TransCanada Profit Falls as Alberta Power Prices Weaken

Updated on
  • More downtime at Bruce nuclear plant in Ontario also weighs
  • Higher earnings from Keystone system partially offsets decline

TransCanada Corp., the pipeline and power generation company, said third-quarter profit fell as lower electricity prices in Alberta and disruptions at its Bruce nuclear plant crimped revenues in its energy division.

Net income dropped to C$402 million, or 57 cents per share, from C$457 million, or 64 cents, in the same period last year, the Calgary-based company said Tuesday in a statement. Per-share profit excluding one-time items of 62 cents beat the 60-cent average of 12 analysts’ estimates compiled by Bloomberg.

On Monday, TransCanada asked the U.S. to pause its review of its $8-billion Keystone XL pipeline proposal to ship oil-sands crude to refineries on the Gulf Coast. The break in the review, which is in its 8th year, would give the company time to settle with Nebraska officials on a route for the pipe through that state at a time when the project has faced escalating criticism from U.S. officials including President Barack Obama.

Plunging electricity prices in Alberta this year have added headwinds for TransCanada’s power generation business, which contributed 37 percent of its revenue last year. The company is trying to construct C$34 billion of large-scale oil and natural gas pipelines in the face of environmental opposition and regulatory scrutiny, to grow its transport business. It’s eliminated more than 200 jobs since June to help bring down the cost of new projects, while its customers grapple with the worst oil price slump in decades.

Business ‘Resiliency’

“The resiliency of our base business through various market conditions, combined with C$12 billion of visible near-term growth projects, gives us the ability to continue growing the dividend at an annual rate of 8 to 10 percent through 2017,” Russ Girling, TransCanada’s chief executive officer, said in the statement.

Earnings in the quarter were trimmed by weaker prices at its Alberta electricity generation unit, Western Power, and higher costs and more downtime at its Bruce nuclear plant. Earnings benefited from higher volumes on its Keystone pipeline system.

The workforce reductions to date are part of a cost-cutting effort that will mean more changes before the end of the year and into 2016, the company said.

Trading Discount

“The shares still trade at a substantial discount to pipeline and energy infrastructure peers,” BMO Capital Markets analysts led by Ben Pham wrote in an Oct. 23 note recommending that investors buy TransCanada stock. Delays obtaining permits for several large projects -- including Keystone XL, a pair of pipelines to supply gas to proposed export terminals on Canada’s Pacific Coast, and the Energy East oil line to the Atlantic Coast -- “have led to uncertainty regarding TRP’s longer-term free cash flow and dividend growth potential,” Pham wrote.

TransCanada also has said it expects the C$12 billion estimated cost of Energy East to increase because of delays and changes to the project. It’s had better luck advancing smaller pipelines. It’s expanding parts of its Alberta gas system and has plans and approvals to do more in 2016 and 2017.

Growing electricity supplies from new generators have weakened prices in Alberta, where the economy has also taken a blow from the oil market crash. Spot Alberta power prices averaged C$26.09 per megawatt hour in the third quarter, down 59 percent from the prior year, according to data compiled by Bloomberg.

More Pressure

“If you can believe it, Alberta power is under even more pressure,” Robert Kwan, an analyst at RBC Dominion Securities Inc. in Vancouver, wrote in an Oct. 22 note. The trend will continue to weigh on revenues in the fourth quarter, he said.

TransCanada reported its results before the start of regular trading on North American markets. The stock, which has seven buy, eight hold and one sell recommendations from analysts, rose 0.5 percent on Monday in Toronto. The shares are down 23 percent this year.

(TransCanada has scheduled a conference call to discuss the results at 11 a.m. New York time, accessible at EVTS)