2.90
$2.90
$2.90
FX - CAD/USD
$1.10
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
$1.30
Capital Structure
2014
Market Price
2015
2016e
2017e
2018e
2019e
2020e
2021e
$10.52
$4.91
$7.81
$7.81
$7.81
$7.81
$7.81
275
284
288
288
288
288
288
288
Market Capitalization - $mln
2,893
1,394
2,248
2,248
2,248
2,248
2,248
2,248
2,946
Outstanding Shares - mln
$7.81
Ending Net Debt - $mln
3,917
4,251
3,942
3,894
3,664
3,390
3,085
Preferred Equity - $mln
942
942
942
642
642
642
642
642
NCI - $mln
594
1,029
1,118
1,089
1,077
1,065
1,053
1,041
Enterprise Value - $mln
Financial Information ($mln)
8,346
2014
7,616
2015
8,250
2016e
7,873
2017e
7,631
2018e
7,345
2019e
7,028
2020e
6,877
2021e
Adj. EBITDA by Segment
Canadian Coal
377
393
377
343
250
273
267
62
67
30
56
46
53
44
22
Gas
309
330
323
376
411
417
420
419
US Coal
112
Wind
177
176
183
177
178
182
185
184
Hydro
85
73
77
76
76
77
77
83
Energy
76
37
52
50
50
50
43
43
(59)
(72)
(65)
(23)
(23)
(23)
(23)
(23)
Corporate
Total Adj. EBITDA
1,027
Interest Expense
1,004
(295)
(251)
977
(244)
1,056
(254)
989
(234)
1,030
(224)
1,014
(219)
839
(221)
Preferred Dividends
Cash Taxes
Distributions to NCI
(53)
(48)
(53)
(50)
(45)
(50)
(49)
(35)
(119)
(130)
(115)
(111)
(114)
(114)
(114)
(114)
Other
77
20
(25)
(51)
(51)
(51)
(51)
(53)
FFO
637
595
539
590
545
590
580
415
(347)
(307)
(274)
(270)
(270)
(270)
(229)
(229)
n/a
288
265
320
275
320
351
186
195
200
46
46
46
46
46
46
-
101
-
-
-
-
-
-
150
182
106
225
-
-
-
-
85
76
18
-
-
-
-
-
4,859
5,193
4,884
4,536
4,306
4,032
3,727
3,588
3.9x
Maintenance Capex
AFFO(1)
Dividends
Acquisitions
Growth Capex
Net Equity Issued
Ending Net Debt (incl. pref.)
D/EBITDA (2)
4.3x
4.7x
4.5x
4.0x
4.0x
3.6x
3.4x
FFO/D (2)
17%
15%
15%
16%
16%
19%
20%
16%
FFO/Interest (2)
3.3x
3.4x
3.4x
3.5x
3.6x
3.9x
3.9x
3.1x
D/Cap (2)
56%
Per Share
2014
Ending Net Debt
55%
2015
52%
2016e
51%
2017e
50%
2018e
48%
2019e
47%
2020e
47%
2021e
$14.24
$14.97
$13.69
$13.52
$12.73
$11.78
$10.72
$10.23
EBITDA
$3.73
$3.54
$3.39
$3.67
$3.44
$3.58
$3.52
$2.91
FFO - FD
AFFO - FD(1)
$2.34
$2.13
$1.87
$2.05
$1.89
$2.05
$2.02
$1.44
$1.07
$1.03
$0.92
$1.11
$0.96
$1.11
$1.22
$0.65
Adj. Earnings - FD
$0.25
($0.17)
$0.00
$0.22
$0.07
$0.19
$0.16
($0.08)
Dividends
FFO Payout Ratio (3)
$0.72
$0.72
$0.16
$0.16
$0.16
$0.16
$0.16
$0.16
31%
34%
9%
8%
8%
8%
8%
11%
67%
69%
17%
14%
17%
14%
13%
25%
287%
n/m
6726%
74%
237%
83%
97%
n/m
41%
38%
0%
0%
0%
0%
0%
AFFO Payout Ratio
(4)
Earnings Payout Ratio
DRIP Participation
Forward Trading Metrics
2014
EV/EBITDA
EV/Free-EBITDA(5)
2015
2019e
2020e
0%
2021e
7.8x
7.8x
8.0x
7.4x
7.2x
8.4x
10.8x
10.5x
11.0x
10.0x
9.4x
11.5x
5.0x
2.6x
3.8x
4.1x
3.8x
3.9x
5.4x
10.2x
5.3x
7.0x
8.2x
7.0x
6.4x
12.1x
n/m
2071.6x
35.9x
115.5x
40.7x
47.4x
n/m
6.8%
3.3%
2.0%
2.0%
2.0%
2.0%
2.0%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / Funds from operations
(4) Total dividends / (Funds from operations - Maintenance capex)
Source: Company Reports, NBF Estimates
2018e
8.3x
P/E
(5) Free-EBITDA = EBITDA - Maintenance capex
2017e
12.0x
P/FFO
P/AFFO
2016e
Page 42
TransCanada – Target: $66 / Rating: SP / Total Return: 6.6%
Cash flow quality: 75% of cash flows are
generated by cost-of-service contracts – including
the Canadian Mainline, NGTL, Columbia, Mexico
and Liquids pipelines. Fee-based cash flows
stem from U.S. pipelines as well as certain power
assets, including Bruce Power (~5% of EBITDA).
