TransCanada Corp. $35 – Toronto symbol TRP

TRANSCANADA CORP. $35 (Toronto symbol TRP; Conservative Growth Portfolio, Utilities sector; SI Rating: Above average) operates a 41,000-km pipeline network that transports natural gas from Alberta to central Canada and the United States. This business supplies 60% of its profit. The remaining 40% comes from its energy division, which owns or operates 23 electrical power plants.

The company has increased its dividend every year since 2000. The current annual rate of $1.28 yields 3.7%.

In the second quarter ended June 30, 2006, TransCanada’s earnings from continuing operations grew 22.0%, to $0.50 a share (total $244 million) from $0.41 a share ($200 million) a year earlier.

The latest quarterly earnings included a $13 million gain on the sale of an investment. Cash flow per share rose 7.9%, to $1.10 from $1.02, while revenue grew 17.2%, to $1.7 billion from $1.45 billion.

Much of TransCanada’s recent growth has come from its power business. Thanks mainly to acquisitions and rising power rates, second quarter profits at the power division rose 137% from the year-earlier quarter. That helped offset an 11% drop in profits at the pipeline unit.

TransCanada now hopes to spur long-term growth in its pipeline businesses with several new projects, including the $2.1 billion U.S. Keystone pipeline. This project will transport crude oil from Alberta’s oil sands region to refineries in the U.S. Midwest.

Other big projects include a liquefied natural gas terminal in Quebec, and a new $181 million U.S. gas pipeline in Mexico.

Consequently, capital spending in 2006 will probably rise to $1.70 a share, up 9.7% from $1.55 in 2005.

The company should generate cash flow of around $4.10 a share in 2006, so it can easily afford these outlays. Long-term debt is 1.6 times equity, up from 1.5 times in 2005. That’s high, but still manageable.

The stock rose to $38 in December 2005, but moved down as warmer-than-usual winter weather cut demand for gas. It now trades at 18.5 times its projected 2006 profit of $1.89 a share.

TransCanada is a buy.

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