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Patrick McKeough is one of Canada’s top safe-money advisors. The Wall Street Journal, Forbes and The Hulbert Financial Digest have all recognized his ability to find stocks with hidden value. He is editor and publisher of The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor; inventor of the Quick Profit/Value System and the ValuVesting System™. A best-selling Canadian author, he wrote Riding the Bull, the book that predicted the 1990s stock-market boom.

TransCanada Corp. $36 – Toronto symbol TRP

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TRANSCANADA CORP. $36 (Toronto symbol TRP; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 578.0 million; Market cap: $20.8 billion; SI Rating: Above average) operates over 59,000 km of pipelines that transport natural gas, mainly from Alberta to markets in central and eastern Canada. The company also operates gas pipelines in the United States and Mexico. This business supplies 55% of TransCanada’s total revenue.

The remaining 45% comes from its electrical power operations. TransCanada owns or holds interests in over 20 power plants in Canada and the United States.

TransCanada continues to expand its power business. This includes its investment in the partnership that runs Ontario’s Bruce nuclear power plant. TransCanada owns 31.6% of the Bruce B complex, which consists of four working reactors.

The company also owns 48.7% of a partnership formed to operate the four older reactors known as Bruce A. Only two of the Bruce A reactors are working right now, but the other two should resume operations in two years. Bruce now accounts for about 10% of TransCanada’s earnings.

TransCanada’s revenue fell from $5.6 billion in 2003 to $5.5 billion in 2004, but grew to $8.8 billion in 2007 thanks partly to the success of projects like Bruce.

Earnings rose 52.7%, from $801 million in 2003 to $1.2 billion in 2007. However, TransCanada typically issues new common shares to pay for its purchases. Consequently, per-share earnings grew just 38.6%, from $1.66 in 2003 to $2.31 in 2007. If you disregard unusual items, TransCanada would have earned $2.09 a share in 2007.

New projects bring growth

The company now aims to spur its long-term growth with several big new projects. For example, earlier this year it paid $2.8 billion U.S. for the Ravenswood power plant located in Queens, New York. The plant has the capacity to service 21% of New York City’s peak electricity load. TransCanada foresees as much as $2 billion in investment opportunities for capacity expansion and efficiency improvements at the facility. As well, Ravenswood provides diversification in power generation and into the U.S.

TransCanada also has high hopes for its proposed Keystone pipeline project, which will transport crude oil from Alberta’s oil sands to the U.S. The company and U.S.-based oil producer ConocoPhillips each own half of Keystone. TransCanada’s expertise with gas pipelines should help it keep Keystone’s construction and operating costs down.

Keystone has big potential

Due to strong interest from oil shippers, the partners now plan to extend the pipeline from the U.S. Midwest to refineries in the Gulf Coast region. They will also expand Keystone’s total capacity.

The expansion will cost $7 billion U.S., which will increase Keystone’s cost to $12.2 billion U.S. TransCanada’s share of that total is $6.1 billion U.S. The partners aim to complete this extension by the end of 2011.

Another big project for TransCanada is a new pipeline that would transport natural gas from the north shore of Alaska to its pipeline network in Alberta.

The Alaska government has granted TransCanada an exclusive licence to build and operate the new pipeline, and will contribute $500 million U.S. to the line’s projected $26 billion U.S. cost. The project is still in the planning phase, but the pipeline could be completed by 2018.

TransCanada is also working on several smaller projects with long-term promise. It recently won approval from regulators in Maine for its Kibby wind farm. The project will cost $320 million U.S. The wind farm requires other approvals, but it should begin operations in 2010.

Long-term contracts cut wind risk

Wind power is less reliable that traditional power plants. However, TransCanada has already sold some of Kibby’s power under long-term contracts. That cuts the risk of this project.

The company has also expanded its natural gas storage capacity. Demand for storage facilities has increased sharply over the past few years. That’s because they let gas producers easily store excess production when prices are low, and sell it when prices improve.

TransCanada’s long-term debt of $12.8 billion is equal to 60% of its market cap. However, that’s normal for utility companies, which invest large sums in new plants and maintenance, but receive steady returns on these assets.

The company generates annual cash flow of over $3.2 billion or $5.80 a share. That easily covers its annual interest costs of $800 million, as well as capital expenditures of $2 billion.

TransCanada also pays about $535 million a year in common share dividends. The current annual dividend rate of $1.44 a share yields 4.0%.

The company should earn $2.27 a share in 2008, and the stock trades at 15.9 times that estimate. That’s reasonable in light of its improving growth prospects and strong cash flow.

TransCanada is a buy.

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