The company will no longer have any meaningful
commodity exposure following the pending sale of
its U.S. power business (closing Q2 2017).
TRP - 2018E CASH FLOW RISK PROFILE
Fee-forservice
24%
Cost-ofservice
75%
Commoditybased
1%
Source: NBF Estimates
Source: NBF Estimates
Leverage: Excluding any capex from our model
on the $16 bln Energy East project (approval
expected late 2018 at the earliest; online late 2021
/ early 2022) or the US$8 bln Keystone XL project
(if approved in 2017, online late 2019 / early 2020),
our D/EBITDA drops to ~6.0x by 2018e, trending
down to <5x by 2020e – well within our long-term
risk-adjusted comfort zone for TRP of 5.0x to 5.5x.
As such, we do not forecast the need for any
additional equity through 2020e (above DRIP)
pending approval of a large-scale growth project
or additional acquisition.
TRP - P/AFFO(1) OUTLOOK
11.0x
2017e
12.0x
11.0x
2016e
LT Avg.(2): 10.1x
12.2x
14.3x
16.0x
14.6x
20.0x
2019e
2020e
8.0x
4.0x
2018e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
TRP - LEVERAGE OUTLOOK
8.0x
375%
7.0x
300%
6.0x
225%
5.0x
150%
4.0x
75%
3.0x
0%
Total Payout
EBITDA: 11% CAGR │ AFFO/sh: 4% CAGR
2020e
2020e
2019e
2018e
2017e
2016e
2015a
$3.00
2019e
$3.50
4,000
2018e
$4.00
2017e
$4.50
5,500
2016e
$5.00
7,000
Secured growth: Based on ~$24 bln of
commercially secured projects (excluding the $1.7
bln North Montney Mainline Project pending
positive FID by PNW LNG), we forecast run-rate
EBITDA by 2020e of ~$9.4 bln – representing a
five-year CAGR of 11%. However, with ~$13 bln of
new equity issued between 2016e and 2020e
(including DRIP), we forecast just 4% AFFO/sh
growth – well below the company’s annual
dividend growth guidance at the upper end of
8-10% through 2020e.
2015a
$5.50
8,500
AFFO/sh - FD
EBITDA ($mln)
$6.00
D/EBITDA
TRP - SECURED GROWTH OUTLOOK
10,000
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
Valuation and investment stance: Rolling
forward our valuation to 2018e, our $66 target
(was $63) is based on a risk-adjusted dividend
yield of 4.0% applied to our 2018e dividend of
$2.73/sh, a 15.5x multiple of our 2018e
Free-EBITDA of $7.5 bln and our adjusted DCF/sh
valuation of $66.25. Of note, our adjusted DCF/sh
is comprised of our base DCF of $62.25/sh, plus
~$4/sh for a 25% probability weighting related to
Keystone XL and Energy East, each representing
~$8/sh of unrisked valuation upside.
Should the Keystone XL project achieve commercial operations by 2020, we see ~6% upside
to our valuation towards $70. However, with the stock already trading at a 12.2x 2018e
P/AFFO multiple, combined with a 12-month total return opportunity of 6.6% (group: 17.2%),
we maintain our Sector Perform rating and would wait for broader market selling pressure to
take the stock below $60 before accumulating a position.
Page 43
Financial outlook: In the table below we highlight our detailed financial outlook.
TRANSCANADA - FINANCIAL OUTLOOK
Key Assumptions
2014
2015a
2016e
2017e
2018e
2019e
2020e
2021e
WTI - US$/bbl
$93.00
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
$60.00
AECO - $/mcf
$4.44
$2.69
$19.00
$18.90
$15.90
$17.00
$17.00
$17.00
Alberta Power - $/MWh
$49.42
$33.33
$17.30
$32.00
$39.00
$43.00
$45.00
FX - CAD/USD
$1.10
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
Capital Structure
Market Price
2014
2015a
2016e
2017e
2018e
2019e
2020e
$45.00
$1.30
2021e
$57.10
$45.19
$60.26
$60.26
$60.26
$60.26
$60.26
709
703
864
884
906
931
959
988
Market Capitalization - $mln
40,484
31,769
52,088
53,265
54,589
56,083
57,774
59,556
Ending Net Debt - $mln
28,164
34,374
44,741
47,062
48,226
45,677
