Stock of the week: TransCanada Corp.Stock of the week: TransCanada Corp.
--------------------------------------
TransCanada Corporation (TSX-TRP, $39.38) is making its largest
acquisition ever. We believe that the transaction is favorable,
particularly since it's in businesses that the company knows well. We
advise you to buy some of the shares that TransCanada will issue to
help finance the acquisition.
The acquisition will cost TransCanada US$3.4 billion and require it to
take on debt of US$457 million. In exchange, the company will own
three solid assets that generate dependable earnings and cash flow.
One of these assets is a 17,000 kilometre pipeline network. It carries
natural gas production from Louisiana, Oklahoma, Texas and the Gulf of
Mexico to markets in Illinois, Indiana, Michigan, Ohio and Wisconsin.
The second asset is underground natural gas storage capacity of 230
billion cubic feet in Michigan.
The third asset is an extra 3.55 per cent of Great Lakes Gas
Transmission for a total interest of 53.55 per cent. Meanwhile, TC
PipeLines LP (of which TransCanada is the general partner) will
acquire the remaining 46.45 per cent of this 3,400 kilometre natural
gas pipeline. This will cost TC PipeLines US$962 million and will
require it to assume debt of US$212 million.
TransCanada says it "expects the transaction to be accretive to
earnings and cash flow in the first full year of ownership". With the
acquisition likely to occur in the first quarter of 2007, it should
add to the company's results in just over a year's time. At the same
time, it may take a little longer for it to raise TransCanada's
earnings per share. That's because the company plans to issue "a
significant" amount of new shares.
TransCanada's debt-to-equity ratio is 1.72 to one. That's like $1.72
in debt for each dollar of equity. This is manageable for utilities
such as TransCanada which generate high, growing and predictable cash
flow. Even so, the acquisition will add to its debt. So the company
feels that issuing shares will let it maintain its credit rating of
"A". With the run-up in its share price from a low of $30.77 last May,
TransCanada believes that it's the right time to strike.
Following the acquisition, TransCanada's fully-owned natural gas
pipelines will extend for 59,000 kilometres. The company will also
hold interests in another 7,500 kilometres of natural gas pipelines.
TransCanada remains this country's largest operator of pipelines.
What's new is its focus on natural gas storage.
With the acquisition of 230 billion cubic feet of natural gas storage
facilities, TransCanada's capacity will total 360 billion cubic feet.
This is becoming increasingly important, given wild swings in the
price of natural gas. When prices plummet, many producers would rather
store the gas until prices shoot up again. So offering gas storage
lets TransCanada provide "flexible, value-added services to our
customers". This can build up customer loyalty and gives the company
an extra income stream.
One other area that TransCanada has expanded into is the generation of
power. It currently owns stakes in a number of natural gas-fired,
nuclear, coal, hydro and wind facilities. They generate a combined 7,
700 megawatts of power in Canada and the U.S.
TransCanada is also investing for organic growth. It recently won a
contract to provide power close to Toronto. It plans to develop the
Keystone Oil Pipeline to transport crude oil from Alberta to
refineries in the U.S. Midwest. It also plans to build a pipeline to
carry northern natural gas to southern markets, when the projects are
approved. It has hopes to develop two liquefied natural gas terminals.
Such terminals will become important when a worldwide natural gas
market emerges to parallel the international oil market.
With a growing need for energy infrastructure, TransCanada should
prosper in the years ahead. The shares remain a buy for high current
income and long-term gains as the earnings per share grow.