TRANSCANADA CORP. $45 (Toronto symbol TRP; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 704.0 million; Market cap: $31.7 billion; Priceto- sales ratio: 3.5; Dividend yield: 3.9%; TSINetwork Rating: Above Average; www.transcanada.com) operates a 68,500- 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. In 2011, they provided 49% of TransCanada’s revenue and 60% of its earnings.
In the past few years, the company has aggressively diversified into other businesses, mainly through acquisitions and big new projects.
It now owns or invests in over 20 electrical power plants in Alberta, Ontario, Quebec and the northeastern U.S. In all, these facilities have over 10,800 megawatts of generating capacity. Trans- Canada’s electrical power business now provides 42% of its revenue and 26% of its earnings.
The company’s oil pipeline business, which just started up in 2011, supplies the remaining 9% of its revenue and 14% of its earnings. These operations mainly consist of the Keystone pipeline, which pumps oil from Alberta to refineries in Illinois, and a distribution hub in Cushing, Oklahoma.
TransCanada now wants to expand Keystone to refineries on the U.S. Gulf Coast. This phase, called Keystone XL, will cost $5.3 billion U.S.
In early 2012, the U.S. State Department rejected the company’s plan for Keystone XL. However, TransCanada recently agreed to reroute the line around environmentally sensitive areas in Nebraska. It feels this will help it win the necessary permits. If so, the line could begin operating in late 2014.
Southern section opening next year
Meanwhile, TransCanada is building the sections of Keystone XL that have already received approval, including a pipeline from Cushing to Texas. This new line should begin operating in mid-2013.
Keystone is just one part of the company’s multi-year expansion plan. This strategy also includes refurbishing two reactors at the Bruce nuclear power station in Ontario (TransCanada owns 48.8% of these reactors). The company’s share of the cost of these upgrades is $2.4 billion. The reactors should start operating by the end of 2012.
In addition, TransCanada recently paid $470 million for nine solar power projects in Ontario. Two should begin operating later this year, with the remaining seven starting up by 2014.
So far, TransCanada has spent a total of $10 billion on its expansion plan, and it has earmarked an additional $13 billion. The company should complete all of these projects by 2015.
TransCanada’s revenue fell 7.6%, from $8.7 billion in 2007 to $8.1 billion in 2010. However, revenue rose 13.3% in 2011, to $9.1 billion, thanks to the new oil pipelines.
Even with the uneven revenue, TransCanada’s earnings rose 42.3%, from $1.1 billion in 2007 to $1.6 billion in 2011. The company issued shares to help pay for its new projects. Because of more shares outstanding, earnings per share rose 8.2%, from $2.08 in 2007 to $2.25 in 2008. Per-share earnings then fell to $1.97 in 2010, but rose 13.2%, to $2.23, in 2011.
Cash flow rose 39.8%, from $2.6 billion in 2007 to $3.6 billion in 2011. Cash flow per share rose 5.6%, from $4.95 to $5.22.
High debt load manageable
TransCanada continues to borrow most of the money it needs for its expansion plans. That’s why its long-term debt jumped 44.0%, from $12.4 billion in 2007 to $17.8 billion on June 30, 2012. That’s equal to a high 55% of its market cap.
However, high debt loads are common for pipelines and other utilities. That’s because steady cash flows from their operations give them plenty of flexibility to pay interest costs and upgrade their operations.
In addition to the projects it is currently working on, TransCanada is looking at building a pipeline that will pump natural gas from Alaska’s north shore to Alberta. From there, the company would ship the Alaskan gas through its existing pipelines to markets in Canada and the U.S. It is also considering pumping the gas to a proposed liquefied natural gas terminal on Alaska’s south shore.
However, rising production of shale gas in North America has raised supplies and hurt prices. That could limit interest in this project.
Focusing on oil makes sense
Low gas prices and declining volumes could also prompt TransCanada to convert some of its main gas pipelines to oil. That would let it pump oil to refineries in Ontario and eastern Canada.
TransCanada should earn $2.13 a share in 2012. The stock trades at 21.1 times that estimate. It also trades at 8.2 times the company’s projected cash flow of $5.50 a share. These are high multiples for a utility stock, but they’re still reasonable in light of TransCanada’s improving outlook. The company has also raised its dividend each year since 2000. The current rate of $1.76 a share yields 3.9%.
TransCanada is a buy.
