Stock:

TBZ CN

Name:

Tonbridge Power Inc.

12 Jan 2009 price:

C$0.14

Market Cap (m):

C$38.0

Current valuation (DCF):

C$0.30

12-month target:

C$0.80

12-month TSR:

471%

Recommendation:

Outperform

Volatility Index:

High

Event

· On Saturday, January 10, Montana Senator, Democrat Jon Tester, spoke at a Montanaenergy conference in Helena and indicated that funding for Tonbridge’s MATL project will be part of President-elect Obama’s $750bn stimulus package. The MATL project, Tonbridge’s primary asset, is a 214 mile, 230/240 kV transmission line linking Lethbridge, Alberta and Great Falls, Montana .

Impact

· Positive. The MATL project has received all the permits needed to begin construction. As such, we understand it is one of only two construction-ready transmission infrastructure projects in the US . Tonbridge has arranged US$99m in long-term senior financing for MATL, but continues to face a funding shortfall of approximately US$25m and has been exploring options to raise this money.

· This Treasury funding would replace both the US$25m funding gap and the proposed senior financing with 20-year amortizing debt at Treasury rates, representing a savings of at least US$2.5-$3.0m per year vs. Tonbridge’s current financing options. This is very significant for a company with a market capitalization of $38m.

· The Treasury financing of MATL debt could take the form of either loan guarantees or direct Treasury investment.

· There remain some risks for investors to consider: 1) the stimulus package has not been passed yet and is subject to change; and 2) there is considerable uncertainty as to how fast the civil service can deliver the MATL funding once the package is passed – these are not investment bankers. Of these, we expect the second risk could be more material.

· Consequently, Tonbridge intends to continue to pursue non-dilutive financing options in order to ensure that the start of construction is not delayed. These financings will be replaced or amended to reflect the Treasury guarantees if and when the stimulus package is passed.

· Elsewhere, management has indicated its EPC contractor is projecting that MATL’s construction costs are declining as raw material prices have fallen. The remaining cost to complete the MATL project has been estimated at US$127m. This estimate could be reduced by US$5-$10m, primarily based on lower costs for steel poles and conductors.

Action and recommendation

· Tonbridge’s share price was the victim of year-end tax loss selling and remains depressed at $0.14/share. The market has not been kind to companies facing financing gaps. This announcement should go a long way towards resolving doubts about Tonbridge’s ability to finance the MATL project and the potential interest savings to Tonbridge are very significant.

· We acknowledge Tonbridge’s small market cap and relatively low liquidity, but investors should appreciate that Tonbridge may have become the Canadian market’s most leveraged play on Obama’s infrastructure spending program.

· We reiterate our Outperform recommendation and $0.80 target price, based on a DCF value of the MATL project and Tonbridge’s planned second project, the highly accretive extension of the MATL line.