42,963
39,551
Preferred Equity - $mln
2,255
2,499
3,992
3,992
3,992
3,992
3,992
3,992
NCI - $mln
1,583
1,717
2,878
2,041
2,393
2,746
3,098
3,450
Outstanding Shares - mln
Enterprise Value - $mln
Financial Information ($mln)
72,486
2014
70,359
2015a
$60.26
103,699
106,359
109,201
108,498
107,826
106,549
2016e
2017e
2018e
2019e
2020e
2021e
Adj. EBITDA by Segment
Oil Pipelines
1,027
1,315
1,176
1,300
1,434
1,434
1,434
1,434
Gas Pipelines
3,208
3,429
4,220
5,216
6,132
7,023
7,187
7,251
Energy
1,505
1,252
1,404
955
880
895
913
918
(100)
(100)
(100)
(100)
(100)
Corporate
Total Adj. EBITDA
(127)
(270)
(151)
5,613
5,726
6,648
7,372
8,346
9,252
9,435
9,503
(1,204)
(1,301)
(1,646)
(1,999)
(2,138)
(2,311)
(2,309)
(2,268)
Cash Taxes
(145)
(136)
(169)
(249)
(300)
(347)
(361)
(609)
NCI
(367)
(395)
(791)
(635)
(635)
(635)
(635)
(635)
96
352
236
-
-
-
-
-
FFO
3,993
4,246
4,278
4,488
5,273
5,959
6,130
5,991
Maintenance Capex
AFFO(1)
3,243
3,309
Dividends
1,360
1,472
187
236
3,869
3,637
6,329
Interest (incl. pref. dividends)
Other
(750)
Acquisitions (net of dispositions)
Growth Capex
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
(937)
(1,377)
2,900
(810)
(853)
(950)
(950)
(950)
3,679
4,420
5,009
5,180
5,041
1,734
2,179
2,454
2,771
3,137
3,233
13,602
1,190
-
-
-
-
8,722
4,433
1,114
895
-
37
27
9,097
844
950
1,073
1,214
1,252
30,419
36,873
48,733
51,054
52,218
49,669
46,955
43,543
4.4x
4.6x
6.0x
7.0x
6.7x
6.0x
5.2x
4.8x
FFO/Debt (2)
16%
12%
9%
9%
11%
13%
14%
15%
FFO/Interest (2)
4.1x
4.5x
3.8x
3.3x
3.4x
3.7x
3.9x
3.8x
D/Cap (2)
Per Share
Ending Net Debt
56%
2014
66%
2015a
63%
2016e
63%
2017e
63%
2018e
61%
2019e
58%
2020e
56%
2021e
$42.90
$50.67
$54.07
$55.50
$55.44
$51.22
$46.89
EBITDA
$7.93
$8.34
$8.86
$8.44
$9.33
$10.08
$9.99
$42.04
$9.76
FFO - FD
AFFO - FD(1)
$5.63
$5.98
$5.64
$5.14
$5.89
$6.49
$6.49
$6.15
$4.57
$4.50
$4.13
$4.21
$4.94
$5.46
$5.48
$5.18
Adj. Earnings - FD
$2.42
$2.47
$2.68
$2.39
$2.89
$3.32
$3.37
$3.04
Dividends
FFO Payout Ratio (3)
$1.92
$2.08
$2.26
$2.49
$2.73
$3.01
$3.31
$3.31
54%
34%
35%
41%
49%
47%
46%
51%
AFFO Payout Ratio (4)
42%
46%
55%
59%
56%
55%
61%
64%
Earnings Payout Ratio
78%
84%
90%
104%
95%
91%
99%
109%
DRIP Participation
Forward Trading Metrics
0%
2014
EV/EBITDA
EV/Free-EBITDA(5)
P/FFO
0%
2015a
21%
2016e
39%
2017e
39%
2018e
39%
2019e
39%
2020e
39%
2021e
12.7x
10.6x
14.1x
12.7x
11.8x
11.5x
11.3x
15.1x
13.3x
15.8x
14.2x
13.2x
12.8x
12.6x
9.5x
8.0x
11.7x
10.2x
9.3x
9.3x
9.8x
P/AFFO
13.4x
14.6x
14.3x
12.2x
11.0x
11.0x
11.6x
P/E
23.1x
16.9x
25.2x
20.9x
18.1x
17.9x
19.8x
3.6%
5.0%
4.1%
4.5%
5.0%
5.5%
5.5%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 44
Valener – Target: $22 / Rating: SP /
Total Return: 10.7%
VNR - 2018E CASH FLOW RISK PROFILE
Cash flow quality: For 2018e, we forecast a
cash flow risk profile of 83% cost-of-service and
17% fee-for-service – largely unchanged from
VNR’s 2017e cash flow risk profile and reflective
of Valener’s ~29% interest in rate-regulated gas
distribution utility, Gaz Métro. Longer term, we do
not expect any material change in VNR’s cash
flow quality.
Fee-forservice
17%
Cost-ofservice
83%
Source: NBF Estimates
$1.00
AFFO/sh - FD
$1.10
30
2020e
$1.20
40
2019e
$1.30
50
2018e
$1.40
60
2017e
70
2016e
$1.50
2015a
EBITDA ($mln)
VNR - SECURED GROWTH OUTLOOK
80
Secured growth: Based on Gaz Metro’s recently
announced f2017 capital program of $430 mln
expected to increase rate base by over $200 mln,
we forecast 2020e EBITDA of ~$75 mln –
representing a compounded average growth rate
(CAGR) of 6% from 2015a levels. Meanwhile, we
forecast a CAGR of -2% for AFFO/sh (FD) through
2020e.
