TRANSCANADA CORP. $46 (Toronto symbol TRP; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 707.0 million; Market cap: $32.5 billion; Priceto- sales ratio: 3.9; Dividend yield: 4.0%; TSINetwork Rating: Above Average; www.transcanada.com) operates a 57,000- 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. In 2012, they provided 53% of TransCanada’s revenue and 60% 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. TransCanada’s electricity operations now supply 34% of its revenue and 21% of its earnings.
In 2011, the company started up its oil-pipeline division. This business mainly consists of the Keystone pipeline, which pumps oil from Alberta to refineries in Illinois, and a distribution hub in Cushing, Oklahoma. Oil pipelines supply the remaining 13% of TransCanada’s revenue and 19% of its earnings.
The company’s revenue fell 5.7%, from $8.5 billion in 2008 to $8.1 billion in 2010. Thanks to the new oil pipelines, revenue rose to $9.1 billion in 2011.
In 2012, the company pumped less gas from Alberta to eastern markets through its Canadian Mainline pipeline. It also experienced unplanned outages at two power plants in Alberta. As a result, revenue fell 12.4%, to $8.0 billion. If you disregard these plants, revenue would have risen 2.1%.
Earnings rose from $1.3 billion in 2008 to $1.6 billion in 2011. TransCanada issued shares to help pay for its new projects. Due to more shares outstanding, earnings per share fell 12.9%, from $2.25 in 2008 to $1.96 in 2010. Per-share earnings then rose to $2.22 in 2011, but fell to $1.89 in 2012.
Cash flow rose 14.2%, from $3.0 billion in 2008 to $3.5 billion in 2011, but fell to $3.3 billion in 2012. Cash flow per share declined from $5.29 in 2008 to $4.58 in 2010. It rose to $4.92 in 2011, but slipped to $4.66 in 2012.
$25 billion of new projects on tap
Over the next three years, TransCanada expects to complete $12 billion of new projects. It has earmarked $13 billion more for the period beyond.
The biggest of these projects is the Keystone XL pipeline, which will cost $5.4 billion U.S. So far, the company has invested $1.8 billion U.S. in this project. If approved, Keystone XL could start operating in the second half of 2015.
The company is also spending $2.3 billion U.S. on a new line that will pump crude oil from Cushing, Oklahoma, to refineries in Texas. This pipeline, which should begin operating by the end of 2013, will help TransCanada profit from rising production of shale oil in North Dakota.
In Canada, the company is spending $3.4 billion to expand its oil pipeline networks in Alberta. That will let it handle rising production from oil sands projects.
Better opportunity than Keystone XL
TransCanada also wants to convert Canadian Mainline to handle crude oil. Right now, refineries in Quebec and New Brunswick process higherpriced imported oil, so demand for cheaper crude from Western Canada would be strong.
Moreover, this project would likely face less political opposition than Keystone XL. Trans- Canada didn’t say how much this conversion would cost, but the Alberta government has agreed to contribute up to $5 billion over the next 20 years. If approved, it could begin operating in 2017.
Other projects that TransCanada is working on include $9 billion of new pipelines that would pump natural gas from eastern B.C. to proposed liquefied natural gas terminals on B.C.’s west coast.
The company is also paying $470 million for nine solar farms in Ontario. The provincial government recently cut subsidies for large solar and wind projects. However, TransCanada has 20-year deals to sell the power from these nine facilities, which cuts the risk of this investment.
TransCanada will borrow most of the money it needs to expand. That will add to its long-term debt of $18.3 billion. This is a high 56% of its market cap, but high debt is common for pipelines and other utilities. That’s because steady cash flows from their operations give them the flexibility to pay interest costs and upgrade their operations.
Expansion justifies higher p/e
The company’s earnings should rebound to $2.26 a share in 2013. The stock trades at 20.4 times that estimate. It also trades at 9.9 times TransCanada’s projected cash flow of $4.63 a share. These are high multiples for a utility stock, but they’re still acceptable in light of TransCanada’s aggressive expansion plans.
The company has raised its dividend each year since 2000. The current rate of $1.84 a share yields 4.0%.
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