TransCanada Corporation: Long-Term Value From Growth Projects And MLP Drop-Downs

By | February 22, 2015

Scalper1 News

TransCanada has $45 billion of commercially secured projects and $50 billion of projects under evaluation. Drop-downs to TCP represent efficient capital plan. Energy East stakeholder agreement could serve as catalyst. TransCanada Corporation (NYSE: TRP ) owns several key natural gas pipelines, power generation, and natural gas storage assets in North America. The company owns and operates about 42,000 miles of natural gas pipelines and 406 Bcf of storage capacity. In addition, TRP has 11,800 MW of power generation operations in place and under development across hydro, gas, nuclear, and coal. We believe that TRP’s organic developments, aside from Keystone XL, multi-billion portfolio of commercially secured projects, and ability to deploy capital into attractive new projects provide for about 15% upside from current prices. Due to TRP’s large scale and expansive network, the firm has access to some of the most attractive growth projects, which we think are not accounted for in the stock’s current valuation. Currently, TransCanada has $45 billion of commercially secured projects and $50 billion of projects under evaluation. In particular, we think that the new long-term contracts for ANR and higher capacity prices for Ravenswood signal positive developments that would benefit long-term earnings. The ANR Pipeline is one of the largest natural gas pipelines in North America, connecting Wisconsin, Michigan, Illinois, and Ohio with supply in Texas, Oklahoma, and the Gulf of Mexico. We would note that the new contracts demonstrate ANR’s quality even during times of low commodity prices. On the power generation side, Ravenswood Generating Station is a 2,480 MW power plant located in Queens, NY that has the capability to serve 21% of New York City’s peak load. In addition, the plant possesses advanced technology that can be used to reduce nitrogen oxide emissions. We believe that drawn-out Keystone XL process poses headlines risk that is currently depressing TRP’s valuation. On Monday, the Department of State restarted the national interest review on the Keystone XL projects. Despite these efforts, the White House is expected to veto the project and the House and Senate are not expected to reach the two-thirds super-majority needed to override the veto. We feel that current sentiments pose a buying opportunity for longer term investors given the company’s other prospects. We also think stakeholder agreements for Energy East would serve as a catalyst for TRP. In the most recent quarter, TransCanada filed for US government approval for the construction and operation of the Energy East Pipeline and terminal facilities with the National Energy Board. The firm is proposing a marine terminal near Cacouna, Quebec, which could impact the beluga whale population. We believe that a successful agreement regarding the impact on wildlife will likely be reached by quarter-end. In addition, we are pleased that the company completed a successful binding open season for the $600 million Upland Pipeline. The proposed pipeline would begin near the northwestern North Dakota oil hub of Williston and go north into Canada about 200 miles. It would transport up to 300,000 Bpd of oil, connecting with other pipelines including Energy East. We would also highlight TransCanada management’s statement that the decline in commodity prices have not had any impact on TRP’s cash flows. In terms of valuation, we believe that the highlighted growth projects combined with the capacity for over $1 billion in annual drop-downs to TC PipeLines, L.P. (NYSE: TCP ), should allow TRP to be re-rated to a 20x forward multiple, more in-lined with peers, Enbridge (NYSE: ENB ) and Fortis (OTCPK: FRTSF ). In the meantime, investors are paid a 3.6% dividend to wait for the projects to be developed. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News

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