EBITDA: 6% CAGR │ AFFO/sh: -2% CAGR
Source: NBF Estimates
VNR - LEVERAGE OUTLOOK
4.0x
100%
90%
3.0x
80%
2.0x
70%
1.0x
Total Payout
D/EBITDA
2020e
2019e
2018e
2017e
2016e
60%
2015a
Leverage: On the leverage front, we forecast
D/EBITDA trending down to 1.5x by the end of
2020e from 2015a levels of 3.0x, underpinning the
company’s 4% dividend growth guidance while
maintaining an AFFO payout ratio <80%. We view
VNR’s balance sheet position as strong and
continue to believe the company is well poised to
take advantage of any further tuck-in growth
opportunities.
D/EBITDA(1) │ Total Payout(2)
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
VNR - P/AFFO
(1)
OUTLOOK
20.0x
15.8x
16.0x
16.2x
14.0x
2017e
2018e
2019e
2020e
13.2x
16.0x
16.0x
LT Avg.(2): 10.9x
18.0x
12.0x
10.0x
2016e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Source: Thomson Reuters, NBF Estimates
Valuation and investment stance: Rolling our
valuation forward to 2018e, our target remains flat
at $22.00 – which is based on a risk-adjusted
dividend yield of 5.25% applied to our 2018e
dividend of $1.16, a 14.5x multiple of our 2018e
Free-EBITDA of $72 mln and our DCF/sh
valuation of $23.25. Overall, based on a 12-month
total return opportunity of 10.7% versus the group
average of 17.2%, we maintain our Sector
Perform rating.
Page 45
Financial outlook: In the table below we highlight our detailed financial outlook.
VALENER - FINANCIAL OUTLOOK
Key Assumptions
f2014a
FX - CAD/USD
f2015a
$1.10
Capital Structure
f2014a
f2016e
$1.28
f2015a
f2017e
$1.32
f2016e
f2018e
$1.30
f2017e
f2019e
$1.30
f2018e
f2020e
$1.30
f2019e
f2021e
$1.30
f2020e
$1.30
f2021e
Market Price
$16.02
$18.01
$20.67
$20.67
$20.67
$20.67
$20.67
Outstanding Shares - '000
38,120
38,120
38,528
38,528
38,528
38,528
38,528
38,528
610,676
686,534
796,374
796,374
796,374
796,374
796,374
796,374
Ending Net Debt - $'000
61,987
117,641
89,906
83,205
77,466
72,294
67,693
63,670
Preferred Equity - $'000
97,480
97,480
97,480
97,480
97,480
97,480
97,480
97,480
Market Capitalization - $'000
Enterprise Value - $'000
770,143
901,655
Financial Information ($'000)
f2014a
f2015a
983,760
f2016e
977,058
f2017e
971,320
f2018e
966,147
f2019e
961,547
f2020e
$20.67
957,524
f2021e
Adj. EBITDA by Segment
GZM
50,372
52,036
63,614
63,939
69,099
70,618
72,152
804
5,256
3,509
5,500
5,500
5,500
5,500
5,500
(2,524)
(2,128)
(2,091)
(2,400)
(2,400)
(2,400)
(2,400)
(2,400)
Total Adj. EBITDA
48,652
55,164
65,032
67,039
72,199
73,718
75,252
76,799
Interest (incl. pref. dividends)
(1,718)
(2,076)
(2,743)
(1,278)
(2,770)
(2,770)
(2,770)
(2,770)
(870)
(1,804)
(2,534)
(3,882)
(3,753)
(4,318)
(4,890)
(5,468)
Energy Production
Corporate & Other
Cash Taxes
73,699
Other
(4,479)
3,122
(7,355)
(12,026)
(15,245)
(16,765)
(18,298)
(19,846)
FFO
41,585
54,406
52,400
49,853
50,431
49,865
49,293
48,715
-
-
-
-
-
-
-
-
AFFO(1)
41,585
54,406
52,400
49,853
50,431
49,865
49,293
48,715
Dividends
37,887
39,318
41,585
43,151
44,692
44,692
44,692
44,692
-
-
416
-
-
-
-
-
3,632
3,892
-
-
-
-
-
-
-
-
-
-
-
-
-
-
159,467
215,121
187,386
180,685
174,946
169,774
165,173
161,150
2.3x
3.0x
2.1x
2.0x
1.7x
1.6x
1.5x
1.5x
26%
25%
28%
28%
29%
29%
30%
30%
10.6x
12.8x
10.8x
14.2x
10.3x
10.2x
10.1x
10.0x
Maintenance Capex
Acquisitions
Growth Capex
Net Equity Issued
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (2)
FFO/Debt (2)
FFO/Interest (2)
D/Cap
(2)
14%
Per Share
f2014a
19%
f2015a
17%
f2016e
15%
f2017e
13%
f2018e
12%
f2019e
11%
f2020e
10%
f2021e
Ending Net Debt
$4.18
$5.64
$4.86
$4.69
$4.54
$4.41
$4.29
$4.18
EBITDA
$1.28
$1.45
$1.69
$1.74
$1.87
$1.91
$1.95
$1.99
FFO - FD
AFFO - FD(1)
$1.10
$1.43
$1.36
$1.29
$1.31
$1.29
$1.28
$1.26
$1.10
$1.43
$1.36
$1.29
$1.31
$1.29
$1.28
