TRANSCANADA CORP. $53 (Toronto symbol TRP; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 709.0 million; Market cap: $37.6 billion; Priceto- sales ratio: 3.8; Dividend yield: 3.9%; TSINetwork Rating: Above Average; www.transcanada.com) operates a 68,000- kilometre pipeline network that pumps natural gas from Alberta to Eastern Canada and the U.S. The company’s pipelines supply 20% of North America’s natural gas needs. In 2014, they provided 48% of TransCanada’s revenue and 53% of its earnings.
The company also owns or invests in 21 power plants in Alberta, Ontario, Quebec and the northeastern U.S. In all, these facilities have over 11,800 megawatts of generating capacity. This division supplies 37% of revenue and 26% of earnings.
The remaining 15% of TransCanada’s revenue and 21% of earnings comes from its oil-pipeline division, which it started up in 2011. This business mainly consists of the Keystone pipeline, which pumps crude from Alberta to refineries in Illinois, and a distribution hub in Cushing, Oklahoma. Keystone accounts for 20% of Canada’s crude exports to the U.S.
The company’s revenue gained 48.6%, from $6.9 billion in 2010 to $10.2 billion in 2014.
Earnings rose 14.9%, from $1.4 billion in 2010 to $1.6 billion in 2011. Per-share profits rose at a slower pace of 13.3%, from $1.96 to $2.22, on more shares outstanding.
In 2012, profits fell to $1.89 a share (or a total of $1.3 billion), mainly due to unplanned outages at some of TransCanada’s power plants. The company sold bonds to help finance new oil pipelines, and the resulting higher interest costs also weighed on its earnings. However, profits improved to $2.24 a share (or $1.6 billion) in 2013 and rose to $2.42 a share (or $1.7 billion) in 2014.
Cash flow gained 7.4%, from $4.58 a share (or a total of $3.2 billion) in 2010 to $4.92 a share (or $3.5 billion) in 2011. It fell to $4.66 a share (or $3.3 billion) in 2012 but rebounded to $5.66 a share (or $4.0 billion) in 2013 and reached $6.03 a share ($4.3 billion) in 2014.
$46 billion of projects on tap
The company continues to aggressively expand, with plans to finish $12 billion of projects between 2015 and 2018. That includes a $4.8-billion addition to its NGTL system, which pumps gas within Alberta and B.C.
As well, TransCanada recently formed a 50/50 partnership with Magellan Midstream Partners (New York symbol MMP) to build a pipeline connecting their oil-storage facilities in Houston, Texas. This will give TransCanada’s oil-shipping clients access to more refineries in the Houston area. The company’s share of the $50-million U.S. cost is $25 million U.S.
In addition, TransCanada has earmarked another $34 billion for several long-term projects, the biggest of which is the $12-billion Energy East pipeline, which involves converting part of its Mainline gas line to handle oil. That would let the company pump crude from Alberta to refineries in Quebec and New Brunswick. If approved, Energy East could start up in 2020.
TransCanada also hopes to build its Keystone XL pipeline, which is the northern half of its existing Keystone system and would pump crude from Alberta to refineries on the U.S. Gulf Coast.
Due to various delays, the company now expects Keystone XL to cost $8.0 billion U.S., up 48.1% from its 2008 estimate of $5.4 billion U.S. To date, it has spent $2.4 billion U.S. on this project.
However, if political resistance forces TransCanada to abandon the line, it could transfer some of its materials to other projects.
Controversial plant to open in 2018
Meantime, TransCanada is also building a $1- billion gas-fired power plant in Napanee, Ontario. This facility, which the Ontario government relocated from its original Oakville location ahead of the 2011 election, should start up by 2018. TransCanada has a 20-year deal to sell the plant’s power, which cuts the risk of this investment.
In addition, the company recently sold its 30% interest in a firm that holds its U.S. gas pipelines to 28.3%-owned TC PipeLines LP for $446 million U.S. These “drop down” transactions help the parent company free up cash for new projects.
Drop downs also reduce the need for Trans- Canada to take on more debt. As of March 31, 2015, its long-term debt of $27.0 billion was a high 72% of its market cap. However, high debt is common for regulated utilities because steady cash flow from their operations gives them flexibility to pay interest costs and upgrade their operations.
Cash flow provides a clearer picture
TransCanada’s shares trade at a somewhat high 21.5 times its likely 2015 earnings of $2.47 a share.
However, it’s better to focus on the company’s cash flow, which excludes big, non-cash depreciation expenses on pipelines that last decades. Trans- Canada’s cash flow in 2015 will probably rise 3.8%, to $6.26 a share. The stock trades at a more reasonable 8.5 times that figure.
Rising cash flow also gives TransCanada more room to increase its $2.08-a-share dividend, which yields 3.9%. The company has raised its dividend each year since 2000.
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