$1.26
Adj. Earnings - FD
$0.97
$1.19
$1.30
$1.36
$1.45
$1.48
$1.50
$1.53
$1.00
$1.03
$1.08
$1.12
$1.16
$1.16
$1.16
$1.16
91%
72%
79%
87%
89%
90%
91%
92%
91%
72%
79%
87%
89%
90%
91%
92%
103%
87%
83%
82%
80%
79%
77%
76%
Dividends
FFO Payout Ratio (3)
AFFO Payout Ratio
(4)
Earnings Payout Ratio
DRIP Participation
Forward Trading Metrics
2%
f2014a
0%
f2015a
0%
f2016e
0%
f2017e
0%
f2018e
0%
f2019e
0%
f2020e
0%
f2021e
EV/EBITDA
EV/Free-EBITDA(5)
14.0x
13.9x
14.7x
13.5x
13.2x
12.8x
12.5x
14.0x
13.9x
14.7x
13.5x
13.2x
12.8x
12.5x
P/FFO
11.2x
13.2x
16.0x
15.8x
16.0x
16.2x
16.3x
P/AFFO
11.2x
13.2x
16.0x
15.8x
16.0x
16.2x
16.3x
P/E
13.5x
13.9x
15.2x
14.2x
14.0x
13.8x
13.5x
6.4%
6.0%
5.4%
5.6%
5.6%
5.6%
5.6%
Dividend Yield
(1) AFFO = FFO - Maintenance capex
(2) Debt includes 50% preferred equity.
(3) Total dividends / FFO
(4) Total dividends / (FFO - Maintenance capex)
(5) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
Page 46
Veresen – Target: $17 / Rating: OP / Total Return: 33.1%
Cash flow quality: We forecast VSN’s 2018e
cash flows to be over 70% cost-of-service /
take-or-pay, which includes AEGS (Alberta
Ethane Gathering System), firm commitments
on Alliance and Ruby gas pipelines and the
Hythe/Steeprock gas plant in northeast B.C.
Fee-based cash flows include the Dawson
Montney gas plants under a maximum
eight-year payback processing arrangement
with Encana and Mitsubishi. Meanwhile, direct
commodity price exposure has been reduced
to <5%, stemming from Aux Sable frac
spread.
$0.75
EBITDA: 9% CAGR │ AFFO/sh: 8% CAGR
AFFO/sh - FD
$1.00
-
2020e
200
2019e
$1.25
2018e
$1.50
400
2017e
600
2016e
$1.75
2015a
EBITDA ($mln)
VSN - SECURED GROWTH OUTLOOK
800
VSN - 2018E CASH FLOW RISK PROFILE
Commoditybased
4%
Cost-ofservice
72%
Fee-forservice
24%
Source: NBF Estimates
Secured growth: Based on the ~$1.4 bln (net)
worth of commercially secured investments
coming online through 2018e, we forecast 2020e
proportionately consolidated EBITDA of ~$730 mln
– representing a CAGR of 9% from 2015a levels,
and an AFFO/sh (FD) CAGR of 8%. Although we
do not forecast any dividend upside through our
forecast, we highlight a significantly reduced
payout ratio of 69% by 2019e versus 99% in 2015.
Note: EBITDA is on a proportionately consolidated basis.
Source: NBF Estimates
50%
2020e
100%
0.0x
2019e
150%
2.0x
2018e
200%
4.0x
2017e
250%
6.0x
2016e
8.0x
Total Payout
VSN - LEVERAGE OUTLOOK
D/EBITDA
Leverage: On the proportionately consolidated
leverage front, we forecast D/EBITDA trending
down to 4.1x by 2019e (i.e., full year’s contribution
from the company’s secured growth program).
Recall, the company shut off its DRIP in mid-2016
following announcement of a sales process for its
power business. We assume a $1.0 bln price tag
(10x EBITDA) with announcement of a sale
expected by the end of Q1 2017.
D/EBITDA(1) │ Total Payout(2)
Note: 2015a proportionately consolidated D/EBITDA not provided;
2017e total payout ratio = -30%.
(1) Debt includes 50% preferred equity.
(2) Total Payout = (growth capex + total dividends) / AFFO
Source: NBF Estimates
VSN - P/AFFO
(1)
OUTLOOK
10.2x
9.0x
10.0x
Avg.(2):
9.2x
LT
10.6x
12.0x
12.1x
14.0x
11.4x
16.0x
2019e
2020e
8.0x
6.0x
4.0x
2016e
2017e
2018e
(1) AFFO = FFO - Maint. capex
(2) Based on consensus CFPS and adjusted for maint. capex.
Valuation and investment stance: Rolling our
valuation forward to 2018e, while trimming our
cost of capital to be more in line with its peers (i.e.,
pure play Midstream company post power sale),
our $17 target (was $15) is based on a
risk-adjusted dividend yield of 6.0% applied to our
2018e dividend of $1.00, a 13.5x multiple of our
2018e Free-EBITDA of $667 mln and our DCF/sh
valuation of $17.50.
Although the $7.5+ bln Jordan Cove LNG project
continues to represent attractive option value
(~$6/sh unrisked), we continue to leave the project out of our valuation pending FERC
approval. Overall, with VSN trading at a relatively attractive 9.2x mid-2018 run-rate P/AFFO
multiple (peers: 12.7x) despite a run-rate payout ratio of 69% (peers: 74%), combined with a
12-month total return opportunity of 33.1% (group: 17.2%), we reiterate our Outperform rating
and would continue buying the stock ahead of the power sale announcement expected by the
end of Q1 2017.
Source: Thomson Reuters, NBF Estimates
Page 47
Financial outlook: In the table below we highlight our detailed financial outlook.
VERESEN - FINANCIAL OUTLOOK
Key Assumptions
2015
WTI - US$/bbl
2016e
2017e
2018e
2019e
2020e
2021e
$48.70
$43.00
$55.00
$55.00
$60.00
$60.00
$60.00
NYMEX - US$/mcf
$2.70
$2.60
$3.00
$3.30
$3.30
$3.30
$3.30
FX - CAD/USD
$1.28
$1.32
$1.30
$1.30
$1.30
$1.30
Capital Structure
2015
Market Price
2016e
2017e
2018e
2019e
2020e
$1.30
2021e
$8.86
$13.23
$13.23
$13.23
$13.23
$13.23
299
314
314
314
314
314
314
2,649
4,149
4,149
4,149
4,149
4,149
4,149
Ending Net Debt - $mln
n/a
3,761
3,410
3,365
3,018
2,757
2,530
Preferred Equity - $mln
536
536
536
536
536
536
536
3,185
8,446
8,095
8,050
7,704
7,443
7,215
Outstanding Shares - mln
Market Capitalization - $mln
Enterprise Value - $mln
Prop. Consolidated ($mln)
2015
2016e
2017e
2018e
2019e
2020e
$13.23
2021e
Adj. EBITDA by Segment
444
531
510
513
523
525
523
Midstream
Pipelines
11
91
103
194
239
239
239
Power
48
93
49
-
-
-
(22)
(33)
(34)
Corporate G&A
Total Adj. EBITDA
Interest (incl. pref. dividends)
(34)
(34)
(34)
(34)
481
683
628
674
728
730
728
(110)
(205)
(183)
(183)
(171)
(161)
(153)
Cash Taxes
(37)
(8)
-
-
-
-
Other
(21)
1
-
-
-
-
-
FFO
314
470
445
490
557
569
520
Maintenance Capex & Other
AFFO(1)
(23)
(110)
(99)
(98)
(102)
(103)
(105)
291
360
346
392
456
465
415
Dividends
288
307
314
314
314
314
314
Acquisitions
Growth Capex(2)
-
-
-
-
332
(415)
-
-
-
Net Equity Issued
167
114
-
-
-
-
-
Ending Net Debt (incl. pref.)
Net Debt/EBITDA (3)
n/a
4,297
3,946
3,901
3,554
3,293
3,066
n/a
5.5x
5.4x
5.0x
4.1x
3.8x
3.5x
FFO/Debt (3)
n/a
19%
12%
14%
17%
20%
20%
FFO/Interest (3)
n/a
3.4x
3.6x
3.9x
4.5x
4.8x
4.7x
D/Cap
-
(3)
Per Share
-
32%
2015
37%
2016e
(19)
32%
2017e
(82)
32%
2018e
29%
2019e
26%
2020e
(55)
23%
2021e
Ending Net Debt
$3.49
$4.12
$2.94
$2.90
$2.45
$1.96
$1.64
EBITDA
$1.19
$1.42
$1.33
$1.49
$1.69
$1.72
$1.74
FFO - FD
AFFO - FD(1)
$1.01
$1.18
$1.11
$1.25
$1.45
$1.48
$1.32
$0.99
$1.16
$1.10
$1.25
$1.45
$1.48
$1.32
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
Dividends
FFO Payout Ratio (4)
98%
84%
90%
80%
69%
67%
76%
AFFO Payout Ratio (5)
99%
85%
91%
80%
69%
67%
76%
DRIP Participation
58%
37%
0%
0%
0%
0%
Forward Trading Metrics
2015
2016e
2017e
2018e
2019e
2020e
0%
2021e
EV/EBITDA
EV/Free-EBITDA(6)
6.6x
12.4x
13.4x
12.0x
11.1x
10.6x
16.8x
10.6x
11.6x
14.1x
12.8x
12.3x
11.9x
P/FFO
18.2x
7.5x
11.9x
10.6x
9.1x
8.9x
10.0x
P/AFFO
13.4x
11.4x
12.0x
10.6x
9.1x
8.9x
10.0x
7.6%
7.6%
7.6%
7.6%
7.6%
7.6%
7.6%
Dividend Yield
(1) AFFO = Distributable Cash Flow
(2) Includes Jordan Cove development costs.
(3) Debt includes 50% preferred equity.
(4) Total dividends / Funds from operations
(5) Total dividends / (Funds from operations - Maintenance capex)
(6) Free-EBITDA = EBITDA - Maintenance capex
Source: Company Reports, NBF Estimates
10.2x
Page 48
Comparables:
NBF PIPELINES, UTILITIES & ENERGY INFRASTRUCTURE COMPARABLES
Market
Company Name
Net Debt/
Cash
AFFO
EV/
EV/Free-
12 mo.
Total
TSX
Price
Cap
EV
D / EV
EBITDA
Yield
Payout
P/E
P/CF
P/AFFO
EBITDA
EBITDA
Target
Return
Ticker
24-Jan-17
$mln
$mln
%
2018e
%
2018e
2018e
2018e
2018e
2018e
2018e
Ratings
%
High Payout
AltaGas
ALA
$33.13
5,763
10,683
46%
5.8x
6.5%
89%
n/a
10.4x
12.9x
13.7x
16.0x
$38.00
21.2%
SP
Canexus
CUS
$1.63
305
912
67%
4.9x
0.0%
0%
n/a
4.3x
6.6x
8.1x
10.4x
$1.65
1.2%
Tender
Enbridge Income Fund
ENF
$36.09
29,266
44,028
34%
4.8x
5.6%
82%
n/a
12.0x
14.0x
14.0x
14.6x
$38.00
10.9%
SP
Gibson Energy
GEI
$19.61
2,779
4,217
34%
3.9x
6.7%
85%
n/a
10.9x
12.6x
11.5x
12.7x
$18.00
-1.5%
SP
Inter Pipeline
IPL
$28.75
10,907
16,458
34%
5.0x
5.6%
77%
n/a
12.1x
12.9x
15.1x
16.0x
$31.00
13.5%
SP
Keyera
KEY
$39.46
7,523
9,222
18%
1.8x
4.2%
50%
n/a
10.4x
11.0x
11.4x
11.9x
$49.00
28.4%
OP
Pembina Pipeline
PPL
$41.93
16,854
24,081
30%
3.4x
4.7%
63%
n/a
12.8x
12.8x
14.0x
14.0x
$44.00
9.6%
SP
Superior Plus
SPB
$12.47
1,781
2,183
18%
1.4x
5.8%
59%
n/a
7.7x
10.8x
8.8x
11.0x
$14.00
18.0%
OP
Tidewater Midstream
TWM
$1.57
516
484
-7%
0.0x
2.5%
20%
n/a
7.2x
7.9x
6.6x
7.2x
$2.25
45.9%
OP
Valener
VNR
$20.88
804
985
18%
1.7x
5.4%
89%
n/a
16.0x
16.0x
13.6x
13.6x
$22.00
10.7%
SP
Veresen
VSN
$13.52
4,240
8,186
48%
5.0x
7.4%
80%
n/a
10.8x
10.8x
12.2x
14.2x
$17.00
33.1%
OP
31%
3.4x
5.0%
63%
10.4x
11.7x
11.7x
12.9x
High Payout Average
17.4%
Low Payout
ATCO
ACO
$46.07
10,006
18,380
46%
4.4x
2.8%
34%
13.9x
5.6x
10.5x
8.9x
12.1x
$51.00
13.5%
SP
CU
$37.24
10,051
20,640
51%
5.3x
3.8%
41%
16.6x
6.5x
9.7x
10.6x
14.2x
$44.00
22.0%
OP
Capital Power
CPX
$24.56
2,361
4,435
47%
3.1x
6.6%
52%
19.5x
6.0x
7.4x
8.8x
10.4x
$29.00
24.7%
OP
Emera
EMA
$45.68
9,514
26,071
64%
6.0x
4.8%
56%
16.4x
5.9x
11.0x
9.6x
13.3x
$52.00
18.6%
SP
Enbridge
ENB
$57.54
94,077
163,757
43%
5.2x
4.2%
64%
17.8x
11.0x
13.6x
12.8x
14.8x
$66.00
18.9%
OP
Fortis
FTS
$41.40
16,863
41,317
59%
6.3x
3.9%
48%
16.9x
6.4x
11.5x
10.8x
14.7x
$47.00
17.4%
SP
H
$24.33
14,476
26,869
46%
5.9x
3.6%
68%
18.8x
9.1x
17.9x
12.4x
19.5x
$27.00
14.6%
OP
Canadian Utilities
Hydro One
TransAlta
TransCanada
TA
$7.81
2,248
7,873
71%
4.0x
2.0%
17%
115.5x
4.1x
8.2x
8.0x
11.0x
$9.00
17.3%
OP
TRP
$64.24
56,783
109,877
48%
6.0x
3.9%
56%
22.3x
10.9x
13.0x
13.2x
14.7x
$66.00
6.6%
SP
53%
5.1x
4.0%
48%
28.6x
7.3x
11.4x
10.6x
13.8x
Low Payout Average
Note: UP = Underperform; SP = Sector Perform; OP = Outperform; NR = Not Rated
Source: Company Reports, NBF Estimates, Thomson Reuters
17.1%
Page 49
DISCLOSURES:
Ratings And What They Mean: PRIMARY STOCK RATING: NBF has a three-tiered rating system that is relative to the coverage universe of the particular analyst. Here is a brief
description of each: Outperform – The stock is expected to outperform the analyst’s coverage universe over the next 12 months; Sector Perform – The stock is projected to perform in
line with the sector over the next 12 months; Underperform – The stock is expected to underperform the sector over the next 12 months. SECONDARY STOCK RATING: Under
Review  Our analyst has withdrawn the rating because of insufficient information and is awaiting more information and/or clarification; Tender  Our analyst is recommending that
investors tender to a specific offering for the company’s stock; Restricted  Because of ongoing investment banking transactions or because of other circumstances, NBF policy and/or
laws or regulations preclude our analyst from rating a company’s stock. INDUSTRY RATING: NBF has an Industry Weighting system that reflects the view of our Economics & Strategy
Group, using its sector rotation strategy. The three-tiered system rates industries as Overweight, Market Weight and Underweight, depending on the sector’s projected performance
against broader market averages over the next 12 months. RISK RATING: NBF utilizes a four-tiered risk rating system, Below Average, Average, Above Average and Speculative.
The system attempts to evaluate risk against the overall market. In addition to sector-specific criteria, analysts also utilize quantitative and qualitative criteria in choosing a rating. The
criteria include predictability of financial results, share price volatility, credit ratings, share liquidity and balance sheet quality.
General – National Bank Financial (NBF) is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on Canadian stock
exchanges.
The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based
upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein.
Research Analysts – The Research Analyst(s) who prepare these reports certify that their respective report accurately reflects his or her personal opinion and that no part of his/her
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All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and all of the subject securities or issuers. No part of the analysts’
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members of the National Bank Financial Group may have or may in the future issue reports that are inconsistent with this report, or that reach conclusions different from those in this
report. To make further inquiry related to this report, United States residents should contact their NBCFI registered representative.
UK Residents – In respect of the distribution of this report to UK residents, National Bank Financial Inc. has approved the contents (including, where necessary, for the purposes of
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group and/or any of their directors, officers and employees may have or may have had interests or long or short positions in, and may at any time make purchases and/or sales as
principal or agent, or may act or may have acted as market maker in the relevant investments or related investments discussed in this report, or may act or have acted as investment
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This information is only for distribution to Eligible Counterparties and Professional Clients in the United Kingdom within the meaning of the rules of the Financial Conduct Authority.
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Copyright – This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or
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NBF quarterly ratings summary and the total ratings by month can be found on our website under Research and Analysis/Equities/About NBF Research/Quarterly Ratings Summary (link
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Click on the following link to see the company specific disclosures http://www.nbcn.ca/contactus/disclosures.html
Click on the following link to see National Bank Financial Markets Statement of Policies http://nbfm.ca/en/statement-of-policies/
If a company specific disclosure is not found herein for a listed company, NBF at this time does not provide research coverage or stock rating for the company in question.
Page 50
ADDITIONAL COMPANY RELATED DISCLOSURES
ACO.X
ALA
CPX
CU
CUS
EMA
ENB
ENF
FTS
GEI
H
IPL
KEY
PPL
SPB
TA
TRP
TWM
VNR
VSN
2,3,4,5,6,7
2,3,4,5,6,7
6,7
6,7
2,3,4,5,6,7
2,3,4,5,6,7
2,3,4,5,6,7
2,3,4,5,6,7
2,3,4,5,6,7
2,3,4,5,7 **
2,3,4,5,6,7
2,3,4,5,6,7
2,3,4,5,6,7,10
2,3,4,5,6,7
6,7,14 *
2,3,4,5,6,7
2,3,4,5,6,7
6,7,10
2,3,4,5,6,7
LEGEND FOR COMPANY RELATED DISCLOSURES:
2
3
4
5
6
7
8
9
10
11
12
13
14
*
**
National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months.
National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months.
National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months.
National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months.
National Bank Financial Inc. or an affiliate has a non-investment banking services related relationship during the past 12 months.
The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months.
National Bank Financial Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services from this issuer in the next 3 months.
As of the end of the month immediately preceding the date of publication of this research report (or the end of the second most recent month if the publication date is less than 10
calendar days after the end of the most recent month), National Bank Financial Inc. or an affiliate beneficially own 1% or more of any class of common equity securities of this
issuer.
National Bank Financial Inc. makes a market in the securities of this issuer, at the time of this report publication.
A partner, director, officer or research analyst involved in the preparation of this report has, during the preceding 12 months provided services to this issuer for remuneration other
than normal course investment advisory or trade execution services.
A research analyst, associate or any other person (or a member of their household) directly involved in preparing this report has a financial interest in the securities of this issuer.
A partner, director, officer, employee or agent of National Bank Financial Inc., is an officer, director, employee of, or serves in any advisory capacity to the issuer.
A member of the Board of Directors of National Bank Financial Inc. is also a member of the Board of Directors or is an officer of this issuer.
Richard Fortin is a member of the Board of Directors or is an officer of this issuer.
Lino A Saputo, Jr is also a member of the Board of Directors or is an officer of this issuer.
Raymond Bachand is a member of the Board of Directors or is an officer of this issuer.
National Bank Financial Markets acted as financial advisor to Hydro One Limited. Hydro One Inc. has entered into a purchase agreement to acquire from Brookfield Infrastructure
various entities that own and control Great Lakes Power Transmission LP.